Delivered on: Thursday, January 14, 2021
Choosing a ‘Perfect’ Day to Retire:
How not to let short-sighted decisions ruin your big day:
- PENSION: timing and amount of first check, formula used and creditable service
- LEAVE: effects on the application of both the annual leave and sick leave
- OTHER BENEFITS: how benefits like SRS, SS, FEHB, FEGLI and TSP are impacted by your retirement date
- TAXES: the tax consequences directly tied to your retirement date
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Prefer to read instead? Below is a transcript from the video:
All right. Welcome everyone. We are delighted to have you with us today for our webinar on Choosing the ‘Perfect’ Day to Retire. My name is Chris Kowalik. Our team is grateful to have you here with us on this topic that tends to draw a lot of attention. Just real quick, in our audience today, we’ve got quite a number of employees on today’s session. We’ve got thousands of you registered. So our support team is standing by to make certain that all of your questions are answered, or at least as many of them as we can, given the volume of federal employees on the session today.
Now there are handouts available. So in the handout section right next to the Q&A that many of you are already using to let us know that you can hear me, you can download today’s handouts. It’s a copy of all the slides. So certainly feel free to download that. Of course it will be available to you later as well if you come back and decide to do that.
Now this session is being recorded. All of you will get access to the replay at the end of this session. Give us a little bit of time to get all that rendered and out to you, but you’ll have that to be able to go back and listen to, okay? And stay till the end. We have a lot to share with you about this important decision of picking a perfect day to retire.
All right. So like I mentioned, my name is Chris Kowalik of ProFeds. I am the developer of the FedImpact Retirement Workshop that many of you have already been to. We do a podcast, we do a slew of things to help federal employees to feel really good about the decisions that they’re making as they approach that retirement window. So happy to have you here.
Now, our topic today of Choosing the ‘Perfect’ Day to Retire: How not to let short-sighted decisions ruin your big day. There are so many decisions with respect to choosing the right retirement date for you. And we’re going to share some of the tree tops, some of the big decisions that you’ll be making today to be able to give you a little bit of perspective of how things will really work for you when you go to make that decision. So our agenda today is to cover the real objective of choosing the right date, to discuss the water cooler effect that happens sometimes, learn how to balance all of these decisions, and do a little case study to explain how the pension, leave, all these other benefits, taxes, all those pieces really work for you. Okay?
All right. So the real objective of today’s session is to get the very most possible, get everything that you’ve earned, get it on time, get your priorities straight, and get your ducks in a row. Right? We’ve got to be able to figure out all of these big decisions to be able to pick right date. Okay?
So let’s talk about this water cooler effect. There is a ton of misinformation, myths, and misplaced advice. And it spreads like wildfire at the water cooler. Okay? So I think all these folks that stand around and want to give a lot of unsolicited advice to their coworkers, they’re well-intentioned. But the information that they share is often missing an important piece, which is what about the rest of the story? Most of the people that you work with, you probably haven’t given carte blanche knowledge of your federal benefits and the choices that you’ve made. And you certainly haven’t given them a whole view of your financial situation. Okay? So really important that you recognize that even though you might hear some good information at the water cooler, you always want to double-check that the person who’s giving that advice actually knows what they’re talking about. Okay?
All right. So when it comes to balancing the decision of what we’re deciding to do on a retirement date, there’s really three levels of decisions. And you’ve probably seen this analogy. It spreads over a wide variety of different stories that are out there. But it’s this idea of the big rocks that are big decisions with big consequences. The pebbles, which are medium decisions with medium consequences. And then the sand. And those are small decisions with small consequences.
And the way the story goes is if you have a jar and you’re trying to fit as much into it as possible, if you put in the sand first, there won’t be enough room for the big rocks. And the big rocks remember are those big, important decisions. But if you put the big rocks in first and there’s still some room, you can fill that with the pebbles. And if there’s still some room, you can fill that with the sand. And the same goes with the decisions about really planning your retirement date. You have to start with the big decisions first and make sure to get those right. And then you can begin to drill down and get into the pebbles of those medium-sized decisions. And then finally, the sand. Okay?
Now I want to talk about what this webinar will not cover. You’re going to see quite a number of calculations, the end result of the calculations. We’re not going to cover all of the formulas and the rules. We’ll cover a couple of rules on a certain couple of items. But we’re not going to get into the weeds of how all of these things are calculated, because we’ll never get through all of today’s material. Okay. So really important, make sure that you’re on board with us here.
