Delivered on: Thursday, September 1, 2022
Last Paycheck vs. First Retirement Check
A detailed explanation of how you can expect your pay to change once 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
- SHORTFALL: how you can fill the income gap (but there’s a catch!)
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Prefer to read instead? Here’s the transcript!
Hello everybody. We are delighted to have you here on our webinar today on the last paycheck versus the first retirement check. So a couple things that I want to be able to share with you with respect to this webinar is I really appreciate how many of you have been so prolific in sharing these webinars with your friends. We get lots of links from different social media channels, and I know that you guys are spreading this word. I appreciate that so that we can help as many employees get this message as possible.
Today’s session as everyone’s kind of getting started. This topic was really inspired by a slide that we have in our workshop. And our speakers are like, gosh, this is the slide that makes everybody’s jaw drop! So I knew that this was going to be an awesome topic to talk about today.
We’ve got lots of different types of feds on here as we always do. We’re happy to be able to have just such a wide variety of people who are interested in this topic and making sure that you guys are getting the most out of your federal career.
Q & A. I’m going to stay focused on giving today’s material, but our support team is standing by in the Q & A to be able to answer all of your questions. All that I ask is that the questions that you submit have to do with today’s material that way they’re able to get to everybody’s questions today.
The handouts are currently available through the webinar portal. You can go right next to the Q & A section, to handouts and download it there. If you happen to be listening on your phone and you can’t easily download a PDF you can certainly wait for the handout to come to you by email.
And as always, this session is being recorded and we will give you instructions on how to get the replay at the end. Stay until the end of this session. There are some, some big aha moments that federal employees have in our workshops with this specific topic that we’re talking about today. I want to make sure that you have the full story, so don’t leave halfway through, listen to the end because you are going to be quite surprised. So of course, I’m your presenter, Chris Kowalik. I am the founder of ProFeds and the developer of the FedImpact Retirement Workshop. Of course, I’m also the host of the FedImpact Podcast. Many of you are hearing our webinar today because you heard about us on a podcast and vice versa. If you haven’t listened to those podcasts, you can go to fedimpact.com/podcast and see a list of them on our site. Or of course you can look up the fed impact podcast on any of your favorite podcast platforms.
Again, our support team is standing by to be able to answer your questions. Please submit those in the Q & A area.
Today’s topic is all about the last paycheck versus the first retirement check and what that transition really looks like. How can you expect your pay to change once you retire from federal service? This is such an important topic because it’s one that will hit you squarely upside the head when you go to retire and we don’t want there to be any surprises. For our agenda today, we’re going to talk about income and how that changes when you retire. Talking kind of about your gross income and then the expenses. Which expenses go up and which go down in retirement and I’ll give a little bit of a hint here. Some of them will magically appear. Expenses that you didn’t have while you were working that will show up in retirement too.
Lastly, we’ll talk about the shortfall that you can expect when you go to retire and how you can fill the income gap. And there are a lot of different ways, but there’s a catch for pretty much every one of them. We definitely want you to stay tuned for the whole message today. As I normally do in these webinars, I have to talk about what this webinar will NOT cover. I’m going to be talking about things like a starting pension and the Special Retirement Supplement (SRS) and the life insurance and the health insurance and TSP and all these different pieces. But I am not going to go into the detail of how each of those individual components are calculated.
That would be a really long webinar for us today. That kind of detail of course, is covered in our workshops that we do our in-person sessions and even in some of the webinars that we’ve done, but I’m going to cover a little bit more of the wave tops or the treetops of the material so that you can get the big picture of what’s really happening. And then I’ll give you an opportunity at the end to have some one-on-one help that I think most of you desperately need as you’re approaching that retirement window before you make the commitment to retire. Very, very important. You’ll have an opportunity to dig into all of your numbers and, and see all those calculations, but for now I want you to stay really focused on really absorbing the message that I’m going to share with you today.
