Broker Check

Why Federal Employees Need Different Financial Advice

| January 17, 2020
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Feds and OPM

As a current or former government employee, you’re a part of the largest employer in the world. You may have worked in many different capacities and continued to be a member of the Senior Executive Service (SES) or other leadership roles (SL/ST), or you might now be working in the private sector as a consultant or contractor.

Regardless, as a part of this group, you have a powerful compensation package that includes many benefits from FERS/CSRS pension and survivor annuities when you retire, health insurance, life insurance, and Thrift Savings Plan (TSP). This package has myriad options that completely change the approach that you need to take when doing financial planning and structuring your investment portfolio. OPM does a good job of having tons (if you’ve been on OPM’s website, you know I mean TONS) of information available.

While this is great, sometimes it can be overwhelming and feel like you’re reading portions of the IRS code, and OPM puts all of the responsibility on you to understand your benefits when electing your pension and survivor benefits, insurance coverages, or TSP investments. OPM makes you responsible for your benefits and for knowing what you will and won’t have available to you throughout retirement. By making the wrong choices with your federal benefits package, you can cost yourself thousands of dollars of benefits, every year for the rest of your life. What’s worse is that some of these mistakes cannot be reserved.

This makes understanding not only how your benefits work, but also how they affect the rest of your financial picture, critically important. A lot of HR specialists or federal retirement specialists are not fiduciaries, which means they’re not required to put your needs before their own. Many have knowledge about how the federal benefits package works but everyone’s finances are different, and many don’t also specialize in the other aspects of financial and investment planning. They don’t have the fiduciary duty to give you the best possible advice, and you should take care to ensure that you’re careful about who you work with.

Thrift Savings Plan

As a Fed, you might receive information about the TSP investment choices1 and how to set your TSP allocation. There is plenty of great information available on how to do that, or you can even choose the “set it and forget it” option of the Lifecycle Funds. The Lifecycle funds are TSP’s version of “Target Date” funds, and it rebalances for you constantly, changing the combination of the different funds in the TSP automatically for you. While that’s a nice benefit, a Federal Employee gives up control and sometimes that doesn’t always mean it’s the best thing for you. For example, there are some investments that are more tax efficient than others. Typically, those investments should be placed in non-retirement accounts, where investments that are less tax efficient should be placed inside retirement accounts like TSP, 401Ks, IRAs, etc.

The other consideration is that the investment advice that you receive for your TSP will not take your other assets into consideration. Your spouse might have a 401K. You might have other IRAs or brokerage accounts, savings, etc. Your house is an asset. All of these pieces influence each other and are a part of your total wealth portfolio. This is why it’s important to ensure that whenever you’re planning your TSP investments, you should consider the rest of your financial picture too.

Common Considerations

I’ve received many questions from Feds trying to understand how all of the pieces fit together. Here are some common questions they have:

  • How much should I invest in my TSP?
  • Which TSP Fund should I be invested in? When should I make changes?
  • How do I decide when I should retire? Am I going to be safe in retirement?
  • Is my Federal Employee Group Life Insurance (FEGLI) enough to keep my family safe?
  • Should I keep my money inside the TSP after retiring?
  • How can I keep more of what I’m earning?
  • How do I decide on my pension benefits?
  • How do my benefits affect my taxes and Social Security?
  • How do I invest my other money not in my TSP? How about my spouses?

The list can go on, not only because there are a lot of components to your federal benefits but because your life is individual and unique. You have your own circumstances and situations. Your spouse might also be a Fed, or they might work in the private sector and you’re wondering how to combine your benefits with theirs?

Your unique benefits can allow you to have the economic safety and security that you want for yourself and for your family. Mistakes can be costly and the world is constantly changing. Just recently the SECURE Act2 was passed and it drastically changes how estate and legacy planning are being considered. People inheriting money from their parents now (or your kids inheriting from you in the future) may be liable for much higher taxes because of this recent law, and new financial planning techniques are having to be implemented in order to maximize an inheritance. I won't dive into the deep details on the SECURE Act in this column; you can find more info on that by clicking here, where I give an overview on the new law. 

How to Plan Properly

As a Federal Employee, you can see that picking your retirement strategies is a bit more complicated than checking off a few boxes. The good news is that there are resources at your disposal. OPM's website, while dense, contains tons of information. There are a plethora of websites out there that have commentary on Feds and their benefits -- although a caveat: I've read many, many articles that had incorrect information and you should be weary about what information you ingest. As with most things on the internet, confirm and confirm again. 

You also want to make sure that, when working with an advisor, they hold a fiduciary relationship with you. This means that they are putting your needs before theirs. When does this come to play? If they're recommending a specific investment, are they being paid a commission to sell the product or are they offering fee-based advice? The latter is preferable, since there is no economic motivation to the advisor of offering one solution over another. You also want to make sure that your advisor is well-versed in the federal compensation structure and benefits. Many claim they are, but few have received credentials and specialized training on the federal benefits package. Keeping up to date on changes in hugely important as there are consistently changes to laws and policy. Finally, make sure your advisor knows how your benefits apply to the rest of your life. They should be able to guide you in deciding your pension and health benefits. They should talk to you about the FEGLI versus private sector life insurance, and what happens to your federal health insurance premiums after you retire. They should be well versed in the taxation of your benefits both while you're working and when you retire. 

There's good information out there and there's bad. If you'd like to run your questions by us, we're happy to be a sounding board -- drop us a line or an email. We've encountered plenty of situations where people have gotten bad advice and we were able to catch something before it became a pothole on your road to retirement. You deserve to have the right information given to you. After all, it's not just your money, it's your future.

1 - There are risks involved with investing, including possible loss of principal. Investments will fluctuate and may be worth more or less than when original purchased.
2 - www.irs.gov

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