Delivered on: Thursday, August 4, 2022
Dialing in Your Best Date to Retire
A review of the various factors that go into choosing an ideal date to retire from federal service
- PENSION: how to have no gap between being paid as an employee and as a retiree
- TSP: how the timing of retirement affects the access you have to the TSP
- OTHER BENEFITS: how other benefits may be impacted by the decision to leave service
- THE END GOAL: how to ensure you get the most out of each of the benefits you are entitled to receive
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Prefer to read instead? Below is a transcript from the video:
Hello and welcome everybody to the FedImpact webinar. Today’s topic is Dialing in Your Retirement Date. Now, if there’s one thing that I know federal employees are really paying attention to it’s when they plan to retire. As everyone’s getting settled, let me just run through a couple of things. Of course, today’s topic is top of mind for so many people, and that’s why we knew it was going to be a great topic today. Again, like we always do, we’ve got thousands of you guys register today and so we’re excited to be able to share this message. It’s one that we get an awful lot of questions about and so we’re in for a treat today.
Now our support team is standing by in the Q&A area, so if you do have questions, please don’t be bashful. You will not be able to use your microphone or your camera in today’s session. Those have all been disabled. If you do have a question, please pop them in the Q&A area and our support team will get those answered.
Now this topic, there’s going to be a lot that we’re covering today, and it will be very easy for you to get sidetracked where you want to get into the nitty-gritty of some burning question that you’ve had. And then before you know it, 15 minutes have passed and you haven’t even been paying attention to what we’re delivering. Keep that in mind, make sure that the questions that you are asking pertain to the material that we have here today. And don’t forget just to breathe and listen carefully to what I’m sharing with you, because I’ve intentionally put this material together based on some misconceptions that I think federal employees have about planning their retirement date.
Now the handouts are available for download right next to the Q&A area, you’ll be able to download those handouts. And as always, we will send out the recording of the replay to you along with the handouts. Stay till the end. We have our next webinar topic that I’m excited to be able to share, but there is so much in today’s session between now and when we announce that. I want to make sure that you are paying attention.
Of course, I’m Chris Kowalik, the founder of ProFeds. Delighted to be able to be here with you today to cover this pretty important topic. Dialing in Your Retirement Date, a review of the various factors that go into choosing an ideal date to retire from federal service. Of course, as trainers, we deal a lot with federal employees who are trying to get that right date, and they’re not really sure everything that goes into those decisions. Today’s session is going to cover just that.
For our agenda today, of course, we’re going to cover all things pension-related with respect to making sure that you’re getting the pension that you think you should be getting. The Thrift Savings Plan and how you’re going to be able to access that money in retirement. And of course the other benefits as well, your life insurance, health insurance, all those good things. The end goal here is to really ensure that you get the very most out of each of the benefits that you’re entitled to receive.
Now what this webinar will not cover. We will not be able to cover all of the nitty-gritty and all the exceptions and all of the little pieces of these benefits. We’re going to stay a little bit higher level so that you can really appreciate what it looks like to examine different retirement scenarios that you might be considering.
But for any of this to be accurate, you have to start with accurate data, as far as what your service history is and what credit you’re getting and all of those things. Because if those things are wrong, none of your numbers are going to be right. You also have to be honest with yourself. You’re not lying to me. You’re not lying to your coworkers. You’re lying to yourself if you are not being truthful about the scenarios that you are considering and what you might be giving up by retiring under one of them. You also must acknowledge facts. We can believe all we want, but we also have to look at facts of a case and those facts typically translate into numbers. The next thing that you have to do is you have to believe math. Math matters when it comes to looking at your retirement, the other part matters, too – your mental health, your excitement for that next phase of your life, your purpose, and carrying that on. All of those things are incredibly important like I’ve shared in previous podcasts. But the math won’t lie to you and you’ve got to make sure that you are in a position of strength when it comes to your numbers.
The last thing I have on here is that you must understand that all of this is complex. I’m going to break things down into kind of that simple high level overview today, but it’s worth your time to get this stuff. You can’t spend 20 or 30 years of your life working for an employer and dork up your retirement. We want you to get this right. You have one time to retire. And if you’re really unlucky, you get multiple times to retire because that means that you retired and realized that you couldn’t live on what you had and so you had to come back to work. And you do that a couple of times and you get pretty frustrated. Our job is not only to help you to know when it’s right to retire, but knowing that it’s right, so that you can stay retired.