Let’s talk about while working what your paycheck includes. Of course, we have your salary. Some of you might have some special income as well. We may add that to your salary as far as income goes then we have deductions. There are a slew of deductions that happen out of your pay. If you haven’t looked at your pay stub in a while, take a quick peek because you are going to see lots of these coming right out of your check. Of course, we have federal and state income tax. We have Social Security tax Medicare, of course we’re all going to pay for that. No matter which retirement system you’re in, we do have the CSRS or the FERS program, (whichever one you happen to be in), you’ll be contributing to that. Then of course, TSP contributions. Now this is not necessarily an expense, but it kind of feels like an expense sometimes because it is leaving your paycheck and you are not able to spend it. Even though you’re saving it for the future, it kind of feels like an expense while you’re working.
Next up, we have the federal employee’s health benefits program and a subsection of that is the Federal Employee Dental and Vision Insurance Program (FEDVIP). Each of those are what we call pre-tax meaning the money that you use to pay those premiums is not considered taxable income to you while you’re working. Then we have the life insurance under the Federal Employees Group Life Insurance Program (FEGLI) and the Federal Long Term Care Insurance Program (FLTCIP). This is a pretty good list of the types of things that would be normal for federal employees to have on their paycheck.
Next in retirement. So here, we’re talking about your retirement check. Now we’ve got your pension. If you’re under the FERSprogram and you’re under 62 and meet all the rules, you may qualify for the FERS Supplement and Social Security could be another source of income. Of course, Social Security is not included in your first retirement check, but a method of income in retirement. Next up, we have deductions just like we did before we know we’re going to have federal and state income tax, but I’ve got some good news. You don’t have to pay Social Security tax or Medicare tax as a retiree. That’s only on earned income that you have, so a great little perk there in retirement. You’re also not going to be contributing to your respective retirement system, whether it’s CSRS or FERS and you’re no longer going to be contributing to the Thrift Savings Plan.
Many of you would look at this and say, well, gosh, if I don’t have to pay for those things, my pays going to go up in retirement, not so fast. We’re going to have the health benefits and the dental and vision program. That’s still going to come out of your pay. But here’s the first catch that you’re going to see in retirement. And that is when you step into retirement, you now have to pay those premiums with after-tax money. We’re going to look at an example today and I’ll point out where that’s happening, but important for you to know that whatever you’re using to pay that FEHB premium, for instance, whatever income you’re using to pay that it’s not considered income right now for tax purposes, but it will be considered income in retirement.
Next up is FEGLI. Of course, we’ve got the life insurance, then we’ve got the long term care insurance program. And then the benefit that kind of appears in retirement is Survivor Benefits. So that’s a way to protect a portion of your pension for a surviving spouse. Of course, for those of you who are married. We’re going to do a case study today so that you can have an appreciation for how these things play out in real life. Obviously this is a made up person, but we’re going to talk about Mike and Mary. Mike is the federal employee. He’s a regular employee (so he’s not law enforcement, firefighter or air traffic controller). They have some different rules, but for Mike he’s, he’s a regular FERS. Mary is his wife. She’s also working, but they really want to retire about the same time.
She’s kind of look looking to Mike to say, Hey, you do it first. Let’s see how it goes. And then maybe I’ll follow suit here soon. Mike is going to be 60 years old when he retires and he will have 30 years of service at that time. He’ll be fully-eligible. He’s 59 now he’s going to turn 60 and be ready to, to go at that point. Or at least he thinks he’s going to be ready to go. I guess we’re going to see how the numbers shake out for Mike and Mary. So Mike, once he gets to the end of his career, he’s going to finish up his federal career with an ending salary of a little over a hundred thousand dollars, so $101,790. The big question for Mike (and probably Mary) is how does his last paycheck compare to his first retirement check?
Right? That’s of course the whole topic we’re talking about today, but it’s a fair question because someone who like in Mike’s case is a six figure earner. They’re probably used to the kind of income that, that allows their family to live on. Right. And him and Mary, they don’t live a lavish lifestyle. They’re comfortable, but nothing extravagant. They’re able to pay their bills. They’re able to, to, you know, dine out every once in a while, you know, those type of normal things, but he is wondering what’s that next paycheck really going to look like? That’s what we’re going to cover today.
