Delivered on: Thursday, May 27, 2021
To Watch on YouTube, CLICK HERE
Federal Law Enforcement Officers (LEOs)
Breaking down the unique retirement complexities of federal LEOs
- PENSION: explore various ways that LEOs are treated differently than regular employees for eligibility and in the pension calculation
- SUPPLEMENT: determine when the SRS is paid to LEOs and how future earnings may affect how much you receive
- TSP: uncover the special rules that allow you to access TSP early with no penalties
- OTHER PLANNING: review the various planning considerations unique to LEOs – and what to do if you’re not ready to stop working at mandatory retirement
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Prefer to read instead? Below is a transcript from the video:
Welcome to today’s webinar, exclusively for federal law enforcement officers. Now, this topic is one that is near and dear to my heart. I happen to be married to a federal law enforcement officer, and so I hear about all of the strange questions and the rumors that fly around about how these things work, how you’re different from regular employees, and we wanted to set the record straight today.
I’m your presenter today, Chris Kowalik. I’m the founder of ProFeds. I’m really delighted to be able to do this training, not just the webinars that we do, but all of the different types of training on all these different mediums that we have for federal employees.
You might read one of our articles or listen to our podcast, come to one of our workshops, lots of different ways that we try our very best to help federal employees get a clear grasp of what retirement is going to look like and some of those unique complexities that apply to them.
Federal Law Enforcement Officers
Remember today’s session is all about federal LEOs and breaking down the complexities of the specific retirement plans that you have. There are minor differences that make a huge impact to the end result of your pension and several of your other benefits that we’re going to be focusing on today.
Agenda
Our agenda, we’re going to review each federal benefit that is specifically affected by your LEO status. As a bonus, we’ll add in some that have a good by-product because you’re LEOs but aren’t necessarily because you are LEOs. I’ll point those out as well.
In each of these categories, these are the main things I’m looking for. What is it about the LEO status that makes a particular benefit behave differently? What impact does it have on you? And is there anything you can do to leverage it further? If we can look at all of these benefits through those lenses, then that will help us to know how to maximize everything that you have available to you.
In this session, we’re assuming that everyone has a baseline understanding of the federal benefits, but of course, a 30 minute webinar is never designed to be all-inclusive. So we’re having a general belief that everyone has this understanding of the federal benefits structure, at least to some degree. And then we’re simply pointing out where LEOs are different.
Retirement Contributions
Let’s start with retirement contributions. You know that you’re working for a pension. The entire law enforcement community is required to contribute an extra 0.5% of their pay into FERS as compared to a regular employee. Whatever regular employees have to contribute, you have to contribute an extra 0.5%. It used to be that we could simply say regular employees contribute 0.8% and you all contribute 1.3%, but that’s no longer as easy to say.
The reason is in 2013 the law changed that required regular employees to contribute a whole lot more than the normal 0.8% that they had contributed for all of the time back to when the program was created in the mid ’80s. Anyone hired as a regular employee in 2013 has to contribute 3.1% of their pay. Of course, as a LEO, if you were hired in that 2013 mark, you have to contribute an extra 0.5% or a total of 3.6%.
If you happen to be newer to the game and were hired 2014 or later, as a LEO, you contribute 4.9%. A much bigger ask of you on the front end of this to fund the pension that you’ll ultimately get.
I suspect the majority of you who are nearing that retirement point and you really want to get things dialed in, I suspect you were hired prior to 2013. Probably safe to say that we’ll be using that 1.3% number a couple of times today, but we didn’t want to leave out these other groups in the event that you’re trying to really get ahead of the game much earlier in your career.
A special note, you will only pay that extra 0.5% on the types of pay that count for retirement purposes. There’s lots of different types of pay that you can get, but not all of it counts for retirement purposes or what we would refer to as the high-3 calculation.
That’s what’s going to be dumped into the retirement calculation. We’ll see that high-3 slide here in just a moment. But before we get to that, let’s talk about the specific type of pay that LEOs receive or that at least most of them receive.
Types of Pay Included in the High-3
Most of you all are receiving either Law Enforcement Availability Pay or what’s referred to as Administratively Uncontrollable Overtime. I love the way the government names things. Whether you’re getting LEAP or AUO, both of those will count for high-3 purposes.
There are certain groups of law enforcement officers that don’t receive either one of them. They may receive other types of pay given the circumstances of the position that they’re in and the kind of work that they do, and we’ll have to determine whether that special type of pay counts or not. We’re going to show you a pretty important example here in a bit.
But to give you an example, probation officers. They’re law enforcement, but they don’t get LEAP or AUO. It doesn’t make them not law enforcement officers, they’re just not receiving this extra pay.
