Delivered on: Thursday, July 24, 2025

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Last Paycheck vs. First Retirement Check

How your pay changes when you retire from federal service

• INCOME: Changes in gross income you can expect as a retiree
• EXPENSES: Which expenses go up and which go down in retirement
• THE GAP: How you can fill the income shortfall (but there’s a catch!)

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Prefer to read instead? A Transcript of this Webinar is Below:

Welcome, welcome, welcome everyone to the FedImpact webinar today on the last paycheck versus the first retirement check.

Last Paycheck vs. First Retirement Check

Today's session is all about how you can expect your pay to change once you finally retire from federal service.

We're going to zoom out a little bit, not really just look at the last paycheck versus the first retirement check, but look really at that last year of work versus the first year of retirement and see how things are going to be different and what you can do to influence what your bottom line looks like in retirement.

You guys know me. I'm Chris Kowalik, the founder of ProFeds. I'm really lucky that I get to help federal employees navigate a lot of these crazy aspects of preparing to retire, and today's session is really no different. I'm grateful to be able to be here to share so much of this with you guys today.

Agenda

Let's jump into our agenda. We're going to talk about income, how your actual gross income is going to change and what you can expect as a retiree. And we're going to use a case study to help kind of paint this picture a little bit and then you can plug in your own numbers here.

As far as expenses with respect to your federal benefits, you're going to have some expenses that are going to go up and some of them are going to go down in retirement. And then of course you have non-federal benefits related expenses for your household and those types of things. That's a little bit separate of a conversation, but still really important.

Then we'll talk about the shortfall. If we identify that there's a shortfall between the income that you need and the expenses that you have and there's not enough income to cover all the expenses, then we have to figure out how to fill the income gap. But I'll warn you, there's a catch. There's actually a number of catches and so you're going to want to pay very special attention to today's material.

And that leads me into my challenge for you today. This particular webinar, we're going to touch on the wave tops of lots of different federal benefits that you have. I don't have the ability to go super deep into all of these benefits, but no doubt you've probably arrived here at the webinar and you have your long list of questions that you want to get answered.

And what I challenge you for today is do your very best to hear the message that I'm sending you. I've taken a lot of care and thought and poured it into today's webinar. And I would hate for you to spend 20 minutes trying to get to the bottom of some random benefit that you had a question about and lose the bigger message of today's material.

What this webinar will NOT cover

What this webinar will not cover. I am not able to cram eight hours of our retirement workshop into today's webinar. I cannot teach you all the intricate details of these benefits. Like I said, I'm going to cover the wave tops of these benefits and give an overarching explanation and some general ideas about how these benefits work, but we're not going to be able to get into all of those details.

But don't worry, I've got a lot of resources for you. If you feel like maybe you're not quite shored up on how some of these benefits work, we're going to have some ways for you to be able to get all squared away.

Benefit Highlights

Let's talk about benefit highlights. There's a lot of benefits that you have as a federal employee and I'm excited be able to share some of these details with you knowing that it's not quite the detail that we're used to teaching, right?

I mean, we're used to going deep into these benefits both in our workshop and here on the webinars. But given the vast nature of this particular topic, we've got to cover a little bit about a lot of things. So let's jump in.

With respect to the benefits highlights, we'll start with the pension. That's of course the big kingpin here in retirement. That pension is a monthly payment that you'll receive for the duration of your lifetime.

Survivor benefits, this is a portion of your pension that is payable to your surviving spouse when you die. We're getting serious really early here in this webinar.

Next is the FERS supplement. This is a monthly payment that you would receive if you retire with an immediate pension before the age of 62.

And then we have Social Security. Most of you know that's a monthly payment that can begin somewhere between 62 and 70 depending on what it is that you want to happen. And once you begin that, it will be payable for your lifetime as well.

Of course, I am oversimplifying all of these and there are requirements that you're going to have to meet to be able to receive each one of these benefits. But generally, I want to get an explanation of each one of these so that anybody who's a little newer to this planning process can have a pretty good idea of what we're talking about.

Next up is FEGLI. This is a life insurance death benefit that is payable to your designated beneficiary when you die. You can name anybody that you wish to be able to receive this.

As far as FEHB, this is your health insurance benefit. This is one that you're probably pretty familiar with. This is for you and your eligible family members.

Then we have the FLTCIP program. This is the Federal Long-term Care Insurance Program and it pays out if you need certain kinds of care. This is not medical care, this is other types of care, bathing, dressing, feeding yourself, those types of things.

Currently this program is under a suspension by OPM, and so this is not available for purchase. For those of you who already have this program, you can keep it. But anybody who doesn't already have it, there's not an opportunity under the government side to be able to get that kind of protection.

And then lastly, the Thrift Savings Plan. This is a 401(k)-style plan designed to provide some of those tax-advantaged savings and investing that help you to be able to set aside money now to be able to use later in retirement. Again, wave tops of all these benefits and how they work. We're going to take a little bit deeper of a dive into each one of these, but definitely a lot to cover today.

