Before working with a financial planner, federal employee Deirdre Gibson, 59, was not familiar with her investment options for retirement. But the 2008 financial crash caused Gibson and her husband Eric, 52, to seek financial help.
"We didn't have the expertise we needed to plan for our retirement or college tuition for our two kids," says Gibson, chief of planning and resource management for Valley Forge National Park in Valley Forge, Pa, who began working with her advisor three years ago. "It was helpful to find a financial advisor who understood federal benefits and knew the best places to invest money while protecting it."
Since then, she says, she's noticed a steadier return on her investment earnings despite the continued market downturn. "We're not seeing the peaks and valleys as much as when we didn't have a financial advisor helping us," says Gibson, one of 1,831,719 federal employees in the U.S.
According to the Office of Personnel Management (OPM), the average salary of the federal employee increased from $66,000 in 2006 to $76,586 in 2010. The average age of the federal employee is 46 years old, and by 2016, an estimated 900,000 will be eligible to retire.
"Financial advisors need to be very familiar with benefits paid to the Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS) so that they can advise employees on retirement. That takes research on what factors go into the calculations and what those factors mean," says David Snell, director of retirement benefit services at the National Active and Retired Federal Employees Association (NARFE), a not-for-profit organization that lobbies to stop Congress from eroding federal employee benefits.
Proposed changes include extending a current two-year pay freeze to five years; disallowing FERS participants from counting unused sick leave toward their retirement; ending the FERS retirement program for employees with less than five years of service and cutting pensions for those with longer service to reflect only the time they have served until now; increasing employee pension contributions from 0.8% to 7% for FERS employees and from 7% to 10% for CSRS employees.
"Financial advisors working with federal employees need to stay up to date on the enactments that have an effect on federal paying benefits," says Snell.
The CSRS is a pension benefit plan paying up to 70% of earnings that is being phased out. How much participants receive at retirement depends on the amount of years in federal service. The government's version of a 401(k) plan, FERS pays only 30% of earnings and centers around the Thrift Savings Plan (TSP) with its 5% matching contribution providing the bulk of retirement monies for those hired after 1983.
"Turning the TSP into an immediate annuity is an option, but the rates aren't as attractive as in an IRA," says Brian Kurrus, a financial advisor in Tyson, Va., outside of Washington, D.C. "There's more interest to be gained in guaranteed income products through variable annuities where we can turn that lump sum investment into a guaranteed income stream and protect the length of time money is distributed from that retirement asset."
Overall, investment strategy depends on how close a client is to retirement. Regardless of age, however, investment options within the TSP are limited to life cycle, index and government bond funds because the TSP doesn't invest in currencies, commodities or emerging markets.
"If a client is keeping money in the TSP to supplement their retirement income and are a short time away from retiring, I would use the life cycle funds, the F and G funds, depending on market volatility," says Larry Rosenthal, president of Financial Planning Services in Manassas, Va.
The G fund is made up of guaranteed issued securities while the F, C, S and I funds are index funds. L funds are invested in the five individual TSP funds based on professionally determined asset allocations.
To make her job easier, Denver-based financial advisor Ann Vanderslice asks federal employee clients to download an updated TSP statement, a Social Security statement and a recent leave and earning statement (LES), which discloses the employee's service computation date, TSP earnings and contributions as well as health and life insurance policies. "If I have those, I can calculate their federal benefits, give them a snapshot of what their income will look like, provide an assessment and make recommendations," says Vanderslice, whose practice is 100% federal employees.
Besides index funds, life cycle funds and bond funds, life insurance also offers opportunities for federal employees.
Made up of options A, B and C, Federal Employee Group Life Insurance is the largest group life insurance program in the world, covering more than 4 million federal employees and retirees as well as many of their family members.
"Option B is a five-year adjustable term policy, which means every five years it goes up in cost. I advise my clients to privatize option B so that they have a sounder policy," says Rosenthal. "Look at the age group, how many multiples the client has, then show what the client is paying and what a new 20-to-30-year term plan would cost in the private sector."
Private companies such as Federal Seminars, the Federal Benefits Training Network and Federal Benefits Educators offer classes to federal employees and financial advisors who want to understand federal benefits and be prepared for the influx of federal employees expected to retire in the next few years. "Federal benefits are under attack," says Vanderslice. "Many of my clients want to retire early before Congress passes any changes, which would take effect in 2013, and they have the resources to do so."
Although private sector employees have traditionally enjoyed higher pay, stock options and bonuses, they lack the health-care plan that federal employees earn to retire early. "The upside of advising federal employees is that you don't have to worry if they are retiring at 55 because they get health-care coverage immediately. Most corporate clients only get COBRA for up to 18 months and have to wait until they are 65 years old to partake in Medicare Part B coverage," says Patti Houlihan, a financial advisor in Reston, Va. "Lack of health insurance limits many of my corporate clients from retiring early. So, in that sense, the federal employee is in a better position than the private sector worker."
The Consolidated Omnibus Budget Reconciliation Act (COBRA) became law in 1986, giving private sector employees the option to keep group health insurance benefits after job termination for a limited time. "Unlike federal employees, private sector workers have the dilemma of securing health insurance coverage when they retire prior to Medicare eligibility if COBRA doesn't get them to 65," says Houlihan.
Corporate clients seeking to retire at 50 or 55 face an estimated $1,400 to $1,500 a month for health insurance when their COBRA expires, depending on their marital and health status.
Once trained, financial advisors are typically challenged with breaking into federal agencies for access to potential clients. "I do training and workshops at federal agencies. That's how I get leads," says Carol Schmidlin, president of Franklin Planning in Sewell, N.J.
The largest percentage of federal employees live in California, Virginia and the Washington, D.C., area, according to OPM. "Most of my clients are through referrals from other departments," says Kurrus. "I contact federal employees at work using employee directories. It's easy to get a list of all the government agencies and their Web sites on the Internet."