In this episode Jason interviews Dan Jamison, CPA and author of the FERS guide about why the FERS survivor annuity election is important. We also discuss how to know if you are ready to retire, what is the difference between a deferred vs postponed annuity, premium conversion for FEHB, what can a federal employee or annuitant expect when divorcing.
Below are articles and resources discussed in this podcast episode:
FERS Guide:
Dan Jamison’s online FERS Guide
https://fersguide.com/
FERS Guide the Book by Dan Jamison:
Regular FERS 2020
https://amzn.to/2HpFEzK
Special Category FERS 2020
https://amzn.to/35leWR1
Premium conversion & paying FEHB with pre tax dollars
Transcript:
Welcome back America to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now, here is your host, Jason Parker.
Jason Parker:
America, welcome back to another round of Sound Retirement Radio. So glad to have you tuning in this morning. It’s my good fortune to have Emilia here with me this morning. Emilia, welcome back.
Emilia:
Thank you. Good morning.
Jason Parker:
Good morning. So, we like to start the morning right, two ways. The first is by renewing our mind. And I was talking to a friend of mine the other day and I was like, this renewing of the mind is great, but only if we’re being transformed by the renewing of our mind. So, we want it to really take root and make us a different person as a result. So, anyways, this is Proverbs 12:11. Those who work their land will have abundant food, but those who chase fantasies have no sense. And Emilia, you’ve got a joke for us this morning?
Emilia:
I do. All right. So, here we go. What do you call a bearded vase maker?
Jason Parker:
A bearded vase maker? I have no idea.
Emilia:
Harry Potter.
Jason Parker:
I like that. In this episode number 328, I’m going to bring a special guest, Dan Jamison on, and we cover a lot of really great material here, but it’s really applicable to federal employees. Where I live in Kitsap County we happen to have a lot of federal employees in this area, and we’ve had a lot of people reach out to us from around the country that are federal employees. So, for some of you this may not be a show that’s going to really resonate or be helpful, but if you know somebody that works for the federal government, you might want to point them this way. Episode number 328 we’re going to look at why the FERS survivor annuity election is so important. Ask the question, how do I know if I’m ready to retire? Can I retire? And some of the things that Dan has learned from working with people that are retiring from federal service. We’re going to be talking about the difference between a deferred versus a postponed annuity and how these things impact things like FEHB, which is health insurance for federal employees.
And then, Dan has really, he’s an expert. He’s a CPA. He’s been called in to be a consultant for folks as they’re going through a divorce. And this is an area that he knows a lot about. And he said, Jason, 50% of people are going to end up getting divorced. He said, I think there’s some things that they really need to know about. So, we’re going to cover divorce towards the end of this show. Anyways, I hope you find this helpful. One thing I want to tell you, as he talks about his personal preference for which spousal option you should take, and I’ll let him explain to you why he chooses the option that he does. But, I would just tell you to be cautious here. I always tell people, build a plan, stress test the plan, and see what happens to your spouse if you choose the reduced spousal survivor option.
So, head into this carefully. As always, remember this is not specific advice for your specific situation. So, you want to understand how does this actually work for you before you implement anything. With that, let’s get into the interview today. All right, everybody, welcome back to another round of Sound Retirement Radio. I’m so glad to be able to introduce my guest to you today. This is episode number 328. We’re going to be talking about federal employees retirement system, and I’ve got the good fortune to have Dan Jamison back on the program with me. Many of you know we’ve had him on in the years past. Dan retired from the FBI back in 2013. For the past 30 years he’s been a CPA and he’s helped thousands of federal employees go through the divorce process and specifically how divorce relates to their federal benefits. So, we’re going to get into that. But, Dan, welcome to Sound Retirement Radio.
Dan Jamison:
Thank you Jason. It’s really good to be back.
Jason Parker:
Man, it’s good to have you back. So, we’re going to talk about divorce. I know that’s an area you’ve spent a lot of time and energy and help people avoid some pitfalls. But, before we do, I just have some general federal employee benefits questions, things that have come up recently that I thought I’d get some clarification from you, because you’re one of my go-to FERS experts, the federal employees retirement systems experts. Before we get too far into the questions though, Dan, I do want to let people know your book is, you’ve got a book on Amazon that’s updated every year, both for regular federal employees retirement system as well as special category, law enforcement and whatnot. And so, we’ll talk a little bit about that. But, my questions for you are, the first one is just big picture, general question. How can somebody know if they’re not eligible to retire from the federal government, but if they’re ready, financially ready to retire? What are your thoughts about that?
Dan Jamison:
That’s a really good question, and I think that the eligibility portion, that’s pretty objective. If you’re old enough and you’ve been in long enough, you can retire. But, your question is, that being satisfied, can you actually do it and survive on that adjusted level of income? But, before I address the level of income, the other component that I run into having done this for a couple of decades is getting yourself prepared to retire mentally. It is very different when you’re going to work for 30 years, and if you’re not a special category employee, you may have been at the same job or same agency for 30 years. So, that’s an awful lot of time. And you’ve got your job nailed down, you know exactly what to do every day, it is just wired. It’s not that difficult to do, but you’ve also let the power become your identity, and it’s what you do every day and maybe you don’t have the skillset to transition out of the federal workforce into the private sector where you’re not ready to just hang up your spurs completely.
