Complete transcript of webinar below:
Jason Parker: Okay, everybody. My name’s Jason Parker. I’ve got Dan Jamison on the program with us. Thank you all for being here. I just want to run through a couple of housekeeping items, and then we’ll get started. First of all, for some of you that were here early, that we’ve been experimenting with the question and answer box on the right hand side of the screen, I want you to use that today, so as we go, you’re probably going to have questions that come up, and one of the things that Dan and I hope to do is be able to answer all of those questions, or as many of them as possible for you today at the end of the program. I want you to write the questions as we go, so that it’s at the top of your mind, but just don’t expect an answer to your question right away. What we’ll do is after Dan gets through the entire presentation, we’ll come back and do a … Answering all questions and answers, do a Q and A session at the very end.
Tell you a little bit about how this relationship came about. My name’s Jason Parker. I am the host of Sound Retirement Radio. Some of you are listeners to us. I know we’ve got people that tune into the program all over the country, in large part thanks to the internet. We have a pretty strong presence through podcasts now, and I’ve been doing the program for a little over seven years. It started out as a radio show right here in the Seattle area, but thanks to the internet, we now have a presence where we’ve got people listening to the program all over the country. The reason that I started Sound Retirement Radio is that I specialize in retirement planning. I’m a financial adviser, I wanted to be able to bring experts on from around the country so that we could add significant, meaningful value to our listeners’ lives. In 2014, my book came out, Sound Retirement Planning, and it was a real honor for me to have my book make it all the way up into the number one slot on Amazon under personal finance. This was a great day for me. I’ll share with you this screenshot.
This was the day that my book hit the number one spot. It was featured next to Robert Kiyosaki’s book, Rich Dad Poor Dad. Robert Kiyosaki and Dave Ramsey are both two of my personal heroes in the world of personal finances, so that was really great. One of the reasons I wanted to bring up my website here is just to let you know that we have a lot of resources available for you at soundretirementplanning.com, and this particular webinar, after we have our event today, we’re going to record this, and we’re going to archive it for you. We’re doing one webinar a month. Last month, we did a program. We had Tane Cabe on talking about the HECM mortgages, home equity conversion mortgage. If you’re not able to stay for our entire event today, I just want you to know we will have the replay available to you, for a short time at least, usually about 30 days over on the right hand side of the screen, if you have friends that are going to want to watch it.
For those of you that are thinking about retirement in the near future, you’ll also notice over on the right hand side, we have what I call the Sound Retirement Planning Blueprint. This is where we take principles and concepts, and help you put all of this stuff together to really make sure you’ve got a solid retirement plan. That’s a video series that we’ve created. It’s a step-by-step process just to show you some of the planning that we do for a lot of the people that we serve as they’re preparing for retirement. One of the other resources you might be interested in, a great benefit is Social Security. In my book, I have a chapter on how to maximize your Social Security benefits. You can request a free chapters of the book from the website Sound Retirement Planning. I’ve learned that in retirement, retirement’s all about cash flow, and so one of the most important things we want to do is make sure you have a really good cash flow plan as you’re heading into retirement.
We’ve worked with a lot of folks that are retirees from the federal employees system, and you guys are … You really have a unique opportunity and Dan’s going to cover a lot of those opportunities with you. The second thing that I’ve learned about retirement, or maybe the number one fear that I’ve learned about retirement is that people have a fear of making an irreversible financial mistake. In fact, the number one search query that brings people to our website, just organically, is people will type in the phrase, “Overcoming the fear of retirement.” One of the reasons we started doing all of this education is that we believe that when we can educate people, we empower people, and we can help set aside some of the fears that you may be experiencing as you’re thinking about retirement. It’s hard to go from 20 to 30 years of career into this … It’s a big transition, and so you’ve got to be thinking differently about the resources that you have accumulated and how you’re going to use those.
The way that the relationship with Dan came about is, I think it was last spring, we had a family member visiting us from out of town, and he had retired from the military. He had worked for the federal government, and he said to me, he said, “Jason, there’s a gentleman out there. His name’s Dan Jamison. He writes something called the FERS Guide. Let me show you this here real quick. This is Dan’s website. The FERS Guide, and he was saying, “You know, he is just an excellent resource on everything having to do with federal employees retirement system,” and so because of that, I looked Dan up online, and I sent him an email. I said, “Hey, Dan. We specialize in retirement planning. Would you be willing to be a guest on my radio show?” He agreed, so we’ve had him on the program several times. Been very, very popular guest speaker, and so last year, towards the end of last year, I asked him if he’d be willing to share some of his knowledge through a webinar type event, and Dan was gracious enough to do that for us.
With that being said, it is my really good fortune to be able to hand this over to Dan Jamison, and he’s going to walk us all through the federal employees retirement system, some of the questions he get asked most frequently as he teaches these classes, and some of the information that he’s been writing now for over 10 years, I believe, on the federal employees retirement system. With that, Dan, I am going to hand this over to you. It will take me just a second to make you the presenter, and then you can pull up your PowerPoint.
Dan Jamison: All right. My screen show PowerPoint. I think it might’ve done it. You see it now?
Jason Parker: All right. I do. I have your PowerPoint presentation pulled up.
Dan Jamison: Outstanding. Thank you for having me, Jason. I don’t think I could’ve introduced myself any better than that. Thank you.
Jason Parker: Thank you.
Dan Jamison: I appreciate the folks that are joining us, and the ones that’ll watch later. I’m going to go over the FERS system as it applies to regular FERS, not the rules for law enforcement officers, or firefighters, or air traffic controllers, or some of those other special groups. On my website, I do have a PowerPoint that covers that, but we’re going to go through the regular first today. The first thing I’d like to make people understand is that we are a very fortunate group of people. I am a federal annuitant myself. I was in the FBI for 21 years, and we get a great set of retirement benefits. You’re not going to find this in the private sector, in most municipal or state plans. We get cost of living adjustments, folks. That just doesn’t happen anywhere else. They are legislated if there is inflation. We participate in the thrift savings plan, which is similar to a 401K, and the government contributes about 75% to our healthcare costs. That is in retirement as well.
On top of all that, we get Social Security benefits, so it’s pretty hard to top that, so wanted to mention that. There has been some changes, though. There may be some people watching that were hired in 2013. That is a very unique year. You are the only people that are called RAE, revised annuity employees. You folks are paying a little more for this benefit. You’re paying 3.1% of your base pay into FERS, and then starting in 2014 onward, the rest of you are known as FRAE, further revised annuity employees, so when they change it again, I don’t know if they’re going to call them FRAE FRAEs or what they’re going to call them, but I think you can see the pattern here of Congress trying to have the federal government, the federal employees, shoulder a larger portion of the financial burden of paying for this. Note the grandfathering now. Everybody who’s already on board before 2013 is still paying 0.8%. That’s eight-tenths of a percent, so that’s how we pay for it. Your agency pays most of it.
The normal cost for your plan is about 15%. You’re paying 0.8. Guess who’s paying the other 14%? Your agency, so your benefits are … Underneath FERS, our benefits are sometimes referred to as a three-legged stool or as a pyramid. We have our basic FERS annuity. That’s a function of how long we’ve been there, and what level of salary we retire at, and we have the Thrift Savings Plan, which is really, it’s a defined contribution plan. What we end up in there is going to be defined by what we put in there, and then these last two kind of go together. Because FERS is different than CSRS, we do contribute to Social Security, but there are opportunities for us to retire prior to that eligibility age, and there is a supplement that we’re going to talk about, so the supplement and Social Security I treat as the same thing, so those are the three legs of the stool. I asked my 16-year-old son to make up a little logo for me this year, and this is what he came up with. This is the FERS benefit period.
The Social Security part at the top includes that retiree annuity supplement. I know I’m going a little fast, folks, but we got 67 slides and I want to make sure I can answer your questions. The first thing you’ve got to understand is, there is a minimum retirement age for FERS. I get calls all the time. Dan, I’ve been with the government for 30 years. I started when I was 18. I’m 48 years old, and I’m ready to retire. I have to explain to them, that’s not a retirement. That’s a separation. The term minimum retirement age means just that. That is the minimum age at which you can retire from the federal government, so the way that works is done by your birth year, and this change from 55 to 57 is the same implementation schedule when they changed Social Security benefits from 65 to 67. You find your year of birth. Mine is 1963, for instance, and I see that my MRA is 56. That means I need to be 56 years old before I can retire from the federal government.
That does catch a lot of people, especially the ones who start working early, but that is something you’re going to need to pay attention to as we go through the rest of the slides, because you need to know when you can leave. I like to break this into three categories, your earliest option of retirement, kind of the standard option for retirement, and an enhanced option for retirement. FERS is very different than CSRS. We don’t cover that at all in this program today. Under FERS, you are eligible to retire at that MRA, as long as you have 10 years of service, and they call that an MRA plus 10 retirement, so as long as you have at least 10 years in, so anywhere between 10 and 29 years, and you’re at least 56 years old in my case … You can be 55 or 57 for others. You’re eligible to retire. The benefit is calculated at 1% per year, so if you’re 56, and you’ve got 10 years in, you’re going to get 10%. It’s pretty simple math. The problem is, there is a 5% permanent reduction in your benefit if you decide to take it when you retire.
It’s a little confusing, so I’m going to back up. I retire at 56. I have 10 years in. I can retire, but it doesn’t mean I can collect it in an unreduced fashion, so at 56, I will take a 5% per year permanent reduction in my benefit. What’s the difference between 56 and 62? It’s six years. Six times five is 30. I can retire at age 56, take a 30% permanent reduction in my annuity payment, and I can retire. I have some other choices. I can stay longer and avoid that reduction, but the reduction is important for that last bullet point, folks. No federal employee health benefits plan coverage from 57 to 62 unless you elect this reduction, so put that in simple terms. You retire at 56, and you say, “I’m not taking that 30% reduction. I’ll just wait until I’m 62.” If you do that, you will have no federal employee health benefits plan coverage until you’re 62, so you will be sitting out there for six years, and you’re going to have to find another insurance option.