Of course, there’s all these other types of pay as well that can be included for high-3 average purposes. We, of course, wanted to point out LEAP and AUO, because LEAP is super unique to you guys, and then AULO, lots of different types of employees can have AUO, but we see it pretty often in the law enforcement community.
Pay Included in High-3… but NOT…
When we look at the types of pay included in the high-3, all of these things on the left-hand side get included. If you’re receiving, of course, regular pay, locality pay based on where you live, LEAP, AUO, certain types of premium pay can count, market pay for physicians that make a boatload of money, environmental pay, and then night differential.
Very important, if you’re a LEO receiving night differential pay, know that it only counts for wage grade employees. We always want to be really careful with all these special types of pay because some count and some don’t.
Everything on the right hand side of this list, these are specific types of pay that OPM has called out that said, “These do not count for high-3 purposes.” If you’re receiving any type of retention pay, your agency really loves you and doesn’t want you to leave and they’re giving you some extra money, I call that a bribe, but apparently the government doesn’t, that doesn’t count for high-3 purposes.
If you leave the United States and you go to Kuwait for five years, you go to Germany, or wherever it might be, you’re going to not get locality pay. Now you’re going to get overseas COLA. That overseas COLA does not count. In essence, if you’re doing that at the very end of your career, you’re stifling the locality pay that you’re receiving because that positively influences your high-3. The more you make, the higher the locality pay, the more money that puts in your pocket.
But if you’re going to give up that and go overseas in your final three years of service, you are not continuing to increase that high-3 over time. We see this quite often, actually, with law enforcement officers who take positions overseas for various reasons. But we want to make that really clear, overseas COLA never counts.
Any military pay. If you’re a military retiree, you plan to be a retiree, you’re getting VA compensation, whatever that might look like, none of that counts for high-3 purposes. It’s not to say your military service can’t count in the calculation of your pension. That’s a different conversation. But as far as the pay you receive, that does not count.
Now, regular overtime. You’ll notice it’s on the same line as your AUO on the left-hand side. That does count. But here we’re talking about regular overtime. A lot of employees years and years ago were banking on this over time at the end of their career to elevate that high-3. And really, I mean, it was disproportionate to the rest of their service. It was really being abused. They made that adjustment a long time ago that overtime did not count.
Now, premium pay again, premium pay (select types) is on both sides of this list. There’s agencies that are inconsistent with the way that they label pay. We want to make sure that you know the type of pay that doesn’t. I’m going to show you a trick here in just a moment. But it is important, just because it’s premium pay doesn’t necessarily mean it counts or that it doesn’t.
Now bonuses, you get any kind of bonus: end of year performance bonus, those types of things, none of that counts. Great that you get it and it feels good in your wallet, but it is not going to count toward the high-3. Same thing with cash awards and a relocation allowance. If your agency pays you to move your home to another location, great that you get it to help offset those costs, but none of that counts for this particular purpose.
Types of Pay Included in the High-3
Let’s talk about the types of pay in the high-3. Sometimes you get a pay stub and you’re looking at these special types of pay and maybe it’s not listed on the list that I just gave you.
On the left-hand side, let me clarify and really hone this in, and that is that if you receive any kind of special pay and you’re not quite sure if it counts for high-3 purposes, I’m going to encourage you to do the backwards math.
We’re going to walk through an example here in a moment, but doing the backwards math is going to tell you exactly what type of pay on a pay stub counts for high-3 and what doesn’t. But you have to remember that you are required to pay the extra 0.5% towards retirement on any pay that counts for high-3 purposes.
Again, for most FERS LEOSs that’s a total of 1.3%. That’s the example that we’re going to use. To be clear, you don’t pay any retirement contributions on pay that doesn’t count for the high-3. It’s only that type of pay that we saw on the left-hand side of the screen in the previous slide.
Look to the right hand side. Here we have just a down and dirty example here. If you’re looking at your pay stub and you see your regular pay of $4,807 for that pay period and you see this other type of pay that maybe is coded weirdly or the name just doesn’t make sense or it wasn’t on the list that I showed you a few minutes ago, and you see that that other pay you’re getting $224.62.
And you say, “Huh, I wonder if that type of pay counts for the high-3?” Well, little further down that pay stub, you find your retirement contributions, the contributions you’re making into FERS. Let’s say on that line it shows $62.50 going to FERS.
And you’re like, “Well, great, Chris, that doesn’t help me to know what I’m supposed to do.” Well, you need to ask yourself this question: that $62.50 that I see on my pay stub that’s going to FERS, that’s 1.3% of what number?
Here’s where the backwards math comes in. We’re going to take that $62.50 cents, we’re going to divide it by 1.3%. And that tells us $4,807.69 is what that retirement contribution was based on. We see, of course, that’s your regular pay at the top, which would mean that that $224, that type of pay that’s on your pay stub will not count for the high-3.