I'm going to guess that as we get into the finer details of the slides today, you are going to realize that there are some of these topics that you simply need a deeper dive in and really get your head wrapped around the options and the true details of how these benefits work and all the requirements to be able to keep them in retirement and those types of things.

Need a Deep Dive Into These Topics?

I encourage you to go to fedimpact.com. We have articles, podcasts, webinars, these are all online resources. And then of course we have our in-person retirement workshops as well that are sprinkled throughout the country. We do hundreds of these a year.

And I hope that if we're in an area where you can get to that, you will make the time to be able to attend. But I want to make sure that you guys have plenty of resources knowing that we're not going to be able to cover all of the details today.

The Transition

Let's talk about the transition into retirement. I chose this image on the right-hand side because winter, spring, summer, and fall, you very well may experience all of those seasons as you are transitioning into retirement. It might take OPM quite a while to be able to finalize your pension and so things might be a little crazy for the first few months, several months perhaps, of retirement while OPM gets all of that right.

OPM is going to take several months to finalize your retirement application. Listen, I know that they're starting with a new online retirement application and I hope that for everybody's sake that that goes really smoothly. I also know that I've rolled out software program in my own life and I know that typically your first round is not great and there are bugs that you find and things that get lost and things that don't quite work like you expected.

Until I start to see that those retirement claim processing times are really plummeting, we're going to still tell employees that we should expect several months of things being out of whack, which ends up affecting your cash flow. And that's the real reason I'm telling you, not to bash on OPM. They have their own work cut out for them, but for your cash flow standpoint, I want to make sure that you're going into this eyes wide open.

During this time that OPM is trying to finalize your retirement application, you are going to receive what they call interim payments, and that is typically between 60 and 70% of your gross pension. The only thing that will be withheld from that money is federal income taxes. We're going to do a deeper dive on this here in just a couple of slides, so stick with me here.

The other thing that you should know is during this time that OPM is finalizing everything, you're not going to receive the special retirement supplement. That's the one that kind of looks like Social Security, but it's paid prior to 62. Now don't fret, I mean once OPM finalizes everything, they're going to get you all your missed payments.

But again, cash flow wise, if you're expecting to receive that money and you don't receive it for, I don't know, 4, 5, 6, 8, 10 months, then that very well may affect your ability to pay bills and do the normal things that you were expecting in retirement.

That's why we always encourage employees to have cash on hand for this transition period. It is absolutely critical that you are not going into retirement cash poor. And what I mean by that is if all of your money is tied up in investments that take a while to access like the TSP, you will have a hard time getting income to flow into your checking account so that you can pay normal bills. Regardless of whether you're retiring or not, we always encourage a nice healthy emergency savings plan.

We don't want to deplete that in retirement because you need an emergency savings plan there too. But being able to have a bucket of money similar to that for that transition period will really help you to feel more confident that even if OPM has taken a while to get their act together and really pull all this together, that it's not affecting your overall cash flow situation. And you can always replenish that savings once everything gets back on track and you get some of those perhaps missed payments.

I want to get into our first meaty slide here. I want to talk specifically about the benefits payable from your retirement payments. We have obligations here on the left-hand side. We're going to talk deeper about each one of these benefits in today's material, but all these benefits that you see here are normal things that you would expect to come out of your paycheck.

In that first or really the second column here, you're seeing where it says paid from initial interim payments. This is the 60 or 70% that OPM is going to go ahead and start to pay you even though they haven't even touched your retirement claim yet. They have no idea what benefits you've elected.

They have no idea, lots of things that you have put into your retirement application. They just know that that application is sitting in a queue if it's electronic. It's sitting in a file folder if it happens to be a paper file.

But we've got to understand what's happening during that time. I already shared with you that the only thing that gets paid out of interim payments is federal income taxes. That's the only thing that they're withholding other than the other 30 to 40% that they're putting in a special little account for you. They're carving that out to be able to pay for things later, which we'll talk about.

During this interim payment period, the several months where OPM is, quote, “processing” your retirement claim, you are going to have a responsibility to pay out of pocket for state income taxes, your dental and vision program, and the Federal Long-term Care Insurance Program. If you have those, you have an obligation to arrange for out-of-pocket payments. Depending on how long this all takes will really determine how complex all of this is going to be.

I do want to point out though, survivor benefits, life insurance and health insurance, even though it doesn't look like you're paying for it, these things all remain in force during this interim period. There are simply agreements that OPM has with the carriers of these products that they're going to get all their money and it's just going to take a little time to let everything get sorted out. But don't worry, you still have all of these benefits.

If you were to pass away during this interim period, survivor benefits are still going to be paid, life insurance proceeds are still going to be paid out. And certainly during this time, you need to go to the doctor, your family member ends up in the hospital, all of those things, FEHB is still there, assuming that you met all the requirements to be able to keep these benefits.

Next step, let's talk about once OPM finalizes everything and they're looking at that portion of the money that they withheld from your check, that 30 to 40% that they did not pay out to you, they use that bucket to pay for those three benefits that you see in the middle. We have survivor benefits, life insurance and health insurance.

