CRITICAL MISTAKES



CRITICAL MISTAKES

FEDERAL EMPLOYEES MAKE brought to you by Federal Navigators® FederalNavigators.com 301-990-8625

11 MISTAKES FEDERAL EMPLOYEES MAKE

INTRODUCTION As a Federal Employee, it’s easy to become overwhelmed by your benefits. When faced with the mountain of options and all the fancy terminology, it can be tempting to simply leave it for another day. But time has a way of flying by, and when your retirement date comes, how do you know you'll be prepared? Many mistakes and oversights are caused by putting off the learning process until the last minute, then rushing to make preparations as retirement approaches. Some mistakes have greater consequences than others, and many are irreversible. After working with thousands of Federal Employees, we outlined the 11 most common mistakes we see them make make. Of course, there are many more potential mistakes to be made, but this guide is a great place to start. Preparing for your retirement is going to take time and commitment, and we hope these tips will begin to get you on the right track. After that, if you are not sure where to go next, we provide some great resources at the end of this guide. The information discussed in this guide, while researched and thought to be accurate, is subject to the various prospectus wording and contract language. You should consult with OPM, Human Resources and/or a qualified financial advisor as well as do your own due diligence before making any decisions. All decisions should be based on your specific situation.Securities offered through Securities Service Network, Inc., Member FINRA/ SIPC. Fee-based advisory services offered through SSN Advisory, Inc., a registered investment advisor.

“The bad news is time flies. The good news is you’re the pilot.” ― Michael Altshuler

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Underestimating Income Needs Many Federal Employees base their income needs for retirement on a general rule of thumb. This is usually not the best approach, because of the variety of unique factors that can affect your retirement.

Instead of crossing your fingers and hoping for the best, its important to create a detailed financial plan, or have a professional create one for you. Some of the important items your plan should address include: retirement spending goals, income sources, taxes, inflation, risk tolerance and life expectancy.

A thorough retirement plan should seek to answer the following questions: 1. How much income do you really need in retirement? 2. How many predictable income sources does your strategy provide? 3. How do you determine if you will have a shortfall?

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For example, let's say you invest $3,500 a month into the TSP, starting in January. By the end of May, you would have invested $17,500, and maxed out your allowable contributions for the year. As a result, you would no longer be able to invest in the TSP until the next calender year.

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Here is the kicker: if your salary was $100,000, the government would match up to $5,000 that year. But since the match is calculated throughout the year, you would only receive $192.31 ($5,000 divided between 26 pay periods) for each pay period that you contributed. So, if you maxed out your contributions in May and stopped receiving any more match contributions, you would only receive a total match of around $1900 for the year, losing out on over $3,000.

Maxing Out The TSP Early For FERS employees, your TSP Contribution Match is calculated each pay period. If you do not contribute during a pay period, you do not get any match. Currently, the maximum amount for TSP contributions in 2014 is $17,500.

TIP

The best way for FERS employees to make sure they don't max out their TSP early is to divde the current year's maximum investment by 26 (number of pay periods). So, in 2014, the maximum amount you would invest per pay period is $673.

Some of the major advantages of the TSP include low fees, simplicity, and automatic contributions which help you save for retirement without much effort.

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Assuming TSP is Best After Retirment

The TSP is a great vehicle for the accumulation phase of your retirement planning when you are building your nest egg. One of the main benefits is the extremely low cost. This vehicle should not be overlooked as part of your investment portfolio.

However, the TSP may not be the best fit once you enter retirement. ! A few things to consider about the TSP as your retirement date approaches... Limited diversification - the TSP only has five funds you can invest in. Limited withdrawal and transfer options. An IRA can be more efficient for estate planning. There is no advisor with your TSP.

4 Forgetting About FEGLI FEGLI Option B increases in cost every five years. Relatively healthy employees should consider comparing their optional FEGLI with private life insurance company quotes.

