The federal government plan
The Federal Employees Retirement System, or FERS, offers a secure three-legged retirement-planning stool for civilian employees who meet certain service requirements:
A basic defined benefit plan
Social Security
The Thrift Savings Plan, or TSP
Only two of these are portable if you leave government work – Social Security and TSP, the latter of which is also available to members of the uniformed services. The TSP is a lot like a 401(k) plan on steroids. Participants choose from five low-cost investment options, including a bond fund, an S&P 500 index fund, a small-cap fund and an international stock fund — plus a fund that invests in specially issued Treasury securities.
On top of that, federal workers can choose from among several lifecycle funds with different target retirement dates that invest in those core funds, making investment decisions relatively easy.
Pros: Federal employees are eligible for the defined benefit plan. Plus they can get a 5 percent employer contribution to the TSP, which includes a 1 percent non-elective contribution, a dollar-for-dollar match for the next 3 percent and a 50 percent match for the next 2 percent contributed.
“The formula is a bit complicated, but if you put in 5 percent, they put in 5 percent,” says Littell. “Another positive is that the investment fees are shockingly low – four hundredths of a percentage point.” That translates to 40 cents per $1,000 invested – much lower than you’ll find elsewhere.
Cons: As with all defined contribution plans, there’s always uncertainty about what your account balance might be when you retire.
What it means to you: You still need to decide how much to contribute, how to invest, and whether to make the Roth election. However, it makes a lot of sense to contribute at least 5 percent of your salary to get the maximum employer contribution.
Cash-balance plans
This is a type of defined benefit, or pension plan, too.
But instead of replacing a certain percentage of your income for life, you are promised a certain hypothetical account balance based on contribution credits and investment credits (e.g. annual interest). One common setup for cash-balance plans is a company contribution credit of 6 percent of pay plus a 5 percent annual investment credit, says Littell.
The investment credits are a promise and are not based on actual contribution credits. For example, let’s say a 5 percent return, or investment credit, is promised. If the plan assets earn more, the employer can decrease contributions. In fact, many companies that want to shed their traditional pension plan convert to a cash-balance plan because it allows them better control over the costs of the plan.
Pros: It still provides a promised benefit, and you don’t have to contribute anything to it. “There’s a fair amount of certainty in how much you’re going to get,” says Littell. Also, if you do decide to switch jobs, your account balance is portable so you’ll get whatever the account is worth on your way out the door of your old job.
Cons: If the company changes from a generous pension plan to a cash-balance plan, older workers can potentially lose out, though some companies will grandfather long-term employees into the original plan. Also, the investment credits are relatively modest, typically 4 percent or 5 percent. “It becomes a conservative part of your portfolio,” says Littell.
What it means to you: The date you retire will impact your benefit. “Retiring early can truncate your benefit,” says Littell. Working longer is more advantageous. Also, you’ll get to choose from a lump sum or an annuity form of benefit. When given the option between a $200,000 lump sum or a monthly annuity check of $1,000 for life, “too many people,” choose the lump sum when they’d be better off getting the annuity for life, says Littell.
If you’re married and don’t want to leave your spouse in the lurch — in the event you predecease him or her — consider a joint-life annuity rather than a single-life annuity.