Again, we're going to get more into the details of these of some of the decisions that you are going to need to be making, but I want you to know what that 30 to 40% is withheld for.

We actually did an entire webinar on interim payments last month. If you missed it, please go back and watch it. I go into even further detail than I am today. But definitely, this interim period is something that makes people a little squirrely. And without understanding what's happening, it's easy to kind of freak out thinking that maybe you've lost some benefits or that someone's going to come after you for these payments.

I assure you for survivor benefits, life insurance and health insurance, those are all simply part of what has been held in reserve for you to be able to pay all of these things.

Because keep in mind, OPM is not processing your retirement claim for that entire period of time. You're in the queue, you're in line to have your benefits package looked at, your retirement package. And so they don't know all the elections that you've made. They don't know what you've chosen for survivor benefits for your spouse.

They don't know how much life insurance you've chosen to keep in retirement. Maybe you canceled it all. Who knows? Health insurance, what's that look like? Is that going to change? Are we changing carriers?

There's all sorts of moving parts here that OPM hasn't even laid their eyes on yet. They have no idea what benefits that you've elected during that time. To be safe, they're going to withhold that 30 to 40%. Once everything gets finalized, they've looked at your package, they've calculated your final pension, then they'll be able to pay those three things. We'll talk about whatever's left over if there is any left over here in just a second.

Once OPM Finalizes Your Pension

Once OPM finalizes everything, here's the good news. All of these things, all of these obligations can be paid right from your check. But in the meantime, while you're in that interim status, things can be kind of a mess if I'm being really honest. You're trying to figure out who do I have to pay out of pocket? Is OPM going to pay that? How does that work? I'm getting letters, I'm not sure what to do.

Oh, I forgot state income taxes. My CPA's all over me about that. It can just be really messy in this interim period. And so what's good at least to know is once everything gets finalized and all of these payments are coming directly out of your retirement check, just like you're used to them coming out of your check right now, at least for most of these benefits.

Once OPM finalizes your pension, you are going to get a letter that indicates that they have completed this retirement application process and they have determined what your real annuity or pension amount is. If it turns out that OPM held too much in reserve, you're going to get a refund of any of that leftover money.

But if it turns out that they held too little in reserve, maybe you have a relatively low pension, but a high health insurance program, you've selected a lot of life insurance, the full survivor benefit, it's very possible that you end up owing money at the end of the day. Nobody loves to see that, but it happens.

From that point, you're going to start to receive your normal pension check, now that we know what the real number is supposed to be. And we mentioned this a couple of slides ago, but that first supplement payment that you were supposed to be receiving during that time that you weren't, they're going to give you the back pay for any of those missed payments. And then from that point forward, it'll simply continue on a monthly basis.

So yeah, this could be a big mess, but again, I needed to talk about this transition here because the rest of this feels out of context and there will be lots of questions about, well, what happens in those first couple of months? I wanted to go ahead and cover this. Even though I did a full webinar on this topic last month, I wanted to at least make sure this made it into this session for everybody's benefit.

Case Study: A look at the numbers

Let's talk about a case study. We're going to look at the numbers for a federal employee. We're going to have a little fun with Mike and Mary today. I have chosen for Mike to be the federal employee. Please don't read into that. I know that there's an equal number of men and women who are both federal employees.

But here's the deal, Mary, his wife has a long list of things that she needs Mike to do when he retires, and so she's delighted that he is going to retire first. She's going to keep working for a little while, but she's got her honey do list for Mike already.

He's 59 right now. Right at the end of the year, he's going to turn 60 and he's going to go December 31st. So he'll be 60 years old. At that time, he'll have 30 years of service, and we're going to show Mike with an ending salary of about $103,000. I know this seems like an odd number, it'll make a little bit more sense here as we go through the numbers.

The big question that we have for Mike is how does his last paycheck compare to his first retirement check? We're going to again, zoom out to the bigger picture of what we're looking at and see how that last year of working compares to that first year of retirement.

FERS Pension

Let's talk about Mike's pension. As far as employee type, he's a regular employee. He's not law enforcement, firefighters, air traffic controllers, anything like that. He's a regular employee. He's 60 years old when he retires and will have 30 total years of creditable service. We're going to look over to the chart at the right-hand side that shows full eligibility for FERS.

We know that he does not meet the age 62 with 5 year rule. He doesn't meet both of those because he's not at least 62. He does meet the 60 with 20, and he also meets the minimum retirement age with 30 years. The good news is he actually meets two of these. He doesn't need to meet more than one, but he qualifies under both the 60 with 20 and the MRA with 30 retirement rules.

With respect to the calculation of that pension, the formula that Mike is going to use to calculate his pension is based on both his age and his service years. We've got both formulas here. You need to know which formula you are going to qualify for. On the left-hand side, this is what we would consider the regular FERS 1% formula. And by regular, I mean non-law enforcement, firefighter air traffic controller. This is a normal federal employee with a 1% formula.

