Federal Worker Layoffs: What Are Their Next Options?
Key Points – Federal Worker Layoffs: What Are Their Next Options?
- Planning Considerations for Federal Workers Who Are 55 and Older
- The Importance of Having a Comprehensive Financial Plan
- What Will Happen to My Pension Benefits?
- Things to Know About Federal Health Insurance
- How Will Your Retirement Be Impacted If a Higher Contribution Rate Is Required?
- 6-Minute Read
Have You Been Affected by the Federal Worker Layoffs?
As the Department of Government Efficiency (DOGE) attempts to reduce spending and the size of the federal government, more than 100,000 federal workers have lost their jobs.1 Are you one of them or concerned about becoming one of them? Even if you’re not, think about friends and family members that you have that might fall into that category.
According to the Pew Research Center, 28.1% of federal workers are 55 and older.2 Let’s review some planning considerations specifically for federal workers who might now be thinking about an early (forced) retirement.
The Big Question for People Impacted by Federal Worker Layoffs: What Will Happen to My Pension Benefits?
Some people might think that most federal workers live in the Washington, D.C. area, but the impact of these layoffs has been widespread. As of September 2024, there were around 454,000 federal workers that resided in Washington, D.C., Maryland, and Virginia compared to 1.86 million federal workers lived elsewhere according to the U.S. Office of Personnel Management.3 For example, there were 1,000 IRS employees who were laid off at the IRS campus in Kansas City, Missouri in late February — right in the middle of tax season.4
Modern Wealth has offices all over the country, including the Washington, D.C. and Kansas City areas. Many of our advisors serve federal workers who have voiced concerns about the widespread layoffs. The No. 1 concern they’ve shared is what will happen to their pension benefits.
FERS Retirement Plans
Since 1987, federal workers have had retirement coverage from the Federal Employees Retirement System (FERS).5 A FERS retirement plan provides benefits via a basic benefit plan, Social Security, and Thrift Savings Plan. FERS has four categories of benefits for its basic benefits plan: immediate, early, deferred, and disability.6 Your eligibility for those benefits is contingent on your age and years of creditable service. Make sure you know your Minimum Retirement Age (MRA) since that could be a determining factor for your retirement benefits.
FIGURE 1 – Minimum Retirement Age – U.S. Office of Personnel Management
To be vested under FERS, you’ll need to accrue five years of service.7 Due to there being so much anxiety and confusion due to the fluidity of the federal worker layoffs, some federal workers have worried about possibly losing their pension benefits altogether and forget that they’re already vested.
If you retire at your MRA and have between 10-20 years of service, your annuity will be reduced by 5% for each year you’re under 62. Your annuity won’t be reduced if you’re 60 or older and retire with a minimum of 20 years of service. See Figure 2 to see how the FERS basic annuity formula is determined.8
FIGURE 2 – FERS Basic Annuity Formula – U.S. Office of Personnel Management
That raises another concern that our advisors have been hearing: what if the pension formula changes from high 3 to high 5? That is one of several budget options regarding federal workers that’s being considered by Capitol Hill Republicans according to FEDweek.9 How would that impact your plans for retirement? That is something that we would want to discuss with you and plan accordingly for that possibility.
If You’re Eligible for Federal Health Insurance, Should You Take It?
Health insurance is another key component of retirement planning. If you’re a federal worker who has been enrolled in the Federal Employees Health Benefits (FEHB) program for a minimum of five continuous years, you’re eligible to continue receiving coverage in retirement.10 The same goes for your dependents and survivors. If you’re eligible for the FEHB program, is that the best option for your health care needs in retirement?
It’s also important to understand what happens to your health insurance after your death and if your family can continue health coverage. That will depend on the type of coverage you were enrolled in.11 If you die after you retire, the continuation of health coverage depends on the type of coverage you are enrolled in and if there is a survivor payable benefit.12
Currently, the FEHB has a premium-sharing structure, but one of the budgetary options that Capitol Hill Republicans have considered is shifting to a voucher model. 13 A voucher wouldn’t be subject to payroll and income taxes. Make sure to take that into consideration when determining your health insurance options going forward. If you are eligible for FEHB insurance and Medicare, you have the following three options.14
- Keep FEHB and enroll in Medicare Parts A and B
- Turn down Medicare Part B and keep FEHB
- Disenroll from FEHB and enroll in Medicare
What About Life Insurance?
Along with considering your health insurance options in retirement, it’s important to weigh your options for life insurance as well. The Federal Employees’ Group Life Insurance program has been in existence since 1954.15 FEGLI is comprised of basic life insurance and three forms of optional insurance, but you must have the basic insurance if you want any of the other three.
You have the option to keep basic FEGLI life insurance in retirement if you meet certain requirements.16 If you decide to keep it, you have the three following options: a 0%, 50%, or 75% reduction.
With a 75% reduction, basic coverage decreases 2% per month until reaching 25% of the pre-reduction total. Basic coverage is premium-free when reductions start and will continue to be until you die.
With a 50% reduction, basic coverage decreases 1$ per month until reaching 50% of the pre-reduction total. However, there is an additional premium for this option. You must continue to pay it until you pass away, cancel basic coverage, or switch to the 75% reduction.
And with a 0% reduction, basic coverage remains the same it was when you ceased being enrolled while working. An additional larger premium also applies with this option. Just like with the premium with the 50% reduction, you must pay the premium until you die, cancel basic coverage, or switch to the 75% reduction.