That’s what I call the earliest option. That is the MRA, minimum retirement age, plus 10 years. The next option I’m going to discuss is the standard option. This is what most career employees end up doing. Excuse me, a career employee is someone who has at least 30 years of service. This is by far and large, folks, the best benefit package in FERS. You can retire at your MRA with 30 years of service, so let’s assume I came in at 26 years old. I worked for 30 years. I’m 56. I can walk out the door with my 1% per year benefit. That’s 30%, right? It’s an unreduced benefit, payable immediately. My insurance coverage continues automatically, and I get a supplement. Can you believe that? I get a supplement. The way FERS was set up, remember, there’s the three-legged stool, and one of those legs is Social Security. If you retire at 57, can you collect Social Security? No. You’re not 62 years old, but Congress felt badly for us and said, “You know what? We should give these people something, because they’re not yet eligible for Social Security.”
You will receive the retiree annuity supplement from age … Whenever your MRA is. My example is 56, but on my slide it says 57, so from 57 to 62, you’re going to get a little supplement. That supplement is intended to be what your Social Security benefit would be if in fact you could draw Social Security that early, so that is by far the most popular and most rich benefit package. If you can stick it out 30 years, folks, and make it to your MRA or past your MRA with 30 years, you can retire with what I think is the best benefits package in FERS. Stepping down to the next bullet point, same benefits I just described to you, folks, are available at age 60 with 20 years, so 60 with 20, age 55 to 57, whenever your MRA is, with 30. It gets you the same benefit package, okay? The third option I call the enhanced option. Maybe you started your career a little bit later. If you retire at age 62 with at least 20 years in, you can get a 10% bump.
You get paid, your annuity benefit is calculated using a 1.1% per year multiplier, so 10 years would give you 11%. Of course you have to have 20 on this option, so instead of 20%, folks, you’d get 22%. If you’re sitting out there at age 60 with your 20 years, if you stuck around two more years, you’ll get paid double for those last two years [inaudible 00:16:02], and of course, you get the same benefit package, unreduced annuity, payable immediately. Your FEHB coverages automatically, and one thing that people don’t think about. Unlike CSRS, there is a maximum benefit that you can earn, right? 80%, at 41 years, 11 month. In FERS, there is absolutely no maximum retirement age. You may work as long as your agency allows it, and your health allows it. I mentioned that kind of tongue in cheek, because many times, at least half of us have been through a divorce. There may be a divorce order sitting out there that orders a portion of your annuity paid to your former spouse.
They may be expecting you to retire at 62, or 60, or 57. You may decide to stay until you’re 70, and there’s nothing that they can do to collect. OPM is not covered by the same laws as a private sector employer. You’re not allowed to pay a benefit to a former spouse until you actually retire, but I digress. Those are our three options. We can leave them in 10 years at our MRA. We can leave 30 years in our MRA. We can leave at 20 years, at age 60, and we can leave 20 years, at age 62. All right? Hopefully I’ve still got everybody, Jason, and won’t get too many questions.
Jason Parker: Yeah. It’s looking really good, Dan. It’s looking really good.
Dan Jamison: Good. What I’ve covered is, what are your benefits? We covered the three-legged stool, and then we talked about your eligibility. How do I get out of here? What’s my exit strategy? When can I leave? Now I want to talk about, what are you going to get when you leave? How do you calculate what you’re going to be paid? You only need two things to do that. We need to know your high three. High three is a 36-month moving average, where your salary was the highest. If you could imagine somebody at OPM is standing on a timeline with a little magnifying glass, and they would run it up and down the timeline, and when the highest salary you’ve earned over a three-year period pops up, folks, that’s what they use. We need to know your length of service. How long did you work? OPM uses months, days, and years. They’ll calculate your months, days, and years of service, and any days less than 30 are tossed away. If you have 23 years, eight months, and 10 days, the 10 days go bye bye. You won’t get credit for that. The smallest unit of measure that OPM will use is the month.
We get our high three. Where do you get that? You can estimate it yourself, based on your own pay information. Your agency will usually provide that to you when you ask for a retirement estimate, and many times you can find it … For instance, if you’re paid by the National Finance Center, that information can be found in the FERS personal benefits stated. You get a similar one for DFAS, where you can do that as well. There’s only four providers of payroll services for the government. I explained the high points. This trips a few people up. Look at point number three. Bonuses, awards, and anything paid as an allowance don’t count, so all that overtime you’re pulling down, doesn’t matter. Going over to Afghanistan, having people shoot at you and getting a danger allowance doesn’t count. Overtime won’t count either unless you’re a wage grade employee, so OPM is very, very good at getting this right.
Don’t fret it if your agency’s estimate doesn’t look right to you. I can assure you, the Office of Personal Management will get it right. Your high three may also not be your final 36 months. It wasn’t for me. I was making more in San Diego than I was in Richmond, Virginia, so my high three was based on my time in San Diego. Service credit we touched on earlier. It’s expressed in years, months, and days. They’ll take your service from employment, they’ll add your military service if you bought any back. They’ll add, they being OPM, will add your unused sick leave. They’ll look at the years and whole months that are left and throw away the leftover days. In my guide on page 25, you can follow up on part-time. We have to move forward in the essence of time here. One thing I wanted to make sure everybody understands, there was a change in the law in 2014. There is no better investment I think that you can make than buying your military service credit into FERS.
I’m talking about folks who have four years, three years, five years, eight years of active duty service. Maybe you’re still in the reserves, maybe you’re not. I am not referring to people who have earned a full 20-year military career and will be collecting at age 60. That is a different set of circumstances, so if you’re people, ignore me for a moment. For you all that served four, six, seven, eight years, whatever it may be, buy that time back. It now must be bought back before you retire. That changed in 2014. You will be forever barred if you do not have it done in time. I have seen it happen. OPM makes no exceptions to that rule for anyone. There’s some examples in my guide, but there is no better financial, and I’m sure Jason would agree that there’s no better use of your money than buying your military service credit back. That’s the one time I would tell you to write a credit card cash advance check if you had to. There’s just no better investment you could possibly make.
Jason Parker: Dan, the reason I agree with that is …
Dan Jamison: Yeah, Jason.
Jason Parker: … Is just getting back to this idea that retirement is all about cash flow. It’s your income that’s going to determine your lifestyle in retirement, not your net worth. If we can enhance your cash flow as a result of your military service credit, man, that’s golden. That’s really good.
Dan Jamison: Absolutely. Many times, unfortunately, our military folks aren’t paid as well as they are in their civilian jobs, so the charge is 3% of your pay. Maybe in a three year period, you made $100,000 in the military. It’s going to cost you $3,000 to buy that back. Now that three years, and now you’re making $100,000 a year, so you’re going to get that added to your service credit, so three more percent times what you’re making now, $100,000, that’s going to pay itself back in one year. Where else can you get a 100% return on your money in one year, Jason?
Jason Parker: Yeah. It’s awesome. It’s incredible.
Dan Jamison: You got to do it folks. Got to do it. Starting in 2014, we now get full service for our unused sick leave, just like our CSRS brethren, and does anybody out there know what CSRS stands for? It stands for the Clearly Superior Retirement System, but we are all … [inaudible 00:22:47] so we’ll take what we get. It’s still better than what anybody else in the country gets. Now we get credit for unused sick leave. Don’t go crazy over this, folks. I have people calling me saying, “Dan, when this rule changed, I’m never taking another day of sick leave. I’m going to burn my annually. Now I’m going to save my sick leave so it counts for my retirement. What do you get paid? If your sick leave counts to your retirement, folks, what do you get for it? 1% per year, right? You’re getting paid 1% of your value. If you take your sick leave, what are you getting paid for it? 100% of its value. You take a day of sick leave, does your check change? No. You get paid 100% of it.
Don’t get too caught up on that. It will fall out where it falls out. If you’re sick, use sick leave. If you’re on vacation, use annual leave. Don’t try to manipulate that. You will come out on the bottom of that ship every time, but it certainly is a benefit, and every 174 hours of unused sick leave is going to give you a month of service credit. What’s that worth? It’s one-twelfth of 1%. For many people, it’s about six bucks a month. It’s better than a sharp stick in the eye. I’ll take it, but don’t get too wrapped up in the six leave credit, but I do want to show one. This is my favorite slide of the whole thing. I’m not a big fan, folks, of leaving anything on the table. You look at that first set of facts there. We’ve got a person with 22 years, five months, and 16 days of service credit. They wisely bought their military time. They had two months and six days of unused sick leave, and what do they have for total service credit? This is exactly how OPM does it, folks.
You’ve got 24 leftover days there. What happens to those? They get thrown away. OPM truncates it. This person, in that first set of facts there, will have their retirement computed on 25 years, nine months. Look at the next column over with the green number. This person just happened to have six more days of sick leave, by sheer happenstance, and that brings them to 30 days in the days column. Every month in OPM’s year has 30 days. OPM operates like a bank, 12 30-day months, 360 days a year. This person is going to, because they had those extra six days, is going to get 25 years, 10 months of credit. Now, let’s say you are that person in the first column. What are you going to do about those 24 days, folks? You need to use them. They’re yours. You’ve earned them. There’s a way to convert that. Those 24 days are in calendar days. That doesn’t mean you can take 24 days of sick leave. If you do, then you’re going to end up with 25 years, eight months.
Look right above the calendar, I mean right above the chart, and you’ll see that we have to do a little conversion, so we take those 24 days times 5.8, because I said there’s 5.8 hours of sick leave for a calendar day, and then we divide by eight. Or you can do the easy way, which is what I like. 24 calendar days times 0.725. What I’m trying to tell you is in that first scenario, you could take 17 sick days in this year. I’m assuming this is your calculation you’re doing in your terminal year when you’re going to retire. You could take 17 days of sick leave, folks, and your annuity will be unchanged. You got knee surgery planned. It’s got a three-week recovery period. Why would you waste the first three weeks of your retirement in pain, having knee surgery? Have that done while you’re still on the job, use up those 17 days, and walk out the door with an even zero in that days column.
I’m not advocating fraud by any means, but if you need to use the time for an elective procedure, taking your child to the doctor’s office. I also remind you that federal law allows you to take the entire day off for a doctor’s visit. You do not have to take two hours in the morning because you have an 8:00 dentist appointment, so in your last year of work, you may want to be a little more liberal on how you do that. Did I stay on the right side of the law there, Jason?