This is a handy little kind of cheat that you can do because it takes a lot of the ambiguity out of what counts and what doesn’t. If your retirement contributions are not coming out of that type of pay, then it will not count for the high-3.
Hopefully, you liked that little trick. Maybe you’ve seen it before, but want to make sure everybody knew how to just do a down and dirty look right at their pay stub and know what types of pay count and what doesn’t.
Full Eligibility
Let’s talk about eligibility. To be fully eligible to retire, a LEO has to meet certain age and service year requirements. Now, so do regular FERS employees or CSRS employees for that matter. Their age and years are just different. We went ahead and left all the CSRS material here.
I have not met a CSRS law enforcement officer in a very long time. They’re a little bit of a unicorn these days because of mandatory retirement. We’re going to leave their material here, but I’m just going to cover verbally the FERS LEO pieces that you’re going to see throughout this material. But certainly it’s here for their reference if we happen to have one pop on the session today.
If we look over to the far right-hand side, the FERS LEO full eligibility, in order to be fully eligible to retire under a law enforcement pension, an employee has to be at least age 50 with at least 20 years of covered service, so special provision service, or any age with at least 25 years of covered service.
Now, for that covered service or special provision service, that never includes sick leave, military service, or non-covered federal service. If you joined maybe your agency or another agency prior to becoming a LEO, that time can count in your pension eventually, but first you must meet these minimum requirements with your actual LEO service for it to count.
Then, of course, with military time, you’d have to have a buyback and all those good things, but on the very bare minimum, if you’re going to go 50 years or later, you must have 20 covered years or any age with 25 years.
Mandatory Retirement Age
Let’s talk about the mandatory retirement age. On the surface, this sounds cool that you guys get to retire earlier than most people with a whole lot less service, on the surface. I say that because sometimes you guys aren’t ready to stop working at age 57, you still have a lot of life in you, you have a lot of ambition to accomplish a lot in your government service.
And so it’s not as maybe as great as it sounds. We’ll cover that piece here a little bit closer to the end of today’s session. But as far as mandatory retirement goes, LEOs must retire by the age of 57. Of course, in order to meet that 20 years of covered service requirement that we mentioned in the previous slide, you had to have been hired by age 37.
Now, that might not mean anything to you now because you’ve been working for the government for probably many years, but it is important to know that if you have a waiver, all of that was from your parent agency and due to hiring needs and workforce issues that they had to fill certain spots, and it’s not to say that someone can’t be hired after the age of 37, but it’s certainly by exception.
I do want to make a special note here. This is something I see LEOs confuse all the time, and we want to set the record straight here. You do not want to confuse your mandatory retirement age with your minimum retirement age. For some of you, this will be the same. We’re going to see the chart here in a little bit, but for many of you it’s different.
This minimum retirement age, for the most part, only applies to regular FERS employees because that’s one of the measurements that they have to be eligible, but all of you are going to be affected by the minimum retirement age as well, but in a very different way.
I’ll show you that chart here in a bit, but we definitely want to have a clear distinction between mandatory retirement age and minimum retirement age. I wish they have picked a different acronym to have, because when we say MRA, we’re always referring to the minimum retirement age, but then you guys roll in and you think that maybe we’re talking about that too, the mandatory retirement.
Calculating the Federal Pension
Like I said, I’m not going to verbally review the CSRS special provision calculations, but it’s there for their reference if we happen to have them on. If we’re looking at the actual FERS calculation, the formula for our special provision employees, on the left-hand side, we have the formula on the right hand side, we have an example.
In that formula, it’s a two-part formula, so we’re going to take whatever the high-3 average salary is, we multiply that by 1.7% times 20. Let’s pause here and talk about this 20. I like to tell LEOs, you have 20. No more, no less.
It is not possible to have a LEO retirement formula, a pension formula with less than 20 years in the first part, in the A that you see here on the screen, because remember, you had to have had 20 years in order to qualify for a LEO pension. And that’s assuming that you’re at least 50 when you go.
Likewise, if you spend 40 years in a LEO position, it doesn’t matter, you will have 20 years in the A part of this calculation. No more, no less goes in the first bend of the formula. Now, the second part that we’ve labeled B, we’re going to take the high-3 times 1% times the rest of your years.
They might be LEO years, they might be regular service years, they might be military years that you bought back, but anything above the first 20 that you serve will go in this 1% part of the formula. We add A and B together, and that becomes your pension.
If we look over here to the right hand side, we’ve got the example of a FERS law enforcement officer, let’s say they’re 50 years old, and they’ve got 30 total years of service. 30 of it might’ve been law enforcement. They might’ve had 20 LEO and 10 in the military. Doesn’t matter, 30 years.