Case Study data
So here’s our case, study data, a couple of things we need to know here. The first is that Mike has to contribute to Social Security, Medicare, and furs while he’s working. Not a surprise to anybody.
Those, those are, are not voluntary contributions. Those are mandatory contributions to those three plants. Next he’s been contributing $27,000/yr to TSP. He feels like he’s done a really good job, socking away, as much as the government would allow him to do. And he’s been able to amass $500,000 in his TSP. He took the stance that it was probably best that he leave it all Traditional. Maybe he didn’t really understand the Roth side and how it worked. But he just said, I’m going to dump as much money as I can. I’m going to make it all Traditional, no Roth. And he took the tax advantage right up front while he was working. That’s going to be an important factor that you’re going to see today.
A little bit more about Mike and Mary they’re under the Federal Employee Health Benefits Program (FEHB). They are under that Blue Cross Blue Shield, the Self Plus One plan (the high Self Plus One plan under Blue Cross). And as far as the life insurance, you know, Mike has made it very clear that he wants to make sure if something were to happen to him, that Mary is taken care of. All of ther children are grown, but he still, you know, wants to make sure she’s all good to go if something should happen. He’s maxed out on the kind of life insurance that he could have on his own life. That is the Basic, Option A and Option B times five. At this point, Mike doesn’t have any coverage under the Federal Long Term Care Insurance Program. He’s not really bought into the idea that a long term care event is going to happen to him. And he’s just crossing his fingers and hoping that that’s not the case for him.
Comparing last paycheck to first retirement check
Here’s what we’re going to do. There’s a lot on this slide that I want to share with you. I’m going to ask you to focus your attention so that we can all follow along. Unfortunately the animation that I’m normally able to do in some of our slides where we build the slides one line at a time is not working in our platform today. Unfortunately, we’re just going to have to look at the whole slide and hope everybody pays nice and special attention to what I’m covering. On the left hand side, we’re going to review Mike’s last year of work and what his income is, what the expenses are. And we’re going to go line by line, and then we’re going to compare that to his first year of retirement when he’s 60. Again, left hand side of the screen – last year of work.
Last year of work
I’ve already shared with you. His final salary was $101,790. Of course, he doesn’t receive a pension or this Special Retirement Supplement (SRS) at that point because he’s still working. He hasn’t retired yet. Now we get into the not so fun parts like taxes. He’s going to have his federal income tax. Him and Mary are married, filing joint on their tax return and they’re in the 24% tax bracket. That’s going to be important because remember Mary has income too (that’s going to add to Mike’s). Then we have state tax. They’re in a state that has a flat 5% tax on all income. We know that Mike has to contribute to Social Security and Medicare as well. Total, we’re looking at $7,210 for the year for those two programs combined.
The lower amount that we’re seeing here is actually the amount that Mike contributes to the FERS program. He contributes 0.8% of his total salary into the FERS system (so a total of $814). Like I mentioned, a few minutes ago, he is maxing out his TSP contribution at $27,000 for the year. And remember all of that is Traditional. Now on the life insurance side, remember he’s maxed out FEGLI for what he can have on his own life. His premium is $2,856 and the health insurance that they have with Blue Cross Blue Shield is $7,530 per year. As an employee, Mike does not pay anything for the Survivor Benefit Plan (SBP). Technically, it’s enforce if he were to pass while he’s still working, but he won’t begin to pay for it until later.
Before we move to the right hand column, we want to look at that very last number that we see in blue. So Mike’s initial take home pay is $45,344. What this means is that when he gets paid on the federal side and all the things are removed from that, that he’s going to bring to his checking account, $45,344. That is what Mike and Mary are using for their standard of living. That’s what they pay their mortgage with, their rent, their car payment, their car insurance, electricity, gas, groceries, all of the normal things that one would need to maintain their lifestyle. Again, nothing extravagant here, but they need ~$45,000 because that’s what they’ve been able to work their budget to fall under.
Now we’re going to switch gears. We have Mike in retirement mode and instead of receiving a salary, he’s now going to receive a pension. Well, that pension is significantly different than what we’re seeing on the salary side, right? We go from a salary of ~$101,000 to a pension of $30,000.