Jason Parker: Dan, I appreciate the fact that you explained this in such detail, but you’re encouraging people to be honest and ethical about this, too. We don’t want people to take advantage of it.
Dan Jamison: No.
Jason Parker: We want them to do it the right way if they’re going to.
Dan Jamison: I had some surgery done. That’s one of the things I always throw out. As you get older, you start collecting procedures, and you may need to have something done, and many people will say, “Well, I’m just gonna wait and have it done in retirement.” If you’ve got this 24 days, Jason, you just do it while you’re on the job. What I use to calculate my date periods, this website here called timeanddate.com. It’s free, and it will give you the answer exactly how you want it. You will enter your EOD, or entry on duty date, or if you’ve purchased military time, you’ll enter your service computation date, and your expected retirement day, so this will give you an idea of the years, months, and days for that column, that table we saw before with the green and the red. That’s what I use for all of my date map, divorce work, calculating retirements. Timeanddate.com, because it gives you the answer in years, months, and days. You can add that all together.
Third bullet point. We just look at our years and whole months. Give yourself 1% per year. If you’re retiring at age 62 with 20 years, give yourself 1.1% for every year. It’s that simple. You will be able to calculate and go back. You will be able to calculate your annuity with the exact same specificity that OPM does. This is not how to estimate your annuity. This is exactly how OPM calculates it. If you have the right high three, and you have the right service credit, folks, you will come up with the exact same number that the Office of Personnel Management will come up with. I do have to give them credit, Jason. They do a fabulous job. They’re not the fastest people in the world, but they do accurate work, so you will likely be done correctly when you’re educated.
Jason Parker: Dan, let me ask you a question. Let me ask you a quick question there, because I know that you talked about just requesting an estimate from, regarding the retirement benefits statement. When’s the right time to request that estimate?
Dan Jamison: Many agencies have rules and regulations about how many they will provide to an employee, and how close it must be to retirement. Most agencies will not provide you with one unless you’re within a year of eligibility, and then after that, they will provide you one every year. I have other agencies that they’ll give you one every week if you ask for it, so I would advise everyone to, if they could get one a year before eligibility, that gives you a good starting block to start monitoring what a change in your service credit, and what a change in your high three might do to your decision to retire or not. It’s a very good question, and many agencies won’t do them. Quite frankly I didn’t even get one from my agency because I’ve also found, Jason, that it causes a lot of consternation. The agency is not the entity that will be calculating your retirement, but many times they will present information to the employee in the estimate that it’s incorrect. It may not include some military service. It may not correctly classify them as a special category employee. It may have a service credit deposited for temporary or seasonal work, and it’s just done wrongly.
It causes a lot of grief, and there’s a lot of back and forth with the HR department who try to get it right. Quite frankly it makes absolutely no difference. The Office of Personnel Management is going to get it right. I’ve been doing this for about 20 years, and I can’t honestly point to a case where OPM screwed one of these up. They are very good. They’re very slow because there’s not enough of them, but they are awfully good at what they do, Jason. I think it’s nice if you want to get … What they are pretty good about doing is giving you an accurate high three, but I think anyone who looks through this slideshow is going to be able to calculate their annuity very close to being accurate. That answer your question?
Jason Parker: Yeah. It was great. Thank you.
Dan Jamison: One of the things I mentioned in the beginning when I said we had this fabulous retirement is cost of living adjustments. Our cost of living adjustments are legislated. This isn’t at the whim of the board of directors. This isn’t because our union has been squealing for three or four years for it and we get a whopping 1% raise. Folks, if there’s inflation, if you get a raise. There’s nothing more secure than being an annuitant. If the cost of living goes up, I’m getting a raise. If the cost of living goes up, you may not be getting a pay adjustment. Pay adjustment are not based on cost of living. In FERS, though, you will not get a cost of living adjustment until you’re age 62, so thinking back to our options of retirement, remember we could leave at 56 or 57 with 10 years or 30 years. You’re going to be sitting out there from 57, 58, 59, 60, 61, 62 without a cost of living adjustment, so you could imagine if we have a 4% inflation rate, which is of course much higher than we’ve experienced, but let’s just say we get a 4% for five years straight.
You’re going to use 20% of the value, the purchasing power, of your federal annuity by the time your cost of living adjustment kicks in. That is another reason many employees do work until age 62, because when they walk out the door, they’re eligible for a cost of living adjustment, and what else are you eligible for when you walk out the door at 62? One of Jason’s favorite topics, Social Security. There are some advantages to sticking around until 62, and what’s the third one? You get the 1.1%, instead of one, so the one way to make sure you always get cost of living adjustments, folks, is work until you’re 62. Under FERS, and again, remember I called CSRS the Clearly Superior Retirement System? That’s because CRS annuitants will receive the COLA, whatever it happens to be. If the cost of living adjustment for Social Security is 5%. CSRS annuitants will get 5%. FERS annuitants will get 5% minus 1%, so this amenable chart there, if the cost of living adjustment’s 2% or less, you get it. If it’s between two and three, they will round it down to an even two, and if it’s over 3%, it’ll just be N minus one.
The cumulative COLA, I don’t know if I left that slide in there. I didn’t, is 2.1%, since inception of FERS in 1984, so overall, we’ve averaged about a 2.1% increase every year, and I’m sure Jason would agree, in the private sector, you just simply do not see cost of living adjustments occurring on an annual basis. Let’s see what time we’re at. Oh, wow. We’re moving far.
Jason Parker: Hey, Dan. You’re doing great, and I just wanted to point out. I was meeting with some folks the other day that were retired from the federal government, and they said to me, they said, “Jason, we’re making more money in retirement than we did during our years of working.” They’ve been retired for some time now, and so they’ve seen these cost of living increases happen over time, so they were just, they felt very blessed during their retirement years thanks to this cost of living increases.
Dan Jamison: It’s really what separates us from a lot of other plans, is that ability to not lose our purchasing power. Typically, the cost of living adjustments will outpace the pay adjustments. For instance, there were three years in a row, right, where the onboard employees got no pay adjustments. We got no COLA for two of those years because there was no inflation, and as many of you, poor me, an annuitant, I got no raise in January because there was no inflation last year, but you did get a raise. Typically the annuitants tend to get raises as COLAs when the onboard employees still may not get anything. We don’t have time to go into the detail things, but I’ve been to … On these types of retirement, folks, a voluntarily retirement’s what I’ve been talking about here, the [inaudible 00:35:07], the 30 to 20. That’s when you’re eligible to walk out the door on an immediate annuity. A deferred annuity is when maybe you worked for the federal government for five years, you walk out the door, you never come back. At age 62, you’re going to get five, six, whatever it was years times your high three.
Postponed annuity is what I was talking about when I said MRA plus 10. You leave at 57, but you got to take that 30% cut in order to stay in the health insurance. You could decide not to postpone, if that’s what a postponed annuity is. An early out for many people refer to it as, that’s a voluntary early retirement act, VERA. Disability, we’re not going to have time to go into here, but this is built into FERS. You will receive more or less 40% of your high three until you’re 62 years old, and then you’ll get your actual annuity. What I tell people about disability annuity under FERS, the only problem with a disability annuity is you’re sick. Other than that, from a financial standpoint, considering there’s no premium for this. It’s not insurance you have to buy. It’s a really remarkable benefit. I do a lot of work with disability annuitants, so I know a lot about it. If you have any questions, let me know, and of course there’s a new phased retirement, which is a complete flop. Most agencies have decided not to participate, and the ones that do have a very low participation rate.
Just kind of went through this already. Deferred versus postponed. This is the only slide I left in. There’s a little confusion sometimes between deferred and postponed. Deferred annuity is an annuity that you don’t have a title to right now. You couldn’t collect it if you wanted to, so if you worked five years, walked out the door, you couldn’t collect that if you wanted to, even with a penalty. You’ve got to wait until you’re 62. A postponed annuity is one you could collect if you wanted to, like that MRA plus 10. You could collect it if you wanted to. You have to take that 30% hit, but you could collect it. You can postpone that, as I said, so you can not incur that 30% hit. I’ll pause here and see if Jason has any questions about eligibility, computation, or type of retirement, and keep in mind, I’m cramming about an $80 class here into an hour, folks. I’m trying to hit the parts I get the most questions about.
Jason Parker: That’s great. In fact, I’m glad you took a break here, because I want to remind … We’ve had some people that joined after the seminar, the webinar started here. Remind our listeners over on the right hand side of this screen, we have a Q and A session, so as we’re going, feel free to ask your questions. Type your questions in, and then at the end of our presentation here, we are going to do a Q and A and make sure that all of those questions get answered. I know that we’ve already got a couple of questions up having to do with a divorce decree, having to do with unpaid TSP loan balance at the time of retirement, so we’ll certainly address those questions. Don’t think that we’re not listening or paying attention, but this is great, Dan. I really appreciate you, again, taking time out of your busy schedule to help educate so many people out there that want to retire, that want to have confidence in their retirement.
By being able to plug into this type of resource, I’m really hopeful that we’re going to have a very confident group of people that experience a lot of freedom in retirement, so go ahead and continue with your presentation.
Dan Jamison: Thank you. I hope so. I’ve been writing this guide for 20 years, folks, so try to stump me. I appreciate it. I love a challenge. If I don’t know the answer, I will get it for you, but it is a passion of mine. I learned a long time ago when I found out someone was going to pay for me for the rest of my life if I promised to never come back and do another thing, that got my attention. It really did. I’m like, so I can leave here, and you people are going to pay me 20, 30% of my pay if I promise just to never come back and do anything for you guys. [inaudible 00:38:59] for me, and I wanted in that line, and that’s when I got into this. This was probably five years into my career. A IRS agent got me interested in this, so we’re back to our pyramid. We’ve discussed the bottom part first. That is the part that we have a little bit less control over, depending on … Just it’s a functioner of the kind of job you’ve taken with the federal government, how much it pays, and how long you can stay in that position.