Let’s say they have a high-3 average of $125,000. We’re going to take that $125,000 times 1.7% times 20 and we’re going to add that number to the second part of the formula.
So then we’re going to take $125,000 times 1% times 10, of course, we have a total of 30 years that we’re calculating here, we add A and B together, and we come up with a pension of $55,000 a year. $55,000 a year is a pension is pretty darn good, especially when you consider that the private sector really doesn’t have pensions anymore.
But if you look at the delta between the $125,000, or probably a little bit more than that, that this person’s retiring, because this is the high-3 average, they’re probably leaving making $127,000 and some change.
They’re going from that pay down to the $55,000. We always have to look at that delta between those two numbers because that’s the gap that you’re going to need to fill in some way to maintain the standard of living that you have.
Cost of Living Adjustments
Next step, let’s talk about cost of living adjustments. COLAs, or cost of living adjustments are applied each year in an attempt to protect the purchasing power of your pension. It doesn’t always do that, but that’s the purpose.
Those retiring under a LEO retirement receive COLAs immediately regardless of your age when you retire. I make this distinction because for regular FERS employees that are non-LEOs, they have to wait until 62 to get a cost-of-living adjustment on their pension.
It flatlines perhaps for several years before their pension starts to go up. You guys don’t have that problem, which is a nice perk. To give you an idea, the 10 year average for the FERS COLA is 1.47%. To give you a little bit of a sense of how your pension may change over time.
Custom & Boarder Protection Officers
Let’s talk about a special group of employees, and these are customs and border protection officers. I happen to be at a workshop in Orlando, Florida just a couple of days ago and I was met by three CBPOs that had of course special questions about their situation because they’re very different in many ways.
Let’s talk about the three categories of CBPOs. The first is, those who were already in a LEO position prior to July 6th of 2008. Prior to this date, CBPOs were not considered law enforcement.
But if this particular person maybe was with another agency, they hadn’t switched over to CBPOs yet, whatever that might be, if they were already in a LEO position prior to July 6th of 2008, they’re going to be treated like a regular LEO. All the same, eligibility requirements and pension calculation and all that, that we just covered.
Next, those who were converted to a LEO position on July 6th of 2008, that’s when this law went into effect and that conversion made them kind of a gray area law enforcement officer. I’ll explain what I mean by that here on the next slide.
The third category of CBPOs is those who are hired into a LEO position after July 6th of 2008. Again, they’re going to be treated like a normal LEO. It’s just this gray area group of those who were already employed with CBP prior to this date when the law changed that converted their position to be a LEO position. Let’s see how they’re different.
For those who were converted to a LEO position on July 6th of 2008 under CBP, these guys follow non-LEO eligibility. Not the eligibility chart I showed you a few minutes ago, but regular eligibility. They need to reach age 62 with five years, age 60 with 20 years, or their minimum retirement age with 30.
Those are normal rules for non-law enforcement officers. The reason being is that many of these people were hired that wouldn’t have met law enforcement standards. They were over the age of 37 perhaps when they were hired. And so they would never get to mandatory retirement and have their 20 years of service.
They had to make some sort of special exception for these guys, and this was the compromise that they came to. They’re going to go out on normal eligibility rules.
A subset of that is they do not have to have reached their 20 years of covered service. Where on the eligibility chart we covered a few minutes ago, I really hit home that it has to be 20 years of covered service if you’re retiring at 50, or 25 years of covered service if you’re retiring with at least 25 years at any age, but these guys, the special little subset of CBPOs, do not have to meet the 20 year requirement.
They’re also not subject to mandatory retirement, because remember, they weren’t brought in under those rules. That’s not how they were hired. That’s this gray area group.
For these guys, some select overtime is included in the high-3. Most of them do not receive a LEAP or AUO. They’re receiving different types of overtime. It’s typically a really long list. Some of it counts, some of it doesn’t.
But up to $22,500 in 2021 can count towards the high-3. The reason this number is what it is, is that this is half of the overtime cap. Right now it’s $45,000. Next year when the cap changes, this number is going to go up.
The last exception for these guys is, they’re going to receive an enhanced pension specifically for their LEO covered years. Let’s say they end up having 13 years of CBPO time and that’s the only LEO service that they’ve ever had, their pension is going to have 13 years calculated as a LEO and the rest of it calculated as a regular employee.
This is a little bit of a high level overview for CBPOs, but I wanted to not leave you out. You guys are doing important work, and I know there’s a lot of confusion here. But very glad that we were able to at least include a couple of slides in here to make sure that you’re on the right track.
