Retiring under the Federal Employees Retirement System (FERS) offers a robust framework for financial security, combining a basic annuity, Social Security, and the Thrift Savings Plan (TSP). For those retiring before age 62 with a full annuity, a Retiree Annuity Supplement provides income until Social Security kicks in. To maximize your TSP and enjoy a successful FERS retirement, here are some tips for planning your retirement finances.
Timing Your TSP Withdrawals
If you’re not ready to tap into your TSP, perhaps because you plan to work post-retirement, consider leaving your funds untouched. Many FERS and CSRS retirees continue working, either due to financial needs or a desire for new opportunities. Your TSP will keep growing based on your chosen investment funds. Delaying withdrawals can significantly boost your nest egg.
Navigating TSP Tax Rules
Withdrawals from traditional TSP accounts are taxed as regular income, often at both the federal and state levels. If you withdraw before age 59½, a 10% penalty may apply unless you separate from service in or after the year you turn 55 (or 50 for public safety employees with 25 years of service). Early retirements under VERA or DSR before age 55 don’t qualify for this exemption. To sidestep penalties, opt for life-expectancy-based installment payments, but maintain them for at least 5 years or until age 59½. Altering or adding withdrawals during this period could retroactively trigger the penalty.
Prioritizing Taxable Accounts
Before dipping into your TSP, consider using savings in taxable accounts like mutual funds. Capital gains taxes (0%, 15%, or 20%) are typically lower than income taxes on TSP withdrawals, preserving your tax-deferred savings for later.
Balancing Longevity and Lifestyle
Withdrawing too much from your TSP early risks running short, especially with unpredictable lifespans and investment returns. A 6% return stretches funds further than 4%. To gauge retirement needs, calculate your current monthly net income: multiply your biweekly net pay by 26, then divide by 12. Retirement often brings new expenses, like travel or hobbies, so plan for a lifestyle that matches your goals. Early retirement demands a larger savings buffer to ensure long-term security.
Building a Secure Future
Your FERS retirement is more than just numbers; it’s about crafting a fulfilling life. By strategically managing your TSP and understanding its rules, you can confidently transition into retirement. Reach out to a Federal Retirement Consultant (FRC®) who can provide a comprehensive benefits analysis and help tailor a retirement plan that fits your needs.
