Assessing Early Retirement Affordability: Ponder these 4 Critical Factors Before Taking the Plunge
In a supplement to Tammy Flanagan's earlier article about administrative considerations for federal employees facing an unexpected retirement, we delve into the financial planning aspects that should be considered when a federal employee's time with the government is coming to an early conclusion.
Firstly, it's crucial to understand that if a federal employee has worked for at least five years, they are entitled to a pension. However, the pension payout date depends on the employee's age and total years of service; it may be immediate, or they may have to wait until 60 or 62.
When it comes to securing the necessary funds for retirement, there are several sources to consider. These include the Thrift Savings Plan (TSP), Individual Retirement Accounts (IRAs), annuities, cash, or other investments. The higher a person's expenses, the more money they need to generate from their pension, social security, and investment withdrawals.
Health insurance can be a substantial expense, so knowing whether or not the federal employee will be covered is extremely important. If the federal employee has MRA +10 years of service but doesn't qualify for an immediate pension, they may lose their Federal Employees Health Benefits (FEHB) plan until their pension starts at 62. However, if they qualify for an immediate pension, their FEHB plan may continue in retirement.
The TSP offers an age 55 early withdrawal rule, which allows for penalty-free distributions if the account holder separates from service at 55 or older. This rule could be a saving grace for some federal employees. However, it's important to note that distributions from the Traditional side of the TSP account are still subject to taxes.
The article emphasizes the importance of understanding one's distribution options. It's not just about knowing where to get the funds, but also how to withdraw them without incurring unnecessary penalties. The new administration's measures to downsize the federal government may lead many federal employees to retire earlier than planned. In such a situation, careful consideration of distribution options becomes even more critical.
Lastly, it's important to become intimately acquainted with one's spending when facing an early retirement or a prolonged period without work. Retirement sustainability is an equation with income on one side and spending on the other. Therefore, understanding one's expenses and finding ways to minimise them is key to a comfortable retirement.
In conclusion, the article advises federal employees to step back, take a deep breath, and assess their options if they are facing an unexpected retirement. It encourages a thorough understanding of one's pension, health insurance, and distribution options, as well as a careful examination of spending habits. By doing so, federal employees can better prepare for a secure and comfortable retirement.
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