So, the number one thing is, I think you’ve got to get mentally there. I’m not going to let his job as an IRS agent be my identity. I’m going to get out and go do something else. And I firmly believe you have to have a plan to do something else. I think if you retire and go home and sit on your tail, you’ll be dead in five years, and I see that. You’ve got to have something to do, something of purpose. You got to exercise your brain, you’ve got to exercise your body. Even if you’re working part-time at Home Depot helping somebody find something on the shelf, I think that’s better than sitting at home. So, let me get that off my chest first, because I run into that a lot.
Jason Parker:
So, just out of curiosity, because I run into that a lot too, and it’s actually a big concern that a lot of couples have, especially I’ll hear the wives say, I’m really worried about my husband retiring. I think he’s going to drive me crazy being at home all day. Any resources that you can point people to, to help them get clarity about this transition, retiring not from something, but retiring to something is the way I’ve heard it described.
Dan Jamison:
I was just maybe talking to some of the folks in your office that have already made the retirement jump, but not just made it. Maybe they retired five or 10 years ago and you knew them when they were there and asked them how that adjustment period for them. I can tell you personally, my wife was used to me being gone Monday through Friday, 10 hours a day. I’m here 24/7, 365, and the wife says, I’m going to go run to Walmart to pick up some groceries. I’m trying to figure out, is that an invitation for me to come or is she’s telling me she’s going to go head over to Walmart and I’m going to stay here.
So, it does take a few months to work that routine out. But, I talked to a lot of newly retired federal employees, Jason, and they tell me that there is this transitional period 3, 6, 9 months where it’s, you’re going to work out? Are you going to eat out today, eat in today? There’s a lot. But, I can tell you from personal experience having, again, retired seven years ago with my wife here at the house. Most days she works three days a week. The other two days we make it work and it works out really well. But, you definitely don’t want to let the job become your identity. I wish I had a resource to do, but I think talking to people who have been through the process, I think is the best medicine for that.
Jason Parker:
All right, great. So, now as you think about being financially ready, what would you say people really need to do to be financially ready to retire other than obviously being eligible?
Dan Jamison:
Hopefully some of the people listening to this are earlier on in their career, because the number one takeaway, and I probably said it on an earlier show, is contribute to the Thrift Savings Plan until it hurts, and then contribute a little bit more. Having a well-funded Thrift Savings Plan account, I think is the number one key to a more stress-free and solid retirement where you’re not worried about running out of money. That is the number one thing that I would point out is, we get paid 26 times a year Jason. So, every pay period is an open season, if you will, opportunity to change that amount. And most agencies, you can make that change every pay period. And let’s say you contribute $300 a pay period, make it 310, next pay period make it 315, next pay period make it 320. Just have a plan to get there.
I routinely see balances in excess of $1 million in the Thrift plan for a 25-year employee or a 30-year employee routinely. Because, in my divorce practice I see the Thrift Savings Plan account because it’s going to get divided. So, it’s not a pie in the sky number. And I’m always intrigued by the folks that have a million bucks and maybe 25 years of service, and I ask them, and this is not investment advice, I know you’re [inaudible 00:09:39], but I ask them, how did you do it? And they tell me the same thing, I didn’t or I ask them, how many transfers did you make? The usual answer, Jason, is zero. They would tell me that they placed it in one fund, usually the C fund or the S fund or a combination of those two and left it alone for 25 years, and now they’re millionaires. So, it does happen and it can happen.
But, in terms of the monthly obligation to fund your life, you have to look at what you’re bringing home in retirement on an after-tax basis and compare that to what you’re making on the job on an after-tax basis. So, what I tell people is, you make less in retirement, but you get to keep more of it. So, when you’re working for your agency, you’ve got Medicare taxes and social security taxes coming out of your paycheck, and that’s not going to come out of your annuity. Your annuity payment is not active employment or earned income, it’s 1099. So, you don’t have the Medicare tax, you don’t have social security. You may have been paying into a short-term disability fund. Short-term disability generally ends when you retire, so that’s not coming out anymore. If you’re in FERS, you’d be paying anywhere from 0.8% all the way up to 4.9%. If you’re a law enforcement officer towards FERS, that goes away.
You may be contributing $750 a pay period if you’re maxing out or close to that, that would be this year’s max. The Thrift plan, well, if you retire Jason, that 750 that you are used to seeing, it’s not coming out anymore. So, you might’ve been making $100,000 a year, maybe making $4,000 a pay period, but you surely weren’t living on $4,000 a pay period. That’s what I tell people. You were living on a lot less. So, in retirement, we don’t have the Thrift, that 750 bucks coming out, right? That’s already a plus 750. So, what I tell people in my book, there’s a little example, a little place you could write your numbers down. I said, take that number that you got from your take-home employment at your agency, and do these add-backs. Add-back what’s not going to [inaudible 00:11:54], what’s not going to social security, what’s not going to Medicare, what’s not going towards FERS.
