In this four-part series, get guidance on making the decision to leave the federal government workforce.
Know Your Dollars In
Now we’re probably wondering why we didn’t start with a review of dollars coming in first. That is because this is where we have the most flexibility to change. Your lifestyle demands a specific baseline of expenses that no matter how much we cut other expenses; those remain. So, if we can’t cover the basics, it’s a hard truth we need to address. We have the most power to increase our retirement income while we are working. Once we retire it may be harder to save and find work. As a federal employee, you have three distinct ways to increase your retirement income:
First, you are entitled to a pension. Every day, month, year that you continue to work grows the amount of guaranteed income you will receive. This is a sure way of getting closer to maximizing retirement income.
Something to note: are you close to reaching the milestone age of 62? If you are retiring at or age 62 and have at least 20 years of service (including sick leave), your pension calculation changes from 1.1% x high three x years of service to 1.1%. This is a 10% raise for the rest of your life! When you are running the retirement reports include one showing the 62 number and you can visually see the difference.
An additional way to increase your pension amount is by saving your sick leave hours. Unlike annual leave, there is no cap on how many hours you can accrue, and it does not get paid out in a lump sum. At retirement, sick leave gets converted to service time and added to your accrued service time for your pension calculation, growing your income!
If you have accessed a system to run retirement estimates, run a few for different time periods. Maybe one for as early as possible, one for the target time and another for a period in between the two. Part of what I do as a financial planner is to look at all the options. We can make decisions based on what the overall impact will be to the numbers.
For most Feds, the TSP holds most of your cumulative retirement savings. And this past 12+months has been incredible for most people, what do we do now to make this money last?
Know your allocation:
Without a proper asset allocation strategy, your TSP investments may be too risky or too conservative for your retirement income goals. Developing a well-diversified asset allocation plan tailored to your risk tolerance and time horizon is essential for long-term investment success. Asset allocation is more than “not putting all your eggs in one basket.” Asset allocation is about decreasing your risk but also increasing your return. Sounds too good to be true? Well, that’s exactly what Harry Markowitz won the noble prize for in 1990. He mathematically proved you could do both with proper asset allocation2. Avoid the “water cooler” chatter online or social
media where people are trumpeting TSP allocations based on their situation and not on your income/ withdrawal needs. I see plenty of people being way too conservative for their situation because that’s what “google” told them.
Know Your Risk Tolerance
Allowing your investment portfolio to become imbalanced by neglecting to periodically rebalance can expose you to unnecessary risk or hinder your ability to achieve your financial goals. Regularly reviewing and rebalancing your portfolio helps maintain a suitable asset allocation and risk profile over time.
Has the last 15months been great in the market and for our portfolio? Yes! For many of folks I see for retirement planning admit they were very nervous thinking about future market volatility.
Why? What did they all have in common? All were Overweighted to the C Fund.
But, one should always keep in mind that while the C fund has done well, in proper asset allocation one should not overweigh an asset class just because it has done well recently. When you are targeting a specific allocation tied to your risk tolerance, if you get out of balance, what are you essentially doing? You are taking more risk than you are getting “paid” for.
In our recent market, the C fund has been on an unprecedented growth over the last 10 years, so what do we do as emotional investors? We pile more into what is doing well, hoping it will continue to go up, when we should do the opposite and rebalance back to our targeted percentages. This will help prevent us from experiencing a major loss in the even of a market downturn.
Know Your Withdrawal Amounts
There are some tools on TSP.gov and OPM.gov that allow you to estimate growth rates and withdrawal amounts needed to support you financially. While they’re not the most super detailed and don’t consider all the details that go into a financial plan, it’s not a bad starting place. Something to keep in mind and research are “Safe withdrawal rates.” In high level, a safe withdrawal rate’s purpose is to have a lump sum of money last 25-30+ years. Generally, and has been highly debated recently, that safe withdrawal number is somewhere between 3- 5%.
Know When To Draw Social Security
In my decade of experience there have been few cases where it made sense for someone to draw their social security benefits early. However, it would be misguided to automatically dismiss this option considering the objective of this article, preparing to exit the government workforce. Drawing social security would provide a stream of income guaranteed for life. If drawing early, in combination with your pension income and TSP withdrawals meets all of your income needs, it may be the option for you and your family.
Two concerns to be aware of if you draw early are:
- The reduction is permanent. This means if your FRA was age 67 and you draw at 62 your benefit will be permanently reduced by 30%! A common misconception is that the benefits will be stepped up at FRA.
- The earnings test. If you draw SS before FRA and make more than $21,480 (2024 numbers) there will be a earnings test reduction to take back 1 dollar for every 2 over the limit. This is important to consider if you were planning to leave the Federal workforce and pursuing something in the private sector. It may be a big enough reduction to pause drawing social security early.
There are a dozen other considerations with drawing social security that would be worth collaborating through with your financial advisor, but for the sake of this article I want to highlight options to fulfill retirement income in the event of an unexpected work shortage.
Deciding to leave the government can be a tough decision. If you would like help with the financial planning surrounding this choice, please contact us.
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