Two Kinds of Retirement Readiness
When we think about being ready to retire, there are really two kinds of readiness. There’s the mental readiness that I think all of you get to quickly. That’s the left hand side. And the higher up on that mental readiness you are, the more you’re kind of checked out, retired in place. However, you want to put it, but mentally you’re just ready to go. And then the bottom part of this axis is the financial readiness. And I think this is the part that federal employees struggle with more because they don’t really know how to properly assess their readiness when it comes to numbers.
Sure you can pencil whip some numbers and maybe get a little bit of a glimpse in time. But do you actually understand how your numbers on your federal benefits affect all of the rest of your financial life? That is the key part. And we are not going to be able to determine that today. Let me be very clear. I don’t want to mislead anyone. We’re going to talk about the financial readiness and what that looks like on a couple of different levels. But as far as your situation, I would implore you to please seek the advice of a financial professional that actually knows what they’re doing in working with federal employees. Of course, we have a network of them. We’re delighted to provide an introduction if that’s what you’d like to do, but don’t leave this to chance. You’ve never retired before. You don’t know what’s ahead, but we have professionals that do this for a living that can help.
Of course, our goal in all of this is that you not only have the mental readiness to go, but you also have the financial readiness. And that’s where you see the happy face in the green section of our chart here. Very important that we get you high on both levels, the financial readiness and the mental readiness to be able to go.
Questions to Ask Yourself
But you might wonder like, “Well, what are some questions I should ask myself?” Well, here are some starter ones and these are really high level. So the first is, “Am I eligible to go? Will I have enough income? Can I keep all the benefits that I want? Are there any consequences and are there any perks?” And that’s easy for me to say at the very high level, and you to be like, “Well, of course I should ask those questions.” But what does it actually look like in real life when you’re evaluating your benefits in the scenario that you’re in? I completely understand, and we’re going to show some examples today.
Filter of Decisions
I want to talk about the filter of decisions that you have, specifically when it comes to choosing when you’re planning to retire.
If we start at the very top of this funnel and we think about what decade are we going to retire? That is pretty broad, that you can imagine has a really big impact. If you’re going to retire at 30 or you’re going to retire at 70. All of those are very different scenarios. Feds don’t typically think about the decade that they’re going to retire. Because again, that’s a pretty broad metric here. But thinking about the year in which you’re going to retire has some pretty big impact for a lot of reasons. Then we get a little bit more granular to the month, the specific month of the year that you’re going to retire and then the specific day of the month. And let me share with you the further down this funnel you get the smaller, the impact of the decision that you are making.
But unfortunately the day of the month is where most feds focus their energy. That’s what they’re focused on thinking, “Well, a guy in my office said I should retire on the 28th of this month because he read it in an article online and that’s what we should do.” Without giving much credence to the rest of the filtering of decisions, of specifically the year and the month that you’re planning to go. And it’s not just a matter of are you eligible, but what scenario does retiring in a given year or a given month, put you in to put you on the right trajectory to have the retirement that you want. I encourage you to think about the bigger decisions first and filtering it down to the more granular decisions that really, by all stretch, don’t have a lot of consequence to you.
That impact is very, very small. We always want to get everything we’re entitled to and I’m all for that, but I don’t want you to trip over a dollar to pick up a penny. I don’t want you to try to get the day of the month so correct, when in fact you don’t have enough money to retire and stay retired. I’d rather you know that, and that is looking at the bigger picture. Then once that is good to go, then you can get more granular in your decision.
Today’s session, we’re going to cover a high level case study because I want you to have a good appreciation for the different types of scenarios that feds find themselves in as they’re trying to decide when to retire. For this pretend employee that we’re going to look at, we’re going to assume that they are a FERS employee and that they’re a regular employee type, meaning that they’re not law enforcement, firefighters or air traffic controllers. We are going to assume that they are married and this is what they’re debating. They really have two questions on their mind. The first is, should they retire now or wait it out? Because for this particular person, they’ve been offered a job out in the private sector, for instance. And they’re wondering like, “If I go ahead and leave now, could I have like a second career versus if I stick around then will I have the energy to have a second career if I retire later?” And the other question that they’re rattling around in their brain is, “Should I make a military deposit?”
