On January 28, the Trump administration announced buyout offers to all federal employees who opt to leave their jobs by next week.

A memo from the federal human resources agency titled Fork in the Road reads:

… you will be provided with a dignified, fair departure from the federal government utilizing a deferred resignation program. This program begins effective January 28 and is available to all federal employees until February 6.

Source: Office of Personnel Management

Below are several critical considerations for federal employees deciding if taking the buyout is the right decision. Whether you are considering this buyout offer or another is offered to you down the road, here are some things to consider.

CSRS vs. FERS: How Does the Buyout Impact Retirement Benefits?

To make the right decision about this buyout offer, it’s critical to understand how the buyout will affect your retirement benefits, particularly under the two different retirement systems: Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS).

CSRS employees who leave before meeting the age and service requirements may:

  • Be eligible for deferred retirement benefits, provided you have at least five years of creditable civilian service.
  • Face a reduction in their annuity (typically a 2% reduction for each year the employee is under age 55 at the time of retirement).

FERS employees who leave before qualifying for immediate retirement benefits may:

  • Be eligible for deferred retirement, contingent upon having completed at least five years of creditable civilian service.1
  • Face a reduction in pension benefits (generally a 5% reduction for each year the employee is under age 62 at the time of retirement.2

Your pension benefits are based on several factors, including years of service and GS (or SES) level.

As you make this decision, it helps to be familiar with the expected balance of your federal pension benefits and plan for how the pension will support your retirement goals.

Sources: 1. fedretire.net  2. psretirement.com

How Does the Buyout Impact My Thrift Savings Plan (TSP)?

Upon separation:

  • Your contributions to the TSP will cease.
  • For FERS employees, agency contributions — including the automatic 1% and any matching contributions — will also cease.

Consider reviewing your TSP balance and consider how this may impact your retirement savings strategy.

How Should I Take the Buyout?

At this time, it’s unclear whether federal workers have the option to take the buyout money in a lump sum, but to ensure you make the right decision, it’s important to understand how a lump sum will impact your pension calculations when compared with other options.

If I Take the Buyout, What Should I Do with the Cash?

Prioritizing cash flow management will help ensure you can satisfy your financial needs in the short and long term.

For younger employees, this means considering what to do with the money that comes in. Employees closer to retirement will be assessing if everything they’ve accumulated so far will support the lifestyle they expect to have in retirement.

Early Retirement Considerations

The buyout may encourage some federal employees to consider going into early retirement. Of course, this decision has to be weighed against the impact of taking social security benefits before full retirement age.

Here’s another important consideration: for those that retire prior to the end of the deferred resignation period — whether early or as planned — that decision will override the deferred resignation election.

Is Taking the Buyout the Right Choice?

Make an informed decision about this buyout offer.

At PBMares, our strongest motivation is to help our clients create the future they envision for themselves and their families.

As an independent registered investment advisory firm, our fiduciary standard of care requires us to make decisions in your best interest. Our evidence-based approach is informed by academic research. This enables us to properly diversify your assets, while always keeping expenses and tax considerations in mind to ultimately support your objectives for the future.

Let us become part of your financial team. Our driving philosophy is to do what is best for you, your family, and your future.

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About the Author:

Daniel Yoo PBMares Wealth AdvisorDaniel H. Yoo, CFP®, CEPA®, CM&AA®
Senior Wealth Advisor

As a Senior Wealth Advisor and Certified Financial Planner™, Daniel Yoo simplifies the financial lives of entrepreneurs, executives, and their families. He is also a Certified Exit Planning Advisor® to help business owners understand and optimize the value of an exit strategy.

Be sure to consult with your financial advisor on this topic as individual situations may vary.