5 Irreversible Federal Employee Retirement Planning Mistakes

Federal employee retirement benefits can be valuable, but the rules around FEHB, FERS, the TSP, sick leave, and taxes can be difficult to coordinate in the final years before retirement.

In this video, Alec Sunners, Wealth Advisor with Financial Consulate, shares five common retirement planning mistakes federal employees may want to review before they retire.

You’ll learn why the FEHB five-year rule deserves attention before your retirement date, how the FERS Supplement earnings test can affect income from part-time work or consulting, and why your TSP strategy may need to change as you move closer to retirement. Alec also explains how unused sick leave can affect your FERS pension calculation and why federal employees benefit from having a coordinated plan for retirement income and taxes.

If you are within three to seven years of federal retirement, this video can help you understand which decisions may need a closer look before important windows close.

Financial Consulate offers a Financial Physical®, a no-cost review of your financial plan, taxes, and benefits before you make any commitment to work with us. The goal is to help you see where you stand, what decisions are in front of you, and what you may be missing.

Transcript 

The Thing That Surprises People Most About Federal Retirement Planning

The thing that surprises people most isn’t how complicated their benefits are; it’s how many irreversible decisions they’ve already made by the time they sit down with a financial advisor. If you are within three to seven years of retirement, your most consequential choices are happening right now. Your health insurance, first pension, TSP, and your taxes can either work beautifully together or actively fight against each other.

Hi, everyone, my name is Alex Zunners, and I’m a Wealth Advisor with Financial Consulate. Today, I’m walking you through the five most common financial mistakes we see federal employees make in their final years and exactly how you can avoid them. Let’s start with mistake #1, the FEHB five-year rule.

Mistake #1: The FEHB 5-year rule and federal health insurance eligibility

To carry your federal employee health benefit coverage into retirement, you must have been enrolled in it for the five consecutive years immediately before your retirement date. Not five years total, five years in a row ending the day that you retire. Employees who switch to a spouse plan to save money or who had a gap in coverage at some point can lose FEHB eligibility entirely.

And losing that coverage is a serious problem, especially if you’re retiring before Medicare eligibility at age 65. If you are within five years of retirement, your FEHB enrollment status deserves a hard look right now before the window closes. The next mistake involves a benefit most federal employees know they have, but they don’t fully understand.

Mistake #2: FEHB supplement earnings test and retirement income limits

If you retire before age 62 under FEHB, you likely qualify for what’s called the FEHB supplement. It’s an additional monthly payment designed to bridge the income gap before Social Security kicks in and can be worth hundreds or thousands of dollars a month. But here’s what’s usually missed.

The FEHB supplement has an earnings test. If you take part-time work or consulting income in retirement and your earnings exceed the current annual earnings threshold, the supplement gets reduced by one dollar for every two that you earn above that limit. Imagine someone that retires at 58 and qualifies for a $1,200-a-month first supplement.

They pick up part-time consulting work and earn well above the earnings threshold that year.

They could lose hundreds of dollars a month in supplemental payments they were counting on. For people who plan to stay active or do some consulting in early retirement, this can come as a real financial shock.

Knowing this in advance means you can plan your income strategically and avoid giving back money you’ve already earned. Now let’s talk about your TSP, because this is where we see some of the biggest planning gaps. The Thrift Savings Plan is a powerful retirement tool, but in the years before retirement, many federal employees leave it in whatever allocation they set years ago and never revisit it.

Mistake #3: TSP allocation, Roth vs. traditional, and tax planning opportunities

Others don’t think carefully about the difference between their traditional TSP balance and any Roth TSP contributions they’ve made. And these two pots of money have very different tax consequences when you start taking withdrawals. The window between your retirement date and age 75, when required minimum distributions begin for anyone born in 1960 or later, is often an opportunity to move money from your traditional TSP into a Roth account at a lower tax rate.

If you retire in your late 50s or early 60s, you could have a 15-year window where your taxable income is lower than it’s ever been. Now most people know about the TSP, but far fewer think carefully about the next mistake we see. Under FERS, your unused sick leave at retirement is converted into additional retirement credit.