And I did that analysis for myself when I retired seven years ago, and Jason, I was working for $600 a month. That was my after tax cash in hand working and not working, 600 bucks, which means if I could go out and find a part-time job where I cleared $600 after taxes a month, I would have the same amount of money to pay my bills as if I stayed working. And when people crank out the numbers, they’re usually surprised and wow, I really can do this. The other thing people forget about is the Thrift plan. That’s what it’s there for. I’ll be conservative. Let’s say you got $500,000 in there. I personally think that could safely throw off 1,500 to $2,000 a month for the rest of someone’s life, depending on their age. Well, when I talk to people about retirement, they tell me, well, I was making this much every month and now I’m only making this much.
I say, well, what are you taking out of the Thrift plan? What’s your monthly withdrawal? Oh, I’m not touching that. I’m not touching the Thrift. I’m talking about just my [inaudible 00:13:00]. And I remind them that FERS is a three-legged stool. One leg is social security, one leg is the Thrift Savings Plan, and one leg is FERS. You can’t just live off of two legs. The whole idea behind saving for the Thrift was for you to start drawing that money when you retire. And if you do it right, as I tell people, you’ll write the last check for your last dollar on the last day of your life. It’s there to be used. And if you’re not going to use it, then I question, well, why did you sweat for 20 years and maybe didn’t take any vacations?
And so, you’d have the money to [inaudible 00:13:33]. I applaud your decision to save and what you’ve accomplished, but understand it’s okay for the balance to slowly go down over time. That was its purpose. You build up this big nest egg and then you draw upon it. So, [inaudible 00:13:45] and then they sign up for a 1,500 or $2,000 a month payment from the Thrift plan, then they realize I’ve got more money retired than I did working. That’s my long answer to your short question.
Jason Parker:
Well, I like it. And I like the emphasis on the after-tax income. Of course, that was what we would expect from a guy that’s been a CPA for 30 years. So, I appreciate that. So, another little nuance thing that I’ve run into recently is this idea of postponed retirement versus deferred. Will you take a minute and help our listeners understand the postponed versus deferred retirement in the federal employee’s retirement system?
Dan Jamison:
Oh, sure. That term really is applicable to your non-special category folks, your regular FERS employees that comprise 95% of the workforce. Those are the folks that in order to retire on what we call an immediate annuity, which is unpayable within 30 days of your last day on the job, kind of your normal voluntary retirement, that person would normally need to work 30 years and be at their minimum retirement age, which can be anywhere from 55 to 57. For most of your listeners I would guess it’s 56 or 57. It’s just like social security where it’s staged from 55 to 57. So, that’s your first hurdle. Do I have 30 years and I’m at my MRA? And then, the others, if I’m aged 60 and have 20 years, then I can get an immediate retirement. But, those are your only unreduced immediate options in FERS.
Now, let’s say you’re at your minimum retirement agent, and for our example, let’s say it’s 57. So, I have an employee who’s 57 years old and has 10 years in. So, there’s another opportunity for regular FERS called MRA plus 10, minimum retirement age plus 10 years. So, if you meet the qualifications for that, so you’re 57, you got your 10 years, you are five years younger than age 62. So, there would be a permanent 25% reduction, because five years times 5%, it’s 25% permanent reduction to your annuity. If you wanted to collect it at 57 with 10 years in, you can, but it’s reduced by 25%. Why would somebody do that? I was anticipating your question, why would somebody do that? Because, they want to get out, they want to retire, and they want to retain health insurance benefits. The only way to retain health insurance benefits, the FEHB, in the federal system is to retire on an immediate annuity for the most part.
So, when they retire at 57 with 10 years, they can keep their FEHB subsidized by the government by the tune of about 75% for the rest of their life. That’s why someone would take that 25% reduction because they need the health insurance. Alternatively, now, that’s an MRA plus 10. Now, the next option would be for this person who is again, MRA 57 has 10 years in, would be to postpone their annuity, not defer it, postpone. Postponed means you currently hold title to an annuity, but you’re choosing not to take it because if you did, it would be reduced. So, postponed is a very narrow area in FERS.
So, a postponed annuity is somebody who could take it, but it would be reduced. So, they don’t want to take it and they wait until 62 to claim it. So, that’s a postponed annuity. The downside to that is, from 57 to 62 this person would not have FEHB. Maybe they can get insurance through their spouse, so they don’t care. So, they’ll wait until 62, collect an unreduced annuity, so no 25% reduction. And on that postponed annuity, the FEHB restarts with the application for health benefits and retirement at age 62. So, that’s your postponed. Now, you also asked about deferred.
Jason Parker:
Now, one question for you there though, another little nuance on the postponed. So, let’s say you’re eligible, you postpone to 62 so that you don’t take that big 25% reduction and you’re qualified eligible for FEHB, and you decide to start your pension at age 62 under the postponed retirement. Is it mandatory that you also take FEHB at that point if you have health insurance through another provider?
Dan Jamison:
That is correct, and a very good question. If you want the FEHB, that is something that you have to start up with the application for your postponed or, sorry, with your postponed annuity. You have to start that up. You can’t just retire or stay on your spouse’s plan for three more years, and then start up the FEHB at age 65 or 62 or 63.
Jason Parker:
Good.