Let’s take a look at more of the specifics of this person. Currently, they’re 50 years old, they have a current High-3 of $100,000. They have 26 years of federal service and an additional 4 years of military service. Now we know based on the question that they’re asking that they have not made a deposit for those 4 years of military service. We’re going to see kind of how some of that plays out in their decision making.
The very first thing that we’re going to look at is this person’s eligibility to retire. Remember, they’re 50 right now and they’re debating like, “Do I wait it out? Do I continue to have a few more years under my belt? Or perhaps get all the way to 62?” that’s kind of the span. So 12 years of a span that they’re considering, so we have to get really clear on what that’s going to look like.
First things first, let’s talk about if they’re 50. At that point, this employee will not be eligible to retire, (at least not fully). They would only be eligible for a deferred pension and that’s going to come with some consequences that you’re going to see as we move through the material. One of the first consequences that we have with a deferred retirement is that they’re not able to draw it until later. In this case, this employee’s able to draw it at age 60. Now the question is, does making a military deposit make me eligible sooner? Well, in this case, it doesn’t because although this employee would have 30 years of total service, they’re still too young. 50 years old, they don’t meet the age and service requirements that are required for employees to go.
You all have seen the charts, age 62 with 5 years of service, age 60 with 20, or their Minimum Retirement Age with at least 30. Well, they’re still too young for any of those. The military deposit, while it might be good in other ways, it doesn’t help them to be eligible to retire sooner. But if they wait all the way until 57, are they fully-eligible to retire then? Well, the answer is no. They would have met their minimum retirement age and they would have their 10 years of service at least (so they would qualify for this MRA+10 type of retirement), but it’s going to come with its own penalties that we’re going to see in the next slide. The next question that this employee has is, “Can I draw the pension right away if I leave it 57?” The answer is yes, but there’s a catch and we’re going to cover the catch here on the next slide.
Now we’re going to ask the same question. “Does making a military deposit make me be eligible to retire sooner?” And the answer is yes, because if they have 26 years of service now and they make a deposit to get an extra 4 years of service, they’re going to have 30 years of service and since they’ve reached their minimum retirement age of 57, they are now fully-eligible to retire. So they don’t necessarily have to work longer, they just have to make a deposit for that military service. Next up, at age 60. Are they fully eligible to retire? Yes. Can they draw the pension right away? Yes. And does making a military deposit make me eligible sooner? Well, in this case, it doesn’t really matter because they’re already eligible. And the exact same scenario plays out for age 62. This is just focused on eligibility to be able to retire.
Next up, we’re going to talk about the actual pension itself. Now, we’ve taken the liberty of running these numbers based on the belief that there will be continued pay raises and all of that along the way. We’ve used the 10-year average for pay raises, so we’re right in line with normal figures, but I want to walk through each scenario. Don’t let your eyes travel throughout the rest of the slide, stay with me. I’m going to cover the age 50 scenario first. In this case, if the employee was to leave service at 50, there is a pension of $26,000 a year but there are penalties (kind of). In this case, there’s not a dollar amount penalty that’s being subtracted from the pension. The penalty is that they can’t draw it until age 60. For 10 years they don’t get a pension and that feels like a penalty, even though technically it’s not called one.
Now the question becomes, “Does making a military deposit increase my pension?” Before we were asking, does it make me eligible sooner? But now we’re asking, does it increase the pension? And in this case, it would increase it by $4,000 per year. Gosh, that’s worth looking at. And eventually when they draw their pension, it would be $34,000 per year at 60. The next question is, “Do I get cost of living adjustments right away for the 50 scenario?” No, you won’t get it until you’re age 62. Let’s move over to the age 57 now. This one gets a little bit more complicated because we have a couple of different levers that we’re pulling here. The full pension amount, if someone were to retire at 57, would be $36,600 per year. Now that does not include the military service that we talked about.
