district-financial-advisors

5 Financial Planning Must-Haves for Federal Employees

Mon, 30 Jun 2025 22:23:33 GMT

Financial planning is easy to procrastinate on--even if you aren’t actively putting it off, it can still feel challenging due to the element of the unknown.

For federal employees, understanding and organizing your financial life can be even more complex due to the unique benefits and retirement options available. To help, here are five essential financial planning tools and concepts that every federal employee should have on their radar:

Benefits Summary.

Federal employment comes with a range of benefits, but many employees don’t fully understand what they have access to. Start by reviewing your benefits summary, which outlines your health insurance, retirement plans, life insurance, and other perks.

This document comes in different forms depending on the agency you work for, if you’re unsure how to access it reach out to your agency for help.

What to look for?

What benefits you are currently enrolled in
The specific details and coverages
The cost to you and how much your agency is contributing

Learn how to interpret the details--understanding your benefits is the first step to making the most of them.

One Page Financial Plan.

A one-page financial plan can help simplify and visualize your plan. There’s no perfect format outside of the one that works for you, but you may consider including:

Define your ‘Why’ and short + longer-term goals
List concepts you’re currently working on
Action items required to move closer to goals
Track milestones + progress achieved
Document current stats - net worth, gross income, savings rate, tax rate

Just get started, you can refine your version as you continue working with the concept.

Understanding How You Are Invested.

Do you know how your money is invested and whether it gives you an opportunity to reach your goals? Risk and return are the driving force behind the outcomes investors may experience, and getting this right is about as important as it gets. Being too conservative or too aggressive can both be equally damaging.

Take the time to understand how all of your money is invested—whether TSP, IRA or taxable money. Remember target dates are one-size fits all and your situation is likely anything but that.

Retirement Income Worksheet

This is one of my favorite tools, and one we talk about all the time. Creating your retirement income worksheet just takes a little bit of effort, but the payoff is clarity.

Determine your current annual spending - use this as a basis for what you may spend in retirement. We’ve found retirees spend about 80%-100% of their current spending. At a minimum this gives you a starting point to work with.
Project retirement income sources - FERS basic annuity, social security and investment income. Make sure to adjust for cost of living and/or grade+step increases, consider taxes and project for various ages.
Add it all up. Future Cash Flow = Income-Expenses

This should give you an idea of what you can expect down the road.

Basic Estate Plan

Estate planning is essential for everyone. Start with the basics such as ensuring your will is up to date and reviewing beneficiary designations on retirement accounts and insurance. Consider health-care proxies, guardianship and the uses of a trust. Don't be intimidated, recent advances in digital tools have made this process more accessible for many families.

Summary

Remember financial planning isn't a one-time event. By tackling these 5 must-haves you’ll be on your way to creating or updating your plan, but make sure to check-in on your finances often. By creating a goal-based financial plan you'll give yourself an opportunity to see greater success and achieve your goals.

-Justin

*The content is developed from sources believed to be providing accurate information.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material

How to Estimate Your FERS Annuity to Include Pay Raises and Grade/Step Increases

Mon, 30 Jun 2025 22:20:42 GMT

“How far do you think you could advance over the course of your federal career?” I asked a younger employee recently.

“I guess I’m not sure. Why do you ask?” they replied.

This exchange was meant to highlight the reasons to be thinking proactively—one of those reasons is creating an accurate picture of FERS basic annuity estimate. The FERS pension can be a federal employee’s most valuable benefit over time, and what it may be worth in the future is not always straight-forward.

Projecting a Future FERS Annuity

The FERS Basic Annuity projections located in a benefits summary can serve as a good starting point, but it’s important to understand this summary generally incorporates your current High-3 salary as the basis for future benefits.

There are two big things to consider when projecting a future pension amount:

1) Grade and step increases

How will your career progress over time? It can be hard to know exactly where you’ll finish up, but I’ve found that most federal employees have a pretty good idea on how far they may advance.

Consider potential ending grade and step, as well as locality pay. You can find the various GS pay tables at OPM.GOV.

2) Annual pay raises / cost-of-living increases

Looking at things in today’s dollars can be useful, but it’s also important to plan for future increases. Adjusting the current GS table by reasonable cost of living increases over time will help us to understand what future dollars may look like.

While pay raises have been all over the place in recent years, looking at a long-term history of the Consumer Price Index (CPI) and past pay raises may provide good basis for an estimate.

Example:

Let’s look at a simple example to drive these concepts home.

A current federal employee is a 48-year-old GS-14 with 16 years of service. They are considering retiring at age 60 with 28 years of service, and potentially 2 years later at age 62 when the 1.1% multiplier would kick in. Advancing to GS-15 level is a big goal, and they feel GS-15 step 3 is where they could end their career.

The Washington DC locality pay table as of January 2024 looks like this:

Their goal--GS-15 step 3--currently pays a salary of $174,894 in DC as of January 2024.