How Will Your Retirement Be Impacted If a Higher Contribution Rate Is Required?
As we begin to wrap up this article on planning considered for those impacted by the federal worker layoffs, we want to make sure that you’re aware your current FERS contribution rate compared to what it could be in the future. Currently, federal employee contribution rates are tiered based upon the year the employee was hired. If you were hired in 2012 or earlier, it’s 0.8%. It’s 3.1% if you were hired in 2013. And if you were hired in 2014 or later, it’s 4.4%.
One of the budget options Capitol Hill Republicans are considering is having a contribution rate of 4.4% for all employees.17 How would that impact you if you were hired before 2014? If the required contribution rate goes up, it will reduce your income. Does that affect your ability to contribute to your Thrift Savings Plan and, hence, your retirement goal?
Remembering the Rule of 55
If you or someone you know has been impacted by the federal worker layoffs, there are obviously several challenges that could arise when job searching.18 If you’ve started to consider retirement and are 55 or older, remember that there is another option for instant income besides dipping into your savings accounts. For people who are 55 and older that have left their employer for a reason, whether it’s via a voluntary retirement or you’ve been laid off, you’re eligible to take distributions or withdrawals from your employer-sponsored retirement plan without being subject to the 10% early withdrawal penalty. In this case, it applies to federal workers 55 and older who have Thrift Savings Plans.
Don’t Navigate Financial Uncertainty Alone – We’re Here to Help!
As you’re trying to determine your best path forward (whether you have been a part of the federal worker layoffs or are concerned about losing your job), take some time to reassess your financial life. Rather than potentially making important decisions about your financial future while under a great deal of stress, work with a team of wealth management professionals that can help provide clarity about your situation.
It can be easy to reach out to your past/present colleagues about how they’re planning to move forward, but it’s important to understand that everyone’s path will look different depending on their situation. Even if you and your colleague have/had the same job and similar salary, things such as your family situation, age, career earnings and savings, health, lifestyle, goals, etc. could be completely different. Where you live is also a big determining factor, especially since some states have special tax treatment for withdrawals from your Thrift Savings Plan.19
Do You Have a Comprehensive Financial Plan?
That’s why it’s so important to have a comprehensive financial plan that’s tailored to your goals. When our team builds a financial plan for someone, we stress test it against various forms of risk, such as losing a job before your desired retirement date, early death of a spouse, prolonged market downturns during retirement, and high inflation.
All those forms of risk are out of your control, but you can plan for them. Those are just a few of the planning considerations that are mentioned in our Retirement Plan Checklist. It features a checklist of 30 yes-or-no questions that gauge your retirement readiness and age-and date-based timelines of retirement planning considerations. Download your copy below.
If you have any questions about your situation, what we’ve covered in this article about federal worker layoffs, or our Retirement Plan Checklist, start a conversation with our team below.
Income planning for retirement can be very complex, especially when your plans for retirement aren’t crystal clear. We want to make sure you’re not going through this stressful time alone and are here to help you and any other federal workers impacted by these recent layoffs.
Resources Mentioned in This Article
- 5 Types of Financial Plans
- Stress Testing Your Financial Plan
- Forced into Retirement? Consider These 7 Strategies
- 4 Retirement Risks Out of Your Control
- 10 Ways to Fight Inflation in Retirement
- Financial Checklist After the Death of a Spouse
- Reviewing Your Retirement Checklist
- Don’t Retire without Doing These 8 Things
- Income Planning for Retirement
- Why You Need a Financial Planning Team with Jason Gordo
- Retirement Savings by Age
- Family Matters: A Multigenerational Outlook on Financial Planning
- What Is Wealth? 4 Types of Wealth
- 6 Levels of Wealth
- Your Retirement Lifestyle: What Do You Want Your Retirement to Look Like?
- 10 Steps to Reach Financial Goals
- 2024 Tax Return Tips
- Health Insurance Options for Retirees Under 65
- Health Care Costs During Retirement
- Life Insurance in Retirement: Do I Still Need It?
- What to Do with Your 401(k) After Retirement?
- The IRA Early Withdrawal Penalty: How to Avoid the 10% Penalty
Downloads
Other Sources
[1] https://www.cnn.com/politics/tracking-federal-workforce-firings-dg/index.html
[2] https://www.pewresearch.org/short-reads/2025/01/07/what-the-data-says-about-federal-workers/
[4] https://moneywise.com/news/top-stories/kansas-city-irs-layoffs-begin-with-about-1000-job-cuts
[5] https://www.opm.gov/retirement-center/fers-information/
[6] https://www.opm.gov/retirement-center/fers-information/eligibility/
[8] https://www.opm.gov/retirement-center/fers-information/types-of-retirement/#url=Early-Retirement
[9 , 13, and 17] https://www.fedweek.com/fedweek/gop-weighs-familiar-new-options-for-reducing-value-of-federal-employment/
[12] https://www.opm.gov/healthcare-insurance/life-events/memy-family/what-happens-if-i-die/
[15] https://www.opm.gov/healthcare-insurance/life-insurance/
[18] https://www.adn.com/business-economy/2025/03/10/fired-federal-employees-flood-the-job-market/
[19] https://stwserve.com/what-states-tax-social-security-tsp-federal/
Investment advisory services offered through Modern Wealth Management, Inc., a Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.