It is a defined benefit plan. The benefit that you get is defined by the length of your career and what you make. My favorite topic is the middle here, the Thrift Savings Plan. This is the choice where people decide to either have a comfortable retirement or not. This is the part you control. This is the part that is a defined contribution. Whatever you contribute’s going to define what kind of retirement you have. Oh, sorry. You know what? I’ve done a little different order for your thing here today, Jason. We’re going to talk about the annuity supplement. Then we’ll go into the TST. The annuity supplement, I mentioned earlier, remember I said Congress felt really badly for us because we can’t have Social Security yet? When I get my large seminars, and I get a show of hands at the end. 25% of the people in the audience have no idea we got this benefit. It’s called a bunch of different names, as you can see up on the screen. The real name is the Retiree Annuity Supplement.
If you walk out the door at 57 years old with 30 years, folks, you get this. If you walk out the door at age 60 with 20 years, you get this, and it is paid until age 62. It’s not something you apply for. If it’s due to you, OPM’s going to pay it to you. It’s not something you can turn down either, because it has no interaction with Social Security. I get so many questions about, “Well, Dan, I want to take the annuity supplement because it’s gonna cause my Social Security to go down.” Nothing could be further from the truth. It has nothing to do with Social Security other than the fact that OPM uses a very similar mathematical computation to determine it. Let’s go through the slides here. Just mentioned all this. You don’t apply for this benefit. I get that all the time. “Well, Dan, you know, what if I don’t opt for this?” There is no opting, folks. You can’t prevent payment of this benefit to you, all right?
I call it pennies from heaven, is what I call this Jason. I call it pennies from heaven, because there have been at least 20 attempts in the last 20 years to eliminate this benefit from FERS. From the outside looking in, as a taxpayer, I go, “So I got somebody who could work until they’re 62 years old. They’re just choosing not to, and as a taxpayer, I’m going to subsidize that early retirement.” As a federal retiree, I’m just playing devil’s advocate. I think we deserve it, of course, but from an outsider looking in, it’s an incredibly rich benefit, but it is subject to an income tax, and it’s subject to the very income tax that Social Security is before you hit full retirement age. Anybody recognize the number 15,720 bucks? That is the income limit for earning Social Security. You will lose a dollar of your annuity supplement for every two bucks you earn over that limit. Very simple. If you get $1,000 a month annuity supplement, and you make 15,722 bucks, you now have a $999 benefit. You’re going to use a dollar benefit for every two bucks you earn.
Let me tell you a trick. There’s a lag. OPM will survey the annuitants in April for how much earned income they had in the previous year, and that change is made on July 1 of the year. You will always get this benefit, folks, for a year. I don’t care if you walk out the door making $100,000 a year in the private sector. You’re still going to see some retiree annuity supplement until you report that income, so that is a tidbit that not everybody knows. Here is a little slide that just gives you some example of the phase out. Let’s say your annuity supplement is $1,000, which is not an unrealistic number. If you go out and get a job paying $30,000 on the left side there, you can see that your annuity supplement’s going to drop from $12,000 to $4,700. You’re still going to get something, but you’re going to lose 60%, and by the time you make about 40 grand, folks, this supplement’s gone, so what this does is it invokes the welfare mentality.
Do I go out and work, and make $40,000 a year, or do I sit home and collect my $12,000? It’s a tough call for some people, but that is the rule on the earnings. Before I showed you how to actually compute your OPM FERS award, your basic annuity. There’s an entire chapter, chapter 52 in the CSRS handbook, FERS handbook, on how OPM does this. I don’t even understand it. I’ve been at CPA for 25 years, so there is a way to estimate it. I did not make this up. Every guy like me, or gal like me, or person like Jason, probably uses the same exact formula. All we need to know to estimate this number, and you’ll get really close, is the number of years of your civilian service credit. Don’t count the military time that you bought back, just your civilian credit. I had 21 years, three months of civilian military, I mean civilian federal service, so I used 21 as my numbers, and you need to know your age 62 expected Social Security benefit. Where can you get that?
Go to ssa.gov and create yourself an online account. I don’t know how many of you may already have that. I tell everyone I come in contact with to do it. It’s in my guide. It’s a great way for you to find out if your benefit, if your wages have been correctly reported, and you can see what your age 62 benefit will be. Here’s how you do it. This is my calculation, folks, for me. These are real numbers, so following the steps on the previous screen, I need to know the number from my Social Security statement, which is the $1,781. It’s the third thing down on the second page. It’s says at 62, your benefit would be, and that’s what mine is 1,781. Then I take a number of years that I have worked for civilian service, which is 21, and divide it by 40. I will get 52 and a half percent of my Social Security number, so that formula cranked me out at $935, and folks, it was awarded to me at $940. It’s a pretty accurate estimator.
Most people get within $20 or $30, and if you’re now retiring, or retiring over $20, then you shouldn’t be retiring. This gets you close enough that you know, with pretty reasonable estimation, what this is going to be, and this is a fair amount of money. Jason, this is a nice piece of change to carry you over from your age 57 retirement until you’re 62 and eligible for Social Security. This stops at 62, folks, whether you elect for Social Security at that age or not. This is done at 62, because you could. What I find in practice is that many federal employees elect to start Social Security at age 62 because of that. If you’ve been receiving 940 bucks a month for five years, folks, you live to the size of your aquarium, so you’re spending that money, and you’re going to look for a way to replace that. What would happen if you collected Social Security at 62 here? You’d get a raise, right? Right now you’re getting 52 and a half percent. If you collect Social Security, how much do you get? 100%, right?
You’re going to give yourself a raise. I’m a big proponent of collecting at 62, but that’s another story for another webinar. Any questions on the supplement, either from the typed-in questions, Jason, or from you? It is truly pennies from heaven. Many people don’t understand the phase out as you make money, or the fact that it runs in a rears. It takes OPM a year to survey you, so you’re always going to get it for at least a year.
Jason Parker: Yeah, so let me take just a minute here and look at some of the questions, but I think that’s a great point, is that there’s that people have to do. They’re automatically going to qualify for the supplement. It’s going to be paid to them. If they do take a private sector job that’s paying them a lot of money, they may not, after that first year, they may not receive that additional supplement, but it could be some additional income to maybe plan a big trip or something that first year of retiring from the federal government. One of the questions I had that popped up here, Dan, has to do with … Let me read this one to you, and see what your thoughts are here, but the question is, two employees who are not married with 20 years, they intend to retire and live off FERS and TSP, and postpone Social Security until age 70. If we marry before 70, are we penalized in any way? If we marry after age 70, is there any benefit?
The only thing I was thinking of, and I’ll just talk briefly from a Social Security standpoint, is remember, Social Security’s made up of a couple of different pieces. One is your own benefit. One is your spousal benefit, and one is the survivor benefit, so one of the things that we’re often times helping people do with Social Security is maximize that benefit over two people’s lifetime. When we have a married couple, we can have a married couple that was born before January 1, 1954 file a restricted application to elect just their spousal benefit, and so there’s some nuances within Social Security. I would just say by waiting until age 70 to get married, you may miss out on some of those planning opportunities with Social Security, but what are your thoughts from the FERS standpoint? Is there anything that people need to be thinking about?
Dan Jamison: From the first standpoint, the first thing that would come to mind for me with marriage would be providing survivor benefits for the other, but when you have a dual fed couple, the real benefit of a survivor annuity from OPM is the ability for that surviving spouse to continue in the FEHB. If this were a different scenario and you had a 20-year fed, and you had someone who was not a fed, I’d beat people over the head to do their survivor benefit because if the federal employee dies, the surviving spouse would have no continuing FEHB, and that’s a subsidized benefit. That’s worth four, five, six, $7,000 a year. When you have dual feds like this who are both entitled to FEHB coverage in their own right, the only advantage to the marriage would be the allowance of being able to elect a survivor benefit. Then you would have to pay that premium back to the date of retirement, which is incredibly expensive.
Typically life insurance is less expensive of a product for income replacement. Does that make sense, Jason? You nailed the Social Security side. I’m not an expert in Social Security, but from a FERS side, I really can’t think of a reason to marry or not marry because the health insurance benefits are going to be provided either way.
Jason Parker: Just speak for a moment there, when you were talking about life insurance. I want to make sure that our listeners are understand what you’re saying from a life insurance standpoint regarding the survivor annuity.
Dan Jamison: We have a section in the presentation on the survivor benefit, but the survivor benefit is a costly benefit, and under FERS, you can elect to have your annuity reduced by 10% to provide for 50% of the unused benefits of the surviving spouse. Let me put that in real numbers. Let’s say you have a $3,000 a month self-only annuity. OPM will reduce that to $2,700 gross annuity for the rest of your life, but if you die, they’ll pay your surviving spouse $1,500 a month, half of that original amount. That would cost $300 a month. My point, Jason, is you can buy a lot of insurance for $300 a month. When I have people who are not insurable because they are skydiving pilots, frequent war zones, and maybe have health challenges, then they’re not insurable, right, from a typical life insurance standpoint. For those people, a survivor benefit through OPM makes good sense, or if they’ve kept their [inaudible 00:51:59], that would be good because there’s no underwriting there.
The real benefit to me is the access to the health insurance. In this question, both of these people are feds. They each have access to the FEHB in their own right.
Jason Parker: Okay. All right. Very good.
Dan Jamison: They don’t need that, and I’ll cover that probably a little more clearly in the coming slides.
Jason Parker: One more question before we move on here.
Dan Jamison: Yup.
Jason Parker: Two LEOs retiring. Supplement and any advice?
Dan Jamison: Two LEOs retiring, they are … The maximum retirement age there is 57. They could be leaving at 50 like I did. I left the day I turned 50, or they could be sticking around until 57, or begging for an extension and going past. There are some dual feds, but it matters to me who retires first. Under the Pension Protection Act of 2006, the retired law enforcement officer can exclude up to $3,000 of premiums paid for health insurance from an income. Remember, an onboard employee has no limit, right? You can do premium conversion, and lower your salary by an unlimited amount of money. If these dual feds are on a self and family, and it’s costing $4,000 a year for that self and family, I would advise them, for the one who continues to stay working, to carry the insurance, because you get the full $4,000 benefit of pretax dollars versus the $3,000 benefit if the retired person carried it.