Next, we’ll need to adjust that number for pay raises:

At Age 60 - $174,893 @ 3% annual pay raise x 12 years = $249,357

At Age 62 - $174,893 @ 3% annual pay raise x 14 years = $264,543

In this scenario the employee’s High-3 would technically be an average of their last 3 years of salary (probably something a little bit different than our calculation), but we are going to keep the math simple. You can always back out the numbers to be as precises as desired.

Now we can look at how much the annuity may be worth.

FERS Annuity Calculations:

Age 60 -- 1% x 28 years x $249,357 = $69,819

Age 62 – 1.1% x 30 years x $264,543 = $87,299

This gives us a pension estimate based in future dollars by including potential pay raises and promotions.

If you are working on a retirement income worksheet make sure to include any deductions that may apply to your FERS annuity – survivor benefits, taxes, health and other insurance coverages.

What do you think, have you thought about your pension in these terms?

-Justin

*The content is developed from sources believed to be providing accurate information.

Am I Taking Too Much Risk With My TSP?

Mon, 30 Jun 2025 21:56:05 GMT

“I’m 73 years old and I’ve got this TSP account. I’ve really been feeling the ups and downs but overall, its’ been doing well and making me money. I’m not sure how much longer I want to put myself at risk.”

This was part of a recent conversation I had with a lovely retired federal employee about her financial situation. At the same time she was having these feelings about her TSP, we were discussing what to do with a sizable amount of bank CDs - she was interested in an investment that would potentially yield a higher return.

Background

A little back story. She retired 11 years ago with a CSRS pension that has been more than enough to cover living expense in retirement. Her TSP is worth around $900,000, she has a good amount of money in CDs and savings at a credit union, as well as a paid off home on her balance sheet.

Consistent contributions and growth-oriented investment options helped grow these retirement assets over a long career—and the benefits of not needing to take withdrawals and keeping stocks in the portfolio mix have allowed the funds to continue to grow.

She does not have children and plans to leave the assets to her siblings and most of her money to the university she attended as her legacy.

“I don’t have any children and I’m planning to leave money to certain family members and the college I attended”

Without any prompting, she also offered “I haven’t been comfortable moving my TSP, I feel like someone is watching over it for me while it’s there.”

Investment Considerations

What may be the right approach and how should she be thinking through this?

First, based on her comments she has an emotional attachment to the Thrift plan. The TSP board administers the plan in the interest of participants and their beneficiaries--working to make the plan functional and monitor the funds within the plan—but it’s not accurate that anyone is watching over individual participant accounts.

Let’s look at her account and see what we can come up with.

This TSP account was currently invested 50% in C Fund, 25% in G, and 25% in F. Certainly, the allocation feels like it could be suitable based on the details of her situation.

50% allocated to a growth bucket in the C Fund - tracking the equity-based S&P 500 Index.
25% allocated to a very conservative bucket in the G Fund – the funds objective is to ensure the preservation of capital and generate returns above those of short-term US Treasuries.
25% allocated to a conservative/income-oriented bucket – although the F fund has some sneaky risk factors that should be considered closely before using.

If something changes in her situation – unexpected expenses, life changes, etc. – the conservative buckets hold 50% of the account balance to fall back on. For instance, if a stock market downturn occurs when capital is needed, she wouldn’t be forced to take money from the stock portion of the account.

A persons’ age isn’t the best way to determine an investment mix, and portfolio construction isn’t an exact process.

Things to consider may include:

Goals and objectives
Time horizon
Risk tolerance
Need for income

“Overall, the account has been making me money. But I’m not sure how much longer I want to put myself at risk.”

When emotions start to play into the thinking it’s time to step back and create perspective--understanding expected returns and the risk involved may be useful to that end.

A portfolio’s expected return can be calculated by multiplying the weight of each investment by its expected return.

Finding an individual investment’s expected return is a little trickier. One piece of information that can help are historical returns for various broad asset classes – while future performance may be very different, we can learn from historical market trends. The historical data for TSP funds is available on TSP.gov for use in providing context. Historically stock-based investments have returned significantly more than their bond-based counterparts.

Forecasting investment returns is a complex process that can be done using several methods–cash flow, risk premium, or statistical models—this however is an overly simplified example for the sake of our conversation.

Putting portfolio risk into context may be even more helpful in this situation.

Morningstar put together a study looking at investment recovery times--they looked at all time periods with negative returns for each investment category in their fund classification system, with the majority of return data starting in 1990. Then they measured the time to recovery after a downturn–the average time and the maximum time.

Within the study they track a category allocation of 50% to 70% equity – with our example portfolio consisting of 50% equities, this may serve as a reasonable benchmark. Not perfect by any means but still helpful.

This category showed an average recovery time of 0.4 years and a maximum recovery time of 4.3 years tracking data over 55 total recovery cycles during the study’s time period.

Conclusion

Again, there is no guarantee that this data will hold true in the future but it gives us some information to work from and helps put market risk in perspective on a historical basis.

Discussing risk and return is an involved process that should include concepts like these and more—ultimately having a broader conversation than we are permitted in this short text.

