When Abraham Grungold decided on a second career providing financial counseling to active and retired federal employees, he did not have to go far to find a test case.
After all, he is one.
Grungold retired in February after 36 years working for the federal government. He realized early on that his generous federal retirement plan could help him retire relatively wealthy — if he made smart choices along the way.
He did better than that, riding out several economic downturns to retire a millionaire three times over.
“The first 12 years of my federal career, I never earned more than $50,000 a year,” Grungold said. “A lot of federal employees think that they have to earn $100,000 a year in order to be a TSP [Thrift Savings Plan] millionaire. That’s just a misconception that employees have.”
The federal government is the nation’s largest employer, with roughly 4.3 million employees, including military members, and it offers a unique set of benefits. Many federal active and retired employees were the first participants in the Federal Employees Retirement System established in 1987 to replace the old Civil Service Retirement System.
The TSP plan is the centerpiece of the FERS, as the federal government engineered a massive shift from a defined benefit plan to a defined contribution plan. For employees like Grungold, the benefits are generous, but the onus is on the employee to make the decisions that lead to a comfortable retirement.
The industry responded to the need, and a thriving niche advice market emerged to provide advice to federal employees. Grungold — an investigative analyst at the U.S. Postal Service Office of Inspector General for the past 18 years — is living in both worlds.
“I saw a niche to be a financial counselor for federal employees,” explained Grungold, who started AG Financial Services three years ago in Plantation, Fla. “I understood all the benefits that the federal government provides its employees. I’m the guy who reads all the materials that come across every employee’s desk. Employees often just throw them in the trash.”
By the mid-1980s, the federal government came to the same realization as private industry: Traditional pension plans were going to chew up budgets if left unchecked. Workers were living longer and longer in retirement, and the money going out outstripped the money coming in.
FERS came about amid a remarkable period of bipartisanship driven by the need to rein in Social Security and cut the federal budget. Despite initial opposition from labor groups and veto threats from the Reagan administration, Congress ultimately enacted a plan that reduced federal spending and completely overhauled the federal retirement system.
FERS includes three basic elements:
• Mandatory Social Security coverage of civilian federal workers as a base.
• A basic and mandatory defined benefit pension plan, but with a lower level of benefits than the rich plan that existed at the time.
• And a new voluntary thrift savings 401(k)-type plan (patterned on the private sector), where worker contributions matched by the employer would be invested in a limited variety of investment funds. The changes applied to most federal civilian workers hired after 1983, including by the foreign service and intelligence agencies.
Social Security and the TSP are portable for employees who leave federal employment.
On June 6, 1986, President Ronald Reagan signed FERS into law, and it took effect Jan. 1, 1987. At the time, Grungold was early in his federal career, working as an auditor with the Pension Welfare Benefits Administration.
“When I went to my first meeting on the TSP in 1987, a lightbulb just went on in my head,” recalled Grungold, who has an MBA in finance from the University of Miami. “It made perfect sense to me. I knew I could reach the $1 million mark during my federal career.”
FERS remains essentially the same plan introduced in 1987, with some tweaks. Most notably, the TSP evolved from three funds in 1987 to 10 today, with the addition of a new after-tax investment option.
The TSP Modernization Act signed in 2017 by President Donald Trump loosened the restrictions on withdrawing funds from the accounts. TSP had been very strict about when users can access their own retirement funds, and the act essentially removed a lot of those old limits or penalties.
What To Do?
One major difference for employees in the federal system is they can retire and begin drawing benefits as early as age 55. At this relatively young age, participants have the option to dabble in a second career or just take an early retirement.
There are costs with both.
For starters, working longer earns the employee a better benefit, just like Social Security. The minimum retirement age (MRA) for eligible employees is 55 for anyone born before 1948. It is age 56 for workers born between 1953 and 1964, and age 57 for anyone born in 1970 or later.