You would use this formula on the left-hand side if you are retiring under the age of 62 or you're at least 62 but have less than 20 years of service at the time that you leave. With this 1% formula, we're going to take your high three average salary. We're going to multiply that by 1% and multiply that by the number of years of FERS service that you had, creditable years of service, and that would become your pension. Don't worry, we're going to show you an example here in just a minute.

On the right-hand side, there's a different formula. It's the regular FERS 1.1% formula. In order to get this higher formula, you're going to have to retire at least age 62 and have at least 20 years of service. You must meet both requirements, be at least 62 with at least 20 years of service.

If you meet both of those, then you're going to get this formula that you see. We're going to take the high three times 1.1% times the number of years of creditable service and that becomes your pension. Mike, we know is going to use this pension on the left-hand side because he's not 62 yet. Under 62, you're absolutely going to use this formula on the left.

Let's take a look at Mike's details. He has a high three of $100,000. You'll recall though, his final salary though was about $103,000, but it turns out that based on his pay history over the last three years of his work, averaged out to $100,000. That'll be an important number that we're going to use here.

And then his years of service, including unused sick leave, which he happened to have none, this is actual 30 years. He's got some military time sprinkled in here, but he's done all the things that he needed to do to get credit for it, and we've got a total of 30 years. Off to the right-hand side, we're going to use that regular FERS 1% formula. We're going to take that $100,000 high three times 1% times 30 years of service. We've got a $30,000 a year pension for Mike.

Survivor Benefit Program (SBP)

Next up is the Survivor Benefit Program. Mike's details, the only thing he knows is he plans to leave something for Mary from his pension. He's not exactly sure of the dollar amount, but he wants to explore what the choices are. For his $30,000 a year pension, we're going to see the different choices that Mike and Mary have.

On the left-hand side is the benefit amount. That is the percentage of Mike's pension that Mary's going to receive when Mike dies. The cost is on the right-hand side, this is how much Mike gives up of his pension while he's still living. Let's run through these real quick.

As far as the benefit, the most that the government is willing to allow Mike to protect for Mary of his pension is 50%. We know that would provide her $15,000 a year if in fact he died in that first year of retirement. It will cost him 10% of his pension while he's living to provide that benefit to Mary. He's going to give up $3,000 a year of his pension to be able to provide that. Another option would be the 25% level that would provide Mary a $7,500 a year pension and it will cost Mike 5% of his pension while he's living. About 1500 a year.

There is of course the option for Mike to protect none of his pension, which of course means Mary gets nothing and it costs Mike nothing while he's living. I do want to make a special note though, and you see it in the footnote here, that in order for Mary to continue having that FEHB program after Mike dies, Mike has to elect at least the 50 or the 25% option for Mary.

Again, I'm not going to go super deep into those details, but I think it's important enough to mention here that there is still a requirement for Mary to be a survivor annuitant to be able to keep that health insurance.

As another side note, it's probably worth mentioning if we were to ask Mary, Mary if something happens to Mike, how much of his pension would you like to keep getting if it was up to you? She's probably not going to say half of it. She's probably going to say she'd like all of it, but that's not an option under the government program. Mike and Mary have a discussion.

They again, haven't done a lot of planning around this topic. They don't know another way to be able to protect this pension, and so they decide they're going to protect the most that the government is willing to give for Mary's benefit, and Mike is willing to give up 10% of his pension to be able to do so.

FERS Supplement

Next up is the FERS supplement. This is the benefit that kind of looks like Social Security, but it's paid prior to the age of 62. The formula that Mike will use will be based on the estimated amount of Social Security benefit that he's going to receive at 62 and the number of years of FERS service, not including any military time.

When we look at Mike's details with respect to the supplement, we're going to first look to the Social Security statement and say, how much is Mike expecting to get at the age of 62? And when we look at his statement, it shows $1,200 per month. And then we have to determine how many years of actual FERS service Mike had. And keep in mind, this is pure FERS service.

This does not include any military service. We know he already said he made a deposit, he got credit for that military time, but it won't count in this particular calculation.

He did his four years in the military. He's got 26 years of FERS service. That is what we are going to include in this calculation. We're going to take that $1,200 a month of Social Security benefit, multiply that by 26 years divided by 40, which is a constant in this formula. It does not change.

That 40 does not change. And that gives us $780 a month of supplement benefit. A little over $9,000 a year, which is great. This is something that Mike didn't have to sign up for, he didn't pay for, it's just part of the deal. We can put a check on this benefit. We're going to carry this over into our final assessment when we're looking at everything comparing that last year of work versus the first year of retirement. We're going to be able to see how all this shakes out.

Social Security Program

Next up is the actual Social Security program. Mike is a little ways away from having to make this decision. He's 60 when he retires, so he's not going to make a decision right away, but he at least has his eyes set on kind of the different levels of benefit. When he looks at his Social Security statement, the formula has already been done for him. We don't need to know how the sausage is made with respect to the Social Security benefit.