On top of that, we also have the Special Retirement Supplement (SRS), which is a little over $9,000 for the year. That’s a nice little perk before he is eligible for Social Security a couple years from now. And then, of course, we have to get into some of those obligations. We have federal tax on the surface. It looks like taxes sure went down in retirement, but the story’s not over yet. You’ll see how that’s probably not going to be true for most people, (and at the state level as well). Again, seeing that, that income tax at the state level drop to $1,818 for the year. And then we have three pieces, like I mentioned before that he will no longer have to pay. Social Security tax, Medicare tax, the FERS contribution and the TSP contribution.
Looking at that, you’re like, okay, there’s $7,200, there’s almost a thousand, there’s $27,000 of things that I had to pay for while I was working that I don’t have to pay for now, surely things are going to be better, but here’s where things get a little bit interesting. And that is when we get to the life insurance. Remember, Mike was intent to make sure that if something happened to him, that Mary was going to be okay and he needed some life insurance to be able to do that. And he chose to do that through the FEGLI program. While he was working, he paid $2,856 a year for the FEGLI, but immediately when he steps into retirement, his premium goes to $8,700. This is him trying to keep all of that coverage in force for the duration of his lifetime. There are some other options that he could choose in there as far as how FEGLI would work. But if he’s trying to keep all this coverage, this is the premium that he would expect to pay. On the health insurance side, we’ve got $7,530 while he is working and we’re going to see a slight increase.
Presumably we’re moving into a new year. We can’t always make all these examples perfect. But the $7,820 would simply be a natural increase for the next year’s premium. So, that 78, 20 is 3.85% higher than the previous year. That is the 10 year average for FEHB premiums. And last the survivor benefit plan. Remember while he was working, he didn’t have to pay for this, but in the event that he steps into retirement and he wants to protect half of that pension that he has half of the $30,000 for Mary so that when he dies, she gets $15,000. He’s going to have to give up 10% of his pension to have that coverage in place. So that’s $3,000 in the year that he is going to have to put towards that program. When we take the income in retirement and we subtract out all these obligations, it leaves an initial take home pay of $14,057.
What this means is if we allow everything to operate just like we described, we are going to have a $31,000 deficit in their standard of living. Because remember the take home pay is what’s used to fund the budget, right? The things that they do, the things that they have like a house, electricity, all of those normal things, right? We’re not talking about fun things they’re doing. This is just maintaining their lifestyle. Initially I have a feeling, I know what you’re thinking. I’m not a mind reader, but I’ve read enough minds in workshops to know that many of you have an idea of where you’d get that extra income and that’s where the catch comes into play. Let’s talk a little bit about what’s missing from the table that we just reviewed. What have we not accounted for?
What have we not accounted for
Well, for, for starters, we don’t have any long term care coverage. If Mike decides to get it, of course, that cost will vary based on the kind of insurance that he gets or in the event that he or Mary need care. Of course, that’s a whole different conversation because long term care is quite expensive as far as receiving the actual care and paying out of pocket for it. So in the event that one of those things happen that sure can rock a retirement plan for most people, if there’s not a plan in place. Next up, is Medicare part B. Of course we don’t have it on the previous table because this only happens at age 65. That’s when you’re initially allowed to enroll in part B. He’s got a few years before he’s going to be able to do this, but if he chooses to enroll in part B, it’s going to cost about $2,000 a year per person to have this coverage in place.
The next thing that we’re not taking into account are those unexpected expenses, right? Major repairs, you have a repair to your home that’s not covered by insurance. You have to replace a vehicle that was old and needed to be replaced. You have medical bills, whatever that might be. That can really cause some budget issues for most people. Now here’s a topic that’s near and dear to all of our hearts right now, which is inflation. It is causing the cost of living to go up, right? So we’re not talking about your standard of living going up, just the cost of living. Everything’s getting more expensive. We all feel it, food, gas, housing, all of the things that we all typically pay for gets more expensive. Next, is loss of income when Mary stops working, remember she really wants to retire about the same time as Mike does. We haven’t taken into account any of her issues as far as income and expenses and those obligations. That’ll be, that’ll have to be part of the full conversation, but for now, we’re just kind of laser focused on Mike.