We recommend Federal Employees keep their FEGLI basic insurance. Currently, 2/3 of the premium is subsidized by the federal government until retirement. Upon retirement, you have the option to elect a 75% reduction in coverage, giving you an annual premium of $0 from age 65 and on. Before shopping for an Option B replacement, take a moment to calculate how much coverage you actually need. If you do decide to replace your optional coverage, make sure your new policy is in force before dropping your Option B.

TIP A PBA (Personal Benefit Analysis) will help you determine how much insurance you need, and what the accumluated cost will be.

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Not Designating A Beneficiary

One Word Of Caution: If you do fill out the beneficiary forms, make sure you review them regularly to confirm that all of the information is up to date. For example, if you remarry, you may not want your former spouse to receive your full benefit when you die.

If you don't select a beneficiary, your life insurance, retirement, and TSP will be paid in the predetermined order of precedence.

Here are the forms you will need in order to designate your beneficiaries:

Beneficiary forms are quick to fill out, offer you more control, and can make the process easier for your loved ones in the event of your death.

1. FEGLI Form SF-2823 2. TSP Form TSP 3 3. For lump sum retirement payout - Form SF-2808 for CSRS and SF-3102 for FERS

FERS employees have the choice of three different survivor annuity options. You can choose...

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Neglecting Survivor Options Tomorrow is not promised for any of us, and making assumptions about when you will die can be a huge mistake, especially if your assumption leaves the people you care about in a desperate situation.

1. Full Survivor Annuity - 50% of your pension 2.Reduced Survivor Annuity - 25% of your pension 3.No Survivor Annuity CSRS employees also have three options: 1. Full Survivor Annuity - 55% of your full pension 2. Reduced Survivor Annuity - 55% of a portion of your pension 3. No Survivor Annuity Make sure you keep enough survivor benefits to cover the cost of health care, so that your widow or widower does not have to worry about making the payment every month. If you are married, you will need your spouse's written permission to choose anything other than the full survivor annuity IMPORTANT: You must choose a survior benefit if you want your spouse to remain covered on your health care plan when you die.

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Think long and hard about the tax consequences before pulling a large lump sum of money out of any qualified account, because you may never be able to recoup the loss that this creates.

Paying Debts With TSP

If you are under the age of 59 ½ you will also be subject to a 10% tax penalty.

Before cashing out your TSP, it's important to remember you have never paid taxes on this money and it will all be taxed as ordinary income.

TIP

Consult with a financial professional to help you weigh the pros and cons before making any withdrawls.

Here are some of the forms you may want to review: SF-50 – Notification of Personnel Action. This form is to establish and reinstate federal employment, and lists grades, occupation, and pay.

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Failure To Review Records It's important to review the details in your OPF (Official Personnel Folder) This file will show the validity of your federal employment for retirement and the computation of your CSRS or FERS annuities.

- Box 30 - Type of retirement coverage: CSRS, FERS, or none; Type of appointment: temporary, intermittent, When Actually Employed (WAE), part-time, career, or career conditional. - Box 31 - Service Computation Date (SCD), usually accompanied by the word "leave" in parenthesis. This is the date you began employment, but not necessarily the SCD that will be used to calculate your retirement. It is one of the two factors that will determine when you can retire and how much of a CSRS or FERS annuity you will receive. SF 2823 - Designation of Beneficiary under FEGLI (The federal group life insurance). This form desingates who will inherit your FEGLI benefit when you pass away. TSP-3 - Designation of TSP Beneficiary. This form designates who will inherit your Thrift Savings Plan when you pass away; SF 2808 (CSRS) or 3102 (FERS) - Designation of Beneficiary Civil Service Program. This form designates who will receive your contribution to the retirement system if you pass away before you receive the contributions back through benefits. This form was completed when you first began service. Health Insurance Benefits Registration Form DD214 - Certificate of Release or Discharge from Active Duty. This is a document of the United States Department of Defense, issued at a military service member's retirement, separation or discharge from active-duty military service.

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Not Using VCP

If you are a CSRS employee you may be able to use the VCP to fund a Roth IRA with a large lump sum contribution of up to 10% of your career earnings. The typical income and contribution limitations do not apply to this transfer, so it can be a good opportunity to shelter your non-qualified cash from taxes.

