Federal Employment has perhaps never been more uncertain. 

The Cross Roads 

When we visit with Federal Employees, we usually run into two groups of people. 

Group 1: A Former military member who is now having a second career as a civilian fed.

Group 2: Someone who started Federal Service in their 20s and has stayed to have a meaningful impact in federal service (the benefits are too bad either).

No matter which group you fall into, this or another, volatility as a federal employee has always gone along with the job. Furloughs aren’t anything “new” for most seasoned federal employees. 

Here are Major U.S. Federal Government Furloughs / Shutdowns (chronological):

• May 1, 1980
• Nov 20 – Nov 23, 1981
• Oct 3 – Oct 5, 1984
• Oct 16 – Oct 18, 1986
• Dec 18 – Dec 20, 1987
• Oct 5 – Oct 9, 1990
• Nov 13 – Nov 19, 1995
• Dec 16, 1995 – Jan 6, 1996
• Oct 1 – Oct 17, 2013
• Dec 22, 2018 – Jan 25, 2019
• Oct 1, 2025 – ongoing
  

But this time around, the financial uncertainty of not knowing if Federal employees will receive back pay has made many Federal Employees who passed on the “Fork in the Road” question whether they should stay.

There is a moment during our eight-hour-long benefits class, when we ask federal employees who love their job, half the hands go up.  Then we ask who would stay and do it for free? Normally, all but maybe one hand goes down. This time around, there was a collective laugh as someone made the joke, “Hell, we are now!”  The gentleman was working in law enforcement, and although he was considered “essential,” he wasn’t receiving a paycheck and wasn’t sure when he would. He came to the class because, after talking with so many co-workers about what they wished they would have done differently, they all told him they wished they would have started to learn about their benefits before they were forced to retire. They needed time to get their financial affairs in order and a week’s notice to turn in your paperwork, didn’t feel like enough time. He didn’t want to be put in the same situation.

It’s been a rollercoaster ride for most federal employees, and it doesn’t look like this ride is going to end any time soon. 

So let’s dive into what we really want federal employees to start working on before they consider leaving federal service.

Can you afford to retire? Will your pension and social security be enough?

Make no mistake about it, cash flow is the King of Retirement. When you spend your entire adult life earning a paycheck and saving for retirement, the shift from accumulation to distribution is… tough. 

To make sure that you’re ready to retire, here is what we recommend you do BEFORE retirement – start living off of your expected retirement income as soon as possible, and if you can, two years before retirement begins.  Allow yourself time to adjust to what your net retirement income will be. Evaluate where the shortfall is and determine what you really need to supplement your lifestyle on a monthly basis. 

One strategy that we work with Federal Employees on is taking 100% of their income and putting it into a savings account. Then, once a month (oh, did you know that your retirement pension comes in only once a month, not twice a month like your paycheck does today?), have only your anticipated net retirement income deposited into your everyday checking account to cover your monthly expenses.

Why do they keep saying net?

Too often, federal employees calculate their gross pension income and forget that one of their biggest expenses throughout their lifetime is taxes! 

The pension that you receive when you retire under the Federal Employee Retirement System (FERS) is subject to federal income tax. There is a tiny portion of your pension that is tax-free, as it was made with your after-tax contributions throughout your work years. However, the greater portion of your pension will be taxable. 

To calculate what part of your pension is tax-free, the Internal Revenue Service uses the simplified method. Essentially, the Office of Personnel Management (OPM) will tell you what your total contributions to FERS are. The IRS assigns you a life expectancy that is based on your age at the time in which you retire from federal service. Your total contributions divided by your life expectancy will equal the annual tax-free amount of your pension that you will receive. The rest of your pension is subject to federal income tax.

Do States Tax Federal Employee Pensions 

Remember how we said that taxes were going to be one of your biggest expenses during your lifetime, most likely, well, let’s talk about State Income taxes.

What state you choose to retire in matters. At the time of this publication, there are only a few states that do NOT tax pension income because they do not assess a state income tax on their residents. 

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington and,
• Wyoming

There are a few states that require their residents to pay a state income tax; however, they do not fully tax all of a federal employee’s pension. Those include:

• Illinois
• Iowa
• Mississippi and,
• Pennsylvania 

Several states partially tax pensions and have blended scenarios for retirees.  

If you choose to live in one of these states, make sure that you work closely with your financial advisor and tax professional to ensure that you are accounting for the reduction in your pension income.

Is Social Security Taxable

When we explain federal employee benefits, we often refer to them as a “Three-Legged Stool.” Understanding the role each leg plays in your cash flow is critical – you want to know which ones you can lean on and when.

Your FERS Three-Legged Stool is made up of your pension income, your Social Security benefits, and your Thrift Savings Plan. 

We discussed which portions of your pension are taxable. Distributions from your Pre-Tax Contributions to your Thrift Savings Plan are also taxable in the year that you receive the income. This is one reason that when it comes to the TSP, which is a phenomenal accumulation tool for federal employees who want to save for retirement, that we strongly recommend you speak with an advisor who understands your benefits. You want someone who works with all areas of financial planning, not exclusively investment management, when it comes to making long-term decisions around retirement.

What most federal employees don’t fully understand is how much of their Social Security is taxable. No more than 85% of your Social Security is taxed. 

Where we see most federal employees miscalculate their taxes when preparing for retirement is that they forget to make adjusted withholdings on their Social Security income. This is completed using Form W-4V.  No one likes an unexpected tax bill, and having one in retirement is not any more pleasant. 

There are so many aspects of your retirement that have to be aligned. If you think you would benefit from a meeting with an advisor, schedule your appointment today on the following link:https://plan-your-federal-retirement.com/schedule-your-personal-consultation/