We’re also not taking into account any of the fun things that they wish to do in retirement. Remember this is just living their regular lifestyle, but what I always share with folks in our, in our webinars and podcasts and workshops is you have eight extra hours a day to spend money in retirement. So you better have some on hand to be able to do the things you want.
And the last thing, and probably the most frustrating thing for most people is how long it will take OPM to get everything straight. For those of you who have been paying attention to what happens with OPM throughout the years. We see a retirement backlog that takes oftentimes, if you’re lucky, maybe three months to get your retirement application processed, but we like to share with employees to expect 9 to 12 months, just to be on the safe side in the event that you get in the wrong line at OPM, or that there’s a lot wrong with your retirement package, that has to be fixed.
There’s a lot that we haven’t even accounted for, even though that slide was chocked full of all those numbers and thinking of all the things that are going to come out of your paycheck in retirement.
Addressing the income shortfall
How do we address the income shortfall? When we’re thinking about Mike and he’s looking at these numbers, he’s trying to figure out how do I fill the gap of $31,287? How do I do that? Where’s that money going to come from? Well, there’s a couple of things that they could consider. Some will be popular. Some will be very not popular. The first is they could lower their standard of living. I don’t think Mary’s going to buy it, but that is an option. That’s not where most people want to go. In fact, we ask in our workshops, we ask for a show of hands who would like to lower their standard of living in retirement and nobody ever raises their hand. Right? Most people want to increase their standard of living in retirement.
The next option is they could use savings. If they have cash, you know, they got 31 grand land in the bank. They could take that and use it, but then it’s gone, right? And that’s just one year of a gap. What happens the next year and the next year and the next year after that.
Another option that Mike is not thrilled about at all is working longer. We’re like, Hey, Mike, if you just stick around for a couple more years, you’re going to have more pay. You can contribute to TSP more. And if you can make it to 62, you even get an increase in your pension. Man, like all things point in the favor of working longer. Except Mike is like, no, I am not interested in that at all. Now the idea of maybe getting another job, tweaks his interest a bit, but Mary’s not excited about that because remember she wants to retire at the same time he does so that they can go enjoy life and not have to worry about a job.
Now here’s where I think most of you were thinking that money was going to come from. Well, shouldn’t Mike just take it from the TSP. He’s got $500,000 there. Take the ~$31,000 out of that. Well, that’s okay on the surface, but if Mike needs $31,000 of income, how much does he have to take from the TSP? If you said $31,000, you’re wrong. Because remember this is all Traditional money. He’s not paid tax on any of this yet. Once he starts tapping into that TSP, he has to account for the taxes that he’s going to owe on that money when it comes out. He’s going to have to take out more like $42,000 of income to be able to have $31,000 left over after the taxes are paid.
Controlling the expenses
Now, if we can’t fix the income, how do we maybe control the expenses? That’s a good question, right? It’s not just about making more. It’s like, well, can we control some of the things that we’re spending our money on? Well, let’s take a look. We’re going to kind of cycle back to the original slide and we’re going to look to the right hand side. These dots were built in my animation, but unfortunately it’s not working today. In our first year of retirement, we know we can’t control the salary, right. Unless of course, Mike wants to go get another job, but then he’s going to incur Medicare and Social Security tax and all those normal things and regular federal and state income tax as well. If we’re just going to look at the federal stuff, let’s see what that looks like.
Next up, we’ve got the pension. There’s not really a whole lot we can do to influence the pension if, in fact, Mike wants to retire right at 60. But if he were to work a little bit longer, you know, every little bit helps, I suppose, he’s doing a number of things. He may increase his pension and he’s working at that higher salary for a longer period of time. His high-3 continues to go up. The number of years of service he’s putting into the pension, the pension formula, right? All of those details of the pension that can really make it better.