It's more complicated than most people ever care to learn, but there is a rhyme and reason as to how this works. But they're basically looking for your highest 35 years of earnings while you are contributing to the Social Security program. They're going to look over all of your years for your entire working career and cherry-pick all the top 35. They don't all have to be together, anything like that. They throw it into this formula and it spits out these numbers.

We already know that Mike at the age of 62 is expecting $1,200 a month, but if he were to wait to begin drawing benefits until a later age, then his benefits will naturally be higher. There won't be any benefit to waiting after the age of 70 to start drawing Social Security benefits. It kind of caps out at that point, but this at least gives everybody an idea of what the value is of waiting to draw these benefits.

I'm not suggesting that waiting is always the best answer, but Mike has a little bit of time for him and Mary to figure out when the best drawing time is for him to take those Social Security benefits. He's not going to make a decision right now because he's simply not eligible to do so just yet.

Federal Employee Group Life Insurance (FEGLI)

Next up is the Federal Employees Group Life Insurance. As far as Mike's details go, he currently has all of the FEGLI that he could have on his own life. He's got the basic, option A and five times option B. For the basic coverage, he has $106,000. We're going to take that salary of $103 and some change, we round it up to the next thousand and add $2,000. That's how we come up with $106. It's going to cost them about $37 a month to have that coverage.

Option A is a flat $10,000 of coverage, inexpensive to have, but it's also not providing a whole lot. And then we have option B. This is where the bulk of the FEGLI coverage comes from because it's a salary multiplier. In this case, we're going to take that 103,000 and some change salary.

We're going to round it up to the next thousand and multiply it by the number of multiples of option B, which in this case is five. We have $520,000 of coverage and it's going to cost Mike, while he's working, about $203 a month to have that coverage.

That's what things look like right now, but when he goes to retire, he's going to have a choice, how much FEGLI do you want to keep, Mike? Here we're talking about looking into retirement, and so he's going to have a decision to make about every piece of his FEGLI coverage.

For his basic coverage, he's going to have a choice to keep all of it, to keep 50% of it or to keep 25%. For option A, there's really no choice. It automatically goes down to only 25% of the value. And then option B, it's an all or nothing. You keep all of it or you keep none of it.

Again, I'm oversimplifying a lot of these things. There are nuances in here with each of these benefits, but generally speaking, these are the choices that Mike is going to have with respect to the basic A and B, which is coverage on his life presumably for Mary's benefit.

They talk and they decide they're going to try to keep as much coverage as they can. Maybe they don't feel like they've explored other options and they just don't really have a choice. They have to do this because they don't have any other life insurance.

They decided under the basic coverage to keep 100% of it in force in retirement. For option A, there really is no choice to keep anything more than the 25%. And then for option B, we're going to show him keeping all of that coverage in force as well.

Federal Employee Health Benefits (FEHB)

Next up is health insurance. Mike currently has the Blue Cross Blue Shield Standard Self Plus One Plan. That's the higher option in Blue Cross. If you're already part of one of these programs, that stands to reason because 60% of federal employees are in one of these six plans. So a very popular program.

Mike, in this particular year, at the 106 plan, he is paying just under $10,000 a year in that annual premium to have that coverage in force for him and Mary. He's going to go ahead and continue that coverage. He doesn't see any reason to change it at this point, but of course he's going to be free to do so later in retirement during normal open seasons if he wishes to switch plants.

Federal Long-Term Care Program (FLTCP)

The next program we'll review is the federal long-term care program. Mike doesn't currently have this benefit and it's not available through the Office of Personnel Management since it's been in suspension since December of 2022. It is currently set for suspension through December of 2026 and we'll see what happens at that point, although we're not seeing signs of this program coming back to life. We'll certainly maybe not hold our breath, but it may be an option to come back.

Thrift Savings Plan (TSP)

And then lastly, we have the Thrift Savings Plan. Mike is currently contributing $31,000 a year to the traditional TSP. He could have done a little bit more with the rules for this year, but he decided just to keep it at that 31,000 and he has a balance of a half a million dollars in the TSP. But he knows once he retires, he can't continue to contribute to the TSP at that point.

The Comparison

Now we get to the fun part of this. Now that we set up this scenario with Mike and Mary, we're going to have a little bit of fun doing the comparison. This is a really interesting exercise, we'll call it, to be able to see everything side by side. You might not like the end result, just fair warning.

We're going to start by looking at a comparison between the last year of work while he's 59 and the first year of retirement at age 60. We're just going to go line by line. I've got a lot of juicy little tidbits in here, so follow along with me.

We've already established that his current salary while he's working is $103,011. Not a lot to say about that. We know he's not drawing a pension while he's still working. Of course that's going to be reserved for retirement as will the special retirement supplement.

I don't think I'm telling anybody anything new at this point, but here's where things start to get interesting. We have federal tax. Mike and Mary are in the 24% married filing joint bracket. And you might say, “Chris, I think your calculator is broken because 24% of $103,000 should be more like $24,000, right?” No, that's not the way this works at all.

We have a progressive tax system in the United States where different levels of income are taxed at different rates. It turns out his highest level of tax is 24%, but it doesn't mean that all of his money is taxed at the 24% level. There's going to be things like the Thrift Savings Plan contributions that he's putting to traditional, his FEHB premium that's not included in his taxable income.