Once they’re both retired, they could each, depending if they have children or not, they could offer a self plus one or two self-only policies, and then each of them has a $3,000 exclusion. It’s not a family benefit. It is an individual benefit. Not sure that answered the question or not.
Jason Parker: I think it’s some good advice. Thank you, so let’s keep going with your presentation here.
Dan Jamison: Oh, yeah, so now one of my favorite part, the Thrift Savings Plan. There’s just nothing that is going to make your retirement more comfortable than the Thrift Savings Plan. The government makes an automatic contribution of 1%, so if you show up for work, and consume oxygen, you’d get 1%. They’ll put in four more percent if you’re willing to put in five. All in all, it ends up you put in five, they put in five, and only 4% of theirs is a match, and then at retirement, you have your withdrawal options. Here’s the breakdown of the matching. You’ve got to do 5%, folks. I would hope that all 34 people that are logged in are at 5%. If you’re not at 5%, you’ve got to find a way to do that. You are leaving money on the table. You have to find a way to do it. Take the bus to work. Eat Ramen noodles. You got to get the full match. All government funds go to the traditional TSP. I’ve had a number of people that are very pro-ROTH. I happen not to be. That’s really a conversation for another day.
All the government contributions will go in the traditional TSP, so even if you’re 100% ROTH, all that 5% of the match coming from G is going into the traditional, so know that, and they’re going into the same fund allocation that they specified in their contribution allocation. Limits for 2016 stay the same. You can contribute up to $18,000 into the regular TSP, and $6,000 for catch up, so it’s a total of $24,000. Keep in mind on the catch up contribution, you do not have to be 50 years old yet. All you have to do is be 50 years old by the end of the year that you would start the contribution. That’s what I did. I was 49. I have a birth date’s in December. I was 49 in a month. I started contributing to the catch up. All the IRS cares about folks is your situation on 1231. They’re like a snapshot company. If you got married on December 30, you’re married filing jointly. If you’re 50 on December 31, that was your age for the entire year, so keep that in mind. As long as you’re 50 by the end of the year, you can automatically start contributing.
Most of the payroll processors, like the National Finance Center, will automatically make this option available to you in that year that you turn 50. They know that, and they will have it in there. It’s a lot of money. $693 a pay period, folks, if you want to max out, and another $231 for the catch up. One of the things that … I took this out. One of the things that will catch some people … I’ve got folks that very pride on themselves. I’m contributing 23% of my pay to the Thrift Savings Plan. It turns out by November, they get the $18,000, and they will argue with me that it doesn’t matter, that they got their match. You didn’t, and you won’t. You have got to have a contribution every single pay period in order to get a match. The matching is done on a pay period by pay period basis, not on annual basis, so make sure that you’re not contributing more than $692 a pay period. If you are, you’re going to max out early, and you’re going to miss out on some of that 4% match.
I get those call every week. It still happens. There is absolutely nothing more important that you can do. You’ve got to contribute, and this third bullet point here, I have got a lot of people doing this now. I came in the FBI. There was only one open season every six months, so only twice a year I could make a change. Jason, you know how many open seasons there are now?
Jason Parker: No.
Dan Jamison: There are 26. Every single pay period, folks, is an open season. What I mean is, you can go in every pay period and make an adjustment to your Thrift Savings Plan. That’s what I beg you to do. I’ve been at this 20 years. I have seen lots and lots and lots of Thrift Savings Plan balances, and every time I work on a divorce for somebody, I’m looking at their Thrift Savings Plan. I’ve seen hundreds and hundreds and hundreds of them, and the folks who were putting the money in on the first part of the career, that is the most important money. The money that goes in first has a longer time to work for you, so here’s what I’m begging you to do. If you’re not maxed out, go in every pay period, add $5. Let’s say you’re contributing $150 a pay period. I want you to go in and make it $155. Two weeks later, I want you to go in and make it $160. You get the idea. Two weeks later, $165.
At some point, you’re going to notice this, and when you do, stop. It’s okay. Get yourself adjusted to that level. Now you get a step increase. What’s a step increase? It’s 3%. All right. Why don’t you split it with yourself? Take one and a half percent of your pay, figure out what that is, and put that in here. Now maybe you could start putting in 10 extra dollars a pay period, and if you just did the $5 a pay period for one year, folks, you’d be up $125 a pay period in contributions to the Thrift Savings Plan. Before you know it, you are going to be very happy with your balance. You’ve absolutely got to find a way to squeeze even … You can go in and out a dollar. My point is just have a plan, and know that that plan is for you to go upward in the amount of money that you’re contributing. This is the thing you control. You can’t control your FERS. In fact, it might go down if Congress makes some changes, right?
Not everybody can control what kind of job they have, or what city they work in, for locality, or what kind of opportunities. Your FERS is what it is, but the Thrift Savings Plan, folks, you are in the driver’s seat. This is something that you control. I can’t tell you how many times I’ll be working with somebody, and they’ll tell me they’ve got 20 years in the federal government, and I ask them what’s in their Thrift Savings Plan, and they tell me $65,000. That’s just completely unacceptable for a 20-year employee in the federal government, absent any type of emergency that they’ve been through. We have the opportunities. The matching is provided by the government. You can’t afford to miss out on getting through the Thrift Savings Plan. I know we’re a little tight on time. I’m not going to go through all the finds. I want to rather talk about the fact that on the traditional TSP, that gives you the tax benefit now.
If you can somehow put an extra $100 a month in, and you’re in the 30% tax bracket marginally, it’s only going to cost you 70 bucks. That’s all it’s going to feel like, so you get that tax benefit in your pocket right now. When you’re going in, and making those changes, and adding more to your traditional TSP contribution every pay period, go ahead and pay yourself back by lightening up on your withholding a little bit, because it’s going to even out on you. On the ROTH, it’s just the opposite. You’re going to put in money that you’ve already paid taxes on, but you’re banking on the fact that number one, tax rates will be lower in retirement than they are now, and you’re also banking on the fact that you are going to withdraw money at a reasonable rate of return, I mean a reasonable rate of withdrawal. I don’t think Jason would disagree with me here. If you have a ROTH TSP, and you retire, and you don’t touch it for 20 years, your tax savings are zero.
Unless you take the money out, folks, you don’t enjoy the tax savings. If you’re the kind of person that’s throwing all your money into the ROTH TSP, and you’re going to let it sit there for 30 years so you can just give it to one of your kids, you’re not going to get the same benefits of someone who used a traditional TSP. who’s another little known fact about the ROTH. You’re money’s got to be in there for five years since the beginning of the contribution here, and you’ve got to be 59 and a half, so when did the TSP come out with a ROTH? In 2012, so when is the first year any federal employee is going to have a qualified withdrawal from the ROTH? Answer, 2017, next year, so are there people out there now that are retired, taking money out of the TSP, thinking they’re getting ROTH TSP followed by withdrawals? Sure. Are they? No. The other thing is you got to be 59 and a half, so let’s say you’re one of those people that worked until you’re 57. 30 years, right, and you’re going to start withdrawing money from the Thrift Savings Plan.
Do you think the Thrift Savings Plan will allow you to take money out of your traditional and not your ROTH? They will not. They have to give it to you in a prorated fashion, so if 80% of your account balance is traditional and 20% is ROTH, and you ask for 1,000 bucks a month, you’re going to get 800 bucks from your traditional and 200 bucks from your ROTH, and guess what? You’re not 59 and a half, so that ROTH withdrawal is not going to be qualified. These are things to look out for, folks, on the ROTH.
Jason Parker: Hey, Dan. One of the things I just wanted to chime in and say there on the ROTH, because I think maybe I may be a bigger fan of this than you are. One of the things we’re always encouraging our clients to do is to think about diversifying their future tax obligations the same way that we would consider diversifying their overall investments and their cash flow plan. One of the things I’m always looking at is this national debt that we’ve stacked up in our country. We’re at $19 trillion, and we have some of the lowest marginal income tax rates in history right now, and so if tax rates do go up, and people do have these ROTH accounts and they’re retired, it could be one way for them to help manage that future tax liability by being able to pick and choose which accounts they’re going to be pulling money from. Often times, when people come in to meet with us and they’ve really put a lot of money into their traditional TSP, but they’re approaching retirement, we will have them start making contributions to the ROTH just to diversify that future tax liability and give us some options when the withdrawal time comes, so that’s all.
Dan Jamison: I agree. If the Thrift Savings Plan would allow a retiree to take money out of the ROTH or the traditional, and make that choice, Jason, but there’s no choice. Many of my clients are law enforcement officers who are retiring at 48, 49, or 50 years, like me. I retired at 50, and if I have my ROTH RIA, I mean my ROTH TSP and my traditional TSP together, the TSP, I can’t just take the money out of the traditional. I’d have to move those funds over to another custodian, and then if I do that, I lose my … Law enforcement officers have the same rule at age 50 that everybody else has at 55, right? If somebody who is 57 years old and retires under FERS, they’re not yet 59 and a half. If they take their money and they move it over to anyone else before 59 and a half, they’re going to be locked into one of the section 72T withdrawal methodologies.
Jason Parker: Yeah.
Dan Jamison: I’m a big fan of leaving the Thrift Savings Plan. Don’t get me wrong, Jason. I encourage every single person that I encounter that as soon as they’re 59 and a half, they beat feet and leave the TSP. I am not a fan of leaving your money. I am not a fan of leaving your money there after 59 and a half. I’m only a fan of leaving money there if you have some tax advantage or penalty advantage reason for it, the 55 rule, or the 50 rule. [inaudible 01:05:18] the ROTH. It’s just that the TSP makes it very difficult to selectively withdraw. If I’m $10,000 away from the next tax bracket, I may want to go ahead and pull out $10,000 from my traditional bracket, but if I’ve already entered that tax bracket and I need 10,000, I might want to pull it out of the ROTH, right?
