Common Retirement Mistakes Federal Employees Make (And How to Avoid Them)

Federal employees have access to one of the best retirement packages in the country. Between a guaranteed pension, generous TSP matching, lifelong health coverage, and Social Security, it's an enviable foundation. And yet, a surprising number of federal employees arrive at retirement with less security than they could have had, not because of bad luck, but because of avoidable mistakes made years or decades earlier.

Here are the five most consequential ones we see and what you can do instead.

Not Understanding Your Minimum Retirement Age and Retiring at the Wrong Time

The FERS system has specific rules about when you can retire and the penalties for getting them wrong can follow you for the rest of your life. Yet many federal employees have only a vague sense of how the rules actually work.

Under FERS, your Minimum Retirement Age (MRA) depends on your year of birth and ranges from 55 to 57. If you were born in 1970 or later, your MRA is 57. But reaching your MRA doesn't automatically mean you can retire with full benefits, as that depends on both your age and your years of creditable service.

Here's where it gets critical. If you retire at your MRA with at least 10, but fewer than 30 years of service, you technically can retire. Although, if you retire, your pension is permanently reduced by 5% for every year you are under age 62. Retire at 57 with 15 years of service, and you're looking at a 25% reduction in your pension, locked in permanently. That's not a temporary penalty. It follows you for the rest of your life.

On the other hand, if you retire at your MRA with 30 or more years of service, you receive your full unreduced pension immediately. Alternatively, reaching age 60 with 20 years of service also qualifies you for an unreduced benefit.

Poor TSP Allocation — Too Conservative for Too Long

The Thrift Savings Plan gives federal employees access to some of the lowest-cost index funds available anywhere. The expense ratios are extraordinarily low and typically are fractions of what most retail mutual funds charge. The investment options are fairly straightforward, yet we continue to see poor allocation quietly costing thousands of federal employees hundreds of thousands of dollars over the course of their careers.

The most common version of this mistake is over-reliance on the G Fund. The G Fund (Government Securities Investment Fund) offers capital preservation and a modest return tied to Treasury rates. Because it never loses value, it feels safe to many investors. For employees close to retirement, some allocation to the G Fund is sensible. But for employees with 15, 20, or 25 years left in their careers, parking the bulk of their TSP in the G Fund is a slow, invisible wealth erosion strategy masquerading as caution.

The math is blunt. Over the past 20 years, the C Fund (which tracks the S&P 500) has vastly outperformed the G Fund. An employee who contributed steadily to a diversified stock-heavy allocation for 30 years and then shifted more conservatively in their final decade will retire with dramatically more than one who played it safe the entire time. While the G Fund may feel safe, in real, inflation-adjusted terms, it often isn't.

The second version of this mistake occurs on the opposite side of the spectrum. Employees in their late 50s maintain a heavily aggressive allocation with no gradual shift toward more stable assets. The danger of a major market downturn corresponding with your retirement (also known as ‘sequence of returns risk’) is real and it's not paranoia to address it.

Ignoring Survivor Benefits and Leaving Your Spouse Exposed

Of all the mistakes on this list, this one has the most potential to cause lasting harm to the person they love most.

When you retire under FERS, you are given the option to elect a survivor annuity for your spouse. This benefit, if elected, continues a portion of your pension to your surviving spouse after your death. You can choose a full survivor benefit (which pays your spouse 50% of your unreduced pension) or a partial benefit (25%). Electing the full benefit reduces your own pension by 10%; the partial benefit reduces it by 5%.

Many retirees decline survivor benefits to maximize their monthly pension check. On the surface, the math can look appealing. If you keep the full pension, you and your spouse both benefit from the larger income. The problem surfaces if the federal employee retiree dies first. At that point, the pension stops entirely. If the surviving spouse's primary income was built around that pension, the financial consequences can be severe.

Federal employees also sometimes assume that life insurance through FEGLI (Federal Employees Group Life Insurance) makes survivor annuity elections unnecessary. More often than not, this is faulty reasoning. Life insurance provides a lump sum, while the survivor annuity provides ongoing monthly income for life. Both have value, but they both serve different purposes as well.

Claiming Social Security at 62 Without Examining the Numbers

The eligibility age for Social Security is 62. That doesn't mean 62 is the right age to claim. For many federal employees, claiming at 62 is a costly impulse decision dressed up as financial pragmatism.

Here's the core trade-off. Claiming Social Security at 62 permanently reduces your benefit by as much as 30% when compared to claiming at your full retirement age (67 for most people born after 1960). Waiting until 70 increases your benefit by approximately 8% per year beyond full retirement age. The difference between claiming at 62 versus 70 can be $800 to $1,200 per month or more, every month, for the rest of your life.

The break-even analysis matters here. If you claim early and invest the proceeds, or if your health is poor and you have reason to expect a shorter retirement, claiming early can make mathematical sense. But the break-even point for most people typically falls somewhere in the mid-70s. Given that a healthy 65-year-old today has a significant probability of living well into their 80s, delaying Social Security is often the higher-expected-value choice.

For FERS employees, you also need to consider the FERS Supplement. If you retire before 62 and are immediately eligible for your pension, you may qualify for the FERS Supplement, which approximates your Social Security benefit until you turn 62. This bridge income reduces the financial pressure to claim Social Security the moment you become eligible, potentially giving you the option to wait.

Underestimating Healthcare Costs in Retirement

Federal employees are fortunate to have FEHB (Federal Employees Health Benefits program) which can follow them into retirement and provides genuinely good coverage. 'Good coverage' and 'free coverage' are very different things though, and this distinction catches a lot of retirees off guard.

In retirement, you pay your share of the FEHB premium without the buffer of pre-tax payroll deduction. The government continues to cover roughly 72% of the premium cost, which is substantial, but your out-of-pocket share can still run $2,000 to $6,000 per year, depending on the plan and your family situation. And as you may expect, premiums have historically increased year over year.

Then there's the Medicare question. FEHB and Medicare interact and navigating them well requires intentional planning. Most federal employees are eligible for Medicare Part A at no cost (because they paid Medicare taxes throughout their careers). Medicare Part B, which covers outpatient care, carries a premium of around $175 per month in 2024. Many retirees with FEHB skip Part B to avoid that cost, which can make sense if your FEHB plan is comprehensive. For others, enrolling in both FEHB and Medicare Part B creates a coordination of benefits that can dramatically reduce out-of-pocket costs in later years, particularly for major medical events.

Beyond premiums, dental and vision coverage through FEDVIP (Federal Employees Dental and Vision Insurance Program) doesn't end automatically at retirement, but it does require you to maintain enrollment actively. And long-term care, the expense that derails more retirement plans than almost any other, is largely not covered by FEHB or Medicare.

The Common Thread

Look back at all five of these mistakes and you'll notice a pattern. Not one of them requires bad luck to occur. They happen because of assumptions that went unexamined, default settings that went unchanged, and decisions that got deferred until it was too late to make a different choice.

Federal retirement can be generous, but generous doesn’t always translate into simple. The employees who retire with the most financial security aren't always the highest earners or the longest serving, but the ones who understood their benefits well enough to use them deliberately.

If you recognize any of these mistakes in your own situation, the best time to address them was years ago. The next best time is now.

---

IMPORTANT DISCLOSURES

This post was created with the assistance of AI tools for research and drafting.  It was reviewed, edited, and fact-checked by Will Cunningham before publication.  Please verify any critical information.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC., a Registered Broker/Dealer and member FINRA/SIPC.