Don't Let Retirement Planning Become a Financial Nightmare: 5 Scary Mistakes Federal Employees Should Avoid
October is the month for haunted houses and horror movies, and most of us enjoy a good scare, as long as we know the lights will come back on. Retirement doesn't work that way. A planning mistake made at 58 can follow you for the next thirty years, and there's no point in time where the credits roll and everyone walks out laughing.
If you're a federal employee covered by the Federal Employees Retirement System (FERS), you have more built-in support than most workers in the private sector, with a pension, the Thrift Savings Plan (TSP), Social Security, and the ability to carry your health insurance into retirement. Those benefits are valuable, but each one comes with its own rules, deadlines, and tradeoffs, and the way they interact is where people tend to get tripped up. At Corbett Road Wealth Management, we sit down with federal employees at every stage of this process, and the same five mistakes come up again and again. Here is what they look like and how you can avoid them.
Mistake 1: Underestimating Retirement Expenses (The Budget That Comes Back to Haunt You)
Most people expect to spend less once they stop working. Some costs really do disappear, such as commuting, work clothes, and the TSP contributions coming out of every paycheck, but others quietly take their place, and the first several years of retirement are often the most expensive ones. Travel, hobbies, helping adult children or grandchildren, and the home repairs you put off for a decade all compete for the same dollars, and suddenly having forty extra hours a week to fill tends to cost money also.
You may have heard that retirees need about 70 to 80 percent of their working income. Treat that as a rough starting point. Your real number depends on how you actually spend, which is why we ask clients to track their spending for a few months before they retire instead of guessing.
Inflation deserves special attention for FERS retirees. If you retire under the regular rules, your FERS pension generally won't receive cost of living adjustments until you turn 62, and even after that the FERS adjustment is reduced whenever inflation runs above 2 percent. A pension that feels comfortable at 57 can lose a meaningful share of its buying power over a retirement that lasts 25 or 30 years.
It also helps to remember that your pension is not the same as your deposit. FEHB premiums, FEGLI life insurance premiums, and the reduction for a survivor benefit all come out before the money reaches your bank account, and choosing a full survivor benefit alone reduces your annuity by 10 percent. A realistic retirement budget starts with the net figure and separates the fixed bills you can't avoid from the flexible spending you can adjust in a lean year.
Mistake 2: Ignoring Your TSP Withdrawal Strategy (Don't Let Your Savings Vanish Into Thin Air)
For many federal employees the TSP is the largest pool of money they can reach and control, which makes how you take money out of it nearly as important as how much you saved. After you separate, you can take partial withdrawals, set up installment payments on a monthly, quarterly, or annual schedule, buy a life annuity, combine several of these approaches, or roll some (or all) of the balance into an IRA. Each path changes your tax bill, your flexibility, and how long the money is likely to last.
Timing matters as much as the method. Pulling large amounts out during a market decline in the first few years of retirement can do lasting damage, because the shares you sell at low prices aren't there to recover when the market does. Many retirees keep a year or two of planned withdrawals in the G Fund or another stable holding to help mitigate the risk of selling equities during market downturns. You must find the right balance for your situation and what you are comfortable with, keeping in mind that a higher cash balance also means participating less in market growth and subjecting the cash holding to inflation risk.
The TSP also has a few rules that reward careful planning. If you leave federal service in or after the year you turn 55 (50 for law enforcement officers, firefighters, and other special category employees), withdrawals taken directly from the TSP avoid the 10 percent early withdrawal penalty, but rolling that money into an IRA first can cause you to lose that protection until age 59½. Your TSP withdrawal plan should also line up with your Social Security decision, since using TSP savings to cover a few years of expenses can let you delay Social Security and lock in a larger monthly benefit for life. Required minimum distributions begin at age 73, or 75 if you were born in 1960 or later, and they are far easier to manage when you've planned for them years in advance.
Mistake 3: Overlooking Healthcare Costs (The Monster Under the Bed)
Few federal benefits are as valuable as keeping your Federal Employees Health Benefits (FEHB) coverage in retirement, with the government continuing to pay its share of the premium. To keep it, you generally must have been enrolled in FEHB for the five years of service immediately before you retire, or continuously since your first opportunity to enroll. Miss that requirement and you lose the coverage for good, which makes it one of the few retirement mistakes that can't be repaired afterward.
Keeping FEHB doesn't make healthcare free. Premiums continue and typically rise each year, and you'll still face deductibles, copays, dental and vision bills, hearing aids, and prescriptions. Extended long-term care, such as help with daily living at home or in a facility, isn't covered by FEHB or by Medicare, and it is one of the biggest financial risks retirees face.
Medicare adds another decision at age 65. Federal retirees with FEHB can choose whether to enroll in Medicare Part B, and the right answer depends on your health, your plan, and your income. Pairing Part B with FEHB often eliminates most out of pocket costs, and some FEHB plans help pay the Part B premium. Skipping Part B saves the premium for now, but if you decide to enroll later you'll face a late enrollment penalty of 10 percent for each full year you went without it, and that penalty lasts for the rest of your life. Part B premiums are also tied to your income from two years earlier, which links this decision directly to the tax planning we cover next.