All right. So here’s our case study today. We have a federal employee named Mike that we’re going to review. Mike is a FERS employee. He’s what we call a regular employee. Okay? So meaning he’s not law enforcement, firefighter, air traffic controller, or any other kind of special employee. He’s special, but not in that way. Okay?
So Mike’s situation is he’s 58 years old. He’s got 25 years of service. And he’s got a salary of $80,000 a year. Okay? And he’s making a decision. He says, “Man, I’d really like to retire now. But I’ve always thought I was going to wait until 62. But I got this job offer to go work for a government contractor, and I’m going to make more money, and it’ll just be different than what I’m doing now. So I’m debating what this is going to look like for me.” Okay. So we’re going to take a look at what Mike’s situation will really look like from this point forward. Okay.
So Mike’s very first decision, the big rock that he has to come to grips with is, is he eligible to retire? If you don’t get this right, and you leave federal service, and you are not eligible to go, you are going to have a big problem on your hands. So this has to be a big rock for everybody to make sure that you’re eligible to retire first. So you want to ensure that you’re eligible to retire based on your age and your years of creditable service. Okay. So that creditable service is really important. It’s not necessarily all of the service you’ve ever had with the federal government that’s going to count for retirement purposes. So you want to pay very special attention if you have any of these special types of service that can drastically impact your eligibility to retire. If you had any military service, any non-deduction service. So where you were in a temporary position, not contributing to surge CSRS or FERS. And any refunded service where you left federal service thinking you’d never come back and took a refund of your contributions.
These are the types of service that typically kind of fouls folks up right there at the end, when they’re trying to count all of their eligible years. And if you don’t know how each of these pieces of service are actually going to affect you with respect to eligibility, we’ve got to get to the bottom of that first. Big rock, eligibility, have to figure this out.
So when it comes to being eligible to retire, I’m going to cover something that most of you have probably seen at some point, which is the eligibility chart. So under FERS, we’re going to go to the far left hand side here. Under FERS, full eligibility. You meet one of these three gates. You either are age 62 with at least five years of service, at least age 60 with at least 20 years of service, or you’ve met what we call your MRA, your minimum retirement age, with at least 30 years of service. And that minimum retirement age for those of you who don’t know what yours is, it’s a sliding scale based on the year that you were born. Somewhere between age 55 and 57. So there in the middle, you’ll see the MRA table. You simply go in the year in which you are born. You go to the right hand side, and that is your minimum retirement age.
Well for Mike, this happens to be age 56. So we know he’s already met that. But when we look at the full eligibility table on the left-hand side, he would’ve had to have had 30 years of service. And we know he only had 25. So from a full eligibility standpoint right now, Mike is definitely not eligible.
But if we look off to the right hand side, this is a topic that some of you are familiar with called MRA+10. And it’s this idea that as long as you’ve met your minimum retirement age, and you have at least 10 years of creditable service, you can retire. Your pension is just going to be penalized. Okay. That’s the real way that this works. Okay. We’ll talk about the penalties that Mike might experience here in just a few minutes, but MRA+10 is essentially a way to help FERS employees who don’t meet the service years requirements of the 30, but they at least have 10. So somewhere in between the 10 and the 30 mark, to be able to go ahead and retire a little sooner, but of course there are consequences. Okay.
So let’s take a look at how this looks for Mike. Well, if he were to retire now, he will qualify for the MRA+10 rule. Again, he’s already met his minimum retirement age and he has at least 10 years of service. And under those rules, he either takes the pension right away with a permanent penalty, or he can voluntarily wait to begin drawing it at 60. And if he does that, he avoids the penalty. Okay. We’ll see a calculation, a sample calculation here in a moment. But these are really important factors when someone’s trying to choose when to actually retire.
Now, If he were to retire at age 60 or later, we know that he’d be fully eligible at that time based on the table that we just reviewed. So he would be able to draw that pension right away. Okay? All right.
So when we’re thinking about the next big decision or factor that Mike needs to think about, the high-3 calculation is one of them. So with the high-3, this is the average of your highest three years of consecutive earnings. Okay. Now not all of your pay will necessarily count for the high-3. That gets into a little bit more detail that we can’t cover in today’s session, just because of the depth of that material. But what I really want everybody to take away from this is that the high-3 average is really your highest 36 months of consecutive earnings. And I make that distinction for a really important reason because those months are going to play a factor in the next slide. Okay? So keep that in mind.