Maintaining a balanced portfolio allocation like she has will allow her funds the opportunity to continue to grow for her legacy goals, while providing money to fall back on if something unexpected happens or her situation changes substantially.

Her next steps are deciding what she is comfortable with.

P.S. One planning note: She may also wish to consider is using a Qualified Charitable Distribution to satisfy the Required Minimum Distribution amount. Giving is a big part of her legacy plan and using a QCD avoids the income tax due on the RMD amount for her. A QCD must be completed from an IRA, and cannot be performed at this time within the TSP.

Don’t be afraid to ask questions. I’m here to help.

-Justin

*The content is developed from sources believed to be providing accurate information.

When and How to Rebalance Retirement Accounts

Mon, 30 Jun 2025 21:51:51 GMT

During a recent discovery meeting with a new client, we came to their TSP retirement accounts--I asked, “When was the last time you rebalanced these accounts, and, why do you own the current investment mix that’s within them?”

After a brief pause, they couldn’t answer either question. They had made some arbitrary decisions a few years back and hadn’t given the accounts much thought since.

We see this happen a lot, and often an employer sponsored retirement account is the largest investment people own.

In this case it had real consequence, the investment mix wasn’t where it needed to be and was potentially impacting the ability to reach their financial goals.

The right investment mix is determined by your financial plan, including your goals, time horizon, risk profile, and need for income. Rebalancing is important for a few reasons — it works to help keep you on track with your financial plan—rebalancing can also help to minimize volatility and may improve long-term returns.

Two Strategies to Consider

Let’s take a quick look at two ways to approach the task of rebalancing.

1) Set Date

Establishing a periodic reminder on your calendar to rebalance your accounts is a great way to approach rebalancing. Setting this up for 2x per year may be a good interval to use--many professionals use June & December for their timing. Mid-year and year-end offer good opportunities to review—looking at performance, and if anything has changed in your situation or financial plan. Simply pick your dates and rebalance accounts back to your targeted allocations.

2) Portfolio Drift - 5/25 Rule

This approach is based on how and when the allocations in your portfolio change over time— admittedly it’s more involved and you’ll need to pay attention! One of the more popular strategies here is the 5/25 rule—where a rebalance is triggered when an investment allocation changes or drifts beyond a threshold % amount from the intended target.

In this strategy the 5 portion means that if an allocation changes by 5% or more on an absolute basis it’s time to rebalance. For example, your C fund’s targeted allocation calls for 60% but due to good performance that fund is now making up 67% of your overall portfolio. This would exceed the 5% threshold and call for a trade back to the target. In this case you would rebalance when C Fund is either above 65% (sell) or below 55% (buy).

The 25 portion applies to the smaller holdings in a portfolio, it indicates that if one of these smaller investments changes by more than 25% on a relative basis it’s time to rebalance. For example, if your S Fund target calls for 10% - you would rebalance when it reaches 12.5% (sell) or 7.5% (buy).

The 5/25 rule isn’t perfect, but you get the idea with setting reasonable targets based on portfolio drift.

Summary

Combining the 2 approaches from above may offer a great way to approach your rebalancing – put it on the calendar and look for drifting allocations.

Using new money can also offer a practical approach to regular rebalancing--If you are making regular contributions to your accounts use those funds where needed to even out your allocations.

Making changes in a non-retirement account carries tax consequences, be sure to consider those implications in your strategy.

I’d love to hear your questions, please feel free to send them my way!

-Justin

*The content is developed from sources believed to be providing accurate information.

Navigating the Gap Years: Can I Retire at 57 (Minimum Retirement Age)

Mon, 30 Jun 2025 21:47:52 GMT

Can I Retire at 57 (Minimum Retirement Age)?

"I am a federal employee age 48 with 18 years of service. I would like to retire at the age of 57 if at all possible. I know I won’t meet the MRA as I will only have 27 years of service at that point.

I have taken a few retirement seminars and I think I’ve picked up that my pension would be reduced by 15% - 5% per year for the 3 years I would give up by not working until I was 60.

I am currently a GS-12 and contribute 16% of salary to my TSP and have a TSP balance of around 460k. I would tap Social Security at age 62.

My biggest concern is the years between 57 and 62. Would I be eligible for the SS supplement for all 5 of those years?

My home will be paid off this year and I don’t have much other debt. I’m married and the spouse also has a 401K with about 300K currently. Just trying to gauge what retirement income will look like if I go at 57."

This is a great question and perfect timing for this family to plan ahead.

Understanding how the FERS annuity calculation works is essential before making your decision on when to go out. The numbers aren’t the only decision, but it is important to have all the information.

First, to be eligible for an immediate unreduced annuity you must meet one of the following requirements:

Retire at MRA with 30 or more years of service
Retire at 60 or older with 20 or more years of service.
Retire at 62 or older with 5 or more years of service.

(If you are a Special Category Employee, you can retire at any age with 25 years of service or age 50 with 20 years of service.)