The formula can get complicated, but the main regulation is as follows: Anyone retiring at the MRA with at least 10 years but less than 30 years of service will see their benefit reduced by 5% a year for each year they are under 62 unless they have 20 years of service, and their benefit starts when they reach age 60 or later.
If that wasn’t complicated enough, the federal government offers a Phased Retirement program. Employees in a phased retirement status continue to work on a part-time basis and draw partial retirement benefits during their continued employment.
So many options for when to quit working and what to do with their TSP funds can leave federal employees dizzy, said Martavius Jones of Jones Wealth Management Group in Memphis, Tenn.
Jones had been a financial advisor for about 15 years when his father retired from a Veterans Affairs job in Memphis in 2009. That’s when Jones learned the nuances associated with the federal retirement system.
“He said, ‘Son, they gave me this information when I started, and nobody’s ever talked to me about it since then,’” Jones recalled. “We’re talking about 11, 12 years that he worked with the VA, and nobody really sat down to help him better understand what his retirement options were.”
‘A More Comfortable Retirement’
The elder Jones referred other federal employees to his son, and they told similar stories. Martavius Jones, also a Memphis city councilman, would go on to earn his Chartered Federal Employee Benefits Consultant designation.
Today, his practice marketing focuses largely on federal employees. According to the most recent data collected by the federal Office of Personnel Management, nearly 73,000 federal employees and annuitants live in Tennessee. In fact, it’s a myth that most federal workers live in the Washington metropolitan area.
California is home to the most active and retired federal employees, with more than 362,000. To serve these FERS members, federal employee-focused advisory firms such as Jones’ have popped up nationwide.
“In advising federal employees, I still find that some of them really don’t have a good understanding of what’s available to them,” Jones said. “They are still in a position to have a more comfortable retirement with just a little guidance and advice along the way. And I like to think that’s what I can provide.”
The perks of being a federal employee extend beyond FERS. Federal employees have the option to continue life insurance and health insurance coverage — and even long-term care insurance — into retirement.
These options can make it easier for the advisor to craft a strong retirement plan that stretches employees’ dollars further, Jones said. But employees still need to be aware of what he calls the health care budget buster.
“They have about 10 years before they’re eligible for Medicare, so they do have the option of carrying their health benefits into retirement,” Jones explained. “So that’s something that’s a little bit easier for the federal employee, but it can be a little bit more expensive because most of that expense [for premiums] has to come out of their pocket.”
Cassie Knight is a federal benefits consultant with Fed Options and based in Spencer, Tenn. Knight was living and working as an independent insurance broker in Washington state about seven years ago when the independent marking organization she was working with offered education programs to federal employees.
Eventually, Knight transitioned to working with federal employees herself. According to the OPM, Washington state is home to about 122,000 active and retired federal employees.
“My goal was to help them become aware of what the benefits are and how they affect them in retirement,” Knight said. “I think the biggest thing was just wanting to provide the education to people.”
Retirement distributions generally come with tax implications, and it’s no different for federal employees.
When rollovers started in the 1970s, if the money that was withdrawn from the TSP (or other tax-advantaged account, such as an IRA) was rolled into another tax-advantaged account within 60 days, there was no tax due and there was no withholding.
But that changed in the 1990s when the law changed to withhold taxes from any rollover that was not a direct rollover. It generally comes down to whether the employee needs the money or not. If not, leaving it alone, or directly rolling it over to an IRA, means the employee can avoid taxes until they are forced to receive the required minimum distributions at age 72.
That’s not the only tax consideration for federal employees, Knight said. Employees may be getting a big lump-sum payment for back pay or a special retirement supplement check for their federal benefit earned while a FERS employee, she explained.
Those dollars need to be planned for as the employee enters retirement.
“Depending on the situation when an employee retires, in certain cases they can be bumped up to another tax bracket or put in a lower tax bracket,” Knight said. “Timing when things happen and how long they anticipate certain things to happen in their retirement picture is definitely something that advisors have to take into consideration because it could have unforeseen tax consequences.”