Spousal Survivor Benefits
Next step, let’s talk about spousal survivor benefits. There is not a specific enhancement that you’re getting or that your spouse is getting under the survivor benefit simply because you’re a LEO. There’s no special rules there, but your spouse can choose to protect up to half of your LEO pension, which of course is calculated to be much higher than a regular employee.
There’s kind of a by-product there for your spouse. Because your pension is calculated at this higher level or this enhanced level, your spouse also benefits from that in the event that you pass.
Annual Leave Payout
Next up, let’s talk about annual leave payout. When you retire or separate from federal service, hopefully you’re retiring and taking this big pension with you, you’re going to be able to get your unused annual leave balance paid out to you in lump sum.
Most agencies are able to get out these payments within two or three weeks from the time that you leave service, which is great. It’s not coming from OPM, so it doesn’t get all tangled up over there. It’s paid directly from your agency.
This annual leave balance that’s paid out to you in lump sum will be based on all of the types of pay that counts for retirement purposes. It will include your LEAP. We get a fair number of misconceptions out there that it only really comes from your true base pay. But in fact, LEAP is included in this calculation.
Social Security
Here’s how it looks. To calculate your annual leave payout, first, you have to determine what your hourly rate is. If you don’t know, you take your final annual salary divide it by 2,087 hours. This equals the number of hours in a normal work year. As a business owner, I wish I only worked 2,087 hours, but that’s what OPM says.
Next up, to determine what the actual payout is, you take that hourly rate that you just calculated times the number of hours of annual leave that you have on the books that you didn’t spend, that you didn’t take there at the end of your career.
That will, of course, produce some dollar amount, and that’s what you will be paid. Now, keep in mind that pay is taxable. It’s going to be subject to all of the normal deductions: Medicare, Social Security, and all of that. Just other things like your TSP contributions and things like that won’t come out of that pay.
I won’t get too much into those details because again, we’re assuming there’s a baseline understanding of the majority of these benefits. But this can a little bit hairy, but I do want to make sure to drive the point home that LEAP is included in this calculation.
Next up, Social Security. Just like the Survivor Benefit Plan, there’s not a specific enhancement to your Social Security benefit just because you’re a LEO, but by the mere fact that you’re a much higher earner, your Social Security benefits will naturally be higher than a lower earner that’s out there.
If you’re making $125,000 a year, your benefit is going to be much different than someone who’s making $50,000 a year. Now, I do want to make a special note. There’s a cap to how much income is subjected to the Social Security tax each year.
It’s gone up drastically over the last few years and now it is $142,800. Meaning that up to that amount of income that you make in a given year will be subject to the Social Security tax. That’s 6.2% of your pay.
Anything you make above this, you get to keep. You don’t pay a Social Security tax on anything above the $142,800 that you see here on this screen. Again, this number changes each year. Well, for a long time it didn’t change at all, and then it changed pretty drastically and has changed considerably over the last couple of years, each year.
Keep your eyes open for that so that you’re sure you know what that is. It’s this benefit or this part of this benefit that makes it look like you make some extra money at the end of the year, and it’s because that 6.2% isn’t coming out of your pay anymore. Once you hit the cap for all the pay periods you have after that, it looks like you’re getting some more money in your paycheck, which you are. So, that’s great.
Special Retirement Supplement
Next up, the Special Retirement Supplement. Many LEOs believe that the Special Retirement Supplement is just for them, and that’s not true. This is payable to the vast majority of FERS employees who retire under the age of 62. And of course it was designed to provide a benefit similar to Social Security.
It’s paid prior to the age of 62. If you are retiring under a LEO retirement, not necessarily in a LEO position, you might’ve switched to a non-LEO position, and we’ll cover that a little bit later. But if you retire on a LEO retirement, you will receive this benefit from your retirement age, whatever age that is, all the way until age 62.
Now, there are no cost of living adjustments to the Special Retirement Supplement for any employee. We have LEOs fight us on this all the time in our workshops and they say, “No, no. I read the pamphlet that says that we get a COLA.”
The pamphlet is written terribly because it’s referring to the cost of living adjustment that you get on your pension that does get applied immediately and is applied at all.
But it lumps in the Special Retirement Supplement in there, and doesn’t provide a very good clarifier in the sentence. If you know the pamphlet I’m talking about, you know that it’s ripe for confusion, but I assure you no employee gets a cost of living adjustment to their Special Retirement Supplement, even you.
Special Retirement Supplement: Minimum Retirement Age
Let’s talk about this supplement. I want to reiterate that this is not guaranteed income. You aren’t guaranteed to get this. What I mean by that is, if you make too much money, this benefit can be penalized. It can be penalized all the way to zero. This penalty is known as the earnings test.
If you are under your minimum retirement age, not your mandatory retirement age, your minimum retirement age, there’s no penalty to this benefit.