Next up is the Special Retirement Supplement (SRS). Now this is one that he would receive from 60 up through the age of 62. Once he hit 62, this benefit will stop when he is eligible for Social Security. There’s not really a whole lot that he could do to increase this number.
But let’s talk about decreasing some of the expenses, like how might we control some of that? Well, on the federal tax side we, we see this $3,965 that he is paying out of his federal pension. The, the number here, I mean, if it’s pension money, it’s going to be taxable. There will be a small, small minute insignificant portion of that pension that’s not taxable, but consider the entire thing taxable for all of your planning purposes. For federal retirees, there’s always going to be a federal tax obligation, because that pension is always going to be taxable. But we can keep that number from being higher by having other sources of income that aren’t taxable. We look to things like the Thrift Savings Plan. Well, if all of that’s Traditional money, it’s all going to be taxed. When it comes out that had some of that been Roth money, we would have an option to take some tax-free money out of that account and manage the taxability that we have in a given year. We might not eliminate the tax altogether, but we can keep this $3,965 in this $1,818 from getting bigger. Of course we love these zeros for Social Security, Medicare, FERS, and TSP contributions. We like to see that, and then we get to the nitty gritty here.
So let’s talk about FEGLI. Remember that Mike has all of the life insurance that he could have on his own life. He is going to pay $8,700, per year to have that coverage in force. Well, had Mike taken a little bit of an earlier look at life insurance in the private sector, he may have been able to get that kind of coverage in force and keep his premium the same. Now there’s no guarantee we don’t know what Mike’s health looks like. But at 60 years old, it becomes more difficult to qualify for life insurance. It’s not impossible, but it certainly becomes more expensive. The later that you wait to get it. In hindsight, Mike says, man, I should have really looked at that life insurance in the private sector, you know, five, 10 years ago. Or as early as possible.
Next is health insurance. There’s not going to be a whole lot that we’re going to be able to do to protect, or lower that $7,820. You guys have a pretty good deal with FEHB.
Last step we have the survivor benefit program. This is the benefit that at retirement he’s going to pay $3,000 a year for, to protect half of his pension for Mary. It’s possible that he could have done that with private life insurance as well to either supplement or perhaps replace the entire survivor benefit plan. There’s a lot of complexity there. It affects other benefits like FEHB for the spouse, so we want to be very careful that we take the benefit that we need to, to protect FEHB for Mary in the event of Mike’s death. But there are some things that we could have done or that Mike could have done to have put himself in a better position so that if he needs to be able to tap into TSP or lower the expenses that he has on things like FEGLI and Survivor Benefits that he could have done that with a little bit of foresight into the future.
The transition period
Next step, let’s talk about this transition period. It is going to take OPM several months to finalize your retirement application. We mentioned a few minutes ago that you might be lucky and get it done in 3 months. Chances are, it’s probably going to be 6, 9, 12 months before everything is really done with your retirement application. So while your application is sitting in a file cabinet at OPM during this time, you are going to receive roughly 60 to 70% of your gross pension with the only thing being withheld, being federal income tax. We’ll tell you what happens to the other 30 to 40% here in just another slide. During this time where you’re receiving these kind of special payments, what we call interim payments, you will not receive this Special Retirement Supplement (SRS). This seems like a bum deal for anyone retiring, who is eligible for the Supplement.
But in reality, it is payable to you. It’s just that OPMs not going to pay it out during this period. You’ll eventually get the money when your retirement application is finalized by OPM. So all of those missed payments, all those missed months that they should have paid you, they will get it to you, but I’ll tell you it doesn’t do you a whole lot of good when you need to pay bills when OPM writes you an IOU.
Obligations payable from your retirement check
Let’s talk about the benefits payable from your retirement payments. We already know about all these benefits, right? We’ve already talked about them today, but I want to walk through the different stages of your retirement application being processed. On the far left hand side, and please follow along with me so that, that your brain is connected to what I’m sharing with you today.