If you don’t fall into one of those categories, the FERS basic annuity is reduced by 5% for every year you are under age 62. This is a permanent reduction.

However, if eligible you may also elect to postpone your annuity until age 62 to avoid the reduction.

In this case the federal employee’s annuity would be reduced by 25% by going out at age 57 on an immediate annuity.

For illustration, let's say their annuity calculation comes out something like this:

27 years x 1% x $150,000 hi-3 = $40,500 annual annuity

25% reduction x $40,500 = $30,375

After a significant 25% reduction the annuity will equal $30,375 per year. It’s also important to keep in mind that cost of living adjustments do not begin until age 62. If inflation averages 3% between age 57 and 62, the annuity's purchasing power is further reduced by age 62 to around $26,000 – the actual annuity amount remains at $30,375 it just doesn’t buy as much in goods or services because of rising prices.

What about the Special Retirement Supplement?

To be eligible for the FERS Special Retirement Supplement (SRS) you must retire on an immediate annuity with the following requirements:

Retire at MRA with 30 or more years of service
Retire at 60 or older with 20 or more years of service.

Those who are not eligible include:

MRA +10
Disability
Those only eligible for a deferred annuity
Age 62 or older

Our employee would only be eligible for the SRS if waiting to retire until age 60 – and the benefit would last until turning age 62.

Retirement Accounts

Lastly, let's look at those retirement accounts and project what they may look like 9 years down the road at age 57.

Employee TSP: $460,000 balance + $18,000 annual contribution @ 8% return for 9 years = $1,162,300

Spouse 401k: $300,000 balance + $10,000 annual contribution @ 8% return for 9 years = $734,567

This gives us $1,896,867 in retirement assets. If we take a simplified 4% annual withdrawal this projects to $75,875 year or $6,322 month at age 57. While the spouse’s 401(k) wouldn’t typically be eligible for withdrawal until 59.5, there are work arounds such as a 72t distribution strategy.

Putting It All Together

Summarizing our hypothetical retirement income at 57:

$30,375 - Reduced FERS basic annuity
$75,875 - Income from retirement and other investments.

Going out at 57 could work for this family but it presents some challenges that could become easier with extra time.

Permanent reduction to FERS basic annuity
No COLA’s until 62
Not eligible for SRS
Increased risk of drawing down TSP and other retirement accounts
Permanent reduction for taking social security early at 62 (up to a 30% reduction)

Of course, we understand that the numbers aren’t the only factor in a retirement decision. The most important part is what you are comfortable with and want your situation to look like. Retirement decisions are personal.

----

Do you have a question about retirement or financial planning? If so please send them my way, I'd be happy to take a look and provide some insight like this.

Don’t be afraid to ask questions. I’m here to help.

-Justin

*The content is developed from sources believed to be providing accurate information.

5 Ways a FERS Annuity May Be Reduced

sam@jandsdigital.com (Sam Cook) — Mon, 30 Jun 2025 21:33:59 GMT

Understanding how much retirement income may be available to spend is a question we try to help answer all the time.

Recently I had an intro call with a federal employee and he told me:

“I’m 59 years old with 29 years of service and a Hi-3 of around $150,000. I’d really like to retire and go out now if possible. What do I need to do?”

We are going to look at this example in the context of potential reductions you may see from your FERS basic annuity when you retire and start receiving pension payments.

Let’s take a look.

Early Retirement Reduction

The early retirement reduction doesn’t apply to everyone, but it’s more common than you might think, and the rules on early retirement reductions are commonly misunderstood.

For most federal employees there are 3 ways to retire on an immediate unreduced annuity:

MRA with 30 years
Age 60 with 20 years
Age 62 with 5 years.

If you don’t meet one of these requirements and retire under MRA +10, taking an immediate annuity will reduce your pension by 5% for every year you are under the age of 62. This is a permanent reduction.

It’s Important to note that you may be able to postpone your annuity or continue working to avoid this reduction.

In the case of our friend from earlier, he’s so close yet there are some serious implications. Together we discussed why it may make sense financially to work one to three more years.

Remember the situation looks like this - 59 years old with 29 years of service and a Hi-3 of around $150,000.

$150,000 x 1.0% x 29 = $43,500 annual pension

However, since he doesn’t quite hit MRA +30 or age 60 with 20 years of service an early reduction penalty will apply. 5% for every year under age 62, in this case the 3 years will cost him 15% of his gross annuity amount.

15% x $43,500 = $6,525 reduction

FERS BASIC ANNUITY

$43,500

Early Retirement Reduction

-($6,525)

He can retire and postpone, work until 60, or maybe even hang on and work for the 1.1% multiplier at age 62. Big decision points.

Survivor Benefit Premiums

This one is important. The FERS basic annuity offers an optional survivor benefit program that allows retirees to protect their dependents with a survivor annuity paid to an eligible beneficiary.

If you are considering bypassing the SBP make sure you have a well thought out plan that is discussed with your family members and the professionals you trust. I prefer the SBP in almost every circumstance vs. pension max strategies.

