Posted on Friday, 8th June 2012 by

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Over these last couple of months I’ve had the opportunity to correspond with a number of federal employees and these two concerns were at the top of their list:

  1. the length of time it is taking OPM to finalize annuity payments, and
  2. the desire to obtain life insurance in the private sector, but neglecting to do so in a timely manner.

When it comes to financial planning, one of the main considerations advisors plan for is the need for liquid cash reserves, or what we refer to as your emergency fund.  Emergency funds for the private sector have generally been recommended at 3-6 months of income.  After the downturn in 2008, with the decline in net worth, job losses or both, that number has now been increased to 6 months to a year of income.

In the federal market, the need for a larger cash reserve fund has increased as well; due to the length of time it is taking the Office of Personnel Management (OPM) to calculate your income.  After speaking to a number of federal employees over the last couple of months, it has become apparent that many employees are not receiving their full federal retirement annuity in a timely fashion. I say this with no disrespect to their actuaries, but with concern for the employees and the financial planning perspective of having an adequate emergency fund to tie you over should indeed this should happen to you.

As an advisor, I strongly recommend that you have at least one year of income in your cash reserves account (emergency fund).   Then, if it does take a year or more to finalize your monthly annuity, you’ll have the cash required to meet your monthly income need.   Without that cash reserves, where would you go to get the money you need to meet your monthly bills?   You may look to Roth IRA accounts, Traditional IRAs, TSP assets, or other non-qualified accounts.  Unfortunately, depending upon your age at the time, it may cost more due to taxes and penalties and not be a prudent option.  Each type of account is treated a little differently by the IRS. The important thing is to have a plan and know the rules.   You may want to consider speaking to a financial consultant when determining which assets to liquidate first?

Secondly, is the need for life insurance planning. Most federal employees know they have life insurance options A, B, and C and may need to consider alternative life insurance options in the future. One of the best solutions to the higher cost of insurance benefits from the federal government later in life or at retirement, is to consider a permanent life insurance solution when you are young and healthy.  It saddens me greatly to see federal employees get turned down for life insurance in the private sector due to a health issue that developed later in life. You can avoid this by planning ahead and I can’t stress enough that it’s never too soon to start.

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Paul H Risser, host of this site’s Financial Planning Forum, is an Investment Advisor Representative with and Securities and Investment Advisory Services offered through Transamerica Financial Advisors, Inc. (TFA) member FINRA, SIPC and a Registered Investment Advisor. Non-Security products and services are not offered through TFA. TFA and Risser Financial Services are not affiliated.

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