By Donald Albach
Federal workers and military personnel have many options for pension maximization. It’s a strategy for making the most of retirement income while preserving financial stability for the families of those serving the country. Though several helpful programs are in place, individuals eligible for these benefits still have to navigate tax implications and make sound investment decisions.
Learn about some of the basics of pension maximization along with effective strategies to make it work for you and your loved ones.
Understanding Federal and Military Pension Systems
Here’s an overview of some of the pension structures in place for federal workers and military service members.
Federal Employees Retirement System (FERS)
The Federal Employees Retirement System is a retirement plan that breaks down into three sources:
- A basic benefits plan through the FERS annuity
- Required participation in Social Security
- The Thrift Savings Program (TSP) for contributing to retirement
FERS was launched in 1987 to streamline federal and military retirement plans, making them more similar to civilian and private sector plans.
Civil Service Retirement System (CSRS)
CSRS was the pension system most federal employees relied on until FERS replaced it in the 1980s. It still exists for a few who were federal workers before 1987, but new federal workers may enroll only in FERS now. CSRS offered a generous pension but did not provide Social Security benefits.
Military Pension System
Military retirees may qualify for a pension plan after serving for at least 20 years. They can receive a lifetime annuity calculated from either their final pay or the average of their highest-earning work period. While the pension serves as the pillar of the system, retirees should support it with additional savings plans.
Thrift Savings Program (TSP)
This program, embedded in FERS, is a defined contribution retirement investment plan for federal employees and active service members. Its structure closely resembles a 401(k), and it gives participants an instant tax break. Participants can choose from six investing options including index funds, mutual funds, and other financial vehicles.
Pension Maximization Strategies
Here are a few approaches for pension maximization that qualified individuals can take.
Choose the Right Survivor Benefit Option
The Survivor Benefit Plan (SBP) offers a lifetime annuity to surviving spouses. Eligible survivors earn a monthly income adjusted for inflation. However, the SBP premium can take a hefty cut from the pension. A life insurance policy may be most cost-effective.
Optimize Social Security Benefits
Individuals in the FERS program quality for Social Security. One common strategy for pension maximization is to delay taking Social Security benefits as long as possible past full retirement age to get higher monthly payouts later.
Consider Replacing Pension With Life Insurance
A life insurance policy may be a worthy, more flexible alternative to official survivor benefits. Plan enrollees can get term insurance for a reasonable premium or take out permanent life insurance to increase cash value.
Tax and Investment Considerations
Pension maximization involves taking into account a few factors involving taxation and other benefits.
Taxation of Pension
Federal and military pensions are subject to federal income tax. State tax implications may also come into play, so retirees should look into the tax laws governing their states of residence.
Roth Conversions
Withdrawals on Roth IRAs are tax-free in retirement. Converting at least some of your TSP or other IRAs into Roth accounts can ease your tax burden after you retire.
Coordinating Pension With Other Retirement Funds
Diversification is a widely recommended investment strategy. It’s worth balancing pension payouts with other investment vehicles and the TSP to gain tax efficiency and extend retirement fund longevity.
Maximize Federal and Military Pensions With Millstone Financial Group
Federal workers and military personnel have many retirement investment options at their disposal. We at Millstone Financial Group work closely with those who choose to serve their country to come up with the best balance of pensions and private investments to help them and their families prepare for retirement. When you contact Millstone, we match you with an advisor who tends to your best interests and special needs.
Schedule a complimentary consultation by calling (732) 385-8544 or emailing dalbach@millstonefinancial.net.
Advisory services are offered through Millstone Financial Group Limited Liability Company, a Registered Investment Advisor in the State of New Jersey. Insurance products and services are offered through Millstone Financial Group Limited Liability Company.
All material discussed is for informational purposes only. Opinions expressed are solely those of Millstone Financial Group Limited Liability Company and staff. All topics covered are believed to be from reliable sources; however, Millstone Financial Group Limited Liability Company makes no representations as to their accuracy or completeness. Investing involves risk including the loss of principle.
This article shall in no way be construed as a solicitation to sell securities or investment advisory services to residents of any state other than New Jersey, or where otherwise permitted. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
