Before You Take That Buyout: How to Protect Your Federal Retirement

Federal buyouts can be tempting. They promise a lump sum and the chance to step away from the job earlier than expected. However, if you do not approach the decision carefully, you could be putting your retirement security at risk.

As agencies across the government offer early retirement and buyout packages to restructure their workforces, many employees are making life-changing decisions on short notice. The benefits you have worked for, such as your FERS pension, Thrift Savings Plan (TSP), Social Security, and FEHB health coverage, are valuable. They are not immune to market swings, inflation, or policy changes.

Understand what you are giving up and what you are keeping

Before you sign anything, know exactly how your pension will be calculated. Early retirement can mean a smaller monthly payment for the rest of your life. The FERS annuity supplement, which bridges your income until you are eligible for Social Security, may also be reduced or eliminated in the future if Congress changes the rules.

Your TSP is another key piece. With interest rates higher now than they have been in years, the G Fund is performing better. Market volatility still affects other funds. If you will need to withdraw from your TSP sooner than planned, you may be drawing from a portfolio that is more volatile than you realize.

FEHB coverage is one of the most valuable benefits you have. To keep it in retirement, you must meet the five-year coverage rule. Dropping coverage now, even for a seemingly cheaper alternative, can mean losing FEHB permanently. With health care costs rising, that could be one of the most expensive mistakes you ever make.

Run your numbers under real-world stress tests

Do not just plan for the best case. Test your retirement plan under three scenarios:

1. Benefits reduced by 10 to 25 percent over time.
2. Inflation staying above 3 percent for several years.
3. Investment returns lower than historical averages.

If your plan still works under all three, you are in a stronger position to take the buyout. If not, consider working longer or adjusting your plan before you leave.

Example: How to Stress Test Your Federal Retirement Plan

Assumptions for this illustration:
-Retire in 2026
-FERS pension: $42,000/year
-TSP balance: $650,000
-Annual income need: $80,000 in year one
-Inflation: 3.5% per year
-Portfolio return: 4% per year
-Social Security not claimed in the base case

• Start with your numbers
  In year one, you need $80,000. Your pension covers $42,000, leaving $38,000 to withdraw from your TSP.
• Apply a pension reduction
  Reduce your projected pension and any FERS supplement by 15% to simulate legislative risk. Pension drops to $35,700, increasing your TSP withdrawal to $44,300 in year one.
• Increase inflation
  At 3.5% inflation, your $80,000 need grows to roughly $95,000 by year five, requiring larger withdrawals from your TSP to maintain purchasing power.
• Lower investment returns
  Assume your TSP earns 4% annually instead of the historical 6–7%.

Outcome under these stress assumptions:

• No Social Security: TSP runs out in ~14 years.
• Social Security $25,000/year starting in year 6 with a 3% COLA: TSP lasts ~19 years.
• Social Security $30,000/year starting in year 6 with a 3% COLA: TSP lasts ~20 years.

If your plan still meets your income needs under these stressed conditions, you may be in a stronger position to accept a buyout. If not, consider delaying retirement, saving more, adjusting spending, or changing your Social Security claiming strategy.

Tip: Robust retirement planning tools can model these scenarios with greater precision and handle multiple variables at once. Ask your current plan administrator or HR office if they offer access to such tools.

Have a plan for your Social Security timing

Coordinating when you claim Social Security with your pension and TSP withdrawals can make a big difference in your lifetime income. Delaying Social Security can increase your benefit, but it may mean drawing more from savings in the early years. Run the numbers so you know exactly how the timing affects your finances.

Checklist before signing a buyout

• Get a pension estimate from your HR office.
• Confirm your FERS annuity supplement eligibility and amount.
• Review your TSP allocation and withdrawal strategy.
• Verify you meet FEHB’s five-year coverage rule.
• Run stress tests on your retirement plan.
• Decide when you will claim Social Security.

The bottom line

A buyout can be an opportunity, but only if it is part of a solid retirement plan. Once you sign, there is no going back. Take the time to understand your benefits, run the numbers, and make sure you are protecting the retirement you have worked so hard to build.

Johnny Medina is the Managing Partner at Nhabla, a fiduciary wealth management firm serving federal employees and other mission-driven professionals. He also serves as Portfolio Manager for the firm’s investment strategies and holds a Master of Science in Finance from Johns Hopkins University. Contact him at johnny.medina@nhabla.com, visit www.nhabla.com, or connect on LinkedIn.

OPM Advises Agencies on Conducting RIFs During Shutdown

Updated Shutdown Contingency Plans Show Range of Impacts

Use Shutdown as Justification for More RIFs, OMB Tells Agencies

Unions Win a Round in Court Disputes over Anti-Representation Orders

Deferred Resignation Periods End for Many; Overall 12% Drop

Senate Bill Would Override Trump Orders against Unions

TSP Adds Detail to Upcoming Roth Conversion Feature

See also,

Legal: How to Challenge a Federal Reduction in Force (RIF) in 2025

How to Handle Taxes Owed on TSP Roth Conversions? Use a Ladder

The Best Ages for Federal Employees to Retire

Best States to Retire for Federal Retirees: 2025

Retention Standing, ‘Bump and Retreat’ and More: Report Outlines RIF Process