It’s also important to consider a surviving spouse will not be able to continue FEHB unless you are enrolled in the survivor benefit program (full or partial).

This SBP cost and benefits are straight-forward:

10% premium for a 50% survivor benefit
5% premium for a 25% survivor benefit

If our guy takes the full SBP it looks like this:

$36,975 x 10% = $3,697.50 annually

FERS BASIC ANNUITY

$43,500

Early Retirement Reduction

($6,525)

Survivor Benefit Premium

($3,697.50)

Please be thoughtful here, I’ve seen poor planning create some really difficult situations.

Taxes

This one does apply to everyone, at least on the federal level. A FERS pension is taxed as ordinary income on the federal level and as ordinary income in most states.

There are currently 9 states who do not tax income at all, and some who exclude pension income from taxation.

Most of your pension payments will be taxable, there is a small portion that comes back to you as a return of premium. These are the contributions you made to the FERS annuity during your career being returned to you.

Going back to our guy looking to retire – his family is likely to fall into the 22% federal tax bracket in retirement – but with the way a progressive tax schedule works their average tax rate is projected somewhere around 18%. Our simple math looks like this:

$33,277 x 18% tax rate = $5,989.95 federal tax due

That will cost $5,989.95 in federal taxes, plus anything due on the state level.

FERS BASIC ANNUITY

$43,500

Early Retirement Reduction

($6,525)

Survivor Benefit Premium

($3,697.50)

Federal Income Tax

($5,989.95)

FEHB Insurance Premiums

If you meet eligibility requirements, FEHB may be continued into retirement. To be eligible, you must:

Retire on an immediate annuity and have been covered by FEHB continuously for the 5 years of service immediately before retirement.

Retirees have access to the same premiums as active employees but with one caveat – retirees pay with after-tax dollars, which equates to an increase. You can also make changes to your plan each year during open season.

No question this is a powerful benefit to carry forward into retirement.

I’m no expert on the complexity within health care plan options and pricing, but for the sake of simplicity in our example let’s assume monthly premiums cost $500 per month -- noting premiums may be significantly higher for many families.

That’s an additional $6,000 per year coming from the balance of your FERS basic annuity.

FERS BASIC ANNUITY

$43,500

Early Retirement Reduction

($6,525)

Survivor Benefit Premium

($3,697.50)

Federal Income Tax

($5,989.95)

FEHB

($6,000)

Other Insurance

We can’t forget about paying for vision and dental plans, long-term care, and life insurance premiums if they are carried forward into retirement years. If eligible you may continue all these coverages but are not required to.

FEGLI gets very expensive in the later age bands. However, the basic coverage may become free at age 65, or retirement if you retire after 65, by accepting the 75% reduction option. Whether you choose to keep this insurance is a personal decision.

Inflation

Inflation doesn’t show up as a line item on your statement, but it’s important. Inflation is on everyone’s mind as costs have risen substantially in the past few years. The exact level of increases can be hard to pinpoint because they are different for every family.

Cost of Living adjustments (COLAs) on the FERS basic annuity start at age 62 for most federal employees. As a reminder COLA’s work like this – the program many federal employees lovingly refer to as COLA Lite.

CPI-WFERS COLA2% or lessSame as InflationBetween 2% - 3%2%Greater than 3%Inflation – 1%

CPI-WFERS COLA2% or lessSame as inflationBetween 2%-3%2%Greater than 3%Inflation - 1%

Adding It All Up.

Knowing the difference between your gross and net numbers can give you a realistic idea of the income you’ll have available to spend in retirement.

How are your estimates looking?

I hope you find this information useful. I would encourage you to take the time to consider how the FERS basic annuity fits into your personal financial situation.

Don’t be afraid to ask questions. I’m here to help.

-Justin

*The content is developed from sources believed to be providing accurate information.

How Retirement Income is Taxed

Mon, 30 Jun 2025 21:23:43 GMT

Today we are covering a question on taxes and retirement from our planning community that comes up a lot.

How will my FERS basic annuity be taxed when I start receiving benefits?

We’ll look at the answer, and provide some information on how Social Security, the TSP, and other investment income may be taxed as well.

FERS Basic Annuity

The FERS pension is taxable as ordinary income and most of the benefits, generally somewhere around 90%-98%, are taxable.

There is a small non-taxable amount within a retirement annuity payment that is considered a return of premium from employee contributions to the annuity. The rest of the benefit amount is taxable, coming from agency contributions on your behalf.

A quick refresher on FERS Basic Annuity employee contributions:

FERS employees hired before 2013 contribute 0.8% of base pay
FERS employees hired between 1/1/2013 – 12/31/2013 [RAE] = 3.1% of base pay
FERS employees hired 1/1/2014 – present [FRAE] = 4.4% of base pay
Employees hired pre 2013 contribute less than 1% of salary to the FERS basic annuity benefit, while rates have been increased by recent legislation for new hires.

The contributions employees make are added up and returned little by little over life expectancy within annuity payments.

