The Office of Personnel Management is anticipating a wave of retirement applications, stemming from the increasing number of federal employees who have opted into the Voluntary Early Retirement Authority (VERA) and the deferred resignation program (DRP). In a justification statement for a recent contract award to modernize its human resources systems, OPM referred to an “expected doubling of the retirement application backlog.”

With so many currently heading for the exit, it’s a good time for federal employees to improve their understanding of the retirement process, including separating facts from common misconceptions.

Misconception: Retirement pay begins right away

Fact: A retiree’s agency doesn’t send their retirement packet to OPM until the date of their retirement. At that point, OPM begins processing the retirement packet. OPM does have a processing backlog; it can take up to 90 days for them to begin.

Retirees can expect their first, estimated annuity payment within two to three months. OPM refers to this as “interim” pay: Usually, it’s about 60-80% of what your actual annuity will be.

Misconception: TSP is all you need after retirement

Fact: Federal employees will have three main sources of income in retirement: their pension, Social Security and their Thrift Savings Plan account.

When planning their budget for retirement, they can easily calculate how much the first two will provide each month. Their TSP will need to bridge the gap between that amount and the monthly cost of the lifestyle they intend to live during retirement. That’s why there’s no easy answer to how much feds should have in their TSP accounts when they retire. It differs for every person.

In addition, the TSP offers different ways to withdraw: partial, full, installment or annuity. It’s recommended that any federal employee within the retirement horizon transfer some or all of their TSP balance into an IRA or Roth IRA in the private sector. As long as they transfer the funds an IRA or Roth IRA, there are no taxes, penalties or fees.

Misconception: Federal Employee Health Benefits (FEHB) go away at retirement, or become more expensive.

Fact: Under certain eligibility requirements, federal employees can continue their FEHB coverage into retirement. These requirements include enrollment in FEHB for at least five consecutive years leading up to, and having coverage on, the retirement date. It is important to note that qualified spouses, dependent children, and children with disabilities can be covered without meeting this five-year rule. Employees become classified as annuitants upon retiring, at which point the government will continue to cover about 72% of the FEHB premium.

In addition, retirees can also enroll in Medicare parts A and B, offering nearly comprehensive coverage, with Medicare as the primary payer and FEHB as secondary. To reduce costs, some retirees opt for a basic FEHB plan.

Misconception: Federal Employee Group Life Insurance (FEGLI) will remain the same price after retirement

Fact: Basic FEGLI insurance costs between $10-$30 per pay period. It’s very inexpensive while employed, but the price increases dramatically in retirement. How much it increases in price depends on the plan; there are four FEGLI options, including Basic, Option A, Option B and Option C. Federal employees often don’t know what plan they have, or how much they’re paying for it. Understanding their plan can help prospective retirees maximize their FEGLI benefits in retirement.

Misconception: Survivor’s benefits are automatic and free

Fact: Federal employees will need to make some decisions about survivor’s benefits on their retirement application. The pension is the main place where retirees need to consider their options along with their potential beneficiaries — these will primarily be spouses, except in a few special circumstances. Each of these options comes with a cost, in the form of a monthly percentage deducted from the overall pension. The options and percentages vary between the Federal Employees Retirement System and the Civil Service Retirement System.

Misconception: Spouses will automatically continue to be covered by FEHB into retirement

Fact: This is the biggest caveat about survivor’s benefits: If survivors were on the federal retiree’s health insurance plan, that health insurance will cease if there is no survivor’s benefit. Any amount of survivor’s benefit will continue the health insurance plan, so prospective retirees and their spouses should speak with a federal retirement consultant, and consider the holistic picture of their assets, the spouse’s income, their needs and budget, life insurance, and whether they have any additional financial obligations, like debt or a child in college.

The post Common misconceptions about federal retirement benefits first appeared on Federal News Network.

© Getty Images/JLco - Julia Amaral

For federal employees it means-

• Resumption of Contributions: The most significant change is that for active federal employees, Thrift Savings Plan (TSP) contributions, including the agency matching contributions (for FERS employees), resume with the return of paychecks. During a shutdown, these contributions are typically paused, which can affect long-term growth.
• Back Pay and Benefits: Furloughed employees receive retroactive pay for the missed period. This resolves immediate financial hardship and ensures that the “high-3 average pay” used to calculate future annuities is unaffected.
• Processing of Paperwork: Delays in processing retirement applications at the Office of Personnel Management (OPM) and individual agency HR departments should end. This is good news for those who retired or were planning to retire around the time of the shutdown, as it means their full annuity payments will be finalized sooner, and they will move from interim payments to full payments.
• Access to Services: Normal access to HR support, retirement counseling sessions, and other planning resources is restored.

For current federal retirees and the general public it means-

• Annuity and Social Security Payments: For individuals already retired and receiving a federal pension (Civil Service Retirement System or Federal Employees Retirement System) or Social Security benefits, payments generally continue uninterrupted even during a shutdown because they are funded differently. The government being back in action ensures these operations continue normally without any threat of future disruption.
• Market Stability: A resolved shutdown can reduce the political uncertainty that sometimes causes short-term volatility in the stock market, which can indirectly affect the balance of market-based retirement savings plans like the TSP’s C, S, and I funds.

A federal civil service career may not be a way to get rich. Yet after decades of performing meaningful and satisfying work, you can look forward to a financially secure and dignified retirement.

Since the late 1980s, federal retirement has consisted of three basic components. Feds who qualify for full retirement can expect their pension, known as their annuity or Basic Benefit, calculated by the Office of Personnel Management at the time of retirement. Civil service reform of that era added a Social Security benefit to compensate for the larger annuities of the earlier Civil Service Retirement System. You don’t have much control over the specific eventual payouts of these two components; they derive from standard calculations based on salary and time.

