Why federal retirement benefits are more complex than advisors realize

Federal retirement benefits aren’t as simple as they seem. In many cases, they’re far more complex than those in the private sector.

Advisors with clients who receive federal benefits must become experts in pension rules, service credit calculations, and benefit elections to serve as a valuable resource during both the planning and retirement phases.

By doing so, costly mistakes can be avoided, and clients have a better chance of success.

The FERS details many advisors miss

According to Meghan Hoover, investment associate at NovaPoint Capital, who was previously a federal employee and is currently a military spouse, the greatest misconception has to do with the Federal Employees Retirement System (FERS).

“Most advisors who are unfamiliar with FERS assume you have to work 20 or more years to receive it. They also believe there’s only one pension calculation,” Hoover explained.

The reality is that there are different pension calculations for Special Provision Employees, such as law enforcement officers, air traffic controllers, firefighters, Customs and Border Protection officers, and nuclear material couriers.

Additionally, there are pro-rated pension benefits for employees who leave government service before the 20-year mark.

Many advisors also overlook military service buybacks. These allow military members who later became federal employees to purchase their years of military service and credit them toward their FERS pension.

“This strategy can significantly increase their eventual pension benefit, yet many advisors are unaware this option even exists," said Robert Zajkowski, advisor at Upleft. "It can materially impact a client’s retirement income if not properly considered.”

Aligning three income streams

In many cases, clients who have worked in the federal sector have access to three income streams to support their retirement: a FERS pension, Social Security benefits, and Thrift Savings Plan (TSP) withdrawals.

Since these benefits often have staggered start dates, coordinating them can get complicated.

“Additional planning might be required to plan for income gaps until all three income streams are in place,” Hoover noted.

It’s also important to remember that while a client can receive a FERS pension even if they put in fewer than 20 years of service, it’s pro-rated and a 1% multiplier is applied to the highest average salary they earned during any three consecutive years of work.

The caveat, however, is they must wait until age 62 to receive their full payout for those years of service. If they choose to collect their benefit at Minimum Retirement Age (MRA), it will be permanently reduced.

Advisors must factor all of these variables into account when designing a retirement plan for federal employees.

Where advisors can add the most value

At the end of the day, the FERS pension is not as generous as most think. It’s simply one piece of a federal employee’s retirement income, not the main source.

“The federal government places a stronger emphasis on personal savings in the TSP as the primary income stream for retirement," Hoover explained. "Ensuring an employee always receives the government’s 5% match is critical and so is maximizing contributions."

That’s where advisors can truly make a difference.

They need to reinforce the importance of taking full advantage of the TSP and coordinating it with the FERS pension and Social Security.

Hoover recommends asking two questions to help guide the retirement planning conversation.

First, were you a Special Provisions Employee?

As noted above, there are different pension calculations, benefit provisions, and in some cases, mandatory retirement ages or earlier eligibility for reduced pension payouts.

The second question should be what income protection do you need for your spouse, children, and/or dependent family?

“Survivor benefit elections must be made when applying for retirement," Hoover said. "You can have more than one survivor elected, but each comes at a separate cost which depends on whether you choose a 25% or 50% survivor benefit election.”

Lastly, the cost for survivor benefits is permanently reduced from a pension and must be reflected in retirement cash flow projections.

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