It may be interesting to see how non-taxable percentages change when RAE and FRAE employees with higher contribution rates start to retire in the future - less of the benefit amount (as %) may be taxable because more will be coming back as a return of employee premiums paid.

What about the FERS special retirement supplement?

The Special Retirement Supplement {SRS) is payable to an employee who has completed at least one calendar year of FERS service when reaching MRA and payable until social security begins at age 62.

The supplement approximates the value of FERS service to a Social Security benefit – it provides a portion of income prior to 62 similar to what the employee would have received by retiring at 62 and applying for Social Security benefits.

The SRS is 100% taxable as ordinary income.

There's also an earnings test that applies. If you go back to work after leaving your federal career and have earned income - if you make more than $19,560 a year (FY2023), you will start to lose some of your benefits from the special retirement supplement. Something to keep in mind.

Social Security Income

If you're receiving a substantial FERS pension, your Social Security benefits are more than likely going to be taxable - and generally 85% of benefits are taxable.

If you file as an individual and combined income is:

Between $25,000 - $34,000 you may have to pay income tax on up to 50% of benefits
More than $34,000 , up to 85% of your benefits may be taxable.

If you file a joint return and combined income is:

Between $32,000 - $44,000 you may have to pay income tax on up to 50% of benefits
More than $44,000, up to 85% of your benefits may be taxable.

*Info via SSA.GOV

This applies to the Federal income tax level. Some states exclude Social Security income from taxation, sometimes this is a factor for people considering relocating to another state in retirement.

Thrift Savings Plan

The TSP account has two accounts to consider – Traditional and Roth.

Money coming out of a traditional TSP account is 100% taxable. This type of contribution receives a tax deduction, the account grows tax deferred, and when you take money out, it’s 100% taxable as ordinary income.

The Roth account receives after-tax contributions that may grow tax-free if making a qualified withdrawal. A qualified withdrawal is defined as where an account has been open for five years and the owner is over the age of 59.5.

There are several factors that may determine how much of your contributions you should put into each of these two account types. The big picture is that tax allocation matters when considering efficiency within your tax situation for retirement income.

One other point on the TSP. Required minimum distributions apply to the traditional TSP - that means when you hit a certain age, each year you're required to take out a percentage of your account based on a life expectancy table. Currently that amount starts around 3.77% (based on age 73 RMD start) and increases every year as life expectancy decreases. For instance, a $2 million TSP that would be required to withdraw 3.77% (based on the uniform table), would be equivalent to a $75,400 distribution that would be taxable ordinary income.

As of 2024 the Roth TSP is no longer subject to RMD requirements.

Other Investments

Last item to touch on today is the taxability of other types of investments

If you own a taxable investment account, this type of investment can be considered pay-as-you-go. That simply means if you receive income during the year from a dividend, a capital gain distribution, or you sell an investment for a capital gain - you pay tax on the taxable amount of transaction in the year it takes place.

This creates what is called a cost basis - basically your account is partially paid up based on the amounts of account value tax has been paid on.

Depending on what type of investments you're holding – something that pay dividends consistently, or if you trade frequently, more or less of your account balance may have already been taxed.

This type of account is another piece in the tax diversification puzzle, it may provide flexibility when it comes to planning and where you're going to take money from within retirement.

We talk about tax diversification all the time because we want to be able to pull money from all three of these buckets - Traditional, Roth, and Taxable accounts. This provides a chance at a better tax footprint, where we pay our fair share and hopefully no more.

A big part of this is avoiding being pushed into a higher tax bracket.

Let's take a look at a simple example involving required minimum distributions.

Let's say you had $36,000 a year coming in from your FERS pension or $3,000 a month, and you also had another $6,000 a month or $72,000 from Social Security income between you and your spouse.

Right off the bat those two amounts put you at $108,000 in taxable income and in the 22% tax bracket based on those two sources of income. Now, maybe you had $15,000 in income from a taxable investment account and $10,000 from some other earned income source. What happens when your RMD hits or you have large distributions from a pretax account? It's going to continue to build in your tax bracket or move you into a higher one.

If you had that $2 million TSP and were required to take $75,000 out of it. Now you're talking about going up into the next tax bracket right here. You can see how it's may be pretty easy to stay in the tax bracket you're in before you retire or even above that based on retirement income with a pension, Social Security, TSP distributions, and other investment accounts, etc..

I hope you’ve found this information on retirement income helpful. I would encourage you to take the time to review all your potential retirement income sources so that you can make the best decisions for your personal circumstances.

I also publish a biweekly newsletter with insights into topics like this and more. If you’d like to join the list, please subscribe here.

Don’t be afraid to ask questions. I’m here to help.

-Justin

*The content is developed from sources believed to be providing accurate information.

Plan and Invest in Your TSP Like a Professional

Mon, 30 Jun 2025 21:15:36 GMT

How does the Thrift Savings Plan fit in a financial plan and how should you consider making changes to your account?

It’s easy to think about the TSP as a stand-alone retirement account, but it needs to work well with all the pieces in your financial situation.

