Retirement planning for federal employees comes with unique challenges and considerations. The Office of Personnel Management (OPM), responsible for administering federal retirement benefits, is prohibited from offering financial advice. This leaves many pre-retirees turning to their colleagues for guidance, which can lead to the spread of misinformation. Here, we address some common misconceptions to help you better prepare for retirement.
Immediate Pension Payments Upon Retirement
Contrary to popular belief, you will not start receiving your pension immediately after retirement. The OPM typically requires several months to process applications for an immediate annuity. Compounding this delay, there is often a year-end backlog of applications. Usually, around the third-month post-retirement, you will begin receiving interim payments amounting to approximately 80% of your full net annuity. It may take an additional three months before your first full pension check arrives. Therefore, it is crucial to have adequate savings to bridge this interim period.
Reduced Spending in Retirement
It’s widely believed that expenses decrease significantly upon retirement. However, many retirees wish to maintain the same standard of living they had during their working years, leading to similar monthly expenses. Surveys indicate that a considerable number of retirees actually spend more in the first few years of retirement. When factoring in inflation, market volatility, and rising healthcare costs, it becomes evident that retirement income may not be sufficient to cover expenses over a span of 20 to 30 years.
Lower Tax Bracket in Retirement
Many retirees are surprised to discover that they may not fall into a lower tax bracket upon retirement. Taxes on the Federal Employees Retirement System (FERS) annuity and Social Security income can be substantial. Additionally, distributions from the Thrift Savings Plan (TSP) are fully taxable since the plan is funded with pre-tax income. With the expiration of the Trump-era tax cuts on December 31, 2025, income tax rates are expected to rise, potentially increasing the tax burden on retirees starting in 2026.
Mandatory TSP Distributions at Retirement
Another misconception is that TSP distributions must commence immediately upon retirement. In reality, distributions are not required until you reach the age for Required Minimum Distributions (RMDs) from your traditional TSP. As of January 1, 2023, the RMD age is 73 for individuals born after December 31, 1950, and will increase to 75 by 2033. Additionally, as of January 1, 2024, Roth TSP balances are no longer subject to RMDs.
Planning for retirement should not be based on hearsay or incomplete information. It is essential to work with a certified Federal Retirement Consultant (FRC®) who understands the intricacies of federal benefits. By dispelling common myths and arming yourself with accurate information, you can make informed decisions to ensure a financially secure retirement.
