Since your FERS annuity (pension), Social Security and Thrift Savings Plan (TSP) provide three streams of retirement income, you may be tempted to put together a do-it-yourself retirement plan. In fact, according to an article on the CNBC.com website, over 60% of pre-retirees go it alone. Then again, when you take the DIY route you run the risk of making costly mistakes.
Miscalculating Deductions From Your Monthly FERS Annuity (Pension)
When planning for retirement, far too many federal workers overestimate the amount of their FERS annuity (pension) because they’ve miscalculated how many deductions are taken from their monthly payment. Keep in mind that the FERS survivor benefit reduces your monthly pension by 5% or 10% depending on which type you elect when you retire. Other monthly deductions include: insurance premiums for FEHB, FEGLI and FEDVIP plus FLTCIP premiums if you were enrolled before the current suspension.
Underestimating Federal Income Taxes
Since you paid into your FERS pension with after-tax earnings, you may assume most of your annuity will be tax free. In reality, your FERS contributions make up a small amount of your total pension. Your annuity is calculated by spreading out your contributions over the projected number of years of your retirement. The remaining portion is taxable as income. On average, this taxable portion can be as much as 95% or more of your total annuity.
Your Social Security is also taxable by as much as 85% when your yearly income exceeds thresholds established by the IRS. And don’t forget that 100% of your traditional TSP distributions are also taxable. Then again, depending on where you live, some or all of your retirement income may be subject to state income taxes.
“If you assume you’ll pass away by age 80, will your retirement savings be enough to cover 10 more years of expenses if you live till 90?”
Underestimating Your Longevity
Believe it or not one of the biggest risks to your retirement is underestimating how long you’ll live. If you assume you’ll pass away by age 80, will your retirement savings be enough to cover 10 more years of expenses if you live till 90? Thanks to inflation, living longer costs more money. It also increases your chances of needing Long-Term Care (LTC) in a nursing home which is not covered by FEHB or Medicare. Without a LTC insurance policy, non-medical custodial care becomes an out-of-pocket expense.
Other Costly DIY Mistakes You May Make
- Filing too early for Social Security.
- Miscalculating your creditable service.
- Mismanaging your accrued annual leave & unused sick leave.
- Missing out on the FERS 10% Bonus.
Don’t go it alone. Consider working with an FRC® trained advisor who understands your federal benefits.