Mistake 4: Forgetting About Taxes (The Hidden Cost Lurking in the Shadows)
A lot of retirees are surprised to find that taxes don't retire when they do. Your FERS pension is taxed as ordinary income at the federal level, apart from a small portion that represents the contributions you already paid tax on. Withdrawals from the traditional side of your TSP are fully taxable, the FERS supplement you may receive before 62 is taxable, and depending on your other income, up to 85 percent of your Social Security benefit can be taxed as well. State rules vary widely, with some states fully exempting federal pensions and others taxing them in full or offering only a partial deduction.
Withholding is where the problem usually shows up. OPM lets you choose how much federal tax to withhold from your pension, and plenty of new retirees set it too low and then receive an unpleasant bill the following April. The TSP also withholds 20 percent from many types of withdrawals, which can be more or less than what you actually owe.
Taxes can also be planned, not just paid. The years between your last paycheck and the start of Social Security or required minimum distributions are often your lowest income years, which can make them a smart window for converting some traditional savings to Roth. Choosing when in the year to retire matters too, because the payout for unused annual leave is taxed in the year you receive it, and retiring in December can push that lump sum into the same tax year as a full year of salary. Keeping your income under control also helps you avoid the higher Medicare premiums that kick in at certain income levels.
Mistake 5: Waiting Too Long to Build a Retirement Plan (Don't Wait Until the Clock Strikes Midnight)
People often assume retirement planning starts a few months before their last day. For federal employees, several of the most important decisions have deadlines that arrive years earlier, and by the time someone submits their application, some of the best options may already be gone.
The five-year FEHB requirement is the clearest example, but it isn't the only one. If you served in the military, you generally need to pay a military service deposit before you retire in order to have those years count toward your FERS pension, and interest on that deposit can grow the longer you wait. The age you choose to leave matters a great deal, because retiring at your Minimum Retirement Age with between 10 and 29 years of service reduces your pension by 5 percent for every year you are under 62, while working until 62 with at least 20 years of service raises your pension calculation from 1 percent to 1.1 percent of your high 3 salary for every year served. Those differences can add up to tens of thousands of dollars over a retirement.
Your survivor benefit election is very difficult to change once your retirement begins, so it should be made with your spouse and a clear picture of your household finances. OPM processing can also take several months, and during that time you'll receive only partial interim payments, which means you'll need cash set aside to bridge the gap. Starting five to ten years before your target date gives you room to fix gaps in your service history, adjust your TSP investments, pay down debt, and test your retirement budget while you're still collecting a paycheck.
Turning a Nightmare Into a Plan
None of these mistakes require bad luck. They happen because the federal retirement system is complicated, the decisions overlap, and most people only retire once, so they never get a chance to practice. Your pension, TSP, Social Security, health coverage, and taxes all affect one another, and a change in one place usually ripples into the others.
At Corbett Road, we help FERS employees look at those pieces together, from estimating what retirement will actually cost to deciding when and how to draw on the TSP. If you'd like a second set of eyes on your plan, or you simply aren't sure where to begin, we're happy to talk through your situation with you. The earlier that conversation happens, the more of your options are still on the table.
Frequently Asked Questions About FERS Retirement Planning
When can a FERS employee retire with an unreduced pension?
A FERS employee can retire with an unreduced pension at their Minimum Retirement Age with 30 years of service, at age 60 with 20 years, or at age 62 with at least 5 years. Your Minimum Retirement Age falls between 55 and 57 depending on the year you were born.
Can I keep FEHB health insurance after I retire?
Yes, as long as you were enrolled in FEHB for the five years of service immediately before retirement, or continuously since your first opportunity to enroll. If you meet that requirement, the government continues paying its share of your premium.
What is the best way to withdraw money from the TSP in retirement?
There isn't one best method for everyone. The right mix of partial withdrawals, installment payments, an annuity, or an IRA rollover depends on your other income, your tax bracket, when you plan to claim Social Security, and how much flexibility you want.
Is a FERS pension taxable?
Your FERS pension is taxed as ordinary income at the federal level, except for a small portion that returns the contributions you already paid tax on. State tax treatment depends on where you live.
Should federal retirees enroll in Medicare Part B?
It depends on your health, your FEHB plan, and your income. Part B paired with FEHB can reduce out of pocket costs significantly, while delaying it saves the premium but can trigger a permanent late enrollment penalty if you sign up later.
How early should a federal employee start planning for retirement?
Ideally five to ten years before your target date. That gives you time to meet the FEHB requirement, make any military or civilian service deposits, adjust your TSP, and compare the pension impact of different retirement ages.
This article is for general educational purposes and is not individual investment, tax, or legal advice. Federal benefit rules and tax laws change, and your situation may differ. Please consult a qualified professional before making decisions about your retirement.
IMPORTANT DISCLOSURES
Any opinions expressed through Claude-powered analysis, or by Concurrent Investment Advisors, LLC, reflect viewpoints as of the date produced. They are subject to change without notice and should not be interpreted as personalized advice or predictions.
The information provided is for educational and informational purposes only. Concurrent Investment Advisors, LLC, d/b/a Corbett Road Wealth Management, does not provide legal or tax advice. Please consult with your attorney, accountant, or tax advisor based on your individual circumstances.
These materials are 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.
Corbett Road Wealth Management provides all investment advisory services through Concurrent Investment Advisors, LLC, an SEC Registered Investment Advisor. Corbett Road Wealth Management and Concurrent Investment Advisors, LLC are not affiliated companies.
