If you’re a new fed, or even an established fed, you’ve probably heard a ton about your options to begin saving for your retirement. And it’s all generally confusing. Not to mention, there are a lot of financial decisions you’ll be making in addition to how, when, or how much to save for retirement. How do you even know where to get started? Or if you’ve already started mapping out your financial plan, how do you keep going? Here are some top tips for financial planning for federal employees.
- Differentiate your goals from your ideals, and then establish your financial goals. Depending on your age and years of service, a typical goal might be a target retirement date or a specific amount to save each month. Once you have defined your goals, add value to them by giving them priority.
- Establish an emergency fund. This is the money that you would live off if you left federal service, were laid off, or were furloughed. If you are in a two-income household, you should have three months of earnings saved in your emergency fund. If you are a single-income household, you should double that and have enough to cover six months of expenses.
- Assess your life insurance. If you have a family, be sure that you have the appropriate life insurance coverage. It is important to understand that your biggest asset is your ability to earn income over your lifetime. Life insurance companies (and even online tools) can help you conduct a life insurance needs analysis so that you can be sure your family is covered in the event anything should happen to you. If you find life insurance too expensive, consider looking to the professional organizations you belong to, as many offer discounted plans.
- Know how much you spend now and how much you intend to spend in the future. Look at this against how much you make to create a cash flow analysis. How do your income and expenses differ? Do you need to cut back on spending? And if so, in which areas can you cut back? Your cash flow analysis will be useful in determining whether you have the appropriate amount of savings on hand for your emergency fund.
- Contribute to the Thrift Savings Plan (TSP). This program allows you to make tax-deferred contributions into a retirement account, a portion of which is matched by the government. It’s in your best interest to contribute at least 5% of your basic salary, if you are able. Why? Because your agency will make a 100% match contribution up to 3% of your basic salary, and a 50% match for any contributions between 4% and 5%. Above that, no matching contributions are made. (If you contribute nothing, the government will still put in 1% of your salary—but you should definitely be contributing something because the TSP is expected to account for about a third of your retirement income.) If you’ve reached age 50 and want to play catch up with your TSP, you’re allowed to make an additional $5,500 contribution per year above the $16,500 limit.
- Make sure your retirement savings are invested appropriately for your stage of life. If you’re young and new to federal service, high-risk investments are appropriate because you have plenty of time to weather the ebb and flow of the markets. As you reach retirement age, money should be moved into more stable (and lower earning) investments, to ensure that you have the funds you expected to retire on.
- Consider career moves with your retirement in mind. Let’s say you’ve been eyeing a job in the private sector. Before taking it, consider how long you’ve been in federal service and whether you’re fully vested in your retirement accounts. If you aren’t, you’ll be risking a lot of your retirement income to move away from the public sector. Is it worth it?
- If you’re feeling overwhelmed or don’t know what to do, consider hiring a financial advisor. If you decide to go this route, be sure to research your options and find someone who you believe will truly take the time to understand your wants and needs, and be sure to look at all of the fees you might be charged. You can find information on brokerage firms and financial advisors on this SEC website, and when you do narrow down your options, it is recommended that you ask each person or firm for their Part 2A Form ADV. This form is required by the SEC and will explain to you the services offered, the fee schedule, and other important background information on the company.
- Check in with your finances on a monthly basis. Be sure that you understand what you have, what you need now, what you will need in retirement, and know how to read the information presented in your different accounts. This does not have to be an in-depth dig through your finances, but look at how you’re doing, and reassess your goals. Once or twice a year, do a deeper dive into your finances and determine whether you need to reallocate your investments or begin contributing more to your TSP (especially if your earnings have changed).
- Never stop saving (and start as soon as you are able). Don’t ever feel comfortable in how much you’ve saved. Don’t assume that you have enough and can start spending all of your income down to the last penny. You never know what the future might hold and how necessary those extra dollars and cents can become.
I like the suggestion to establish an emergency fund. Especially the part about saving 3-6 months of earnings. When I was learning how to budget, my mother always stressed that I needed 3 months of bills covered, at least, in savings. This was a great way to learn that if anything were to happen to you, at least you would be prepared.