Dan Jamison:
The FEHB is a huge benefit. The government’s paying 72 to 75% of the cost. It can save eight or $9,000 a year. I’m retired seven years now. The government still pays three quarters of the cost of my retirement. That’s a big plus. So, one of the reasons somebody might take a postponed annuity again, is to avoid the hit, but also because they can get FEHB through maybe their spouse works for the federal government or for a municipality or someplace that has good health insurance. And then, deferred annuity, of course, is someone… Deferred annuity, I can tell you one easy definition. Deferred annuity equals no FEHB, period. If you’re on deferred annuity, there is absolutely, positively no opportunity for the FEHB.
A deferred annuity would be, like in our example, let’s say we got somebody who is 57, but they have nine years in. There is no MRA plus nine retirement. They’ve got to have 10 years. So, that person would at age 62 be entitled to a deferred annuity based on, if they had nine years, it’d be 9% of their pay and eligible at age 62. And there are no health benefits associated with deferred annuities. You have to have at least five years of federal service to be entitled to deferred annuity. So, if you are separating from service and you have four years in and you turn 62, you’re not getting anything. You might as well just ask for a return of your contributions that you made into FERS and they’ll return those to you.
Jason Parker:
Interesting. So, deferred retirement. So, let’s say you started working at 25. You work for 20 years for the federal government up to age 45. So, you have years of service, but you don’t have minimum retirement age. Your only option is the deferred retirement. You can’t do a postponed retirement at that point?
Dan Jamison:
That is correct. But, if you had 20 years in, you could collect that at age 60, that deferred retirement, because you had 20 years in.
Jason Parker:
Instead of 62. But, you still don’t get the FEHB?
Dan Jamison:
Correct. Because, that isn’t [inaudible 00:20:46]. Now, here’s something that some people do Jason is, let’s use your example. Person’s 45 years old, got 20 years of service in, they separate from service, they come back to work for the government at age 60 and work for a month and retire. They could retire on an immediate annuity at age 60 with FEHB for life.
Jason Parker:
Oh, okay. Wow. So, that’s a way to get FEHB back if you had left service early.
Dan Jamison:
If you return to service in that example, the two periods of time are just concatenated. They’re just pulled together. The period in the middle is forgotten about. It’s like they had their 20 years in a month right there. When I say a month, it’s because you do need to stay on long enough to submit an SF-2809 and get your health insurance started and be processed. So, people do that. I could spend the whole radio show telling you how federal agents that get canned or separate, but have 20 years in and aren’t age 50 come back to work as a night watchmen at a military base for a month and retire as law enforcement officers with full pensions. So, there are a lot of exceptions, but generally speaking, as we pretty well-defined that the deferred, the postponed retirement analysis, there always are some interesting ways to, I encourage if you have a listener that has a unique situation, I’d be happy to give them an answer on that and they can contact me.
Jason Parker:
Well, it’s probably a good time to let people know too if they’re not already a member of your FERSGUIDE, which is an online resource for $20 a year, I think is what you’re charging for it now. You’ve got calculators on there, and my understanding, Dan, is that you’ll actually take people’s questions through the FERS program if they are a part of your membership site, is that right?
Dan Jamison:
That’s correct. There is a contact us portal. I only answer questions from paying subscribers that we have enough time to give my subscribers answers, and there’s no limit to the number of questions that you can pose. So, that’s an easy way to get an answer as well for a complex situation.
Jason Parker:
And it’s just fersguide.com?
Dan Jamison:
Yes, sir.
Jason Parker:
So, another little nuanced question here. I’ve got, let’s say we’ve got somebody who is a special category retiree, going to retire at 55. Their spouse works for the federal government. And so, when the law enforcement officer retires, they’re going to switch over to FEHB on their spouse’s federal retirement plan because of premium conversion. And then, when the spouse retires, they’re going to want to switch back. Will you take a minute and talk about premium conversion, and whether or not that strategy works and any maybe mistakes to avoid when we’re trying to make sure that we don’t lose our health insurance in that type of scenario?
Dan Jamison:
Well, we have that in common. I get that question an awful lot on the premium conversion for dual feds as you described, where you have two, each spouse is employed by the federal government, and this is the typical question, one is a special category employee and one is not. My advice to those folks is pretty simple. Whoever is the onboard employee needs to carry the FEHB. Remember, the five year rule isn’t who carries the FEHB, it’s just that you are covered under the FEHB for five years, even on another person’s policy. So, that is just fine. So, the person who’s staying on the job needs to carry the health insurance. Now, retirement is not a qualifying life event. So, there’s a little planning that has to go into play, because open season is coming up here right through November into December. So, during open season is when you can make a change to your health insurance for no reason.
You don’t have to have any qualifying life event. So, I tell my clients and subscribers to make that change during open season in advance of the retirement so there is no problem, and then the person who’s staying on will carry the FEHB. Now, in your particular question, let’s just assume this person is not going on [inaudible 00:24:55], they’re just going to retire normally. So, if they’re going to retire normally, as you know, there’s a $3,000 exclusion granted to certain special category employees like law enforcement officers where they can exclude up to $3,000 of premiums paid to the FEHB through OPM. So, we want that person when both parties are retired, okay? We want that person, the special category employee to carry the insurance. Now, in your example, if the spouse is separating and not retiring, pretty sure that’s a qualifying life event. That’s loss of coverage from loss of job, and then that’s done outside of open season.