All of that is going to go into determining what the actual federal tax is going to be due on that $103,000. Again, I'm oversimplifying we're not giving any credit to charitable contributions or any of the other things that might affect his tax rate, but just in general, we're looking at just about $7,000 of federal tax on Mike.

Same thing with the state program. There are certain things that are not taxed at the state level, and so we've taken that into account for Mike as well.

Next up is Social Security and Medicare tax. This total 7.65%, but you'll see the dollar amount is not 7.65% of the total salary. The reason being is they don't look at your FEHB premiums that are being paid as part of your taxable income with respect to Social Security and Medicare. It's a little bit less than 7.65% of your total salary.

Next up are the FERS contributions. Mike happens to be contributing 0.8% of his salary every single pay period into FERS. Now keep in mind this is completely separate from the Thrift Savings Plan contributions that Mike is making.

This is a mandatory contribution into the retirement system. Many of you who were hired 2013 or later are actually contributing a whole lot more than Mike is required to, so your percentage might be different.

Next is the TSP contribution. Mike's been a good saver and so he's used to not having $31,000 of his income flow into his checking account to be able to spend. Instead, he's going to save it in the TSP. And he's simply chosen to make that a traditional contribution, although certainly has the Roth option. He's not chosen to do that up to this point.

Next up is life insurance, so that FEGLI coverage that we talked about, that basic A and five times B. That's costing Mike about $2,900 a year in that final year of work.

Health insurance is just under that $10,000 level. We've seen that number before.

And then survivor benefits. That is while working of course, there's no survivor benefit payable at that time as far as a premium goes.

The initial take home pay that Mike is used to seeing flow into his checking account is about $41,000. He knows he makes 103, but all these things that keep coming out of his check before it ever hits his checking account brings him down to that $41,000 level. But he's used to this.

He's been operating on this schedule for quite some time and he's found a way to make it work. Let's look at the first year of retirement. So we're off to the right-hand side and we're going to go line by line just like we did before.

Of course there's no salary at this point. Salary goes away. We know Mike has a $30,000 a year pension and the special retirement supplement that we calculated at $780 a month equates to 9,360 per year.

Next up we have federal income tax. We've got 3,886. Now you might say, “Chris, would Mike still be at the 24% tax bracket when he retires?” I'm going to guess yes, and I'll share with you a little bit here in a couple of slides of why we tend to end up back in the same tax bracket that we were before we retired. So hold that thought.

Next up is state tax. Same concept here. We're looking at 1,818. Not all of the income is taxed at the state level.

Then we have Social Security and Medicare. There are no more contributions to these two programs once someone is retired. You only have the 6.2% and the 1.45% payable while you are working and earning a wage. And so we'll call this a savings that you have in retirement because you're no longer going to be paying for it.

Next, our FERS contribution. So no more contributions into the retirement system. In fact, this is the point you're pulling from the retirement system not contributing to it. We know Mike is not going to contribute to the TSP anymore. He's not allowed in retirement because there has to be earned income from that employer to be able to contribute to that employers 401(k) program.

Next is life insurance. He was paying $2,900 a year for life insurance, but you'll see on the right-hand side we have $8,700 a year. There are two things that happened to Mike.

One is he retired and he had to make these decisions about what was going to happen to his coverage, which throws him into a different premium table that he's going to be paying off of based on his decision of how much of his FEGLI to be able to keep. The other thing is that Mike turns 60 and that greatly influences the cost of that life insurance.

Next up is the health insurance. We've made some assumptions that the FEHB premium is going to continue to go up. We have used the historical average for premium increases, although I know here lately they've been much, much higher.

We hope that that slows down, but we know that there's going to be an increase to the health insurance premium. We just don't always know how big it's going to be. This is an estimate for Mike moving into another FEHB plan year for insurance purposes.

And then with respect to the Survivor Benefit Program, we know that Mike and Mary had the discussion and they said, “Listen, we haven't done any other planning. We have no other way to make money magically appear if something should happen to Mike for Mary's benefit.”

And so they went ahead and selected the full survivor benefit plan that is running Mike $3,000 a year. So 10% of the top line number of that 30,000, he's going to owe that 3,000 from that point forward. Of course, every time his pay goes up in his pension because of cost of living adjustments, that premium is also going to rise because it will always be 10% of however much Mike is earning at the top level of his pension, meaning before any deductions are taken.

Mike's take-home pay at this point is 11,391. That's a pretty big difference and one that Mike is not used to. Remember, he's used to the 41,000 because he's paying for all these things right out of his check. That 41,000 is what he uses to pay his mortgage or his rent or automobile insurance and groceries and all the normal stuff.

But now he's looking at $11,000, so almost a $30,000 difference, and Mike isn't quite sure how to make up the difference between those two numbers, that gap. This is the income gap that we were talking about earlier in the session.