Now most often, an employee will earn their highest three years of earnings at the end of their career. That’s a natural career progression. They continue to make more and more with pay raises, step increases, promotions, that type of thing. Okay? And just know that the high-3 average is not based on a calendar year or a fiscal year. And you don’t have to be in a whole pay grade for a whole year for it to count. Okay?
So thinking of that, let’s take a look at Mike’s situation. If he were to retire now, his high three would be calculated at about $77,000. Okay? And again, that’s based on what his pay is now, what the past pay raises have looked like. We’re looking right about 77 grand. But if he were to wait to retire until age 60, his high-3 naturally would have gone up. Okay? We’re going to look at almost $81,000. If you were to wait all the way until 62, his high three would have continued to go up during that time. And we’d be looking at almost $83,000.
But then the question is what if he retires in January after a pay raise has been announced? A lot of folks think they get credit for a whole year for being in that pay level after a January pay raise. And that’s not at all how this works. Okay? In that instance, for instance, if he were to retire at the end of this month January 31st, after feds have just received a 1% pay raise, this would account for one of the 36 months in the high-3 calculation. And what it would mean is of course that month would go up, but the 37th month would fall off. Because it’s no longer part of that window of the 36 months.
So there’s a couple of different factors to think about with respect to the high-3. But really important because this number is going to be dumped into the pension calculation that we’re going to review. Okay? So got to get this high three right.
All right. So with the pension calculation, this is the third decision that Mike needs to come to grips with. In the pension calculation, of course, when you retire and the scenarios in which you are going to retire dictate the pension formula that you’re going to use, the actual calculation. So if you’re a FERS employee and you retire under the age of 62, regardless of how many years you have, you’re going to get one formula, okay? The same formula would be applied if you retire, you’re at least 62, but you have less than 20 years of service. You’re going to get that original formula. And again, we’re not going to go into the weeds of the actual formula, but I want you to know it’s less. Okay?
Now if you want that higher formula under FERS, the enhanced pension, you have to retire at least age 62, and with at least 20 years of service. If you do that, you’re going to see a marked change in your pension. Okay? Now, in the event that you retire under a program like MRA+10, you might experience some penalties. So we’ll see what that penalty looks like for Mike.
So here’s the scenario. Remember, he’s deciding do I retire at 58? Which is now. Do I wait until 60? Or do I wait all the way until 62? Those are the scenarios that Mike is considering. So if he were to retire now, we know he’s eligible under the MRA+10 rules. We’ve already determined that. But remember, he has a choice of when he takes the pension, if he takes it right away, his pension is going to be $15,520. Because he had all these penalties assessed, and that’s forever, okay? That permanent penalty. But if he says, “You know what, I’m going to go out and get another job. So I don’t necessarily need to get that pension right away. Maybe I can just wait until 60 to begin drawing it.” So he’s going to go ahead and retire at 58. And he’s just going to voluntarily postpone receiving that pension. And if he does so, that pension would be $19,400. Okay? So a pretty big difference by waiting two years.
Now, let’s see what it looks like if he actually waits to retire at the age of 60. We already know he’s fully eligible. And if he were to go at that time based on his high-3 and the years of service that he has, his pension is $21,852. Okay. A nice difference from the $19,400. Okay? And certainly, on a really nice difference from the $15,000.
But look what happens if he waits until 62. Again, he’s already fully eligible. But because he’s getting that enhanced pension calculation, his pension is now $26,427, which is a marked difference from two years prior. Okay. So these are all big decisions that he’s going to need to make. And it’s important to understand what these numbers are before you pull the trigger and you’re ready to retire, we want to get this right and there be no surprises whatsoever. You wouldn’t believe the number of calls that we get here of people that in a fit of rage, left federal service. And they said, “You know what? I’ve had it, I’m out.” And they leave only to realize that they didn’t actually meet the eligibility requirements. Or if they did, they missed a critical window of being able to enhance that pension. Okay.
All right. Fourth decision that Mike is going to have his sick leave. So of course, sick leave is a great perk that you have as federal employees. We’ll cover annual leave here in just a bit, but sick leave has to do with your pension calculation. So let’s see what this looks like.
For sick leave hours, we’re going to take whatever your hours are at the end of your career. We’re going to convert them from hours into years, months, and days. And that length of service is going to be added to your pension calculation. Now you’ll notice we didn’t say it adds to the length of service for eligibility purposes. It doesn’t. Okay? Sick leave only counts to increase your pension. It does not ever count towards eligibility. Okay? So it doesn’t help you to retire sooner.