Jason Parker:
So, that’s exactly right. So, in this scenario, the spouse is eventually going to retire under a deferred retirement, not a postponed retirement. So, she will no longer have access to FEHB because she’s going on a deferred annuity. So, they need to get switched back over to his FEHB at some point. And it was my understanding, I had read or heard that that had to be done the year prior to her leaving service, but maybe that’s not right. What are your thoughts there about making the switch and the timing of it?
Dan Jamison:
Maybe that person that you were talking with was just referring to the open season prior to their retirement, like I was when [inaudible 00:26:18]. There’s no requirements under the plan for a year. There’s no requirement at all for that. So, maybe they’re referring to once a year there’s an open season change. So, meaning the year before you’re going to retire, in that open season, make the change, that’s probably what they meant. But, I assure you, there’s no requirement to be covered for one year before you make a change.
Jason Parker:
In premium conversion, just so people understand what we’re talking about there, that’s pre-tax versus post-tax in terms of how the health insurance is being paid, correct?
Dan Jamison:
Exactly. So, if your health insurance premium was $400 a month under the FEHB and you make $4,000 a month in the federal government, the government will take the $400 out for the FEHB pre-tax, and your W-2 will be based on a $3,600 a month earnings. Now, keep in mind that the $400 isn’t taxable, but it will still have Medicare and OASDI applied to it.
Jason Parker:
And so, that’s the advantage of making sure that you keep your health insurance premiums being paid by the person who’s still working, because the premiums are being taken out pre-tax.
Dan Jamison:
Exactly. Because, once you retire, unless you’re a special category, you’re using post-tax dollars. So, revisit the same scenario, Jason, where let’s just say there’s no special category. You just have two federal employees that are regular employees and one retires first. The one who stays on the job should certainly carry it till they retire. Once retirement comes, it really doesn’t matter, because both of those parties would end up using post-tax dollars. And as you know in the FEHB, if you’re not covering any other kids, yourself and family, two self only policies are generally cheaper than one self plus spouse, or self plus family.
Jason Parker:
Folks, if you’re just tuning in here this morning, we’ve got Dan Jamison on the program. He is the author of The FERSGUIDE. And Dan, I wanted to ask you another question that I hear a lot, and I have my opinions on this, but I’d like to hear your thoughts. A question came in recently on the survivor annuity. The husband is planning to retire and he’s saying, should I pay 10% for 50% survivor annuity, or should I pay 5% for 25%? What are your thoughts about the survivor annuity?
Dan Jamison:
Oh, I’m glad. That’s probably, I bet you that’s the most popular question I get from subscribers when they’re filling out their SF-3701 is, what do I check? Which box do I initial? So, my thoughts on this are, it’s very expensive. If you have a $4,000 a month annuity and you elect a full survivor benefit, that’s $400 a month. If you’re in pretty good health, as you know, Jason, you can buy an awful lot of term life insurance for $400 a month. But, remember that $400 a month is pre-tax, so it’s only going to feel like $300 a month given, say a 5% tax adjustment. So, even at $300, you can buy an awful lot of life insurance. But, to me, what the real purpose of a survivor annuity is to allow your surviving spouse to have subsidized FEHB for the rest of their life, and that’s huge.
That’s seven, eight, $9,000 a year. If you didn’t elect a survivor benefit, the FEHB is gone. They can stay on a temporary continuation of coverage that’s at four times the price. So, what I tell my clients is, the survivor annuity is the gateway to subsidized FEHB for life for your surviving spouse. So, I think the 5% reduction for a 25% benefit is the best of both worlds, it’s under FERS, because on CSRS, the rules are different. You could have a $1 survivor benefit. But, under FERS the minimum we can elect is a 25% benefit for a 5% cost. But, that gets us through the door of buying subsidized FEHB for our surviving spouse for the rest of their life. So, that’s a good thing. The 5% is obviously half the cost of 10%, so that’s a good thing. And if you do predecease your spouse, they’re still going to get 25% of your annuity, which is still a good thing.
So, I’m not a big fan of the 10% reduction unless the situation warrants it. And unfortunately, as I’m sure you know in your practice, unfortunate things happen to people. I may be having a conversation with somebody who’s retiring on a disability annuity. Disability annuitants I almost always, especially if they’re terminally ill, I advise them, of course, you want to elect a full survivor annuity. You may only, I know this sounds awful, but you may only be paying that premium for them for a year before you perish from your disease, and then you really haven’t paid much and your spouse, your surviving spouse is going to get half your pension for the rest of their life. So, it is a little situation dependent. If somebody comes to me and says, I’ve got stage four pancreatic cancer and I’m retiring right now, what options should I elect?
It may sound cold. I’m going to tell them, you want to elect a full survivor annuity. The chances are actuarially speaking, you’re not going to live as long a life as someone who doesn’t have stage four pancreatic cancer. But, given a healthy individual, Jason, I’m a fan of the 5% election. I’m not a fan of the [inaudible 00:31:48] because you can do that with the spousal signature, but if the marriage dissolves later on, that surviving former spouse is not going to have a survivor annuity period, because that election that’s made at retirement is for life.