Jason Parker: That’s a great point, and I think that just to qualify what I was saying there, most of the people that we work with, when they retire, they usually, like they say, they usually pick up their money and they transfer it to another custodian, so that we do have the ability to pick and choose which account we want to draw from, whether it’s a ROTH or a traditional. Assuming that they’re beyond those special circumstances, so that let’s say they’re 65 years old and retiring. We don’t have some of those special circumstances like you were talking about for …
Dan Jamison: I guess I’m a little [inaudible 01:06:08] with the law enforcement officers, because they retire earlier, but someone who leaves at 62, absolutely. There’s no reason to stay there. I don’t know if you saw the last statistic, and then I’ll move on, but 48% of TSP account holders leave the TSP in the first 12 months. That’s staggering. After retirement, within a year, 48% of the people leave, and with good reason.
Jason Parker: At the same time, I would say the TSP is an incredible, incredible savings vehicle for people with very low fees, so we want them to maximize that while they’re working, but once you retire, you have a lot more options available to you by considering moving those funds over to a self-directed IRA.
Dan Jamison: Oh, I agree completely. Maximize it while you’re there, but as soon as you’re 59 and a half, beat feet and leave. I’m going to go into how hard it is to get your money out, so looking at the time that we have here, we just talked a little bit about the ROTH versus traditional, and Jason and I talked. I think everybody’s getting a picture there that it’s an access thing. This pitfall that I have up here now is what I’m talking about. If you are leaving earlier, if you’re leaving in 57, and you want to take advantage of penalty-free withdrawals, you’ve got to leave it in the TSP to get the penalty-free withdrawal. The pitfall is if you leave your money … If you have ROTH money and traditional money in the TSP, and you’re 57 years old, and you ask them to send you 1,000 bucks a month, they’re going to get some of your ROTH TSP money back, and it won’t be qualified, and there’s nothing you can do about it.
If you’re leaving at age 60 or 62, then of course. You participate fully in the ROTH, participate fully in traditional. As soon as you’re 59 and a half move that money to another custodian and definitely separate those funds. I’m going to kind of coal through these advantages and disadvantages now. Just looking at the time, Jason, the thought … The other reason you don’t want to stay in the TSP is the difficulty in getting your money out. The TSP only allows one lump sum withdrawal. That’s it. One, and you’ve got to make that decision before you start monthly payments. You decide to take out some money for little Suzy’s tuition or something, and then you start your monthly payments of 1,000 bucks a month, and then you decide you need $20,000 for something else, folks, you’re done. You can’t do that. The Thrift Savings Plan makes it very hard to get to your money, and that’s another great reason to have it somewhere else.
I’m going to probably move on from the TSP now. The limited options to withdrawals is what I just mentioned. They do plan on implementing some changes by 2020. I don’t have my fingers crosses, and nor am I holding my breath for that, but a TSP is an agency that is very slow to change what it does. I’m going to go being able to cover these other … Any more TSP questions?
Jason Parker: Let’s take a look. Let’s see what we have up here so far. I know what-
Dan Jamison: [inaudible 01:09:14]
Jason Parker: I know that you’re not in the world of giving investment advice, Dan, but obviously as people are transitioning into and getting ready for retirement, one of the funds that they have available to them is the G fund, which is a really great opportunity to keep principal safe and still earn a better interest rate than you’re going to get on most savings account, or even short-term CDs at banks right now. That’s a really great opportunity for people that are looking to start transitioning maybe some of their money into a safer position as they’re looking at retirement, and they’re concerned about some of the market volatility that we’ve been experiencing here recently. I don’t see any other specific questions on TSP, so let’s go ahead and keep going.
Dan Jamison: One last thing on the TSP. One of the new strategies, or one of the strategies I’ve been telling people to do, even the law enforcement officers who the under these rules, I tell them, “Go ahead. Leave enough money there to support your monthly payment withdrawals for the next five years until you’re 59 and a half, and take the rest of the money you’re not gonna need, and go ahead and make that transition out of the TSP to another custodian with more flexibility and investment options,” so that is one way to get out. The other thing with respect to the G fund, Jason, is let’s say someone’s got $400,000 in there. I will tell them, “Look, take $399,000 and transfer it out to your custodian. Leave $1,000 to the TSP.” Did you know five years later, if the world markets dictate that the G fund is a good place to go again, that you can go back into the TSP? You can transfer that money back in because you left your account open.
One thing I beg people to do is when you leave the TSP, leave the TSP in terms of taking your money out, but leave $1,000 there. If you leave $1,000 there, you still have a TSP account, and you’ll always be able to run back to that G fund in a time like you described, so many people don’t realize that.
Jason Parker: That’s great. That’s great.
Dan Jamison: All right. Eligibility. The FEHB is one of the most valuable benefits. I told you that the government pays 75% of our plan premium. That’s phenomenal. I pay $300 a month for my insurance as an annuitant. It’s a $1,200 plan, and I pay 300 bucks. Where else are you going to get that? It’s one of the most valuable benefits we have. I remember watching Walt Wilson give one of these presentations, and that’s when he said, “Hey, this annuity’s a great thing, but let me tell you. The FEHB is really what you’re retiring to get,” and that’s why many people who are in that MRA plus 10 will take out 25 or 30% reduction because they need to stay in the FEHB, because once you leave, folks, there’s no coming back. You lose your coverage under the FEHB, you cannot get back in. You need to make sure you’re covered under the FEHB for the five-year period immediately preceding retirement. It doesn’t matter what plan you’re in. Doesn’t matter which self only, self and family, Blue Cross, SAMA, doesn’t matter, but you got to be in. You got to have your toe in that water for five years, and it’s five years of coverage, not five calendar years since you submitted your change request.
This second bullet is the big deal that I mentioned earlier. You must leave your surviving spouse a survivor benefit annuity. This is when we don’t have dual feds. Like me, my wife is not a fed. I had to leave a spousal benefit survivor annuity. Otherwise, when I die, and I will die first, because I’m a man. We tend to live 12 years less or so than women, so when I die, I want her to have health insurance, subsidized. She will keep subsidized healthcare, and I run across a lot of time, that folks figure out, hey, this is 270, this is $300 a month. I’m going to go buy life insurance. Life insurance is cheaper. I will not argue that point to anybody. Life insurance is cheaper, hands down, but if I take the 300 bucks, and I buy life insurance, and I die first, I am now cheating my wife out of a four, five, $6,000 a year subsidy for the rest of her life, so I do push people into the slower award, the 25% survivor annuity that only costs 5% of your salary, of your annuity, because that FEHB coverage is incredibly, incredibly valuable.
Jason Parker: Dan, one of the things … Since we’re on this topic of life. You just mentioned life insurance. I just want to throw this out there, just to give another point of view on that as well. When folks are trying to make a determination on whether or not they want to pay the 10% or 5% reduction for the survivor annuity. Remember that when you’re buying life insurance, first of all, you have to qualify for it, so based on your health is going to determine how much you can get. Make sure you have the life insurance in place before you make that determination. The second thing is, make sure that you’re doing that based on the inflated dollars that you’re going to be replacing, because again, retirement’s all about cash flow, so if you’re replacing future dollars with money that’s only going to be enough to replace the benefit that you’re receiving today on an inflation adjusted annuity, it many not be enough to really support your spouse.
I just want to make sure that our listeners, the people on this webinar, that you really are taking into consideration the impact that your death is going to have on your surviving spouse. Sometimes life insurance, I’ve found, is a good way to go. Sometimes I’ve found taking the higher annuity is the better way to go, so you just want to be careful there.
Dan Jamison: I would agree. It can work both ways. Many times people are not insurable, or they’re not as insurable as they think they are until they go out and try to get an offer of insurance. There’s no medical underwriting for the spousal benefit survivor annuity, as you know. A person could have stage three cancer, stage four cancer, retire, and offer a survivor benefit, and it’s valid, and they may not be able to seek out and find life insurance, so that’s a very good point. Five years of coverage is five years into the plan. This second bullet is a real person. I had somebody sign up on 12/1 of 2010. Faxed in their SF2809, and they thought they were going to be covered and retire at the end of the year on 12/31/15, but they missed it by nine days. It’s not five years from when you signed up, folks. It’s five years of being covered under a plan, so what I tell people is, trust me, federal agents are the cheapest people in the world, because I know. I was one of them.
If you’ve got a spouse that happens to work for … Trust me. You know the guy when you’re at the New York split, and he goes, “Yeah, but you guys have soda and I have water. I’m not paying a third.” That guy? They’re all over the place and they’re a lot worse, so if they’ve got a … If you’ve got a spouse, let’s say, who’s getting free insurance because they’re a teacher in a particular school district, that agent’s going to be on that plan and not participate in the FEHB. They’re thinking, “Okay, well, I’m gonna work till I’m 57, so at 52, I’ll go ahead and sign up for it,” but then they make this mistake here, and at 57, they’re at the door. They can’t stay. The other thing that happens is maybe there’s a law change, like there recently was with HR2146, allowing you to get your money out penalty-free, early from the TSP. Now instead of 57, you want to retire at 55, but now you’re already 52. What are you going to do? Now you got to work until 57 anyway, so I tell people, five years before you’re eligible, put your toe back in the water.
You can buy a pretty inexpensive plan through ETNA. It’s plan number 224. It’s one of the highly deductible health plans [inaudible 01:16:46]. It at least allows you to have your foot in the door, and you’ll have coordinating coverage. You can have primary coverage from your husband or wife’s plan and secondary coverage through the one that you just purchased. You’ll get some benefit out of it, and you’ll be covered for that five-year period, so incredibly important. Think about it. I get a $900 a month subsidy times 12 months out of the year. That’s an incredible amount of money from the government, tax-free, handed to me to pay for my health insurance. In retirement, popular question for me. What happens in retirement? Folks, nothing happens. The government continues to pay 75%. You know that book you get in open season, and it has biweekly payments, biweekly premiums, and it has monthly premiums? Monthlies for me, biweeklies for you. It’s the exact same annual amount of money, so nothing changes.
The government pays the subsidy. OPM automatically deducts it from your pay, and if you are a part-time employee with a limited subsidy, it goes back to full in retirement. Wanted to point that out. Get this question on two. You got a dual fed, husband and wife, and kids, so one fed is carrying the plan, is self and family, and covering everybody. The husband or wife is concerned. I don’t have my own plan. I’m covered under my husband or wife’s plan. The OPM views that as the same. You being covered under another person’s FEHB plan is no different than you having your own plan, so do not worry about it. If you’re out there, if you’re one of the postal or securities and exchange commission, those unions have gotten better deals on healthcare, that will go away when you retire. Any FEHB questions out there? I’m trying to move this along for you.