The far left hand side shows all of the obligations as far as coming out of your retirement check. And that second column says paid from initial interim payments. Remember, OPM is going to pay you 60 to 70% of your expected pension. When they’re paying you those payments, the only thing that’s coming out of them is federal income tax. Convenient, I know since it’s a federal government, that’s paying you, but they’re not going to pay any of these other obligations. If you are in a state that has state income tax, you’re going to need to pay that out of pocket check with your state. Most of them require quarterly payments. Next, if you have the dental and vision program or the Federal Long Term Care Insurance Program (FLTCIP), you’re going to have to pay those out of pocket along the way until everything catches up.
You’ll notice that Survivor Benefits, FEGLI and FEHB don’t have anything listed there in that second column (paid from initial interim payments). And that’s because that’s what the 30 to 40% is being withheld to be able to pay, because remember OPM doesn’t know what choices you’ve elected until they finally pull your application out of the filing cabinet and begin to process it. They’re not doing that for 9 to 12 months, it’s just taking that long to get your application out of the filing cabinet. But in the meantime, they weren’t really sure what you elected. Did you pick the Survivor Benefit? What did you plan to do with your life insurance? What about the health insurance? Are you keeping that, are you dropping it? Are you switching plans? They don’t know any of those things yet. So they’ve intentionally reserved 30 to 40% of your pension so that they feel like they would have enough to pay for each of those three benefits, Survivor Benefits, FEGLI and FEHB. Now once OPM has finalized everything and you get a normal, accurate retirement check, you will be able to pay each and every one of these obligations directly out of your check. Just like you’re doing right now, right? You’re not having to deal with all this mess as an employee. You’re now in retirement, going to be able to have a nice, simple transition.
What I’ll share with you though, is that this is a giant mess when it happens. When you have to figure out like, well, who’s supposed to pay, what, and how do I pay it out of pocket? Are they going to send me a bill? Do I have to contact them directly? Is this something I should be worried about? Does OPM take care of this? Those are all kind of frantic questions that you might ask yourself in retirement. And you want to make sure that you know the answer before you go into that realm of your life.
Mike’s interim payments
Now we’re going to talk about Mike’s interim payments, because we want to put some numbers around what we just talked about and make some observations. If he has $30,000 a year on a pension on a monthly basis, that’s $2,500 per month. And remember, as a retiree, you’re going to be paid monthly.
We know that he’s going to receive 60 to 70%. We’ve shown 60% here just to be safe. He’s going to get these interim payments of $1,500/mo. Out of that, he has to pay us federal taxes that’s automatically going to be withheld at $150/mo. And then the state taxes on $1,500/mo would be $14 a month. And he’s going to have to pay that directly to the state.
Remember, he’s got those benefits, FEGLI, FEHB, and Survivor Benefits that OPM has held in reserve (the 30 to 40%). Again, we’re going to show 40% being held in reserve (again, just to be safe here). For FEGLI, the cost during that time, even though he’s not paying it directly, the cost is still there, and it’s $725/mo. For FEHB it’s $652/mo. For Survivor Benefits, it’s $250/mo. Now I’m no math genius. But when we add up $725 and $652 and $250/mo it doesn’t equal a $1,000. It’s $1,627. That means every month that Mike is in this interim status, he has $627 of premium that he’s going to have to find when OPM finalizes everything, because the bucket that they’re going to have that orange held in reserve bucket that we’re showing here on the screen, that won’t be large enough to pay for the three benefits that it’s supposed to pay for FEGLI, FEHB and Survivor Benefits.
But I’ve got to add a little salt to the wound here, unfortunately, because it’s not bad enough that he now has to find $627 a month to come up with that money to pay OPM when they finalize everything. On top of that, the money that’s used to pay the FEGLI and the FEHB premiums is taxable. He’s going to have more in federal and state income tax that he’s going to owe because of those premiums that will eventually paid from that 30 in this case, 40% that we’ve held in reserves to be able to get that tax payment over to the federal and the state side. I don’t love being the bearer of bad news, but I feel an obligation to make sure that feds are aware and really appreciate what is happening at this moment in their life. Because stepping into retirement can be scary for a lot of reasons, but it’s a whole lot scarier when you don’t know your numbers and you don’t know what is going to happen to you and your finances when you make the leap.