CSRS employees have access to a special program called the Voluntary Contribution Program (VCP). Note: There may be taxes on the deferred interest of the VCP money rolled to a

Roth IRA. You should consult with your tax advisor regarding the impact that this strategy may have

Here are just a few ways we have seen Federal Employees leave social security benefits on the table:

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Taking Benefits Too Early to Maximize Payouts. Your benefit increases approximately 8% between ages 62 and 70.According to Social Security 74% of retirees take benefits before full retirement age (FRA). Not addressing the $15,120 earning limitation on Social Security prior to FRA.

Not Understanding Social Security

Married Couples Not Collecting Spousal Benefits. Applies to both the working and non-working spouse. Which is higher- your own retirement benefit or 50% of your spouse’s?

The Social Security system is complex and often misunderstood.

Not Using the FERS Social Security Supplement. Applies to those who reach their MRA and retire after 55, but before 62.

It is the responsibility of the retiree to understand what they are entitled to, since the Social Security Administration will not volunteer benefits that are owed, but not requested. As a result, many Federal Employees leave money they are owed on the table.

CSRS Employees Not Collecting. Many CSRS employees do not understand the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). Your social security will not necessarily be $0 just becuase you are CSRS. You may still be entitled to at least 1/3 of the social security you earned before you became a civil servant.

Here are a few things to consider when determining your retirement date: How does your retirement system calculate when your payments begin?

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Retire On The Wrong Day If you have the luxury of being flexible with your retirement date, try and choose a date that will allow you to get more out of your benefits.

Under the FERS system, an employee must be off the rolls for an entire month in order to receive an annuity for that month. For example, a FERS employee who waits until November 3, 2014 to retire will receive their first annuity payment on or about January 1, 2015, and the payment will only cover the December annuity. The employee is not entitled to any payment for November, as they were not off the rolls for the whole month. Under the CSRS system, an employee must be off the rolls no later than the third day of the month in order to receive any annuity for that month. A CSRS employee who waits until November 4, 2014 to retire will receive their first annuity payment on or about January 1, 2015, and the payment will represent the December annuity. The employee is not entitled to any payment for November, as they were not off the rolls by the end of the day on the third day of the month. Generally speaking, it is best for CSRS employees to retire on the third day of the month and FERS employees to retire on the last day of the month. Annual leave. Any annual leave over 240 hours will be lost after the fiscal year end, usally in mid-January. However, if you retire before the end of the fiscal year, your annual leave will be paid out in a lump sum. If you have a lot of annual leave saved up, it is proably best to retire before the end of the fiscal year. Your tax braket. It is not uncommon for someone to enter a lower tax bracket in retirement. If you think that might be the case for you, it may be wise to retire at the end of the year, so that your annual leave lump sum payment is taxed at a lower rate.

11 MISTAKES FEDERAL EMPLOYEES MAKE

This Barely Scratches The Surface Your benefit system is complex. One wrong move could have major consequences that are sometimes irreversible. RESOURCES

CONSULTATION

We maintain a valuable list of free tools and resources on our website, at www.federalnavigators.com/resources. You may want to bookmark this page so you can benefit from future discoveries as well.

Our most popular and valuable service is called a PBA (Personal Benefit Analysis). This includes a complimentary one-on-one consultation with one of our Federal Employee Benefit Consultants, custom tailored to your unique situation. Imagine your own personal retirement seminar focusing only on topics that are relevant to you, where you have the opportunity to ask as many questions as you would like. There is no cost, no pressure, and never any obligation to work with us. To request a PBA, give us a call at 301-990-8625 or request your PBA online by visiting http://federalnavigators.com/request-a-free-pba/

11 Mistakes Federal Employees Make

ONE LAST THING… Understanding your benefits takes time and effort, and isn't something that can be accomplished overnight. But we believe the rewards that come with being prepared are worth every ounce of effort. Don't forget to celebrate your victories along the way. By taking time to download and read this guide, you have already made progress toward a better retirement plan.

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