Now, one thing that’s important is when we get those years, months, and days columns all added together, and we’ve got them all lined up, any extra days that don’t equal a whole month which is 30 days in the eyes of the government, those are going to get chopped off. So we’re going to see an example of that here in just a moment. Okay? And see how the rounding actually takes place.
So here’s how it looks. Let’s say that Mike, again, he’s got 25 years of service. 25 years and 20 days. We’ll give him a few extra days based on his retirement date. He doesn’t have any military service, so there’s none that’s included here on this line. And then sick leave. When we’ve converted his sick leave from hours into years, months, and days, we come up with six months and 28 days. What I want you to realize is those ‘straggling’ days off to the right hand side, the 20 and the 28 that you see in that column, they don’t get chopped off there. Okay. We wait and add up that column and see if we can glue together another month of service. And in this case, we can. We come up with 40 days. We’re going to take 30 of those days and give Mike credit for another month of service. Okay? And what that means is that there’s 18 days of sick leave that Mike can probably go burn. Now, we would encourage him not to burn all of it and mess up this whole calculation with the rounding. But he’s got a little bit of room to go burn some of this sick leave. Okay?
Now you can’t get this granular in the decision until you’re much, much closer to retirement. Because how you earn leave and what leave you actually use, legitimately use, is going to really play a factor in all of this. So we wouldn’t want Mike to drop below 30 in the day column, because then he doesn’t get another month of service in the pension calculation. Okay? All right.
So with sick leave, little case study here. For each extra month of service that he’s able to glue together to add to his pension, it’s going to increase his pension calculation. Okay. So if he were to retire now, again, under the MRA+10 scenario, each extra month that he’s able to glue together gives him an extra $65 a year. If you were to wait to retire at age 60, each month he’s able to add in, would give him $67 a year to his pension. So not a significant difference there. But at 62, of course we see a wider difference because of the way those years and months are calculated with the enhanced pension formula. At 62, each extra month that he’s able to add to his service length is $76 a year to his pension. Okay. So lots of different decisions here for him to think about and figure out with respect to sick leave.
Now, the fifth decision that Mike’s going to have is when his first pension check is due. And it’s not really the decision of saying when he wants it. It’s choosing the right day of the month to allow it to happen as efficiently as possible. So here’s how it works. For the pension check, the rule says the pension will begin accruing on the first day of the following month after someone retires. And it’s paid the next month. So what we’d want is for someone to retire on the last day of the month. Really important, last day of the month. That allows for the pension to be payable, to begin to be payable, to be accruing the first day of the next month.
But sometimes it’s hard to get our brain wrapped around how all this works. So let’s take a quick peek, okay? Little case study here on Mike. So Mike’s debating. Remember, “Do I go ahead and retire now? I’m 58.” He’d retired at the end of this month, let’s say. So he’s going to retire January 31st. His pension would begin accruing the first day of the following month, which is February 1st. That’s great. All the way up until January 31st, he was paid as an employee and beginning the very next day, he started to be paid as a retiree. It’s exactly what we want to see. No gap in pay. Okay?
Now of course, as a retiree, you get paid monthly. So we know that check will arrive or should arrive by March 1st or so. Okay. But this is exactly what we want to see happen based on how the rules are written.
But let’s say that Mike goes to the water cooler. And he says, “Hey man, I was thinking about going ahead and retiring at the end of this month. So I’m going to pop smoke on January 31st and go ahead and retire.” And his buddy at the water cooler says, “Hey, hold on. I just read this article that you should always retire on the last day of a pay period.” And Mike says, “Why?” He says, “Well if you don’t, you’re going to give up your annual leave that you were earning during that time. You don’t want to do that. You want to get everything you earned, man.” And Mike says, “You’re right. Maybe I’ll do that.”
So Mike decides he’s going to wait until February 4th. Now we use this in our example, in our workshops. February 4th is not the end of a pay period in 2021, but follow along with me here. So February 4th, Mike decides to go ahead and retire at that point. Well his annuity begins accruing on the first day of the following month, which is March 1st. And it’s paid the next month on April 1st.
So my question to you is between February 4th and March 1st, was Mike paid as an employee? The answer’s no. He might get a straggling check, right? Because checks are always delayed. But during that time, he’s not being paid as an employee. But is he being paid as a retiree? The answer to that’s no as well, because his annuity doesn’t begin accruing until March 1st. So there’s this window between February 4th and March 1st that he’s not getting anything. So he’s essentially given up 87% of his very first retirement check. And depending on what scenario he chooses whether he goes MRA+10 now, or age 62 later to retire, he’s going to give up $1,100 to $1,700 of his very first retirement check.