If you happen to be between your minimum retirement age and 62 when you’re drawing this benefit, if you have wages, so if you have a job, you left federal service, but you went with the contractor, you went in the private sector, whatever that might look like, if you make more than $18,950 a year in 2021, this benefit is going to start to be penalized.
Again, it can be penalized all the way to zero. I’m not going to go into the specifics of how the penalty works and how it’s all calculated, but we need to have our eyes on that number because I don’t want you to believe that you’re automatically going to get this benefit even if you go out and make a whole lot of money.
Let’s put this into perspective here. First, I want everyone to look to the right hand side and find the year in which you were born. Let’s say you were born in 1964, just to make things easy. Your minimum retirement age would be 56, but based on your federal service, let’s say you plan to retire at 50.
You’ve got your 20 years, your 20 years of covered time, you’re 50 years old, you’re eligible to go and decide to do that. From age 50 to 56, you can go out and make millions, you can make as much money as you want, and you will get this benefit.
It’s not until you reach age 56 that things change. From 56, in this case, that’s your minimum retirement age, all the way to 62, you have to be mindful of the excessive wages. Anything above $18,950, for every $2 above that you earn, a dollar of your benefit gets penalized. So it’s very easy to bring that thing all the way to zero.
I wouldn’t want you to give up a job that’s paying you a hundred grand just because you’re going to give up this benefit. That doesn’t make financial sense. But I don’t want you in your budget to assume that you get this benefit, when in fact it’s going to be completely offset and probably penalized to zero if you make too much money.
Federal Employees Group Life Insurance
Next benefit, and I know I’m going a little bit fast through all of these. I want to try to stay within our 30 minute timeframe and there really is a lot to cover. And we’re kind of touching the wave tops here, but this next section is the Federal Employees Group Life Insurance. FEGLI coverage is based on your base pay.
For LEOs, the way they’ve written the regs, this is included in your base pay. That’s a little bit confusing because that’s not what it looks like on your pay stub. It looks like a separate type of pay. But for life insurance purposes, it does include LEAP. The two parts of FEGLI I’m going to cover that are effected by your salary are the Basic and Option B.
The basic coverage is your salary rounded up to the nearest thousand and add 2,000. Option B, is similar. We take your salary round it up to the nearest thousand and multiply by however many multiples of Option B you chose, somewhere between one and five.
Let’s take a look at an example for an employee. Let’s say they have a total pay, including LEAP and their salary and all that, it’s $127,500, just to show everybody how this really works. The basic pay, we would take that $127,500, routed up to the next thousand, which would be $128,000, we add 2,000 and we come up with the basic coverage of $130,000.
For Option B, this person has selected a five time multiplier for Option B. Again, we start back at the normal pay, $127,500, we round up to the nearest thousand, $128,000, and we multiply that times five. Don’t take the Basic and multiply it by five. That’ll give you a little bit more coverage than you actually have, but make sure to go back to the base salary to do that calculation.
For FEGLI, a couple of things I want to just cover briefly. There are some unique considerations for LEOs. While you’re working, this benefit is relatively inexpensive, mainly because of your age. You guys have to leave by age 57, or the majority of you do.
And so FEGLI hasn’t started to get obnoxiously expensive yet. It’s the 60, the 65-year-olds that are still working, that’s when their arms just get twisted. It’s way too expensive to try to keep the bulk of this coverage in force for most people. Given your work, some of you are door kickers, some of you have some different jobs, but you should give some proper consideration to having the correct protection in place.
We don’t want you to believe that these things could never happen to you. There’s lots of things going on in the news, of course, in our country, talks of qualified immunity going away, at least at the local and the state level.
Hopefully, that doesn’t rise to the federal level. But there’s all sorts of weird things happening out there for the law enforcement community, and you need to think, if you’re gone, what does your family do without you and what does your family do without your income?
Life insurance of course is the way to magically make that money appear in the event that you’re gone. Give some proper consideration. I know it’s an awkward conversation to have and some of you are a little superstitious. Like, “If I have life insurance, I’m acknowledging the fact that I might not make it home.”
I spent time in the Marine Corps, I know what that feels like. Many service members felt that very same way going to Iraq and Afghanistan and all these other places, that they were acknowledging that very real possibility and they needed something to hold on to be able to come back home.
I get it. I understand the mindset, but it doesn’t change the fact that bad stuff happens and it probably happens more frequently in your line of work just because of the nature of the work that you’re doing.
Last step, you’re still young enough to have the chance to get private life insurance and lock in really low premiums that stay low in retirement if you do it now. If you do it while you’re still young.