Jason Parker:
Well, I’m glad you brought this up about a marriage dissolving, because when you and I were talking about having you come back on the show, I said, Dan, we’ve covered a lot in the years past. You’ve done some really great webinars for our audience, but an area that we haven’t spent a lot of time on is divorce. And this is, I know an area that you get brought in on as a consultant a lot. So, maybe you could give us a big picture overview and help our listeners understand the mistakes to avoid making if a divorce is on the horizon for them.
Dan Jamison:
Well, I’d be glad to do that. I certainly hope that it’s not. But, as you know, Jason, I saw an article this year that divorce filings were up 38% this year over last year, and I believe it based upon the number of emails and telephone calls I’m getting. And just because you’re a federal employee doesn’t mean you may or may not get divorced. The worst statistics are pretty poor, especially with law enforcement, firefighters, air traffic controllers have a high rate of divorce, but some of the clients that contact me are just scared. It’s their first divorce. Maybe they’re in St. Louis or Dakota, and their attorney doesn’t have a solid understanding of how the federal system works. Believe me, if you’re in the Washington, D.C., Beltway area, there’s no shortage of people like me that know how the system works.
But, when you get outside of the Beltway, as many federal employees are, there’s not a lot of attorneys and other consultants that know how the system works. So, what I try to do is, I’m going to do another show here today, is just to give a little 10,000-foot overview of what could happen. So, in many divorces, the largest assets being divided are typically home equity, FERS plan, and the pension. That’s not for everybody. But, more often than not, those three things are pretty big. The house ends up being sold, or one party lives in, they find an appraiser and they square that out. So, that’s usually not a big issue. So, what it comes down to are the Thrift Savings Plan, and either your CSRS or FERS, I’m just going to say FERS, but the same rules basically apply to the CSRS.
So, the first thing I tell my customers is, there isn’t a single federal law that gives your former spouse any part, automatically any part, of your annuity or Thrift plan. There are exceptions to that. I’m talking about FERS. Foreign Service Pension System, for example, does have an automatic award. I’m talking about FERS and CSRS. So, under those two plans, Jason, there isn’t a single federal law. Divorce is a state issue. Divorce case law and divorce practices vary state by state by state. And of course, we have our nine community property states that are pretty easy to work in, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. So, those states are pretty easy, statutory award statewide for half of the marital share, or they call it the community, half of the community share. Nothing’s going to happen automatically. There is always a fear that there’s some formula or ratio that OPM is going to employ to divide my pension, and that’s simply not the case.
Now, they’re going to do that when they get a court order telling them to do that. So, the Thrift plan and OPM are purely ministerial in their actions. They just administer a court order ordering them to divide your Thrift plan or your pension. I have cases where neither get divided because the other spouse work, but generally speaking, they’ll get divided. Parties are, I’m kind of a wide brush here for the whole country, but I can tell you I’ve never seen a judge fail to sign a settlement agreement that was stipulated to or signed by both parties.
So, what I mean is that a husband and wife or spouses are free to arrive at whatever division they want. If they say, look, 75, 25 on this and 55, 45 on that, that’s fine. You can do whatever you want. As long as the two parties agree, nobody cares. Judges will sign those unless they’re some unconscionable thing, or they’re non compos mentis, or being taken advantage of or something. But, generally speaking, you’re free to arrive at whatever division that you want to. But, I can tell you that 90% of the court orders that I am engaged to draft for people, award half of the marital share, that’s a pretty common award even outside of a community property state. So, I just want to make sure-
Jason Parker:
When you say marital share, how is that determined? What’s 50% of the marital share?
Dan Jamison:
That’s a great question. The way OPM will calculate a marital share is down to the month. That is the smallest unit of measure. So, let’s assume we have an employee that works a 30-year, and just to make it easier, a 30-year career, which is 360 months, and they were married for 10 years of that 30-year career. So, we’ll keep our numbers simple. It’s 120 months. So, if someone was married and a federal employee for 10 years of their 30-year career, the marital share of that pension is going to be 120 months divided by 360 months, which is one-third, right?
Jason Parker:
Right.
Dan Jamison:
Half of one-third is one-sixth. So, in that very simplistic example of a 10-year marriage and a 30-year career, a person going through a divorce who’s the FERS participant could expect their former spouse will be awarded about one-sixth of their annuity when they retire. And when they retire is the important phrase. In the federal system, as you know, there is no, at least in FERS, there’s no maximum benefit that you can earn. You will die before you hit a 100% in FERS at 1% a year. So, there is no maximum age in FERS. So, OPM can’t pay a former spouse a dime until the employee actually retires. So, that’s kind of a big hammer in the negotiations is that, nobody can force a federal employee to retire.
That is a personal right, and through the federal court system, that is a federal right for the employee or personal right through a federal court not to have to apply for a retirement annuity until they’re ready to retire. So, again, the former spouse doesn’t get any of the money until the employee actually retires. And our federal system is not like many private sector municipal plans. And a lot of the attorneys get confused because they think, in discovery, they’ll ask for statements. We want your FERS statements. Well, you and I know there’s no such thing. Your listeners know there’s no such thing, because they are federal employees and they’re listening.