When it comes to the third component of retirement – your Thrift Savings Plan – actions throughout your career can greatly influence the account you retire with. Small adjustments in strategy early in a career can magnify to significant gains later on, thanks to the historically long-term gains of the stock market.

But it doesn’t happen automatically. In this article, I’ll outline important steps you can take to help ensure you’ll be able to afford those European river cruises after you’ve left your full-time career.

Put enough in

It sounds obvious: The more you contribute to the TSP, the more you’ll have later. Yet too many federal employees fail to take a basic step; namely, contributing enough to earn the maximum match the government makes to your TSP.

The government contributes 1% automatically to your TSP account each year. It will increase that contribution by 1% increments for each additional 1% you contribute, up to an additional 4%. That is, if you contribute 5% of your salary each pay period, the government will keep matching.

A couple of important details about matching contributions:

• For the first 3% of your salary you contribute, the government will match it 100%.
• If you contribute another 2% (for a total of 5%), the government will match half of that. In other words, if you contribute the full 5%, the government will add another 4%.
• You may contribute more than 5% (up to the maximum allowed), but government matching ceases beyond that.

Also keep in mind that your contribution to the TSP is vested the moment you make it. So is the government’s match – with the important exception of the automatic 1%. That’s subject to a 2-year or 3-year vesting period depending on your position. That means you’d have to forfeit the 1% should you leave government service before the vesting period.

Note that tax law puts a limit on yearly contributions to tax-deferred individual retirement accounts. This year it’s $23,500. To max out your TSP, simply divide that number by the number of pay periods to determine the per-period contribution.

It’s wise to spread out your contributions evenly over the year. That way, you’ll max out the government matching contribution.

And keep this in mind: If you are 50 or older, you can take advantage of a provision known as catch-up contributions. Check with TSP for your own eligibility and catch-up max, but this year FEBA estimates you’ll be able to catch up by as much as $7,500. Those between the ages of 60 and 63 can likely contribute up to $11,250 in catch-up savings.

Pay taxes now?

Most federal employees stick with traditional TSP contributions; those made with pre-tax dollars. This presumes that, once you retire, you’ll fall into a lower tax bracket and thus pay less taxes on withdrawals than you would have on the same income dollars when you were working.

For a myriad of reasons, that’s not always the case. For example, retired senior executives or those with highly technical jobs often find themselves working in industry at or past the age at which they must make required minimum distributions from their TSP accounts. That typically puts them in a higher tax bracket.

This is where the Roth option comes in. A Roth account consists of TSP contributions using after-tax dollars. You therefore don’t pay taxes on eventual withdrawals. (Roth IRAs get their name from former Sen. William

Roth, sponsor of the legislation that enabled this form of retirement savings account.)

TSP statistics show that of the more than 7 million accounts, only about a third are Roth. If you have only a traditional TSP, consider adding a Roth option as a strategy to give you more flexible tax approaches in the future. The TSP offers a way to convert some or all of your TSP to a Roth. Because such a transfer entails taxes now, only do this after consulting with a qualified tax expert who can work through your individual situation.

Timidity = loss

Many TSP participants feel safe by investing most of their dollars in the TSP’s G-Fund. Because it consists of government bonds, the G-Fund never shrinks, meaning you get a basically guaranteed positive return on your investments. But that growth is almost always below the rate of inflation.

The result? Over time your savings have ever less real buying power.

A related mistake is retreating to the G-Fund when the stock market goes through a period of gyration with big swings down and up. No one can time the market, so nervous investors often end up selling low, then buying high as they chase the inevitable upswings.

Over the course of a 25- or 30-year career, the difference between a pure G-Fund investment and a diversified one that includes stock funds can add up to hundreds of thousands of dollars. It can determine whether you join the ranks of those with at least $1 million in their TSP.

Alternative strategies include contributions aggressively to the C fund. True, the C, S, and I correlate, meaning they move in the same direction at the same time and carry relatively the same risk. But the C fund has a much larger long-term rate of return.

Keep in mind, TSP now automatically puts new hires into the appropriate L fund based on their date of birth. A L-Fund customized such that the “conservative” portion is all G fund and the “aggressive” portion all C-Fund has historically produced a higher return and with lower fees than the standard-issue L-Fund.

Other ways to enhance

Several other practices can help your TSP investment help you. These include:

• Staying on top of your intended beneficiaries, such as after divorce and you don’t want your ex to remain the beneficiary. The TSP lets you manage beneficiaries online.
• Letting the funds stay put unless you have a dire, potentially life-changing need to take a loan against your TSP investment. TSP loans can go as long as 5 years (15 years for real estate). They are not considered withdrawals if they are in good repayment standing. However if you default on the loan you will get a taxable disbursement and the 10% penalty if under 59 ½.
• Making careless withdrawals, such as a large lump sum the minute you hit 73. You’ll end up overpaying taxes.

Finally, consider whether to leave you funds in the TSP after you retire, versus rolling them over into a standard IRA. True the TSP has low fees and a good record of funds management. On the other hand, an IRA gives you access to a vastly larger universe of investment options. You also get more withdrawal flexibility with an IRA. The TSP only lets you make withdrawals proportionately over the funds you’re in. And, unlike the TSP, an IRA lets you make a tax-free qualified charitable donation, or OCD, once you reach the age of 70½.

Regardless of the many possible strategies you choose, contributing to your TSP to the maximum and managing it carefully will go a long way to ensuring you’ll achieve the retirement you hope for.

The post The government shutdown is over- What that means and best practices to maximize your Thrift Savings Plan first appeared on Federal News Network.

© Getty Images/Andrii Yalanskyi