If you’re not working with federal employees and military personnel, you might be overlooking a solid opportunity for your retirement planning services. Although the number of federal and military employees has been shrinking, it’s still a significant workforce: an October 2013 New York Times article reports there are roughly 2.7 million federal civilian employees and 1.4 million active duty military.
There’s a catch, though. Some of the retirement plans and benefits offered to these groups are similar to those available to those in the private sector. But other features are unique to government plans, which mean you’ll need to develop additional expertise to attract and retain these clients.
John Cermak, CFP, a financial advisor with First Command Financial Services Inc. in Arlington, Va., estimates that 90 percent of his clients are current or retired federal and military employees. I recently asked him about the key distinctions in planning for these clients.
The military’s retirement plan, which is the same across the services, differs significantly from the average private sector plan, he notes. It’s a defined benefit plan and after 20 years service, the retirement benefit is 50 percent of the three years’ highest base pay at that point. The annual benefit increases by 2.5 percent for every additional year served. The benefit is not capped and can exceed 100 percent of base pay for those serving 40-plus years.
Federal employees can be in either the Civil Service Retirement System (CSRS) or the Federal Employee Retirement System (FSRS), generally depending on whether their service started before or after 1983. Both groups can participate in the federal Thrift Savings Plan (TSP), which is similar to a 401(k) plan and now includes a Roth option.
Cermak highlights several planning opportunities with military retirees. Personnel coming off active duty in tax-free zones like Iraq or Afghanistan who contributed to the TSP will have accumulated tax-exempt funds in their accounts. Those funds can be carved out from the overall TSP balance and rolled over to Roth IRAs to preserve their tax-free status.
Another planning opportunity occurs if the military retiree receives disability income from the Veterans’ Administration. Depending on the retiree’s degree of disability, part of that payment can be tax-free and can provide funding for additional retirement savings in Roth plans.
The plans are complex at first glance but the annually published Federal Employee’s Almanac will get you up to speed on the benefits. The good news: you can focus on just a few chapters in the Almanac. “Pay is Chapter 1, insurance is Chapter 2 and retirement is Chapter 3,” Cermak says. “You would spend 90 percent of your time in the first three chapters. So even though the book is relatively thick, the number of pages that the vast majority of advisors will ever need to look at is less than 25.”