My question to you would be those eight hours of annual leave that he was trying to preserve, were those more or less valuable than that figure that you see on the screen? The $1,100 to $1,700. There is zero way that eight hours of leave exceeds this amount. So he did what a lot of folks do in scenarios like this. He tripped over a dollar to pick up a penny. Okay. He tripped over making certain that his very first retirement check was what it should be in order to preserve eight hours of annual leave. Please don’t do this.
If a last day of a pay period happens to be the last day of the month, cool. If it’s a day or two before the end of the month, okay. But gosh, here at the beginning of the month, you never want to do this because of what you’re giving up in order to do so. Okay? All right.
Next big question that Mike has is, “Hey, what about those cost of living adjustments? When are they payable? And how’s all this work?” Well cost of living adjustments when we’re thinking about the pension, that’s a figure that’s released each year by the Bureau of Labor Statistics. And it determines how much that retirees pension is going to increase. So when we think about COLAs, remember FERS employees get diet COLAs. Okay, you’re not going to get the same kind of cost of living adjustment that your CSRS counterpart does. They get a better one than you. And that’s not to stoke any fires or anything, but just recognizing that it’s different. It causes FERS retirees to naturally fall further and further behind inflation. Okay?
But another factor is really important. That is that the COLAs for FERS employees are only payable from 62 forward. So if you retire earlier than 62, your pension will not get a cost of living adjustment during that time. It’s also really important that you look at the month in which you retire, because that’s going to really determine how much of the cost of living adjustment you’re going to be able to get in the very first year of drawing it. Okay? So they’re essentially going to say well, to determine how much of the first COLA you get, they’re going to look back and say, “Well, what percentage of the months in the prior year were you due a FERS pension?” And if the answer is zero, then you get zero of that COLA. If you’re retired the whole year, you’ll get all of the COLA. But we’ve got to figure that out because that’s going to determine what day of the month, or in this case, the day of the year that you’re retiring.
Okay. So here’s our case study. If Mike were to go ahead and retire now, or at age 60, his pension is not going to receive any cost of living adjustments until he’s 62. And that is a permanent loss of purchasing power. All those years where his pension was just flat, he won’t get any of those increases. Okay?
Now this rule is a little different for some groups of employees. For instance, law enforcement officers, firefighters, air traffic controllers, they get COLAs earlier and all that good stuff. But remember, we’re going to focus on Mike here. And because he’s a regular employee, we’re not going to dive into all those details. Okay?
All right. Now if he were to wait until 62, we know that his pension would be subject to COLAs right away. So that’s probably good news for him. But he’s got a lot of big decisions. Remember, he’s got this other job offer and he’s really debating whether he goes ahead and leaves federal service prior to the age of 62.
So when we’re thinking about the first COLA calculation, if he were to retire at the end of the year, let’s say December 31st of 2025 when he’s 62, he will not receive a cost of living adjustment to his pension for the next year. Okay? The one that happens January right after he retires. Okay. So 2026, he will not receive a COLA at all.
But the following year for January 2027 and throughout the remainder of the year, he will receive 12 twelfths of the COLA. He’ll receive the whole thing because in the prior year, in 2026, he was retired all 12 months. Okay? So that’s how that first calculation is going to work, assuming that he were to retire at the end of the year.
If he were to retire in the middle of the year for instance, let’s say June 30th, he’s going to go. He’s still 62. So COLAs are still active here. He would receive six twelfths of the COLA beginning of January of 2026, because he was retired six months of the previous year. Okay? And then from that point forward after 2026, he would get the full cost of living adjustment that’s announced for FERS employees. Okay? So that’s how that works on the COLAs. Sometimes COLAs, they’re a little bit of an afterthought, a little bit of the sand or the pebbles. And everybody’s going to have their own way of aligning all of these things in their head to make sense of it. But we always want employees to go into retirement with eyes wide open and knowing how all of these things work.
All right. Next up is annual leave. So for annual leave, you get a good amount of annual leave as a federal employee. My husband happens to be a federal employee, so I know how much leave he just to burn in December. Now most employees are only allowed to carry over 240 hours from year to year. Okay? Some of you might be at a higher level. We’ve got postal workers at 440, we’ve got some SES at 720, I mean, there’s all sorts of different levels out there, but the vast majority of federal employees are at the 240 max carryover. You’re probably very attuned to that because you’re paying attention every November, December to get all your leave scheduled so you don’t lose any of it.