Mistake #4: FERS sick leave credit and its impact on your pension

It counts toward your length of service calculation, which directly affects the size of your pension. For every 174 hours of unused sick leave, you get approximately one additional month of service credit added to your pension calculation. If you’ve built up 2,000 hours over a long career, that’s nearly a year of additional service credit.

We see federal employees burn through sick leave in their final year, sometimes legitimately, and sometimes just because they figure they’ll lose it anyway. But it has real value in your retirement income. Understand that number before you decide to use it.

Mistake #5: Lack of coordinated retirement income and tax planning strategy

And that brings us to the fifth mistake, which might be the one with the longest-lasting consequences. The fifth mistake is less about a specific benefit and more about a mindset. Federal employees are very good at building toward retirement by saving, staying enrolled, and checking the boxes.

What many of them haven’t done is build a plan for what retirement actually costs and where each dollar is going to come from. When you retire, you go from one predictable income source to managing several. Your first pension, the TSP, the first supplement, and eventually Social Security.

Each of these has a different tax treatment, different timing considerations, and different rules. Without a coordinated plan that accounts for all of them together, including taxes, you’re almost certainly leaving money on the table or paying more than you need to. The good news is that the years before retirement are exactly when that plan can be built.

The picture isn’t nearly as complicated once someone walks through it with you. Federal benefits are among the best in the country, but they’re also among the most complex. And the decisions you make right now will shape the next 20 or 30 years of your life.

What a Financial Physical Review Includes for Federal Employees

If you want to know where you stand, we offer something called a Financial Physical®. It’s a comprehensive review of your financial plan, your taxes, and your benefits—at no cost and before you make any commitment to work with us. The goal is to give you a clear picture of what you have, what decisions are in front of you, and what you might be missing.

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Frequently Asked Questions About Federal Employee Retirement Planning

Can I keep my federal health insurance when I retire?

You can, but only if you have been continuously enrolled in FEHB for the five consecutive years immediately before your retirement date; not five years total, but five years in a row ending the day you retire. A gap in coverage or a switch to a spouse’s plan during that window can eliminate your eligibility entirely. If you are within five years of retirement, your current enrollment status is worth confirming now.

What is the FERS supplement and how can part-time work affect it?

The FERS supplement is a monthly payment available to federal employees who retire before age 62, designed to bridge the income gap until Social Security begins. It comes with an earnings test, meaning that if you take on part-time work or consulting in retirement and your income exceeds the annual threshold, the supplement is reduced by one dollar for every two dollars earned above that limit. For people who plan to stay professionally active in early retirement, this can significantly change the income picture they were expecting.

Should I change how my TSP is invested as I get closer to retirement?

Many federal employees leave their TSP in whatever allocation they set years ago and never revisit it, which can create real risk as retirement approaches. Beyond the investment mix, the gap between your retirement date and age 75, when required minimum distributions begin for those born in 1960 or later, may be an opportunity to shift money from a traditional TSP balance into a Roth account at a lower tax rate than you would otherwise face. Whether that makes sense depends on your income in retirement and how your other benefit payments are structured.

Does unused sick leave have any value when I retire as a federal employee?

Under FERS, unused sick leave at retirement is converted into additional service credit, which directly increases your pension calculation. Every 174 hours of unused sick leave adds roughly one month to your length of service. If you have accumulated 2,000 hours over your career, that translates to nearly a year of additional credit; so burning through sick leave in your final year has a real cost that is easy to overlook.

Why does it matter whether my federal retirement income sources are coordinated?

When you retire as a federal employee, you shift from one predictable paycheck to managing several income streams — your FERS pension, the TSP, the FERS supplement, and eventually Social Security — each with different tax treatment, different timing, and different rules. Without a plan that accounts for all of them together, it is easy to pay more in taxes than necessary or miss windows to position your income more efficiently. The years immediately before retirement are when that kind of coordinated planning has the most impact.