8 Things Federal Employees Should Do 5 Years Before Retirement

For most federal employees, retirement has always seemed like a far-away concept and not a top priority. But as retirement starts to loom, it usually causes an abrupt change in priorities. This change typically occurs five to ten years before retirement, and for good reason. This period is critical for federal employees since specific enrollment requirements begin five years from retirement. This is also a great time to get serious about retirement planning since you’re close enough to make realistic projections but still have enough time to put together a solid plan. So to help you get organized and on track, here are eight things to consider at least five years before you retire.

1: Consider Working With A Professional

Regardless of their life stage, I encourage everyone to consider working with a financial planner, but this is especially important for federal employees approaching retirement. And although your agency is a great resource and will likely provide you with seminars and counseling, they will not create an individualized financial plan for you. So, as you begin to prepare for retirement, consider working with a qualified financial planner. I highly recommend considering a fee-only Certified Financial Planner™ (CFP®) since creating financial plans is our specialty.

2: Define Your Retirement Goals

An essential part of retirement planning is defining your goals. So, grab a beer or a cup of coffee, sit back and think about what you want retirement to look like. Everyone is going to have different goals, but here are a few questions you should answer:

  • When do you want to retire and why?
  • Where do you want to live? If you’re going to move, you may want to transfer there and experience what life is like while you’re still an employee. Plus, this extra time will allow you to set new roots, make friends, and adjust to the new cost of living.
  • What will life look like? Will you have a second career? If so, you may need to learn new skills or build a new network? If you’re going to live the retired life, what will your day-to-day look like? Will the cost of your lifestyle change? Do you have any hobbies? Will you volunteer?

People often don’t realize how much of their identity is tied to their careers. So, although you may be looking forward to sailing into the sunset, make sure you have a plan for what this new stage of life will look like.

3: Find Out Where You’re At Financially

If you work with a financial planner, then this is something the two of you will likely address as you create your financial plan. But, if you decide to go it alone, then you should at the very least create a budget and a net worth statement. These two financial statements will give you a good idea of where you stand financially.

Budget: An accurate budget is a critical tool in planning your retirement because you’ll need it to see whether your projected retirement income will be adequate to support your lifestyle. When creating your budget, make sure to include two sections, one for your current expenses and the other for your expenses in retirement. The two sections will be identical for many, but there can be a significant difference for some. Here are a few apps that can help you track your income and expenses: Mint, Personal Capital, and YNAB.

Net Worth Statement: You need a net worth statement or balance sheet to know where you stand financially. This statement shows you what you own and what you owe and provides the additional clarity that a budget lacks. You can learn more about creating a net worth statement here.

4: Tighten Up Your Finances

Before you retire, you should tighten up any financial loose ends that add additional risk to your financial future. Taking the time to establish or replenish your emergency fund and reducing or eliminating any high-interest debt will position your finances to support the retirement you want to have rather than hinder it.

Although you’ll receive your last paycheck and a lump sum payment for annual leave, usually within the first few weeks after your retirement, it can take 3-6 months to receive your first regular pension payment. So having an emergency fund is especially important during your transition from federal employee to retiree.

How much should you have in your emergency fund? The short answer is 3-6 months’ worth of non-discretionary living expenses. The long answer is, it depends on your situation; some factors include your family’s unique needs (health or lifestyle) and your risk tolerance (what amount will help you sleep at night?). Because of the uncertainty surrounding when you’ll receive your first pension payment, I’d say lean toward the more conservative end of the rule of thumb and save six months’ worth of living expenses. For more tips on creating your emergency fund, read this article.

Now when it comes to managing debt, I don’t mean all debt needs to be eliminated. If your budget shows that you can manage some low-interest debt, it shouldn’t be an issue going into retirement. The debt you should be most concerned with is high-interest debt (think credit cards). If you have high-interest debt, one effective way of tackling it is by using a payment strategy often referred to as the debt avalanche strategy. This method priorities the credit card with the highest interest rate. If you want to learn more about this strategy, read this article.

Although the TSP loan isn’t high-interest debt, an important point to note is that if you leave federal service with an outstanding TSP loan, you’ll need to pay the entire outstanding balance back within 90 days. If you don’t repay the loan within the required period, the TSP will declare a taxable distribution, meaning the loan will be treated as taxable income, and early withdrawal penalties may apply. If you want to learn more about the TSP withdrawal rules, read this article.

5: Estimate Your Retirement Income

Once you have your budget and some tentative retirement dates, your next task is to estimate your retirement income by requesting a pension estimate from HR, obtaining your Social Security benefit estimate, and selecting a Thrift Savings Plan (TSP) distribution strategy.

Whether you get a pension estimate from HR or you calculate your pension, make sure your estimate includes all the deductions applicable to you. You can learn more about calculating your net pension here.

If you plan on retiring before age 62, you won’t be eligible for Social Security but may be eligible for the FERS Supplement (you can read more about the Supplement here). Whether you will be receiving the FERS Supplement or Social Security, you’ll need your Social Security benefit estimate. You can obtain your estimate by creating an online Social Security account.