Now retiring at the end of a given leave year would allow Mike to cash out the highest amount possible. So that would be 240 from the previous year, and the 208 that he earned in the current year. Okay. So a total of 448 hours. We’re going to talk more about this here in just a second on the 448. Okay. But this amount, this payment that he’s going to receive, it will happen typically two to three weeks after he leaves federal service. This payment comes from his agency, not OPM. So it arrives pretty quickly. But know that it’s all taxable as earned income. As earned income. So he’s going to pay Social Security. He’s going to pay Medicare. All of those normal deductions that come out of that. Of course, the only one that is super pertinent to federal employees is TSP. That will not come out of that final lump sum payment. So the retirement month matters because it allows you to bank as much of that earned leave at the very end of the year before you step foot into the next leave year.
Okay. All right. Now for Mike, we’re going to take a look at what things look like if he retires now, 60, and 62, just like we’ve done in the other examples. If he were to retire now, he could cash in 448 hours. And it’s going to be worth about $17,172. Okay? If he were to wait until 60, remember his pay has continued to go up, and that’s what his payout’s going to be based on. So that’s $17,577. And then retiring at 62, same thing. His pay has continued to go up. So you see the value of those 448 hours just a little bit higher. I mean, nothing drastic between the two. But if we’re counting pennies, here’s what we’re looking at. Okay?
But remember, he heard at the water cooler that he was supposed to retire on that last day of the pay period, and how crazy he would be if he gave up those eight hours of annual leave that he was going to earn in that last pay period. Well here’s the deal. If he goes ahead and retires January 31st in that example, instead of the end of the pay period, he’s of course not going to have those eight hours of annual leave. And it’ll reduce his payout by a little over $300. Okay? It’s not the $1,100 or the $1,700 that he would have given up had he retired on that last day of the pay period and given up all that of his first pension check. Okay. So lots to consider. And some of you, this might be more important than others. It really depends on how much leave you have. Some of you struggle to just keep leave on the books, much less banking this much leave. So everybody’s kind of got their own thing that they have to think about. But definitely, something to have on your radar.
All right, next up is the effect on health benefits and life insurance through the federal government. So in order to keep FEHB and FEGLI in retirement, you have to meet some requirements here. There are two. You must retire on an immediate pension, and you must have this coverage in place for five years immediately prior to your retirement from federal service. Now, there are some exceptions to this one. If you’ve had TRICARE, that kind of thing. If you’ve had a break-in service and then came back, there’s some rejiggering that they do of these five years. But if you’ve been working for the federal government and you’re not on the military’s TRICARE program, chances are you’ve had nice consecutive, concurrent service over the last five years. And if that’s the case, you must have been in these programs for five years immediately preceding your retirement to be able to keep it. Okay.
So let’s take a look at Mike’s situation. Let’s assume he’s met the five-year rule. Chances are he has, because that’s the way this works here. If he goes ahead and retire now, we know that he’s going to retire under the MRA+10 rules. And remember he had two choices of when he was going to start to take his pension. He was either going to take it right away and suffer a big penalty, or he would voluntarily wait until 60 to draw it. And then he didn’t have the penalty anymore. The penalty was he didn’t have a pension for two years. Okay?
So if he voluntarily postpones receiving that pension to avoid the penalty, he’ll lose health benefits and life insurance during that time. Anytime he’s not receiving the pension, he doesn’t have access to health and life. Once he begins drawing it at 60, of course he’d be able to keep it from that point forward. It would all be restored, and he would have every choice just like every other employee does on those programs.
But if he were to retire at 60 or later, he would naturally be allowed to keep all that coverage because he’s fully eligible, and his pension is going to start right away.
All right, next decision for Mike. We’ve got a couple more and they’re important ones. We’ve got the Special Retirement Supplement. So this supplement, you see this guy looking over the cliff like, “Wait a minute. There’s this big gap here.” And 62 is the other rock. And that’s when he’s eligible for Social Security. And he says, “Well, wait a minute. I thought Social Security was part of the three-legged stool that OPM had built for me to accompany FERS and TSP. But I’m not eligible for Social Security prior to 62. So what am I supposed to do?” Well, this is the program that solves that problem, at least somewhat. Okay? It’s called the FERS Special Retirement Supplement. And it bridges that gap between the time a FERS employee retires from federal service, in Mike’s case maybe 58, all the way until 62 when they are eligible for Social Security.
So with this program, this is paid to most FERS employees who retire prior to the age of 62. And employees must retire on an immediate non-disability pension. If you want to get this program, you’ve got to meet these requirements. And I want to make a special clarification here. An MRA+10 pension does not qualify. If you go out under MRA+10 like Mike’s considering doing, you will lose the Special Retirement Supplement forever.