When you know your numbers…
Having said that, I have to share something that we say in every one of our workshops. And that is, “When you know your numbers, your decisions become more obvious.” Too many people take the kneejerk reaction and leave federal service because they hate their boss, they’re not real thrilled with their coworkers. Maybe the mission has changed, competing with family commitments, whatever it might be. But if you don’t know your numbers before you step into retirement, you are likely going to be surprised and not in a good way. Do yourself a favor, know these numbers.
Here are some of my observations, figure out your numbers. Now, don’t guess don’t wing it. Get some figures, pen to paper and figure out what it takes to run your household right now, compare that to your take home pay. Hopefully you have more take home pay than you have obligations. And then you’ve got to get these numbers of what things are going to look like in retirement, which naturally would be a little bit more difficult for you to do, because you’re not exactly sure what that’s going to look like, but we know what it’s going to look like because we run these numbers all the time.
Identify the decisions that you need to be making today to give you better control in the future. How do you control those life insurance premiums? How do you control your tax obligation? All of that, those are our big items in retirement and terribly expensive if you’re not paying attention. But where do you get this help? Well, I’ve got a couple of hints for you. It’s not your HR department. It’s not a cool Facebook page that you like or a group that you’re part of. And it’s not your friend in the office. These people are not qualified to provide this type of planning advice to you. You need to be working with a financial advisor that actually knows what they’re doing in working with federal employees. That’s the long and short of it. You guys can pretend that you don’t need financial advisors.
You can, you can use every reason in the book not to go that direction, but these are the very people that have the answers to the questions that haunt most retirees, whether they’re federal employees or otherwise, you’ve got to get some help. Don’t be bashful. Don’t be stingy, right? Get the help that you need. Give them the information so that you can have your numbers locked in and you know exactly what to expect.
Double-checking your retirement math
To do that, you’ve got to double check your retirement math. That’s what today’s session has been about. How do we get all this math to make sure that, that things come out the way we expect? Are you prepared to address that retirement math problem? Most people are not prepared to answer this math problem on their own. They need some help. Do yourself a favor, attend one of our workshops.
We pour a lot into these sessions with real world examples, a little bit of levity with some comedy in the sessions. Our speakers really love what they do, and they want to be able to share that with as many federal employees as we possibly can. Now, the good news is there’s no cost to attend this training. You’re able to attend any of our community based sessions at no cost, and we cover all of the federal benefits topics and the decisions to be made. But here’s the really great part about this workshop is at the end, you get an opportunity to ask for one-on-one help. If you want that kind of help, if you want to be working with a financial professional who understands how federal benefits work and is connected to us to make certain that if there’s anything wonky out there that we can help figure it out and get everything straight, then you have the chance to be able to do that right at the end of our workshop.
They’ll give you a chance to be able to meet there’s no cost to do so. And see if that kind of help is really what will put you in the right direction for retirement and all the preparedness that we want you to have. You can see all the details at fedimpact.com/attend. I highly encourage you to do so.
Now, handouts and the replay for today’s session, they will be available to you. If you’re not able to, to download the handouts, now it’ll be emailed to you. And the link to the replay will be included.
Our next webinar topic, we always announce our next one at the end of our current one. This is going to be a really timely topic because we’re going to talk about record high COLAs and pay raises, but with a catch.
There’s always a catch when it comes to stuff like this. Many of you have been paying attention to the high colas that have been in the news and what the idea of the national COLA is going to be for retirees next year. And just today the pay raise was announced with President Biden. We’ll see what ends up shake out of that pay raise, but there’s always a catch and it is my job to make sure that you know what the catch is. You’re going to figure out how you may qualify for one, both or neither one of these increases for 2023. Join us on October 14th. You’re able to register for that webinar right now by going to fedimpact.com/webinar.
Well, thank you guys very much for joining us. Again, to find a workshop, please go to fedimpact.com/attend and for our next webinar on record high COLAs and pay raises, please go to fedimpact.com/webinar. Thank you guys very much. And we’ll see you next month on October 14th, take care.