Retirement Planning for Public Employees

Retirement Planning for Public Employees

Are you making a career as a public employee—like a teacher, police officer, or member of the military? If so, saving for retirement may look different than it does for the private sector.

Published by Motley Fool Wealth Management Originally posted on Wed, Nov 9, 2022 Last updated on November 30, 2023

read time 5 min read

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Are you eligible to retire from serving as a public employee, but wondering if you can afford to make the transition? Or are you just starting your career as a public employee?

You’re not alone in questioning how best to save for retirement or if your savings and Social Security will be enough. Add to the mix how you'll pay for healthcare, taxes, and cost-of-living adjustments, and you could get overwhelmed easily.

What should you do next? Here are the answers to your most pressing retirement questions.

Can I afford to retire?

Public employees are in a unique situation. The average government employee retires at age 61.81 compared to the average private sector worker, who retires at 64.7 for men and 62.1 for women.2 There are reasons why public sector employees may retire earlier. Unlike the private sector, some public sectors are forced to retire after a certain age or after working a certain number of years. Another reason is that they have robust pensions with healthy benefits packages.

Government workers can estimate their benefits package by asking for information from their HR departments. You can also check an online calculator from your respective department, such as the Federal Ballpark Estimator, which is provided by the U.S. Office of Personnel Management.3

Once you estimate your projected benefits, you can create a personal budget to see the lifestyle you can afford.

Start with how much you might spend in retirement. One rule of thumb to estimate your monthly retirement spending levels is by multiplying your current expenses by 85-90%. For example, if you spend $5,000 a month while you’re employed, you can figure on spending roughly $4,250 to $4,500 during retirement.

Next, estimate your income. Include your Social Security benefits and retirement accounts, like a pension, 401(k) or 403(b), and individual retirement account (IRA). Also consider your taxable investment accounts, like a brokerage account, and other sources of income, such as rental income if you own rental properties. Some public employees may receive a large lump sum--such as from accumulated overtime or vacation days—upon retirement. That should also factor into the income side of your budget.

Something else to think about is whether you plan on starting a “second” career. If you’ve met your service requirements for retirement, you may still be young. So a second career may be in the cards. Retiring young—which we define as before age 60—also means you can’t access some of your retirement savings without penalty. In that case, you may need to save for retirement differently early in your career.

Another important consideration is your expected lifespan. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.4 The older you are, the longer you'll need your money to last in retirement. 

How will I pay for my healthcare?

Health care is one of the highest expenses for retirees. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple may need approximately $315,000 to cover health care expenses in retirement.5 Fortunately for public-sector workers, much of these healthcare costs will be covered for life.

For example, federal workers may be entitled to keep existing health benefits if they meet the following conditions*:6

  • Enrollment in health care insurance under a federal plan at retirement
  • Must have been continuously covered by a Federal Employees Health Benefits Program (FEHB) program, TRICARE, or Civilian Health and Medical Program for Uniformed Services (CHAMPUS) plan for five years immediately before retiring
  • Annuity payments start within 30 days

If you retain coverage into retirement, you should verify its components.

What are my retirement plan options?

Taking a step back, if you are just beginning your career as a young public employee, you should know your retirement savings options. Here is a list of retirement plans that may be available to you:

●Defined benefit plans

Defined benefit plans (e.g., pension funds) provide guaranteed benefits to participants based on their age, length of employment, and salary range. Employers contribute to these plans, not employees. And the retirement benefits do not depend on investment performance. This is one of the perks of being a public employee since it guarantees a stable source of income.

If you are eligible for a pension from employment with a federal, state, or local government and you did not pay Social Security taxes, your pension can affect the amount of your Social Security benefits. This reduction is called the Windfall Elimination Provision, or WEP.7 As debt and financial liabilities continue to grow, public agencies have looked for ways to reduce or modify their pension obligations. If you think you fall under this category, you should consult with a wealth advisor to learn more about the potential risks to your benefits.

●Defined contribution plans

Defined contribution plans are offered by employers, but all contributions and investment selections are made by the employee. Employees contribute pre-tax money from their paychecks, which is invested and hopefully grows tax-deferred. The money can be withdrawn at age 59½ as needed, but it must start being withdrawn at age 72 (known as required minimum distributions). Upon withdrawal, taxes are paid. The most common types are 401(k)s, 403(b)s, 457s, and Thrift Savings Plans (TSP).

●Hybrid retirement plans

Hybrid retirement plans include the defined benefit (based on the employee’s final average salary) and defined contribution savings plans. The military, for example, has two retirement systems: the legacy High-3 system—a defined benefit plan—and the new Blended Retirement System (BRS).8

The BRS went into effect on January 1, 2018, and includes matching Thrift Savings Plan (TSP) contributions and a monthly annuity for life after 20 years of service. The annuity is based on a calculation of 2% per year served. The legacy retirement annuity is based on 2½% per year served.9

There are benefits and drawbacks to each type of plan, along with some regulations that mandate when and how much you must take out each year. Working with a wealth advisor can help you understand the differences and ensure you maximize the benefits of each type of retirement plan.

Consult a wealth advisor

Evaluating your different retirement plan options and strategies as a public employee can be intimidating and sometimes overwhelming. So, if you are just getting started in your career, an advisor can help you set up your long-term plan. And if you're near retirement, working with a wealth manager may help you better navigate obstacles and unexpected hurdles.  They could help direct you to areas in your plan that may need attention or that you may have overlooked. In other words, a wealth advisor can help potentially make the transition smoother and less stressful—a well-deserved “thank you” for your public service.

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1Retirement Statistics & Trend Analysis - OPM, accessed Sep. 7, 2022

2Center for Retirement Research at Boston College, July 2022

3FERS Retirement Pension Calculator, accessed Sep. 7, 2022

4American Psychological Association Life Plan, accessed Sep. 8, 2022    

5How to plan for rising health care costs,      Aug. 29, 2022

6Learn more about health benefits and retirement, accessed Sep. 8, 2022    

7Windfall Elimination Provision, accessed Sep. 8, 2022    

8Military Pay and Pensions, accessed Sep. 8,  2022    

9Military Pay and Pensions, accessed Sep. 8, 2022    

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