Many times folks come to our retirement workshops that are not LEOs, not air traffic controllers, not firefighters. They’re 60 to 65 years old, and they’re like, “I was thinking I should probably plan for retirement.” It’s like, “Yeah, you probably should have done that a long, long time ago.”
But you guys are still so young when you’re even forced out at age 57 that you have an opportunity to explore what private life insurance looks like to get it locked in and not have to experience those big premium increases that you see in FEGLI for the bulk of the coverage and that you see in some other products that are out there. Lots of choices.
I’m not saying everybody run out and buy a life insurance policy, but you have some unique options because of your age to really set yourself apart and do something great for your family.
Thrift Savings Plan
Next up, the topic everybody loves to talk about, which is the Thrift Savings Plan. The TSP match is based on your base pay. That includes LEAP. Again, another misconception that employees have, that for some reason, LEAP doesn’t get included in the match. And of course it does.
Really important, make sure come hell or high water, that you are putting 5% of your pay, including LEAP into the TSP. That is free money that the government’s willing to give you if you give yourself money to operate in retirement. That’s what you’re doing when you put money into the TSP or an IRA and you get free money from your agency. Please, 5% at minimum.
There’s another part of TSP that is really important and one that I want you to give some serious consideration to, and that is the TSP Roth. This is an opportunity that is huge for LEOs for a number of reasons.
The first is, you have a naturally younger workforce in the LEO community. You don’t have people sticking around to 65, 70 years old. That’s not the way your particular community works. By virtue of you being younger and highly paid, you have a unique opportunity in the Roth because you have a long time before you need that money.
Just to give everybody a quick recap of the Roth, if you’re not terribly familiar with it, I’m going to solve all of that next month because that’s going to be the topic that we talk about in our next webinar. But to just give everybody a high level overview, when you put money in the traditional side of your TSP, you get an immediate tax advantage by not paying tax on that contribution this year.
But when you go to take the money out later, you pay tax not only on the principle, that’s the money you put in, but you also pay tax on all of the growth. It’s not just “Oh, I’ll switch this tax advantage for that tax advantage.” It’s much more complicated than that.
By virtue of your money growing over a long period of time, you’re going to have a lot of growth in a Roth account, or frankly, any of these accounts, because time has gone by and presumably, you’re making money in the account. When you go to take it out, you don’t want to be hit with this big tax bill. That’s what happens when you’re in the traditional TSP.
Now, there’s advantages to the traditional TSP, don’t get me wrong, right. And it’s certainly better than nothing. But the Roth is unique in this way. If you put money into a Roth right now, you do not get an immediate tax advantage. You go ahead and pay tax on that contribution for that year and then never again.
When you go to take the money out, the principal you’ve already paid tax on, so of course you don’t pay tax on that again, but all the growth that’s happened in the account in the Roth side of the account is all tax-free to you. You have a huge chance, being a younger person, in the grand scheme of things, for planning for retirement and you’re highly compensated.
You have the ability to leave that money in there for a long time, have a lot of growth and let all of it be tax-free. Really, an incredible opportunity to be able to do this. Hopefully, you’ll give that some thought.
If you still have some questions and you’re wondering like, “Is the Roth right for you,” please come to our webinar next month. It is a topic that so many people ask us about and I knew it’d be a great one to be able to cover.
Next up in the TSP. Thinking about TSP withdrawals, there are some tax implications that are really determined by the age in which you separate or retire federal service. It doesn’t matter if you just leave or if you actually are eligible to retire. If you separate or retire, this is what it looks like.
For LEOs, here are the two rules. If you retire or separate from federal service before the calendar year in which you turn age 50, you will have a 10% early withdrawal penalty on all money you take as a distribution, meaning you actually received the money, prior to age 59 and a half. All of it.
So if you’re 48 and you’ve got your 25 years of covered service, and you look at that eligibility chart and you say, “I’m eligible, I’m out of here.” Well, you can go and you’ll draw your pension, that’ll be fine, but you’re going to have an unintended consequence in TSP, that any money you take prior to age 59.5 will have a 10% early withdrawal penalty on it. You’ll have to pay that to the IRS.
And to pour salt on a wound, you have to pay tax on the whole distribution. Even though you had a 10% penalty that you had to give to the IRS, you have to pay tax on the entire 100%. Keep that in mind. We always want to try to avoid this if we can.
If you happen to retire or separate from federal service in or after the calendar year in which you turn 50, you get to avoid the IRS’s 10% early withdrawal penalty. This is huge.
Planning Consideration
Some planning considerations: If you’re going to retire in your late forties up to your mid-fifties, you might not be able to stay retired, at least not without some long-term consequences. If you remember back to the pension example, we showed $55,000 a year in that calculation for the pension.
