By Jay Shareef and Chris Rhoads
The government may be one of the few remaining employers to offer a pension to its employees. And although you may be thinking that the government needs to get with the times, the value of offering a pension will never go out of date, as your pension provides guaranteed income for the entirety of your retirement (and possibly for your spouse if you pass away first).
You have tons of options when it comes to your government pension. While this is a good thing because you have flexibility, it also means that retiring with your pension is a bit more complicated than simply claiming and receiving your payments every month. Below, we describe 3 factors to consider when weighing your pension options.
1. Choose the Right Survivorship Elections for Your Family
Part of your government pension involves selecting a survivorship election for your dependents if you pass away unexpectedly. The types of benefits available include:
- A current spouse survivor annuity
- A former spouse annuity (can be voluntarily elected or court-mandated)
- A one-time lump-sum payment
If you are retiring under the Federal Employees Retirement System (FERS), your spouse can receive up to 50% of your unreduced annual benefit if you elect the full FERS survivor annuity. Electing the full survivor annuity would permanently reduce your pension by 10% each month.[1] If your survivor is someone other than your spouse, the cost may be higher.
You also have the option to choose a reduced survivor benefit, which would provide your spouse or other dependent with 25% of your unreduced annual benefit. For most government employees, the cost for the reduced survivor annuity is about 5% of the monthly benefit amount.[2]
You do have the option to elect for no survivor benefit if that’s right for your family. However, for most families, it makes sense to choose the full survivor annuity or the reduced survivor annuity so your spouse can maintain access to the Federal Employees Health Benefits (FEHB) program if you pass away.
It’s important to evaluate your options carefully and strike the right balance between maximizing your lifetime income while protecting the needs of your spouse or other dependents. If you pass away early in retirement, your spouse may have a difficult time making up for your lost pension income or health insurance access.
2. Plan for Taxable Income When You Begin Receiving Pension Income
Most retirees draw retirement income from a variety of sources. This is no different for government employees. Each source you’re drawing from has its own tax implications, and when you don’t properly structure your income distributions, you can end up paying significantly excessive taxes. Retirement sources you may be drawing income from include:
- Your FERS pension
- TSP distributions
- Other retirement account distributions
- Social Security benefits
- Taxable investment accounts
- Real estate investments
You have a lot more freedom to engage in strategic tax planning during retirement than you do in your working years. So once you start receiving pension income, it’s important to coordinate income from other sources so you provide for yourself in a tax-efficient manner through every stage of retirement.
3. Build an Investment Portfolio Around Your Pension
Additionally, you can structure your income withdrawals from different sources strategically to make your retirement savings last longer. Allocating your Thrift Savings Plan (TSP) investments alongside your FERS benefits, Social Security, and other invested assets can allow some of your investments to grow longer while you offload less tax-efficient income sources first.
Your investments and retirement income strategies should all be structured around the goals you have for your retirement. And because your government pension provides you with a larger-than-average guaranteed income source—compared to retirees who do not have a government pension—you may be able to take on more risk with some of your investments later into retirement.
How We Can Help
Once you lock in decisions regarding your pension, you typically only have a short window to make changes. After this window, there’s no going back to change your mind, so it’s imperative to make the right decisions from the start.
Partnering with a trusted financial advisor like the team at WealthFlow Financial can help you feel more confident that you’re making the right decisions. Our team specializes in financial planning for government employees and their families and we understand the challenges and decisions. If you don’t already have an advisor helping you with that, reach out to us at (301) 798-5250 or schedule a phone call now.
About Jay
Jay Shareef is vice president, financial advisor, federal benefits consultant, and co-founder at WealthFlow Financial. As a U.S. Army veteran, Jay is passionate about helping federal employees create a bulletproof plan for retirement and navigate the often confusing and complicated federal benefits landscape. He spends his days educating and providing clients with unbiased insurance benefits and retirement strategies to help his clients create guaranteed income for life. As a problem-solver and trustworthy resource, Jay always puts his clients and their needs first so they can find financial peace of mind. To learn more about Jay, connect with him on LinkedIn.
About Chris
Chris Rhoads is a co-founder and vice president of WealthFlow Financial. As a registered investment advisor and independent financial professional, Chris is committed to helping his clients in retirement and he takes a holistic approach to financial planning that includes insurance and risk management, investments and wealth management, retirement income planning, and estate and tax planning. Chris has been married to his wife, Tia, since 2009 and they live in Frederick, MD, together with their two young daughters. In his free time, Chris enjoys traveling, watching sports, and being active in causes about which he cares passionately. To learn more about Chris, connect with him on LinkedIn.
[1]https://plan-your-federal-retirement.com/fers-survivor-benefits/#:~:text=If%20you%20choose%20the%20full,reduction%20to%20your%20FERS%20pension.
[2]https://plan-your-federal-retirement.com/fers-survivor-benefits/#:~:text=Reduced%20FERS%20Survivor%20Annuity%20Option,of%20your%20regular%20FERS%20pension.