We are going to review 4 key decision points around the TSP in this article:

How much to contribute
What type of contributions to make [Pre-tax vs. Roth]
Investment options
How to consider making changes

My goal is to give you the perspective of a financial planner and how key benefits and planning items play together within the context of a financial plan. First, I want to start with a quick story.

Not too long ago, a man named Jack came into the office. Jack is 50. He sat down and said, “I've got 8 to 10 years left before my planned Federal retirement date. What should I be doing with my TSP?”

He and his family have been doing some good things, maxing out retirement accounts, funding education accounts, paying down the mortgage, building home equity, and accumulating significant assets on their balance sheet. But using mostly ‘default options’. Jack’s focus was on the TSP, and I began thinking about all the planning areas where there may be gaps.

In conversations like this, a good place to start is account contributions and cash flow. How much money is flowing into the financial plan? Where is it going?

How much should I contribute?

One of the big questions we get is - how much should I contribute to my TSP? The prevailing advice out there is usually to max out your TSP account.

And, why not? The tax advantages are compelling, both Roth and traditional contributions have long term benefits attached.

But at the same time, we need to answer two questions.

How much cash flow is available to contribute across all your accounts.
Are you on track?

With the first question, we know there are times when money flows a little easier into investments, and times when it's more difficult to come up with contributions.

Both situations are fine. It’s all about making good choices and doing the best we can in the moment. Things always change.

From my conversation with Jack, I found that his family’s situation allowed for cash flow to max out his TSP and do some other things as well.

But let’s assume you had $30,000 to invest for the year. With that amount, you could max out your TSP (if you’re over age 50) or you could invest some money in the TSP and some money toward other accounts.

One thing that's helpful is to consider how much money you have allocated across different account types. If 100% of your investments is in the TSP, maybe this year you put 75% of your contributions toward the TSP and the rest to start building out other account types.

The second part is determining if you are on track for the future.

Answering this question requires understanding how much income you want available in the future, and evaluating where you currently stand in the journey to get there.

Review your current assets and account values, and project them based on different growth rates and contribution amounts over time. It can be interesting to work through those different scenarios. Will your projected assets be able to produce enough income?

Of course, the best situation is maxing out those employer accounts for the tax benefits, contributing to investment accounts, and paying down the mortgage if there are enough funds available.

Max out TSP
Contribute to investment account
Paydown mortgage
Invest in other assets

Contribution Types

One of the biggest questions we get is: Should I contribute to the Roth or traditional TSP?

It’s important remember that Roth and traditional accounts come out to be exactly the same in the end, if your tax rates remain the same and you earn the same underlying return on your investments.

It's when tax rates move in your personal situation (you earn more or less) or Congress changes them, that one option comes out ahead of the other.

Let’s consider a few things.

First is your tax allocation summary, or how much you have in various types of accounts – traditional, Roth, and taxable investments.

This is important in determining where to direct funds to create balance. We don't want to be too overweight in any category - 100% in traditional money, or 100% in Roth money – the goal is to diversify your tax situation and hopefully create efficiency in the amount of tax you must pay in the future.

The second item is your marginal tax rate . This is the tax rate on every additional dollar you earn.

If you're in the 12% or lower tax bracket, consider Roth for all your contributions. If you're in the 22% or 24% tax bracket, consider split contributions or some kind of balance between Roth and traditional.

And if you're in the 32% tax bracket or above, pretax may be the better option as the value of the deduction is increased. Hopefully that helps you think through the contribution type question conversation. As always, it’s wise to consult your tax professional and financial planner on these types of decisions.

Investment Options

The TSP has a limited offering of investment options that include five individual funds, ten lifecycle funds and a mutual fund window.

We're going to stick to the individual funds in this article. Taking time to understand and put together the right mix of core funds is something worth doing for every federal employee. Lifecycle funds don’t account for your unique situation and the mutual fund window is not quite there yet.

Within the five individual funds there are three equity options C, S, and I funds and two fixed income options the G and F fund.

You can find detailed information for each investment option at TSP.gov .

A few quick thoughts:

The C fund tracks the S&P 500. It’s composed of large and mega cap US companies.
The S fund tracks the Dow Jones US Completion Total Stock Market Index. This is essentially a collection of US stocks not included in the S&P 500 index. Although it’s called the Small Cap Index Fund it’s not really a small cap story.
The I fund is an international index that tracks the MSCI EAFE Index. This fund is slated to change to a new index with a very long name later this year.
The G fund is composed of short-term US Treasury securities. The investment’s objective is to ensure capital preservation and generate returns above those of short-term treasuries. This fund will pay interest like a money market account.
The F fund tracks the Bloomberg US Aggregate Bond Index. The F fund is often considered conservative; however, it has risk factors that you may not realize - interest rate and default risk are two of them.

When you're thinking about crafting your asset allocation mix, one piece of advice we hear often is your life stage, or your age, should determine your investment mix - i.e. if you’re older you should be conservative. This isn’t necessarily true.