Addressing the Income Shortfall

How does he try to fill the gap of almost $30,000? Well, there are a couple of ways and we might not like any of them, okay? Fair warning. Mike and Mary can lower their standard of living. That might mean selling off property, the extra car, downsizing to another home. And maybe that wasn't the intention, but they're like, “Well, we have to figure out some way to close this gap because this is too much.”

They could use their savings. That's cash that they have on hand to help make up the difference. They could control their expenses. They could really tighten their belt, so to speak, but that only goes so far.

I mean, where are you going to find $30,000 of expenses that you're willing to part with? Mike could go back to work, maybe not at the federal government. Maybe he's got another job. He could also choose to work longer if he went through this exercise and realized, like, “Oh no, I'm not going to have enough.”

He could have chosen not to retire at 60. He could have gone later to try to continue to build up his cash reserves, to continue to contribute to the TSP, to continue to get his pay raises, which influences high three, which influences pension. Maybe he can get to that 1.1% level to get a 10% boost in his pension.

There's lots of options, but once he's already retired, that option will be off the table. He's already done with the federal government, and now he can just go out and get another job out in the private sector.

Let's talk about the last option that we see here, which is to take money from the traditional TSP. Listen, this is not necessarily a bad option. In fact, the TSP was designed to save money for retirement. That's the purpose of accounts like the TSP, other 401(k)s, IRAs, those types of things. But here's the deal, because Mike has chosen to put all of his money into the traditional side of the TSP, that means that when the money went in, Mike got a tax break.

He didn't have to pay tax on that money. Right now he's contributing 31,000. That's $31,000 of his income that he's not reporting for tax purposes. But you get the tax break on the way in, but the tax breaks you on the way out, meaning when all of that money that he put into the account and any growth on that money that happened while it was living in the TSP, all of that money is going to be taxable to Mike when he pulls the money out of the account.

If he ends up trying to fill this shortfall with money from the TSP, the first thing we need to realize is that he can't pull $30,000 out of the TSP to cover this shortfall because he's going to have to pay tax on that money. He's going to have to pull more like 40,000 from the TSP so that after his tax obligation is figured out that he has about $30,000 left over to be able to supplement his income.

The second thing that I'll mention about this is the very reason why people end up back in the same tax bracket as they were before they retired. Because even though their sources of income are different, and of course their expenses are changing in retirement, if we keep pulling money from taxable places like the traditional TSP, we end up coming right back up to the same taxable level, at least close in that bracket, that we were before.

If Mike had a do-over, would he do things differently? Instead of putting so much money on the traditional side of TSP, would he maybe have done some of the Roth TSP so that he had a tax-free version of that money to be able to pull from? Maybe. It all depends, but we have the ability to control some of these things earlier in our career that set us up to have options later on.

That's the real message here that I hope everybody's picking up because we can't just go into retirement blind and say, “Well, everything will probably work out. OPM will finally get me my check. Yeah, I know my pay is going to go down a little bit, but it's no big deal.” Well, unless $30,000 to Mike and Mary is no big deal, we've got some planning to do.

There may have been some other choices that they could have made with respect to some of these expensive benefits like survivor benefits, the FEGLI program, those types of things that they could control, as well as things like traditional TSP versus Roth TSP.

I'm not suggesting that everybody drop all these programs. In fact, I encourage you not to do that until you've done a full plan and really seen what the different options are that you can do and do them before you start peeling away government benefits.

But I don't think Mike and Mary are going to be really excited sitting on an income shortfall of $30,000 and there's only so much of the tightening of the belt that they can do, and Mike doesn't really want to go back to work. That was the whole reason he was retiring and isn't excited about going to get another job.

What's Missing?

With all the numbers that we just looked at, there are still some things that are missing. There are things that we haven't accounted for yet, long-term care. If you have long-term care services that are being rendered, or if you have long-term care insurance that you'd have to buy out in the private sector if you haven't already bought it through the government program, we're not accounting for any of that cost.

Eventually at the age of 65, we have the Medicare Part B decision. For most of you, you're not required to enroll in Medicare Part B. The exceptions are those under the TRICARE program, the military's health program and postal workers.

Both of those groups are required to enroll in Medicare Part B at 65, but everybody else, you have a choice. It's another $2,200 a year per person in 2025. Mike's not going to have to make this decision for several years, but it's on the horizon of something we need to think about.

Then any unexpected expenses, those big things that kind of pop up that we have to pay out of pocket for.

Inflation, we've seen the flurry of inflation around us over the last several years, and this idea that things around you are just more and more expensive. And you might say, “Oh, but we get cost of living adjustments in retirement on our pension.”

Yeah, you do, but they don't keep pace with inflation for FERS retirees. You're always going to be behind. That purchasing power of your dollar continues to dwindle the longer you are in retirement.

Next, the loss of income when the spouse stops working. Right now, I mentioned at the beginning, Mary is continuing to work. She just has a long list of things for Mike to do when he steps into retirement.

But once she stops working, that's going to change the game even more. Do they have some fun things that they plan to do in retirement? I bet they did. They look like a fun couple.