That’s just the straight 26 years of service, but the penalty, if they don’t make a deposit for that military service, is that because they’re not fully-eligible and they’re just eligible under the MRA+10 scenario, that there will be a permanent penalty to the pension and that is 25%. That’s a pretty significant chunk of your pension that you are going to give up forever. There is a way to avoid that penalty. And again, that penalty in this case is over $9,000 a year. If we don’t think it’s a lot, look, it is a lot and you will regret taking a penalty like this. The way to avoid getting that penalty is to wait to draw the pension until you’re 60. And again, I’m basing all of this on the case study information. This might not be true for you based on your scenario, but it is true for this case study.
If this person were to wait until 60 to begin drawing their pension, they would draw the full $36,600 with no penalty. Now the next question, “Does making a military deposit increase my pension?” Well, in fact, it does. And in this case, it increases it a little bit more than the previous example at 50. Now we’re at $4,400 a year that it’s increased the pension by. And here’s the deal by virtue of making that military deposit, it makes them fully-eligible to retire. So not only do they get the $4,400 a year, they also now avoid the $9,150 penalty because that’s no longer in the works. They’re fully-eligible. There will be no penalty to their pension. So again, 57 gets a little bit complicated here because we’ve got that scenario where making a military deposit does change the game for this employee and so definitely a lot to think of for this person. And same thing with cost of living adjustments, there’s no COLAs until 62. So we’re just going to sit tight at whatever that pension number is until that 62 mark.
At 60 you’ll notice the pension has gone up to $41,650. There are no penalties applied, but of course, making a military deposit does increase the pension. And the reason the dollar amount of the increase of the pension for the military deposit continues to go up is because the High-3 continues to rise with all the pay raises that this employee receives. The later someone retires, presumably their Hign-3 has gone up along the way. In this case, $4,626 per year that their pension has increased by. And again, no cost of living adjustments prior to the age of 62.
At 62, something very interesting happens. Their pension, you’ll see it increases pretty dramatically from 60 to 62. So now we’re looking at $49,720 a year. And the reason is because there’s a little perk here. The fact that this employee was able to get to age 62 and have at least 20 years of service under their belt, they move to a different pension formula. Instead of the 1% formula, they move to the 1.1% formula and so that automatically gives them a 10% raise in their pension. Now, in the age 62 scenario, there are no penalties, but we do see an increase to the pension if they were to buy back that military service of the $5,234 per year. And the good news is when someone retires at 62, there is a cost of living adjustment that starts right away. And so there won’t be any delay or flat lining of their pension if they go at that time.
Next up are survivor benefits. The good news is no matter which scenario you were to retire under, you are able to protect a portion of your pension to your surviving spouse. That maximum that you’re allowed to do as a first retiree is up to 50% of your pension. This is a pretty easy slide to review, but definitely wanted to point out that your spouse is able to receive a portion of your pension as long as you’re naming them as a survivor annuitant when you retire.
Special Retirement Supplement
Next up is the special retirement supplement. This is the one that kind of looks like social security, and it’s paid prior to the age of 62. So the question is, “Am I eligible for the Special Retirement Supplement?” In the age 50 scenario, the answer’s no. You’re going to completely forfeit that you will never receive a dime of the supplement.
And it doesn’t matter how much it would be, or what happens if you have another job because you’re not getting anything anyway in this age 50 scenario.
Now 57, again, things get a little bit goofy here. If a military deposit is not paid, then you will not receive the Special Retirement Supplement. And the reason is that you wouldn’t have been fully eligible to retire at that time. You’d be under that MRA+10 scenario. And those employees when they retire, do not get the supplement. But what’s interesting is by virtue of making that military deposit and it makes you fully-eligible in this scenario then because you’re fully-eligible, now you’ll receive the supplement. So again, if the military deposit is paid for this particular case study, it would provide $9,360 per year in the supplement. And again, that’s paid in this case between 57 and 62.
Next question is, “What if I have another job? Will I still get the supplement?” Well, maybe. If your income exceeds the limit for this year, which is $19,560, it will start to reduce, so it’s possible that you won’t get any supplement, it depends on how much you make.
Next scenario is age 60. Are you eligible for the supplement? The answer is yes. In this case, the amount that you’ll receive is a little bit higher than what we previously calculated because we have three more years of service that are being included in this calculation. We’re looking at $10,440 per year in the supplement. Now, same scenario. If you make too much money, if you exceed more than $19,560 a year, it will start to reduce and can completely go away.
