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Understanding Federal Retirement: Debunking Common Misconceptions

As federal employees approach retirement, many are preparing to navigate the complexities of the federal retirement system. With the Office of Personnel Management (OPM) anticipating a significant increase in retirement applications due to the Voluntary Early Retirement Authority (VERA) and the Deferred Resignation Program (DRP), it’s critical for employees to understand the retirement process and separate fact from fiction.

OPM recently noted an “expected doubling of the retirement application backlog” in a contract award justification for modernizing its HR systems. This guide addresses common misconceptions about federal retirement benefits, including pensions, the Thrift Savings Plan (TSP), health and life insurance, and survivor benefits, while providing actionable insights for planning a secure retirement.

Key Misconceptions About Federal Retirement

1. Retirement Pay Starts Immediately

Misconception: Many federal employees believe their annuity payments will begin as soon as they retire.

Fact: Retirement payments do not start immediately. After an employee retires, their agency submits their retirement packet to OPM on or after the retirement date. Due to OPM’s processing backlog, it can take up to 90 days for processing to begin. Retirees typically receive their first “interim” annuity payment within two to three months, which is approximately 60-70% of the final annuity amount. This reduced amount accounts for estimated taxes and benefits deductions. Once OPM completes the final calculations, retirees receive a lump-sum payment to cover any underpaid amounts.

Tip: Plan for a potential delay in payments by maintaining a financial cushion to cover expenses during the first few months of retirement.

2. The Thrift Savings Plan (TSP) Is Sufficient for Retirement

Misconception: Some employees assume their TSP account alone will cover all retirement expenses.

Fact: Federal retirees typically rely on three income sources: their federal pension, Social Security, and their TSP. The pension and Social Security provide predictable monthly amounts, but the TSP must bridge the gap to meet lifestyle expenses. The amount needed in a TSP account varies based on individual financial goals, living expenses, and desired retirement lifestyle. TSP withdrawal options include partial withdrawals, full withdrawals, installment payments, or an annuity. Many financial advisors recommend transferring some or all TSP funds to an IRA or Roth IRA for greater investment flexibility, which can be done without taxes or penalties if rolled over directly.

Tip: Consult a financial planner to estimate your retirement expenses and determine an appropriate TSP balance. Explore withdrawal options well before retirement to align with your financial strategy.

3. Federal Employee Health Benefits (FEHB) End or Become More Expensive in Retirement

Misconception: Employees often worry that FEHB coverage ends at retirement or becomes significantly more costly.

Fact: Eligible federal employees can continue FEHB coverage into retirement if they have been enrolled in FEHB for at least five consecutive years immediately before retiring and are enrolled on their retirement date. Eligible spouses, dependent children, and children with disabilities may also be covered without meeting the five-year requirement. In retirement, the government continues to pay approximately 72% of the FEHB premium, similar to active employment. Retirees can also enroll in Medicare Parts A and B, where Medicare becomes the primary payer and FEHB acts as secondary, providing near-comprehensive coverage. Some retirees opt for lower-cost FEHB plans to reduce premiums.

Tip: Verify your FEHB eligibility and explore Medicare coordination options to optimize healthcare costs in retirement.

4. Federal Employee Group Life Insurance (FEGLI) Costs Remain the Same

Misconception: Employees assume FEGLI premiums will stay consistent after retirement.

Fact: While FEGLI is affordable during employment (costing $10-$30 per pay period for Basic coverage), premiums can increase significantly in retirement, depending on the plan (Basic, Option A, Option B, or Option C). Many employees are unaware of their specific FEGLI plan or its costs. Understanding your coverage is essential to maximize benefits and manage expenses in retirement.

Tip: Review your FEGLI plan details and consult a benefits specialist to assess whether maintaining or adjusting coverage aligns with your retirement budget.

5. Survivor Benefits Are Automatic and Free

Misconception: Employees believe survivor benefits are automatically included in their retirement plan at no cost.

Fact: Survivor benefits require deliberate choices on the retirement application and come with a cost, typically a percentage deducted from the pension. Options differ between the Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS), primarily affecting spouses or, in rare cases, other beneficiaries. The chosen benefit level impacts the monthly pension amount.

Tip: Discuss survivor benefit options with your spouse and a retirement consultant to balance costs and coverage needs.

6. Spouses Automatically Retain FEHB Coverage in Retirement

Misconception: Retirees assume their spouse’s FEHB coverage continues automatically after their death.

Fact: Without a survivor benefit, a spouse’s FEHB coverage ceases upon the retiree’s death. Even a minimal survivor benefit ensures continued FEHB coverage for the spouse. Retirees should evaluate their overall financial situation—including assets, spouse’s income, life insurance, debts, and other obligations—when deciding on survivor benefits.

Tip: Work with a federal retirement consultant to assess survivor benefit options and ensure your spouse’s healthcare needs are met.

Planning for Retirement: Key Considerations

To prepare for a smooth transition into retirement, federal employees should:

• Understand Processing Timelines: Anticipate delays in annuity payments and plan financially for the interim period.

• Evaluate TSP Strategies: Calculate retirement expenses and explore TSP withdrawal or transfer options to meet financial goals.

• Review Health and Life Insurance: Confirm FEHB eligibility and assess FEGLI costs to optimize coverage.

• Plan Survivor Benefits: Make informed decisions about survivor benefits to secure your spouse’s financial and healthcare future.

• Stay Informed: Attend webinars or consult federal retirement experts to stay updated on benefits and regulations.

Conclusion

Navigating federal retirement requires careful planning and a clear understanding of benefits. By debunking common misconceptions and leveraging available resources, federal employees can make informed decisions to ensure a financially secure and fulfilling retirement. Stay proactive by attending educational events, consulting experts, and exploring Federal News Network’s resources for the latest updates.

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Nothing in this newsletter is financial advice. Always do your own research and think for yourself.