Now this calculation is based on a special percentage of your Social Security benefit that you’re expecting at the age of 62. It’s all based on the length of service that you had and all that good stuff. Okay? We’ll show you one of those calculations here in a second.
But here’s another important piece, especially for Mike in the decision that he’s making. If he goes out and gets another job, he might give up some, or maybe all of this benefit. Really, important to at least consider and have on the radar.
All right. So if Mike retires now under MRA+10, we know that he will not qualify for the Special Retirement Supplement. If he retires at 60, he will qualify for the Special Retirement Supplement. And let’s throw a couple of numbers in here. Not to confuse anybody, but want to kind of set the stage. Let’s say that he has a very normal Social Security amount of $1,200 a month. And at this point at 60, he has 27 years of service. He’s going to receive about $810 a month until he reaches the age of 62. Okay. It’s just how all the numbers kind of shake out. I wanted to give a little framework to that calculation. But important to know, I mean this is a nice amount of money, especially when absent of this, there would be no additional income from the pension. You’d get the pension, and that’s it. So this is a nice little perk for FERS employees to be able to have until they’re eligible for Social Security. Okay?
Now, if Mike goes out and gets that job, and he makes more than $18,950 which I suspect he will, some or all of this benefit goes away. In fact, by the time he makes about 38 grand, this benefit’s gone. Okay? It’s just the way, it’s called the earnings test. He earned too much. So they’re going to start to take some of this benefit away. But once he earns $38,000 or so, all of this will be wiped away.
Now of course if he waits all the way to age 62, he won’t qualify at all for the Special Retirement Supplement, because he’s already eligible for Social Security. Okay? So he naturally would not qualify for this because it stops at the age of 62.
Now next decision is similar to the Special Retirement Supplement, and that is Social Security. Okay? All right. The Social Security benefits that you see on your statement are estimated, and they’re making an assumption that you continue to work, and that you keep contributing to Social Security. That’s part of the big formula that they use to spit out those numbers on your statement.
So the longer that you wait to retire, the more strategies that might be available to you to draw a higher amount. And we’ll see what this looks like here in a second. Okay. But important to know that the earlier you retire, you might feel obligated to take Social Security earlier, and earlier, and earlier because your income has gone down so much earlier in life. If you’re 58, versus 62, versus 67, all of those change the way that you draw Social Security. Okay? And of course just like the program we reviewed a moment ago, if an employee earns too much while they’re drawing Social Security prior to the age of 65 to 67, they’re going to give up some or all of this benefit as well. Okay. So here’s our case study.
If Mike were to retire prior to age 62, of course he’s not contributing to Social Security anymore. Unless of course he does take that other job, and then he would keep contributing. So that’s an important factor here. Okay? But if he doesn’t end up getting another job and he goes ahead and retires, that might cause a reduction to some of those estimated benefits that he sees on his statement. How big that difference is will largely depend on his earnings history with respect to Social Security. But it’s possible that those are going to change.
Now if he has wages more than $18,950, we just saw that number before. Some or all of this benefit will go away. And he’ll be left to choose to draw Social Security benefits from age 62 to 70. Okay? If he decides to go ahead and do that. But really important to make sure that he’s at least considering what this strategy is with Social Security before he makes that call.
All right. Next one is on the effect on the Thrift Savings Plan. That’s a topic everybody wants to hear about, so important that we cover that today. All right. So federal employees who retire or separate from federal service in the year in which they turn age 55 or older can access their TSP funds without penalty. Okay. If this was an IRA that you were taking money out of, the IRS would say, “Hey, hey, not so fast. You’re not supposed to access that money prior to 59 and a half.” And they would assess a 10% penalty on any monies you take out of an account like an IRA prior to the age of 59 and a half. It’s a steep penalty. And it doesn’t feel very good.
But you have some special rules that you’re following here that as long as you retire or separate in the year in which you turn 55 or older, you can access that money without penalty. You still have to pay tax on it, but there’s no extra penalty assessed. Okay?
Now you want to make certain, and Mike wants to make certain, that all the loans out of TSP are paid back, or a taxable event will be declared. And if he’s under 59 and a half, which he is right now, he would suffer a 10% early withdrawal penalty on any of that money that he takes out. Okay? In that case, the loan, because it’s declared as a distribution at the time he retires. If it’s not paid back at that time.