So, you’ve got this big misunderstanding about how it works, and I explained to them that listen, FERS is kind of like social security. It’s the right to receive a stream of monthly income until you die, simple as that. And that amount is based upon how long you were working for the government and how much you made. So, keep in mind, there’s no lump sum payment. We don’t tell OPM to award $150,000 to a former spouse, and then you get to keep your pension. That doesn’t happen. It’s a division, if as and when, meaning when you retire, your monthly payment will be a portion, that’s the word OPM uses, a portion based upon whatever you tell OPM.
You could tell OPM anything. They’ll divide based on percentages, flat dollar amounts, marital share fractions. This example I gave you of a 10-year marriage and a 30-year career is very, very, that’s the most common net that I’d say 90% of cases of employees just what’s called a coverture fraction, where the numerator number of months married and a federal employee, and the denominator is your total creditable service. So, there’s a lot more to it than that, but I want to make sure that people understand nothing’s going to happen in a vacuum. Generally, we’ll have the opportunity to bargain this, see the court order that goes to OPM. Usually not always sign the court order that goes to OPM, at least your attorney will. Very few are just signed solely by the judge unless you’ve gone to trial.
Jason Parker:
So, just out of curiosity, if a couple agreed that, say a husband and wife, and let’s say the husband said, look, I’d really like to keep the full pension, but in exchange for that, I’ll let you take 100% of the TSP. As long as both parties agreed to that, that could happen?
Dan Jamison:
Absolutely. And it happens frequently on shorter length marriages, say maybe 3, 4, 5 years, Jason, that’s very commonly what we will do, is we will determine the actuarial net present value of that cashflow stream as if the employee had retired. And let’s say it comes up to $30,000 and the former spouse is willing, because again, nobody’s going to get forced to do this, is willing to accept 30,000 from the Thrift and walk away from the pension, do that all the time. And it’s a non-event to OPM.
They don’t even get a copy of the decree or a copy of the settlement agreement. You don’t have to prove that your former spouse basically waived their right to, not their right, they waived their award of their FERS. So, that happens a lot. We call them buyouts or offsets. Sometimes we’ve got a pension earned by the non-federal employee by another municipality or a company that still has a defined benefit plan, and we’ll value that plan and offset it to it. Maybe there’s a 30,000 on one, 40,000 on the other. We’ll just swing 10 more thousand out of the Thrift. We use the Thrift plan a lot as an equalizing account to kind of square up the [inaudible 00:41:59]
Jason Parker:
So, another question I have, just out of curiosity, if you go through the divorce proceedings, everything’s finalized, 10 years later somebody changes their mind, is it possible to go back and have any of this revised?
Dan Jamison:
Yes, it is. I would say about 20% of my overall business is running amended court orders to OPM. So, at any time while you’re still working, after you retire, even when you’re in pay status, if you and your former spouse agree that, hey, we got divorced 20 years ago, 10 years ago, things were different, now I’m in a good place, or you’re in a good place, or I’m willing to adjust my marital share to one-third of the marriage share or one-quarter of the marriage share or a flat 500 bucks or whatever they want to do. It absolutely can be done. It’s very easy to do as long as both parties are on board. In most states, most people just handle this themselves. They would hire someone like me to draft the court order for them. They would sign it, stipulated to the contents of it, take it to the clerk of the court.
Sometimes they have to pay a fee because the case is 20 years old, you got to get the file out of storage. But, as long as both parties have signed it, [inaudible 00:43:15] 99% on judge having no issue at all signing those because they’re stipulated to, there’s no need for a hearing. The only thing you cannot change after the retirement of a federal employee, OPM will no longer accept an amended order that changes any part of the survivor annuity. So, if someone was awarded a survivor annuity in the divorce, and then there’s a retirement, and five years later they decide, oh, we don’t need this survivor benefit anymore. I don’t want to pay for it. There’s no out. That cannot be removed. OPM will not, by regulation, cannot accept an amended court order that changes the survivor annuity.
But, you can change who pays for the survivor annuity, you just can’t change the amount of the survivor annuity. Because, let me stick this in here too. In divorce, we have different rules for survivor annuities. CSRS, it could be as low as $1 a month, as high as 50% and anywhere in between. Remember, when you retire, you only have two choices, the 5% and the 10%, the 25, 50, and divorce can be anything.
Jason Parker:
Well, I have to say, when the topic of divorce has come up and they’re federal employees, my advice is always call Dan Jamison. He knows a lot more about this than I will ever probably know. But, I wanted to ask you, when it comes to divorce, is there one thing in particular, just kind of this glaring mistake that so many people make as they’re trying to navigate divorce as federal employees?
Dan Jamison:
There are a number of mistakes that people make and not knowingly, of course, and usually with counsel that weren’t aware of the rules regarding federal employment. There are a number of things that you want to make sure of, and most of all I think is making sure that everything is done correctly. I’m a big measure twice, cut once guy, almost to a fault, because I don’t want this court order not to be approved, because OPM doesn’t pre-approve court orders, neither does the Thrift plan. Most other administrators in this country and you’re dividing a pension or IRA or something, they will look at the order first and they go, yeah, that looks good. We’ll accept that. Go ahead and get a judge to sign it. OPM does not do that, and neither does the Thrift Savings Plan. So, on the Thrift Savings Plan, some of the mistakes people make are forgetting that they have an outstanding loan as of the date of the court order. TSP’s policy is to add back the amount of an outstanding loan to the account balance.