After you have your pension and Social Security (or Supplement) estimates, you can compare this number to your budget to get an idea of whether the two sources of income will adequately support your retirement lifestyle; chances are they won’t, which is why you have the TSP.

Deciding which TSP distribution strategy is right for you is beyond the scope of this article, but a good rule of thumb is that 4 percent of your TSP should be enough to fill the annual income gap left from your two other sources of income.

For example, if Bob adds up his pension and Social Security benefits and finds that he needs his TSP to provide $24,000 a year of additional income, then Bob will need to have a TSP balance of at least $600,000 (24,000/.04=$600,000). Again, this is just one way of deciding how to distribute your TSP in retirement, and I’d recommend discussing any potential strategy with a Certified Financial Planner™.

6: Know The FEHB And FEGLI Retirement Rules

As I mentioned before, one of the reasons it’s important to drill down on your retirement planning five years out is because you must be enrolled in both the Federal Employees Health Benefit (FEHB) and the Federal Employees’ Group Life Insurance (FEGLI) programs for five years prior to retirement to maintain both coverages in retirement.

Although most federal employees have no need for FEGLI in retirement, some may need coverage. If you want to continue your FEGLI into retirement, you must meet the following requirements:

  • “You are entitled to retire on an immediate annuity under a retirement system for civilian employees;
  • You have been insured for the five years of service immediately before the starting date of
    your annuity, or for the full period(s) of service during which you were eligible to be insured if less than five years;
  • You are enrolled in FEGLI on the date of retirement; and
  • You have not converted to an individual policy.”

Source: OPM.gov

One of the best benefits you have as a federal employee is your FEHB coverage, and maintaining this coverage in retirement can help keep your medical cost from skyrocketing during a period when you’ll likely need more health care services. To carry your FEHB coverage into retirement, you must meet the following two rules:

I. The Five-Year Rule
The first hurdle you’ll have to pass to keep your coverage is the five-year rule, which requires that you have been continuously enrolled in the FEHB Program for the five consecutive years prior to your retirement or, since first eligible (if less than five years).

II. Immediate Annuity Requirement
The second requirement you’ll have is that you must retire with the eligibility for an immediate annuity (aka pension) or under the Minimum Retirement Age (MRA) +10 retirement option. Keep in mind that if you retire under the MRA +10 option, your FEHB coverage will stop when you separate and will resume when your pension starts.

7: Review Your TSP Allocation

The years immediately before and after retirement are often referred to as the fragile decade for your portfolio because of the disproportionate impact, your investment returns have on your retirement.

Image retiring right before the 2008-2009 recession, when many nest eggs experienced 50 percent declines. Such a drastic hit right before or after retirement could have had a devastating effect on your retirement.

Hence, when you’re about five years out from retirement, it’s critical to ensure that your TSP allocation (the funds you pick inside your account) aligns with your goals, risk tolerance, and shorter time horizon. For instance, investing in a portfolio of all stock funds (C, S, and I Funds) is inappropriate for most, and a diversified portfolio that includes a mix of stock funds and bonds (G & F Funds) is usually more appropriate.

Generally, the closer you get to your retirement date, the more conservative you want your allocation. In fact, I encourage most of my clients approaching retirement to have at least a year’s worth of expenses or more in the G fund or other cash equivalent. This cushion can be instrumental when riding out any stock market turbulence. But again because your TSP should be tailored to meet your goals, risk tolerance, and time horizon, there is no allocation that is appropriate for everyone.

8: Review Official Personnel File

Last but certainly not least, every federal employee should check their Official Personnel Folder (OPF) for errors. Since correcting mistakes can take time, don’t wait until right before retirement to address any discrepancies. When reviewing your OPF, take note of the beginning and ending dates for each period of service used to calculate your benefits; if you had any breaks in service, ensure those dates are correct, and if you have bought any military service back, make sure it’s documented correctly (learn more about buying back military time here).

Final Thoughts

Whether you see your retirement as a finish line or starting line, one thing’s for sure: You won’t have the retirement you want if you don’t plan ahead. By starting the planning process years in advance, you’ll be setting yourself up for success by knowing what is required to continue certain benefits into retirement. And just as important, you’ll have some preliminary information about when you can afford to retire and will have enough time to make any needed adjustments. If you’re not confident in creating your financial plan or want a professional opinion, consult with a qualified financial planner.

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2023 Legislative Change Notice

The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.

Author: Jose Armenta, MsBA, CFP®, ChFC®, EA

Hi, I’m Jose Armenta, a Certified Financial Planner practitioner. For over 14 years, I have worked with or among federal employees, from serving in the Marine Corps to my stint as a police dispatcher and now as a financial planner specializing in helping FERS federal employees. In that time, I have spoken to hundreds of federal employees about their benefits and retirement. Helping federal employees maximize their benefits, reduce taxes, and live confidently is a passion of mine. When I am not perfecting financial plans, you’ll find me at the shooting range, playing the drums, or breaching blanket forts with my three little ones.