Now at 62, this is one of the benefits that you will not get if you retire at 62, because at this point you would be eligible for Social Security and the supplement would’ve stopped by this age.
Next up insurance. We’ve got a couple of different insurance programs that we need to talk about. If someone were to retire at 50, again, in this example that we have given, they are not permitted to keep their life insurance or their health insurance. Their spouse cannot keep health insurance after they die, but they are permitted to keep the federal long term care program in retirement. If this person were really to go at 50 and take that other job or sail off into the wild blue yonder in retirement, just because they’ve had enough, they’re giving up two really important benefits that they will never ever get back, which is life insurance and health insurance.
Next up, age 57. Will you be able to keep FEGLI and FEHB in retirement? Yes, as long as you’re drawing the pension. If this person buys back their military service and they become fully-eligible to retire, then of course they’re going to draw their pension right away.
But remember that other scenario that if they go out under the MRA+10 retirement type, if they voluntarily wait to draw their pension until 60, they avoid the penalty. They can do that, but in this case, between 57 and 60, there will be no FEHB or FEGLI coverage. While you are voluntarily postponing receipt of your pension, you will not have coverage, but once you turn on the pension to start it to be paid out, then FEGLI and FEHB would be restored. Again, still a lot to think about as you’re trying to figure out which button to push here. All right, next up. “Can my spouse keep FEHB after I die if they’re enrolled when I die?” Yes, as long as the minimum Survivor Benefit has been elected for them. That is a weird connection that the government makes between the pension protection for the spouse and their ability to keep FEHB after the retiree dies. And as far as the long term care coverage in all of these scenarios, you’re able to keep that.
Age 60. Can you keep FEGLI and FEHB in retirement? Yes. Can your spouse keep the FEHB after you die? Yes. And of course, you’re able to keep that long term care insurance as well and same scenario for age 62. In many respects, 60 and 62 looked very, very similar, but certainly in the pension, they were quite different.
Thrift Savings Plan
Next up is the Thrift Savings Plan. When it comes to investing, a lot of the opportunity comes with time and you’re going to see that here in today’s scenario. If this employee at 50 had been able to save $300,000 in the TSP, and let’s say they’re pretty aggressively invested.
They’re maxing out TSP. All of those normal things that will continue to grow over time. If they go ahead and retire at 50, they’re going to have $300,000 to work with. They are able to access their money right away from the TSP and right away is, I’m doing air quotes here, because the TSP has all sorts of delays in actually paying out money. But technically, you’re able to access it right away. “Are there penalties if I’m under 59 and a half?” In this case, yes. There is a 10% early withdrawal penalty for any money that you take out of the TSP to use between in this case, 50 to 59.5. If you move it to a separate IRA account in the private sector, there’s no penalty there, but if you’re taking it to receive the money, there will be a 10% early withdrawal penalty on all money that you take up until 59.5. There are some minor exceptions with respect to the TSP, but as far as you being able to freely access your TSP in any way in which you choose, then the 10% early withdrawal penalty is going to apply.
But let’s say this employee was able to wait until 57 to retire. They kept pouring money into the TSP. It’s aggressively invested again and it’s rolling. Now, we’re at $620,000, so they have a bigger pot of money to now be able to use in retirement because they’ve spent more time contributing to it as well as more time allowing it to grow. But the question is, “Are there any penalties if I’m under 59 and a half?” And the answer’s no. There’s some special rules in place for 401(k)s. The TSP included that if you retire in the year in which you turn 55 or later, you will not have any early withdrawal penalty.
And we’re certainly seeing that here. Now, as far as 60 and 62, of course, we’re seeing the dollar amounts change over time. Of course, you’re probably getting a little bit more conservative as you reach those later years, but you’re going to have full access to your TSP and there will not be any penalties assessed to your account if you take any money out.
Big Decisions vs. Granular Decisions
I hope that going through these scenarios, just these four in this case study has helped you to better appreciate that there are some big decisions that have big impact to you that we should be focused on instead of those super granular decisions, “How do I not lose any of my hours of sick leave?” And I know it’s something that feds always want to know, but we’ve got to look at the big impact first.
