Are you saving like you should? Our tips below will help you out, no matter where you are in your public sector career.
I happened to be in a government building in Texas last week when I noticed a sign encouraging active participation in a retirement plan. It read: “I’ll save for retirement when I’m older…Older than what?”
Public sector workers at any stage in their career can take this advice to heart. When it comes to saving for retirement, you can never start too soon. And there are plenty of ways to maximize your retirement savings as you progress through your career.
Below, we detail seven important ways you can make sure you’re doing all the right things when it comes to your nest egg – no matter what stage you’re at.
Congratulations! You’ve landed your first job with the feds. After you sign all of those HR forms, make sure that you’re properly enrolled in the Federal Employees Retirement System (FERS). This includes setting up your Thrift Savings Plan (TSP), which allows you to make tax-deferred contributions, a portion of which is matched by the government.
Your agency will contribute a 100% match for contributions you make up to 3% of your basic salary and a 50% match for any contributions from 4% to 5% of your basic salary. Above that, your agency will make no matching contributions.
It is in your best interest to contribute 5% of your basic salary, if you are able. If you aren’t contributing, you’re essentially throwing away free money.
Newbie tip #1: Think about when you want to retire and what you want out of your retirement. Do you want to downsize? Upsize? Travel the world? Take classes? Or just relax? The answers to these questions will help you determine how much to allocate toward your account each month.
The more time you have to save, the less you’ll need to put away on a monthly basis because you have many years to allow your contributions to accumulate. Without needing to find a financial planner, you can use this tool https://www.tsp.gov/planningtools/retirementplanning/howMuchToSave.shtml to estimate how much you need to save now to reach your goals later. (You can also estimate the growth of your TSP here to be sure that it adequately covers your expectations: https://www.tsp.gov/planningtools/howsavingsgrow/howSavingsGrow.shtml)
Newbie tip #2: Don’t let your money sit idle! When you’re young, the best thing to remember when determining how to invest or allocate your retirement savings is that the market is cyclical and you’ll be investing for many years. Most financial experts will tell you that you should consider high-risk investments, mainly in stocks. In your 20s, and even into your early 30s, you can be almost entirely invested in stock funds. Your portfolio might be volatile, but it will, in the long term, outperform other forms of investment. Not only will you receive a higher rate of return than if you choose bonds, given the number of years until you retire, you have plenty of time to recover with safer investment options in the event that the market takes a serious downturn. But do yourself a favor and don’t bail on your investments too easily. If you want the best outcome, you need to take a risk.
Newbie tip #3: Early saving, no matter how much or how little, is paramount to ensuring that you meet your retirement goals. If you have a little extra money here or there, put it into your retirement account. With compound interest, every little bit helps, so consider taking a look at all of your financial obligations—student loans, credit card debt, mortgage, etc. Find out if you can consolidate your debts or refinance at a lower interest rate. If you can lower your monthly payments, you’ll have more available to put toward retirement savings. But be wise: Pay down any high-interest or excessive credit card debt before investing extra funds in your retirement account.
Newbie tip #4: Remember the IRS: When you think about your future, and what you want in retirement, one important consideration is when you will pay the taxes on your TSP contributions. You have the option to make two different types of contributions: traditional and Roth. Traditional contributions are made on a tax-deferred basis, and grow at a tax-deferred rate, but you’ll need to make tax payments on your withdrawals.
Roth contributions are taxed at the time of contribution, and are not taxed at withdrawal. If you are early in your career, it might be beneficial to make Roth contributions. You’ll likely be in a higher tax bracket by the time you retire, and will end up paying more in taxes on traditional contributions.
Mid- to Late-Career
If you’ve been saving for a decade or two or four, great job. You are well on your way to a sound retirement nest egg. But just because you started making contributions at age 25 doesn’t mean that you can sit back and ignore your account until you near retirement.
Mid- to late-career tip #1: Don’t hesitate to start. For those that put off saving when they first started their career, thinking that they’d have more money or more flexibility to contribute later, it unfortunately doesn’t get any easier. Once you reach this point, you are likely raising a family, helping elderly parents, and saving to put your kids in college.
If you still don’t feel like you have enough room in your budget for retirement contributions, take another look at all of your financial obligations and weigh them against one another. If you’re saving to send a child through college, but not for your own retirement, remember that you can always finance an education – but no one is going to give you a grant or a loan to cover all of your expenses once you leave the workforce (and don’t think Social Security will be enough for all of your expenses).
Mid- to late-career tip #2: Check in periodically. Keep an eye on how your investments are doing and make any necessary changes. As you get closer to retirement, you’ll want to gradually lower your investment risk. Again, the market is cyclical, and those dips that you could easily weather at age 30 become a bit more difficult to recover from as the years go by. In the few years before you retire, you’ll want to have a very low-risk account.
Also think about whether you want to increase your contributions (if you’re earning more than you were when you started your career, the answer should almost always be “yes”). Depending on how your paycheck and your contributions to your TSP have changed, take the time to visit https://www.tsp.gov/planningtools/electivecontributions/electiveContributions.shtml to find out how much you can contribute or have matched without reaching your traditional contribution limit for tax deferral.
Mid- to late-career tip #3: Keep asking questions. The closer you get to retirement, the more important it is to think about your current situation and how it differs from when you began saving—will you still be able to retire as intended? Do you have enough cash reserves to delay making withdrawals from your TSP (the longer it sits untouched, the longer you have to continue earning)? Do you have any increase in medical or other expenses, and have you planned accordingly? Will your current account support the lifestyle you plan to live in retirement? Will you be able to fully retire, or will you need to remain in the job force? How have you planned for unforeseen expenses? Have you realistically budgeted for everything you will need in retirement?
Answering these questions every now and again will help you determine whether you need to change your current contribution.
Do you have any other questions about retirement planning or finances for government workers? Leave them in the comments, and we’ll do our best to answer them!