Like most of the workforce, many federal employees worked from home during the COVID-19 pandemic. Many of them also adjusted the timing of their retirement, Grungold said.
“I was interested in retiring last year, but I saw that it would be difficult for me in my life to travel,” he added. “So, I chose to work an extra year beyond my plan. And I have seen a lot of employees do that. I’ve also seen some that just say, ‘I want to get out because it’s just too crazy.’ The pandemic scared a lot of people in many different ways.”
Grungold’s business thrived during the pandemic, with federal employees seeking financial counseling. He does not sell products and never takes a commission, said Grungold, a former Securities and Exchange Commission investment advisor.
“Say an employee needs term life insurance,” he said. “I tell them who I’ve used in the past, and then I give suggestions for a company that they should shop around with, and I usually name the large companies. If an employee is looking to address their IRA, I’ll suggest three or four companies that are well known.”
A lot of government employees are eager to cut ties with the workplace once they retire, Grungold noted. And that means rolling their entire TSP nest egg to another plan. Grungold cautions against going all in with one retirement vehicle.
“If you have a substantial amount of money, don’t put it just with one company,” he said, “because it’s like putting all your eggs in one basket. If that basket drops, you have a bunch of broken eggs.”
In hindsight, the transition from the old civil service system to FERS is an example of win-win bipartisanship sorely lacking in the current political arena.
The government certainly came out ahead. The average monthly annuity payment to workers who retired under the Civil Service Retirement System in 2018 was $4,973. Workers who retired under FERS received an average monthly annuity of $1,834, according to federal data. About 96% of civilian federal employees were in the FERS system.
Employees also seemingly came out ahead through the TSP defined contribution addition. The total value of TSP accounts increased by about $100 billion in 2021, from $709.6 billion to $811.7 billion, according to data presented at the January TSP board meeting.
Unlike Social Security, officials say the FERS system is sound financially for decades to come.
Still, various proposals are floated from time to time to shave the government’s contribution.
Trump’s fiscal 2021 budget proposal would have required federal employees to contribute 1% more per year to their retirement accounts until the government and employees each contribute 50%. It also eliminated annual cost of living adjustments for future FERS retirees and reducing COLAs for retirees in CSRS by 0.5%.
Most of the changes were proposed in all four years of Trump’s term, but Congress refused to include them in the final budgets.
Top Three Mistakes Federal Employees Make
Federal employees enjoy more options within the Federal Employees Retirement System. Workers receive a basic pension, Social Security benefits and a 401(k)-style defined contribution component they control.
They also can opt to continue their life, health and long-term care insurance into retirement. It all adds up to a lot of choices when it comes to retirement planning.
It also means lots of openings for mistakes and missed opportunities. Financial counselor
Abraham Grungold, a recently retired federal employee, listed the three biggest mistakes FERS participants make:
1. Not paying yourself first. The government matches the first 5% federal employees contribute to the Thrift Savings Plan. So, it’s like a free 5% pay boost, Grungold said.
“Many employees don’t take advantage of it because they have a lot of debt,” he said. “And they just seem to be focused on other financial aspects of their lives. So that’s the biggest mistake.”
2. Failing to invest aggressively. In the short term, the market goes up and it goes down. In the long term, the market only goes up. The Dow Jones Industrial Average is up 71% over the past five years. $100 invested in the S&P 500 in 1980 is worth more than $12,500 today.
“Are you someone who likes to ride the roller coaster? Or do you like to ride the merry-go-round?” Grungold asked. “The people who ride the roller coaster can handle the ups and downs of the market. People who don’t want any stress, they like riding the merry-go-round. And they’re strictly in the government securities fund provided in the Thrift Savings Plan.”
3. Not working until age 62. The federal government considers age 62 the full retirement age to receive maximum benefits.
“That’s the magic age,” Grungold said. “A federal employee will receive a 10% increase to their retirement annuity just for reaching their 62nd birthday. And a lot of employees just aren’t aware of that.”