And of course the longer that you keep working, the longer you’re able to contribute to the TSP. Okay? So, your contributions, your agency’s contribution, or the match. And then, of course, we’re hoping that the account continues to grow over this amount of time. So let’s see what this really looks like for Mike.
We know that he’s already passed the age of 55, right? He’s 58 right now. So he’s good to go on that first rule. No penalties assessed for Mike. And he’s been to one of our retirement workshops, then he knows how we feel about TSP loans and that we don’t like to see us going in and pillaging an account that’s designed for retirement purposes. So he knows he’s supposed to leave those TSP loans alone. He does not want to do that. So he doesn’t have any outstanding loans within the TSP.
If he were to continue to work and not retire at 58 but just keep working, he would naturally be allowed to contribute up to $26,000 a year. And it’s this amount, because he’s at least age 50. So he qualifies for those catch-up contributions that the IRS simply allows him to contribute a little bit more than the average person into his TSP. Okay?
Now of course, he’s also got the agency match. This is the 5% of his salary. So for every year he’s working, his agency’s giving him four grand. Well dang, that feels pretty good. So every year he’s not continuing to work, he’s giving up not only the $4,000, but the ability to sock more and more money away in his TSP. Now, will he be able to do that in a private 401(k) that’s offered by the new company? Maybe. I guess that’s left to be figured out. But at this point, what I want everyone to really focus on is this $30,000 that he would be able to get into that account every year, then longer that he waits, of course, $30,000 each year he’s able to get in. But that’s not the real punchline here. The real punchline is the longer he waits to retire, the fewer number of years that he’s going to have to rely on the TSP account for income. Because he’s shortened his retirement window. Okay? The amount of time he’s going to spend in retirement is smaller because he’s continued to work further into it.
Now some of you might say, “Well, that sounds like not a good idea. I don’t want my retirement window to be lower.” That’s okay, as long as you have enough money to support the lifestyle that you have. Okay? And that’s all got to be factored in to Mike’s decision. Okay? All right.
So here’s the deal you have. You have a wall of decisions that are unique to you. Mike has a wall of decisions that are unique to him. And we’ve got this, play along with me, have a little fun here. Look off to the right hand side. This image, you see all these switches over on the right. You’ve got some that are plugs, some that are toggle switches, some that are dimmers. And this is a lot like all of the decisions that you’re going to be making, because all of them affect you in different ways. And the way in which you interact with some of these decisions is going to be different. Some will have a major effect. Some will have a very minor effect, like a dimmer switch. Okay? But really important that you understand that the example that we’ve given today of Mike’s decision points are just that. They’re an example. And I want you to have the ability to really think through all of these decisions so that you find the decisions that are most appropriate for you given your circumstances. Okay?
So I would encourage you, if you have not already done so, to attend one of our workshops where we get into the nitty gritty of how these benefits work, all of the calculations behind the scenes of what you saw today. We have mostly virtual options right now. Starting in the second quarter, we’re starting to hopefully go back live. Fingers crossed. There is no cost to attend. We’re delighted to have you. And we’re going to cover all of the federal benefits topics and all the decisions to be made in that workshop. So for a listing of all of the available workshops, you can visit fedimpact.com/attend. We also have a link right at the bottom of the screen in that little box that will take you right there. Okay?
Now handouts and the replay. Of course you can download the handouts right now. They’ll also be emailed to you, so you’ll be able to print those out. Give us a little bit of time to get this recording rendered, but we’ll send out an email that will link you right to the recording as well.
Now we’ve talked a lot about the MRA+10 decision that Mike has during the session today, but there’s a lot that we haven’t covered. So I would encourage you, if you’re thinking about doing what Mike is thinking about doing and retiring early under the MRA+10 rules, I encourage you to come to our next webinar. Okay? So what you gain, what you lose, and what you might not ever get back. Very, very important that you understand how these play out for you. And you can sign up at fedimpact.com/webinar. Okay? I hope to see you there. We have obviously a lot to share with federal employees on how these things work. Do me a favor. If you enjoyed today’s session, and you got a lot out of it, and certainly our support team, pop over to that Q&A and send them a quick message. We’d love to hear your feedback. We’re not making you fill out an evaluation form or anything like that today. But certainly pop over to that Q&A and let them know, and let me know, what you thought of today’s session. We appreciate your feedback. All right?
Well, thank you guys so much. I encourage you to take charge of your financial future, and certainly the federal benefits decisions ahead of you. So thanks so much, and we’ll catch you at the next webinar, or hopefully one of the workshops that we have upcoming in the new year.
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