Who is in Control
I want to talk about this one concept before we wrap up today, and that is who is in control. When we think of an employee being eligible to retire. Their eligible time versus their optimal time to retire. Those are two very different moments in time for most people. But here’s the deal when you’re just looking at, “When am I first eligible to retire? Cause I’m going to punch the clock at that point.” The government is in control. They’re the ones dictating the eligibility rules. But what they’re not saying in those eligibility rules is that you’re going to be ready to retire. That you’re going to have enough money to be able to go live the retirement that you want because the government doesn’t know you. They don’t know what you want. They don’t know what your income is outside of the federal space. They don’t know any of those decisions.
But if you just look at eligibility and you say, “As soon as I’m eligible, I’m going” without looking at the rest of the picture, you are allowing the government to be in control of your retirement future, which we don’t want. Instead, we want you to look at the optimal view where you are in control. Of course, we still have to look at eligibility and make sure that you can go and draw your pension and all that. Just like in the scenarios that we talked about, but you are the one that gets to be in control of what the numbers look like. You have a big say in that, and you can pull those little levers that make things work in your favor. If you’re paying attention and you are willing to do the work to get these numbers right.
Just like we talked about at the beginning, you’ve got to be honest with yourself and you have to appreciate that this is complex stuff. Everybody wants an article where we tell them like exactly when they should retire and that is just not possible. You’ve got to be able to take this onus on yourself, to get these numbers right so that you feel great about what you’re doing.
Your Retirement Score
This webinar was inspired by a webinar that we did two months ago on Get Your Retirement Scorecard. In that webinar, we offered a quiz to federal employees to get a gauge, really a score, on all the big parts of their retirement decisions. How ready were they? And this is just measuring the financial readiness. It’s not talking about the mental readiness and all of that. But this quiz, I think, has been very enlightening to federal employees because of the kinds of comments that we’re getting back from them.
If you missed that webinar, or for some reason, you didn’t take the quiz, I encourage you to do so. So you can go to fedimpact.com/quiz. And there’s 20 questions. Read them very carefully and be honest with yourself because that’s the only way you’re going to know the types of things that you still need to work on.
Today’s webinar has been all about the federal benefits and the types of scenarios that you might find yourself debating, whether you’re retiring but how does this fit into the bigger picture? I strongly encourage you to attend one of our retirement workshops. We have a team of speakers that go out that do this for a living. They are fun. They bring tons of energy, lots of stories, lots of examples. I so encourage you to attend. And if you’ve been in the past and you need a refresher, don’t be bashful, so please sign up to go. So this is in-person training. There is no cost for feds to attend, and we’re going to cover all of the federal benefits topics. And here’s the best part, is that you get one-on-one help after the session. You can indicate, “Hey, I’d like to meet one-on-one and get more into my details.” And that’s really where you can think about the different scenarios. “I’m thinking of going at 50 or maybe 57. I don’t know. Maybe I’ll wait till 62.” That’s where you can get those types of questions answered in that one-on-one session. You can see all of the details at fedimpact.com/attend. You’ll be able to see all of our sessions that are open for registration right now.
Now we will send out handouts for today’s session if you’re not in a place that you can download them through the webinar portal. We will send them by email, along with the link to the replay.
Our next webinar is on the last paycheck versus the first retirement check. This will be on September 1st and this is a detailed explanation of how you can expect your pay to change once you retire from federal service. This webinar was inspired by a slide that we have in our workshop that really helps feds to appreciate how their pay changes from that very last moment in time that you are a federal employee and all the things you pay for, the income, the expenses, all of that, with respect to your federal benefits…and then the first paycheck that you have as a retiree. The income obviously changes, some expenses have changed. Some go up, some go down. Taxes are changing along the way. And so this webinar I’m really excited to do this because this is a slide that blows employees’ minds in this workshop.
And I’m excited to be able to dive in deeper through our webinar series to be able to show everybody how that works. Alright everybody, that is it for today’s session. Thank you so much for joining us and we’ll leave these links up here on the screen to find a workshop and again, be able to get that one-on-one help go to fedimpact.com/attend and to register for that next webinar on your last paycheck versus your first retirement check on September 1st, go to fedimpact.com/webinar. Again, thank you so much for joining us. We’ll see you next month.
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Register for our next 30-minute webinar: FedImpact.com/webinar
Find a comprehensive retirement workshop for your area: FedImpact.com/attend