The Biggest Mistakes Federal Employees Make Planning for Retirement

The costly federal retirement mistakes are rarely about investments. They are misreading the high-3, leaving service time uncredited, retiring under MRA plus 10 without understanding the reduction, planning from a gross annuity figure, and discovering too late that FEHB, FEGLI and the survivor election largely close behind you.

Treating six benefits as six decisions

The pattern underneath almost every mistake on this page is the same. Federal retirement is one system with six interacting parts, and it gets decided as six separate errands, usually in the last few months, often by different people on different days.

The annuity is estimated by the benefits office. The TSP is handled online. Insurance elections are forms. Social Security is a separate agency entirely. Nobody owns the question of what the combination produces as monthly income after tax, and that is the question that matters.

The map of how the pieces connect is in federal employee retirement planning. What follows is what goes wrong when they are handled in isolation.

Misreading the high-3

The basic annuity is computed from your highest three consecutive years of average basic pay, not your highest three calendar years and not your final salary. Locality pay generally counts. Overtime, bonuses and most differentials generally do not.

Two things follow. A retirement date set a few weeks either side of a pay increase can land inside or outside the window you assumed. And anyone estimating their pension from current base salary is usually working from a number that is too high.

Get the figure from your agency rather than calculating it yourself, and ask which pay periods it actually includes.

Leaving service time uncredited

Several categories of service count toward your annuity only if a deposit or redeposit is paid. Military service is the common one. Temporary or seasonal service before a career appointment can be another, and so can a period where you took a refund of contributions after leaving and later returned.

Interest accrues on these deposits after an initial period, so the cost rises the longer the decision sits. People routinely discover the option in their final year, when it is at its most expensive and there is no time to spread the payment.

Unused sick leave is the opposite case and is widely underestimated. For FERS retirees it generally adds to the service time used in the computation, which is why burning sick leave in a final year can quietly cost annuity rather than save it.

Retiring under MRA plus 10 without doing the arithmetic

Reaching your minimum retirement age with at least ten years of service lets you retire. It does not give you an unreduced annuity. The benefit is generally reduced for each year you are under 62, and that reduction is permanent.

Postponing the start of the annuity can reduce or avoid that, and crucially tends to preserve the path back to federal health and life insurance. Deferring, which is a different thing, generally does not. Those two words get used interchangeably and the consequences are not interchangeable at all. The mechanics are in how FERS retirement works.

Planning from gross instead of net

An annuity estimate is a gross figure. What arrives is smaller, and the gap surprises people in their first year.

Compare net to net. Take your current take-home pay and set it against the projected annuity after all of the above, plus whatever the TSP will provide. That is the only comparison that answers whether you can afford the date.

This page is general information, not tax or legal advice. Figures, rates and eligibility rules are set by federal agencies and change. Confirm your own numbers with OPM or your agency benefits office, and tax questions with your CPA.

Missing the checks that close behind you

• FEHB. Carrying coverage into retirement generally requires enrollment for the five years immediately before you retire. The test is met on your retirement date or it is not, and waivers are rare.
• FEGLI. The reduction election is made at retirement. Coverage can generally be reduced or cancelled later, not increased.
• The survivor annuity. Elected once, with a short window afterward, and it determines whether your spouse can keep FEHB after your death. That link is the single most missed item in federal retirement.

All three are covered in FEHB, FEGLI and survivor elections.

TSP mistakes in the final years

Two are common and both cost money quietly. Front-loading contributions to hit the annual limit early can end your agency matching for the remaining pay periods of the year, so spreading contributions across all of them usually captures more. And becoming very conservative too early, years before any of the money will be spent, trades growth for a kind of safety the plan may not need.

A third is deciding what to do with the balance at separation without comparing the options. A rollover is one choice among several, and the comparison is in TSP rollover options.

Treating the supplement and Social Security as one decision

The FERS annuity supplement, where it applies, ends at 62 whether or not you claim Social Security then. It is also subject to an earnings test, so post-retirement work above an annual limit reduces it. People accept a second career without modelling that, and are surprised twice: once by the reduction, and again when the supplement stops regardless.

Claiming is its own decision, covered in how Social Security coordinates with a federal pension.

Starting late

Nearly everything above is cheap to fix five years out and expensive or impossible to fix five months out. The FEHB window is a five-year lookback. Deposit interest compounds. The high-3 depends on pay periods that have to actually happen. Sick leave accrues.

The single most useful thing a federal employee can do is request an annuity estimate earlier than feels necessary, and read it alongside a Social Security statement and a TSP balance rather than on its own.

Federal households in Lenexa

Lenexa sits west along the I-35 corridor, home to the Legler Barn Museum and the City Center district, with Flat Rock Creek Park marking an original campground on the westward trails. It is about twenty-five minutes from our office, and like the rest of Johnson County it has a steady federal workforce. The conversations we have there are usually corrective rather than exploratory: a retirement date already chosen, an estimate already in hand, and a set of questions nobody has yet put side by side. That is what our federal employee retirement planning is for, done alongside your agency benefits office rather than in place of it. See the communities we serve across the Kansas City area.

CFG Wealth Management Inc. is an independent firm based in Prairie Village, Kansas, led by LaMont Chandler, CRD 2794744. We are not affiliated with any other firm operating under a similar name. LaMont holds FINRA Series 7, 24 and NASAA Series 63, 65 registrations and has been registered in the securities industry since 1996. He is registered in Kansas, Missouri, Texas and Idaho. Securities and advisory services are offered through Madison Avenue Securities, LLC, member FINRA and SIPC, and a registered investment advisor. CFG Wealth Management Inc. and Madison Avenue Securities are not affiliated companies. His record is available on FINRA BrokerCheck.

Common questions

Where this connects

• Federal employee retirement planning: how the pieces fit together
• How FERS retirement works
• FEHB, FEGLI and survivor elections
• TSP rollover options at separation
• More retirement planning insights