Basically, what I want to point out is don’t mess up. I see the horror stories, and there are no do-overs. OPM draws a fine line in the sand on that. You’re not going to get a variation. There are no gray areas. The rules are the rules.
Jason Parker: I don’t see any specific questions regarding FEHB.
Dan Jamison: Okay. This annuity example, this survivor annuity we were just talking about, there are only … In CSRS, you could do anything you wanted, folks, but in FERS, we’ve only got three choices. None, which requires your notarized spousal consent, the 5% option that Jason and I were just discussing, also requires notarized consent, or the 50%, which is the full survivor benefit, and that was the one I gave you the example of the $3,000 annuity really being paid $2,700, because you’re going to pay 300 bucks. The bull there, we’ve already talked about, for your surviving, non-fed spouse to have insurance, you’ve got to leave the spousal benefits [inaudible 01:19:33]. Here’s where I’ve got to mention this. I know I don’t want to talk too much about divorce, but if you have a former spouse, and that former spouse was awarded a former spouse survivor annuity in the amount of a full survivor benefit, guess who gets it first? They do.
What does that leave for your current spouse? Zero, so you have no spousal benefit survivor annuity available for your current spouse. If you were to die, they’d have no health insurance. You have an option. That option is called an insurable interest survivor annuity. It’s on the SF3107 when you retire. You must submit to a medical review at your own cost prior to applying for retirement. You cannot apply for that benefit after you retire. I have three of them over here on my wall hanging up who are pleading with OPM for a variation or a variance. They’re not going to get it. It is a black and white area. That is something you have to do. The other thing that happens is the employee will go and look at that divorce decree, and go, “Well, my former spouse has a full survivor benefit. I’m not even going to bother writing anything out for my current spouse.” Huge mistake. If you take nothing else away from the survivor benefit part, folks, listen to this.
If you have a divorce, you elect your survivor benefit for your current spouse without any regard to the former spouse, and you do that because OPM will take care of the former spouse’s court award, but if that former spouse remarries before 55, or dies, guess what? Your current spouse can pop into that position and cancel the insurable interest survivor annuity, which happens to cost more for two reasons, none of which we have time to go into. If you take nothing else away from this, think about that. This is an election that is irrevocable.
Jason Parker: Dan-
Dan Jamison: It needs to be done at retirement. It needs to be done right. This is a measure [inaudible 01:21:25].
Jason Parker: Just to clarify, because I’m not quite sure I 100% understand what you’re saying here. If your former spouse was awarded a survivor annuity, it’s possible to still have a survivor annuity for your current spouse, as long as you elect it beforehand, and you complete this medical exam, and you pay for it? Is that right?
Dan Jamison: You’ve got it 100% right. Yes.
Jason Parker: Okay. Hey.
Dan Jamison: It’s called an insurable interest survivor annuity, and it will give the same conveyance of healthcare benefits to your former spouse in the event of your death as a regular survivor annuity would. The reason you don’t want an insurable interest survivor annuity is threefold. Number one, you may not pass the matter, right? Secondly, if your spouse is significantly younger than you, it gets very expensive. There’s underwriting on this, and third, the benefit payable is 55% of the reduced amount, so in that earlier example, remember it was half of the $3,000? In this example, it would be half of the 2,700. Actually, it would be 55%, so there’s three reasons that an insurable interest survivor annuity is less preferable, but it beats the alternative of having none at all, and …
Jason Parker: Okay. That’s important, but that has to be done. That has to be done ahead of time. Otherwise they lose it.
Dan Jamison: Absolutely. I have three people here who are contacting their Congressmen, and they’re going through all the imaginations. Folks, it’s not going to matter. The law is the law. OPM cannot change the law. You can appeal it, but you can only appeal OPM’s application of the law to your particular circumstances, and it may seem cold and cruel sometimes, and it is quite frankly. Usually these horror stories are a result of poor advice from HR in the agency. One of those was cold. Don’t elect something for your current spouse because your former spouse already has it. That couldn’t be more wrong, Jason, but once that water’s under the bridge, there’s nothing you can do about it, so that’s why I get so emphatic about it. If you listen to anything else I’ve said today, because this is something you can’t fix. If you have a former spouse who has a full survivor annuity, you still elect one for your current spouse without regard to that, because you never know what might happen to that former spouse.
They could die or remarry, and if they do, guess what? Your current spouse will step into their place, so that’s what I want to make sure I explain. The survivor annuity [inaudible 01:23:54], we covered that already. Here is an example of what I said earlier. On a 10% cost for a 50% benefit, you can see a $2,500 annuity would be reduced by $250 leading to $2,250, and the benefit paid, as you can see, is not half of the $2,250. It’s half of the $2,500, so that’s my example for that. We already talked about the former spouse having a claim. Let’s say your former space was awarded a 15% survivor annuity. One of the neat things about divorce, besides that it’s very expensive and you shouldn’t do it, is that we’re not limited to just 25 and 50%, Jason. We can have a order for a survivor benefit of 18.36%. We’re not limited to those levels, so in bullet three, if a former spouse was awarded a 15% survivor annuity, it still means your current spouse will have a 35, so that’s great.
In fact, sometimes I think it’s great, if I could structure a settlement so that a former spouse gets a 49% survivor annuity, all I’m trying to do is preserve 1% for that current space. To me, that’s the best of all benefits. I’m able to only pay a 1% survivor benefit fee, Jason, to get FEHB, and then I can go buy myself some less expensive life insurance. Typically, as long as you’re insurable, it actually can be a strategy that I try to help people do. We also talked about the insurable interest survivor annuity. Are we ready to move into FGLI? I know it’s already 5:40, my time. Okay. I got nine slides left. FGLI is the Federal Government Life Insurance that you make an election when you retire, folks. You get three choices. You could choose a reduction of 75%, 50% or no reduction. I can tell you right now … I mean this in the benefit. Let’s say you had a $100,000 basic coverage. 75% reduction means you’re choosing to change that the $25,000. 50% reduction says you’re willing to change that to $50,000, and no reduction says, “I want 100 grand all the way to death.”
All right. If you choose option three, folks, after a couple years, you will change your mind, because that becomes prohibitively expensive. I can tell you with complete confidence, there is no more expensive increasing term life insurance you can purchase in this world than FGLI, but FGLI has no underwriting, so when you get it as a new employee, it really doesn’t matter what your health is like, but it is incredibly expensive on a dollars per thousand basis. Most employees choose the 75% reduction, and when you do that, as you can see in the second bullet point, your insurance will be free after age 65. It will drop 2% a month after you hit age 65, and reduce down to that value, and it drops in price down to 32 and a half cents a thousand. With the 50% reduction, that costs us $1.03 per thousand. Reducing to 71, so that’s twice as expensive, right? It’s exactly half of 71 cents, and then with no reduction, look at the price. $2.45 per thousand, and I’m sure you recognize that as expensive, Jason.
Jason Parker: It’s expensive, unless you can’t qualify for life insurance, and then it’s a pretty darn good deal. [crosstalk 01:27:20] … In this situation recently. Yeah, I had a gentleman. We tried to apply for private insurance to see if he could qualify. He couldn’t qualify, so the fact that he had insurance that he could carry into retirement, that didn’t have to qualify for, it’s a heck of a bargain.
Dan Jamison: I would agree. If you’re not insurable, you’ve got to … You said it earlier. Never cancel an insurance policy until you have a new one in hand. Speaking of canceling, even if you make it an election at retirement, many people also don’t realize you can cancel your FGLI any time you feel like it. You just fill out the SF2817 and mail it in, so even if you make it an option at retirement and now you decide to do something different later, it’s certainly not an issue. There’s an open season coming up. I wanted to mention this. In September of 2016, they will have a rare open season. It’s been 12 years since this has happened. That means no underwriting. You could have stage four pancreatic cancer in December 2016 and enroll yourself into FGLI. Look at the fine print. It won’t be effective for a year, so you can sign up in September of 2016. Folks who are already in can also make policy changes without any … If you wanted to add some multiples, you can do that without any underwriting, but those won’t be effective until October 2017.
Jason Parker: Is that-
Dan Jamison: There’s a one-year lag.
Jason Parker: Is that for people who are already retired as well?
Dan Jamison: No one who is retired can do this. This is for onboard employees that is a great question, and I should have mentioned that. This open season is for onboard employees, and there’s another catch to this, too. Let’s say in bullet point two, an employee decides to go from one multiple of salary to five, and three years later, they retire. They will only carry the one multiple into retirement. Even though they had FGLI for five years, they didn’t have FGLI with five multiples for five years, so whatever option you want to take into retirement folks, you’ve got to make sure you’ve got that for five years. Yeah, the third bullet there, annuitants cannot participate in open season, so this is just for onboard employees. It is a big deal. It doesn’t happen but once or twice in someone’s career, and so if I have some onboard employees listening and you’re interested in this, September 2016 is the time. You’ll see lots of press releases from OPM at that point in time.
Then we’ll get into a little bit of the last few slides. I’m going to talk about time to retire early. You got anything lined up from that, or we can move on.
Jason Parker: I have one person who, regarding the FGLI, who says, “I hear people talking that they just don’t do the life insurance, and just rely on their TSP balance. What is your opinion?” The only thing I would say there is, whether or not you buy life insurance, or long-term care insurance, or disability insurance, it really all depends on what the need is, and so I always encourage people to use a plan, a retirement plan as your tool to determine whether or not these things are needed. If you don’t need life insurance because the kids are out of school, they’re done with college, and you’ve built up the TSP to the point where that you and your wife are going to be able to live comfortably, maybe life insurance isn’t necessary. I certainly wouldn’t just throw life insurance out the window just because you don’t like life insurance. If it’s necessary, you should own it, and so until you put together a plan, it’s hard to say whether or not you should have it. Dan, any thoughts from you on that?