So, if the TSP gets a court order that says, former spouse is awarded one half of the account balance on 10-31-2020, and the account balance is 400 grand, but there’s a $20,000 loan outstanding, they’re going to make that balance 420 grand before they divide it in half. That catches a lot of people by surprise. That’s why I always ask people in their emails, do you have an outstanding loan? Because, we can put a sentence in that order that says, hey TSP, don’t add back the amount of the outstanding loans when you’re doing the math, and they’ll honor that. So, that’s a big mistake on the TSP. The other mistake I see on the Thrift plan is people trying to outsmart the system. So, they think, oh, well, gee, my spouse is going to get a part of this, so I’m going to move everything to the G fund that’ll put the screws to him or her.
I’ll put it on the G fund so it doesn’t earn any money. But, the court order at OPM and the court order at the Thrift plan awarded that as of let’s say 10-31-2020, and on that date, this person was in the C fund, and it was a week later, they moved it to the G fund. Well, the Thrift is going to use the return on the as of date on the court order to calculate the return or the earnings for the former spouse. Well, now you just harpooned yourself. Now you’re in the G fund making what? Less than a percent Jason, and yet the return for your former spouse is being calculated at the higher rate. So, what I tell people is, just don’t play that way. You manage your Thrift plan the way you’d manage your Thrift plan as if you weren’t going through a divorce and you’ll usually be better off.
Those are the two mistakes that I see the most on the TSP, other than just having the court order rejected because the Thrift Savings Plan will not calculate a marital share. That example I went through with the 10-years of marriage, 30-year career, the TSP will not do that. They only accept court orders that have a discrete dollar amount or a percentage of the account on a date certain. So, you have to hire somebody to calculate the marital share if you were married after becoming a fed, makes sense? If you were married before you became a fed, Jason, whatever the valuation date is, that TSP is all marital, because you were married the entire. But, if you were a federal employee for 10 years, and then you got married, well, then the first 10 years, whatever balance you had on the date of marriage in most states is your separate property or your sole and separate property.
So, we have to go in and say, what was your balance on the day before you got married? And then, [inaudible 00:48:28] say you had 35,000 in there, we need to roll that forward for the 20 years since you’ve been married to see what that’s worth now. Maybe that 30,000 is now worth 100,000. We want to make sure you get credit for not only what you had in the account on that date, but the earnings in what you had in that account for the last 20 years, and then subtract that amount from the total Thrift Savings by now before we divide by two. So, let me add the three. Those are your three big mistakes on the Thrift plan, not getting credit for what you had in there when you have to have a marital share devised, forgetting that you have an outstanding loan and getting an added back before they divide by two. And then, playing around with your holdings to try to put the screws to somebody, just not a good plan. So, those are my three on the TSP.
Jason Parker:
Awesome. Man, there’s so many nuances. So, my advice would be try to reconcile, avoid divorce and avoid all these layers of complexity. But, like you said, the divorce rates are high in our country and this is just a reality, and people need access to good information. And we’re glad that you’re there, Dan, to help guide people on not only something that’s complicated, but something that you’re trying to make decisions at a time where your brain’s probably not working as well as it could because of all the emotion involved, and it can be just a really hard time in people’s lives. I want to remind our listeners, Dan Jamison has The FERSGUIDE, fersguide.com. If you are a federal employee, you need to make an investment in your future, and I would say knowledge is probably the best investment you can make for 20 bucks a year. Become a member of The FERSGUIDE. If you don’t join the membership, at least look at his book. Dan, isn’t that book, don’t you update it once a year or don’t you have an update coming out here soon?
Dan Jamison:
I do. I update it every year on December 1st. So, the version that’s on my website right now is the 2020 version, but on December 1st, it will be the 2021 version. It’ll be many pages longer, be updated for all any law changes. Like TSP as you know, is going to a spillover methodology for catch-up contributions, all that stuff will be in there. But, I want to assure you that if you buy a subscription today, even though it’s before December 1st, it’s still good until November 30th of next year. So, you’re not just buying a subscription for five weeks. It will be for-
Jason Parker:
Oh, good.
Dan Jamison:
The one on Amazon, however, will not be updated physically until December 1st. So, if you were to order that book, I would encourage your listeners not to buy that book until after December 1st on Amazon.
Jason Parker:
Awesome. Dan, thanks so much for the work you’re doing for the federal employees. It’s really helpful, and I appreciate you taking the time out of your busy schedule to be a guest on the show today and share your knowledge and wisdom here.
Dan Jamison:
It’s been my pleasure. Thanks for having me, Jason.
Jason Parker:
All right, thanks Dan. Keep up the good work. Take care. So, you’ve been listening to episode 328, my interview with Dan Jamison. Just want to remind you that there will be show notes. Visit soundretirementplanning.com and click on episode number 328, and I’ll have links and resources to everything discussed in this show. Until next week, this is Jason Parker signing out.
Information and opinions expressed here are believed to be accurate and complete for general information only and should not be construed as specific tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent fee-based wealth management firm, located at 9057 Washington Avenue, Northwest, Silverdale, Washington. For additional information, call 1-800-514-5046 or visit us online at soundretirementplanning.com.