But remember that person was making about $127,000 right before they retired. That’s a pretty big delta between those numbers. How are we going to fill it? You might say, “Well, the Special Retirement Supplement is going to help me.” You’re right. It might. It’ll help you. As long as you don’t have another job and making more income. That would work. But what else?
You’re going to have to supplement your income somehow. And the next logical place is the Thrift Savings Plan. Well, if the majority of all of that money is taxable to you, yikes, you’re going to have maybe a tax problem that you weren’t anticipating.
If you have a lot of Roth money in your account and you take that, while it might be good in the short term because you’re not having to pay tax on it, on the distribution, you’re not allowing that money to grow for a long period of time and have even more tax-free income later.
To continue the standard of living that you’re wanting, your pension’s not going to provide that level of income for you. And so you’re going to have to figure it out some other way. By accessing that TSP too early, you can deplete that account too rapidly, and then it doesn’t last long enough in your lifetime to make sure that you’re protected longer in retirement.
But I told you to stick around until the end because we get this question a lot and I’m really excited to be able to share it with you because we have so many misconceptions about this. The question is, what happens if you want to keep working beyond your mandatory retirement age?
I see a lot of LEOs, they’ll come up on a workshop or they’ll chat us in the chat box on a workshop or a webinar, and they say, “Well, I’m going to go ahead and retire from my LEO position and draw my pension, and then I’m going to be hired by my same agency or go to another agency, federal agency and get hired. And then I’ll be able to do both.”
Wrong answer. That’s not the way a reemployed annuitant works. The government’s not going to allow that to happen.
If you want to keep working beyond your mandatory retirement age and you’re just going to take another federal position, you don’t retire from the federal government yet, you simply move, you move your position over to another agency who’s willing to hire you.
And here’s the beauty. Let’s say you’re making $127,000 when you leave your LEO position and you’re going to go to a non-LEO position making $60,000 and work another five or six years, those extra five or six years, of course, aren’t included in your pension when it’s ultimately calculated.
But it’s at the high-3 that you got while you were a law enforcement officer. Those years are still extra valuable to you because of your LEO service because of the LEAP, because of whatever the pay was that you had during that time.
Now, if you’re going to go move to another position within the federal government that is more highly compensated than your LEO position was, let’s say you moved to $150,000, if you’re able to secure a job like that, then all of your years, LEO and non-LEO, will be counted at that high-3.
You’re never in a good position to leave and then try to come back as a reemployed annuitant, the math just doesn’t work. Great opportunity if you simply want to move to a non-covered position within the government.
Of course, another option is to move to the private sector. The challenge is, we see a lot of folks leave, you’re used to having a lot of power in a good way, a lot of power in the position that you’re in, you have access to all these cool law enforcement systems, you’re really tapped in, you’ve got the latest intel, you’ve got all that, and you go move out to the private sector thinking you’re going to have that same level of support, and it’s not there.
You might not be as happy in the private sector, and you’re certainly not earning a pension in the private sector. If you’re going to stay working, especially in this type of work, you may want to stay within the law enforcement community, but not in a front line position and simply free that up for another employee to take and you move on to another type of position, but still within the community itself.
If that’s what you’re trying to accomplish, you may be way better off doing that within the federal government structure than moving out to the private sector.
Wrap-up & What’s Next
I’ve tried to keep all of this within 30 minutes. It’s really tough because we have so much to cover. But I’ll tell you, you’ve got to get the rest of the story.
I know I shared a lot today with an understanding that everyone had a baseline knowledge of the federal benefits, but there’s so much that we cover in our workshops that I’ve given you just the tree tops of how all of these things work on the LEO side.
But you’ve got to hear the rest of this story as far as how the benefits work, getting into a lot more detail on the life insurance and the health insurance and TSP choices and all of those pieces. I just showed you the parts that were different as a LEO.
I would encourage you, if you haven’t already, to please attend one of our workshops. We have virtual options available. We’re starting to go back live. Like I said, I was just in Orlando earlier this week and we were able to do a live workshop, which was a lot of fun. Check out your area.
Of course, there’s no cost to attend and we’re going to cover all of the federal benefits topics, from pension to all the insurance products, to TSP and everything in between during that workshop. These are full day sessions. You can find all of them listed, both the virtual and live sessions at fedimpact.local/attend.
Thank you so much for joining us. I like these little sessions because we can dive a little bit deeper into the particular topic that we don’t have a lot of time to be able to do in this kind of detail in our regular workshops.
The three CBPOs that joined me in Orlando know that we weren’t able to be this specific for the law enforcement community in that room because we have lots of different types of employees there, but I’m really grateful to be able to do this session and hopefully dispel some myths and put you on a better path to retirement.
Thanks so much, and hopefully we’ll see you on next month’s webinar on the Roth TSP.
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