And then the other part that we don't have a whole lot of control over is how long it's going to take OPM to get everything straight. I hope that by the end of your first year, everything's nice and smooth, but it's going to be rocky there for a little while.

And so we're already going to have an income shortfall. Even if they gave you all of the money that you're supposed to make during that time, there's still a loss of income. But remember, during that interim period, you're going to get even less than what you thought. We have to take that into account as we're thinking about the real end result of how this works.

Lots of Decisions

Lots of decisions here. I chose this image, this rubber band ball, because this is the way that your decisions probably feel to you. And in some ways it's accurate, meaning many of the decisions are intertwined. They're connected to one another.

FLike if you make this decision over here, it affects this decision over here. And it's important to realize that there's a lot of options that you have if you're willing to look at them and take action on them earlier in your career before you step into retirement.

Some Observations

A couple of observations. Some of the numbers that we've reviewed are pretty set. We can't change how much we contribute to Social Security and Medicare. It just is what it is. But other benefits, the life insurance, the survivor benefit, how much we're contributing to TSP on the traditional versus the Roth side, those are all things that we have control over.

And I encourage you to figure out your numbers now, don't guess and don't wing it. Don't step into retirement with blinders on and then be shocked when you start to see that money rolling in or not rolling in as the case may be.

You want to avoid as many surprises in retirement as possible. We do that by having some forecasting, some prior planning that is happening before you step into retirement so that you can identify all those decisions that need to be made now because we want you to be better in control in the future.

If you stand by and allow the government's plan for you to simply play out, you are likely going to be frustrated and cash-strapped in retirement.

Where do you get this help? I think that's a fair question. Now that you know that there's a lot of complexity with all this, where do you go? I'll give you a couple of hints of where it's not. It's not your HR department. They're not there to give planning advice.

It's not a cool Facebook page where a bunch of people get together and they randomly are spouting out what things everybody should do. And it's not your friend or your buddy in the office that stands at the water cooler and tells everybody what they should be doing.

You owe it to yourself to have a real candid conversation with a licensed financial professional who works with federal employees often.

We have a network of financial professionals that we work with throughout the United States that have gone through our specific training to know how these things work with federal employees so they can better guide and assist them in the planning process. Please don't leave this to chance. T

he guy in your office, who I would call the self-appointed office expert has no obligation to make sure that what they're telling you is correct, and they have no responsibility for the outcome of any of your decisions.

“When you know your numbers, your decisions become more obvious.”

Please give yourself the chance to have the very best retirement possible, but it doesn't happen by accident. It has to happen on purpose. And the only way you get that is to have those, again, real candid, no BS conversations where you get to see real numbers so you can make real decisions. Because here's the deal, when you know your numbers, your decisions become more obvious.

If Mike had seen these numbers before he dropped his retirement papers, he might've made some different decisions. If he had seen this five or 10 years before he retired, he would've made even broader decisions with respect to TSP and those types of things that we talked about.

But if you never bother to look at your numbers, you're never going to know what to do. That's called wearing blinders in retirement and that does not serve you well. Give yourself the fighting chance to have the very best retirement that's possible.

Wrap-Up & Next Steps

Our job here at ProFeds is to help federal employees to retire with confidence. It's easy to look to other people in your life to be the hero, your HR department, that the guy at the office, even a financial advisor, coming to webinars like this.

You're looking for somebody else to save you, but here's the deal. I want you to be the hero in your own retirement story because you took the time, you understood the importance of having real candid conversations.

The primary way that we provide that type of education and guidance to federal employees is through our in-person retirement workshops. The good news is these are sprinkled all over the United States.

There is no cost to attend. These are sponsored sessions, so the fee's already been paid. You can attend even on the clock. That's beautiful. You can get paid by your federal agency to attend these sessions. We cover all the federal benefits and those topics that you're going to need to be thinking about and thinking about the decisions that you're going to need to be making.

And here's the best part, and what really goes into today's discussion is one-on-one help is available to see what this looks like for you. It'll be laid out a little bit differently than I have here on the screen.

But when you're looking at the bigger picture of retirement, of what things are going to look like, are you going to have enough income to do the things and live the life that you want, you've got to put pen to paper.

That one-on-one help that's available is through a licensed financial professional who is in the ProFeds network that work with federal employees every day. They understand these weird, nuanced complexities that you all have that the average financial professional doesn't understand.

So we can anticipate those things a little bit more clearly and with a better focus on how to be able to solve those issues. You can see all of the details, that's locations, dates, all that good stuff at fedimpact.com/attend.

That is it for today's webinar. Boy, that was a long one. We had a lot to share, and I hope that you'll take the opportunity to dig deeper into those benefits topics that you might've felt like you didn't have a really good handle on, or just have tons of questions about.

Those webinars, articles, podcasts are great places to be able to go and solidify your thinking. Keep in mind that you can find an in-person retirement workshop by going to fedimpact.com/attend, and to register for the next webinar.

And to see all of the prior replays that we have available immediately on our site, you can go to fedimpact.com/webinar. Thank you all so much. We'll see you next time.

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