Everyone’s situation is unique, and your investment mix should reflect that. For instance, you could be a retired growth investor - if you don't need income, you have a long-term time horizon, and your goals are for growth. These types of factors should determine your asset allocation plan, not your age.

Key things to consider:

Risk tolerance. This can be tricky because sometimes we might feel conservative, but need to take more risk for our goals, or vice versa.

Time horizon is very important.

Do you have ten years or more until you need to access your funds?
Do you have 5 to 10 years until you need to access funds?
Or five years or less?

You can use these three timelines and when you may need income to help with your asset allocation plan.

Goals. What are your goals and are there any changes to them on the horizon?

When you have a longer time horizon and a greater risk tolerance, then it may make sense to put a greater weight of your investments into stock allocations.

This post is intended as general information and not a specific recommendation of any kind, but many growth investors may consider overweighting the C fund and mixing in some assets in the S & the I funds. That may make sense for some people. If you're considering using fixed income and you're a growth investor, that will limit volatility and risk, but it's also going to limit the amount of return that you can potentially make on the account.

Ultimately, it depends how you feel about risk and return. We know stocks carry more risk, but also greater return potential.

If you're in one of those other two buckets with less than a 10-year investable time horizon, and you're not a growth investor. Let’s say you're an investor with a 5-to-10-year time horizon - you may need to consider more balance in your portfolio, a mix with less risk and volatility potential. This depends on circumstances, but it may make sense to consider using greater weights of fixed income with equity allocations.

If you are a conservative investor with an even shorter timeline of five years or less until you plan to use the money, then you may need to slide further up the conservative scale in the mix. I hope this thinking is helpful as you attempt to craft the right asset allocation plan for you.

This is all very personal, consult with an investment professional.

When to Make Changes

The last part of this conversation is when to make changes.

A rules-based approach may benefit you. There two big things to remember in that context:

You cannot time markets
We must eliminate emotion

First, we know you cannot time the markets. Even the experts are not any good at it. It's incredibly difficult if not impossible to time the markets. Don't mess with your investment mix based on what you think might happen.

Second, don't let emotion play into your decision making with your investments. Fear of missing out, fear in general, or any other powerful emotion shouldn’t play a role in when, or how, we make changes.

We talked about time horizon, risk tolerance, the need for income – when those types of items begin to change, or we anticipate them changing, that indicates an opportunity to review.

A rebalancing schedule can also be helpful. Pick 2 dates throughout the year to look at your accounts and consider rebalancing to your target. June & December can be good times for this.

These are a few of the basics to consider when making adjustments.

I hope you find this information useful. I would encourage you to take the time to consider how the TSP fits into your personal financial situation.

I also publish a biweekly newsletter with insights into topics like this and more. If you’d like to join the list, please subscribe here.

Don’t be afraid to ask questions. I’m here to help.

-Justin

*The content is developed from sources believed to be providing accurate information.

district-financial-advisors

5 Financial Planning Must-Haves for Federal Employees

Financial planning is easy to procrastinate on--even if you aren’t actively putting it off, it can still feel challenging due to the element of the unknown. ﻿

How to Estimate Your FERS Annuity to Include Pay Raises and Grade/Step Increases

“How far do you think you could advance over the course of your federal career?” I asked a younger employee recently.

Projecting a Future FERS Annuity

Example:

Am I Taking Too Much Risk With My TSP?

“I’m 73 years old and I’ve got this TSP account. I’ve really been feeling the ups and downs but overall, its’ been doing well and making me money. I’m not sure how much longer I want to put myself at risk.”

Background

Investment Considerations

Conclusion

When and How to Rebalance Retirement Accounts

During a recent discovery meeting with a new client, we came to their TSP retirement accounts--I asked, “When was the last time you rebalanced these accounts, and, why do you own the current investment mix that’s within them?”

Two Strategies to Consider

Summary

Navigating the Gap Years: Can I Retire at 57 (Minimum Retirement Age)

Can I Retire at 57 (Minimum Retirement Age)? ﻿

What about the Special Retirement Supplement?

Retirement Accounts

Putting It All Together

5 Ways a FERS Annuity May Be Reduced

Understanding how much retirement income may be available to spend is a question we try to help answer all the time.

Early Retirement Reduction

Survivor Benefit Premiums

Taxes

FEHB Insurance Premiums

Other Insurance

Inflation

Adding It All Up.

How Retirement Income is Taxed

Today we are covering a question on taxes and retirement from our planning community that comes up a lot.

FERS Basic Annuity

What about the FERS special retirement supplement?

Social Security Income

Thrift Savings Plan

Other Investments

Plan and Invest in Your TSP Like a Professional

How does the Thrift Savings Plan fit in a financial plan and how should you consider making changes to your account?

How much should I contribute?

Contribution Types

Investment Options

When to Make Changes

Financial planning is easy to procrastinate on--even if you aren’t actively putting it off, it can still feel challenging due to the element of the unknown.

Can I Retire at 57 (Minimum Retirement Age)?