Dan Jamison: I would echo what you said to a tee. Many people don’t realize you have your greatest need for life insurance usually at the younger part of your life and career. The person who’s a three-year employee in the federal government with four kids and a big mortgage is the one who needs the life insurance the most in my mind, typically. There are situations that you may find yourself 60 years old, kids are out of college. You’ve got $800,000 in your TSP. You’ve got a million dollars of equity in your house. There may not be a need for life insurance there, Jason. If the other assets that you can rely on in your balance are solid, then maybe you don’t, but I’ll tell you, the guy that’s 30 years old with those kids and that big mortgage, that’s the guy that needs the coverage, because there’s … You got to look for life insurance as who’s relying on you for support. It’s a cash flow just as well, right?
You got to figure out, and you need to have a plan for it, so I would agree, I would never advise somebody to just have a negative view of life insurance itself, and say, “I’ve got my TSP,” but when you’re a first-year employee in the federal government, you don’t start out with a half a million dollars in there, so you’re not going to have the other assets that you need. I would agree 100% with what you just said.
Jason Parker: All right.
Dan Jamison: All right. This is my favorite part. Can you afford to retire early? You mentioned earlier that you’d talked to people that are saying, “Jason, I’m making more money not working,” and that’s a little bit more common on the CSRS folks than it is with FERS, but you got to remember, your annuity payment’s going to be smaller. No doubt about it. You’re going to get less money paid to you as an annuitant, but look what’s not coming out. No Social Security tax. No Medicare tax. That 1.3 to 4.9% of FERS, or 4.4 for … I’m sorry. This slide was the one from the special category employees. This should say 0.8% FERS to 4.4% FERS. Those rates aren’t coming out anymore. Maybe you were contributing 24 grand to the TSP. Not coming out anymore. Maybe you were paying for disability insurance. Not coming out anymore. That stuff adds up. It’s all about cash flow. It doesn’t matter what your earnings and lease statement says that you’re paid. What matters is the one on the bottom, that says net pay. That’s the one you’re paying your bills with, right? That’s the one you’re paying the mortgage with, and the utilities, and the tuition, and your other automobile expenses.
That’s coming out of your net pay, so we need to compare net to net, and many retirees find themselves in a lower tax bracket because some of these … These things aren’t deductible. The TSP is, but Social Security, Medicare, FERS, those things, they come out post-tax. I frequently run across situations where employees find themselves at 80 or 90% of their pay. I just worked on a new version of my guide that’ll be on my website, that shows a 98% replacement rate with these assumptions, with someone who is putting $24,000 in the TSP and is no longer doing that anymore. Yeah, I’ll get the people that tell me, “Well, damn. That’s $24,000 that you were putting in the TSP.” Yeah, I was, but you know what? I still didn’t have to pay my bills with, and most importantly, I’m not going to work anymore. The thing I run across the most is that people don’t want to face the fact that they’re getting older, and retirement is a transition. It’s a very, very different way of living.
Even at 50 years old, when I retired, do you think that’s half time folks? That’s not half time. I’m in the third quarter. I’m probably halfway through the third quarter with a time out burned and maybe even a challenge flag thrown down, all right? You’ve got less of your life ahead of you than you think, and do you want to spend it at work or do you want to spend it as a retiree? You’ve got to have subject evaluation of quality of life along with an object evaluation of, can I afford to do it? What I’m showing you here are objective things. These amounts of money are not going to come out anymore. You’re going to make less money but keep a larger percentage of it. The other key factor is the tax code. The tax code. It’s like when you get the general life insurance question, Jason, I get a basic question about taxes. You give me 100 people, I’ll show you 100 different tax scenarios.
The tax code highly favors a one earner, multi-child family with a mortgage that they can’t afford. The best way to figure out your cash flow, and I agree with Jason completely. It’s all about cash flow. Do you have the cash to pay your bills? That’s what matters you’re moving on. You’ve been in the accumulation stage of your life for a while. You’ve been accumulating benefits in FERS. You’ve been accumulating in the Thrift Savings Plan, and you’ve got this big snowball that you just kept rolling in the snow, and it’s getting bigger, and bigger, and bigger, and now you’re 60 years old, and you’re going to retire, and you look at the snowball, and you worked so darn hard to accumulate, and guess what? You don’t want to see it melt. You don’t want to see it get smaller. The biggest thing I come across is, when I’m talking about retiring early, people are like, “Whoa. I’m not touching my TSP. I mean, I just got to live off my FERS.”
I’m like, “Dude, you’re 60 years old. You’re going to live 26 years old before you’re dead, actuarily.” Why would you not want to use that snowball? Let’s let that snowball melt. Let’s take some of the money off that snowball. The only reason you were saving for 30 years of work was so you could spend it in 30 years of retirement. My goal, it may be different than others, but my goal was to write my last check for my last dollar on the last day of my life. It’s very hard to define it that way, but I’m not advocate living foolishly, but the point is, you have been saving in these mechanisms like the TSP for the purpose of engaging in a reasonable, and logical, and financially sound plan to pull those assets back out to live in. When I say we need a [inaudible 01:37:12] tax return on your tax software, just like you were retired. You take last year’s Turbo Tax, you delete your W-2. If everything else stays the same in terms of kids, husband or wife’s income, your scheduling, leave it alone.
Just figure out what I just showed you, your TSP money, your FERS money, and your retired annuity supplement. Just drop that in box one. It doesn’t matter where it goes on my tax return for the pro forma, and see what you’re going to have left after taxes, because that’s the only money I have to pay my bills with, is after tax money. The three things that are key in retirement. It’s receiving that retiree annuity supplement, getting paid to stay home, tapping into the Thrift Savings Plan, and hopefully lower tax rates and retirement, assuming no further employment. You have further employment, of course, that’s going to change. I would say I go into a lot more depth on this if we had time. Self-employment is obviously another really key way to make money in retirement, and be able to include some expenses that you might normally incur in your life, but now can be considered part of the business, and the other is the amazing set IRA.
Where else can a person take 25% of their income from their business and put it away? If I make $40,000 this year in this business, I can take $10,000 from my business, as a business deduction, and put it into a set IRA, so think really hard about being self-employed if you are going to go out and do something afterwards. There’s a whole lot more, and we could do a whole show on can I afford to retire early, but I wanted to try to convey is that the Thrift Savings Plan is there to be taken advantage of. You have automatic cost of living included inflation, protected income from your FERS. You will never, ever outlive your money that’s coming from FERS and Social Security. It is paid to your death, so the TSP is all you’re worried about lasting. There have been a number of studies that have shown that if your withdrawal rate is kept between three and 4%, the historical chance of you running out of money in your Thrift Savings Plan is actually zero.
On a full Monte Carlo analysis, it may have some chance of losing, but the point is, it’s there to be taken. I don’t expect to my TSP balance to be the same. I retired two years ago. It’s a little bit lower than it was two years ago. I don’t care. I still know it’s going to last me until I’m 85, 90 years old, something like that. There are a number of great calculators. Bankrate.com, under the retirement calculator section, you can put in how much money you have in your TSP, how much you’re expected to make, how much you’d like to take out a month. It’ll tell you how long it’s going to last, but folks, that’s what it’s for, is for living on. You can sit at home, and you can burn your own life, or you can go to the office every day. I decided to retire the day I was eligible. If I had stayed until I was 57, both of my kids would have just left the house, but by retiring when I did, I have seven years at home with them. I would be handing out carts at Home Depot, quite frankly.
I did this analysis myself that I’m asking you to do, and with $600 a month, folks, I was working for $600 a month on an after-tax cash-in-hand basis, okay, because I was contributing $24,000 to the Thrift Savings Plan. As a law enforcement officer, I have to admit, I’m well compensated. I don’t deny that, but I was clearing $6,000 a month in Richmond, Virginia as a GS139 federal agent. Adding up, so that’s $6,000 a month after taxes for Dan to pay his bills with. What I got from taking my first 21 year, three month FERS annuity, my retiree annuity supplement, and what at that time was a life expectancy base payment from a TSP of about 3%. Add those together, drop those into my tax return because I’ve got a spouse that doesn’t work and two kids, and a mortgage I can’t afford. 600 bucks. I came up with $5,400 Jason. $5,400, cash in hand, after taxes, retired. $6,000 a month, cash in hand, working. Which would you do? I retired.
Jason Parker: That’s awesome. Dan, this [crosstalk 01:41:16] … This has been so val … Do you have more slides or should we start going into questions here?
Dan Jamison: No. That was the last slide. I was trying to … This is 180 slides normally. It’s 67 today. I had to fit it into an hour and a half here.
Jason Parker: Yeah. Thank you, and it’s been an incredible opportunity. I know I’m going to go back and re-listen to this several times, but we do have some questions I want to get your feedback on. First one is, how would an unpaid TSP loan balance at the time of retirement affect any post-retirement lump sum withdrawals?
Dan Jamison: That’s a great question, and one I get with some frequency. The TSP, when you retire and you have an outstanding loan, the Thrift Savings Plan will give you 90 days after separation to pay that back to the TSP. If you do not pay it back, it’s no big deal. They would just issue a 1099, and consider the amount of the unpaid balance a distribution to you. If you are over the age of 55, or you are a law enforcement officer of the age 50, there’ll be no penalty associated with it, nor will it count as your one lump sum withdrawal. The other thing that you can do on this topic is you don’t have to wait 90 days. We have clients that they realize this is going to happen to them, but they want to take out some money. You can contact the TSP as soon as they get your file from the payroll processing center, as soon as they’re notified that you’re an annuitant. You can ask them to declare an immediate taxable distribution, okay, because you can’t ask for the lump sum withdrawal until this has been adjudicated, this outstanding lump.
You can be proactive. You can call the TSP and say, “I want you to immediately declare my outstanding loan and taxable distribution,” and the next day you can send in your TSP 73 and get your lump sum withdrawal out.
Jason Parker: Okay. The next question is, if divorce decree does not say anything about retirement or Social Security, then ex spouse is not entitled to any benefits? Question mark.
Dan Jamison: It can be an interesting answer. In terms of, and I’ve done about 1,000 federal divorces, folks, so I’m drawing on a lot of experience here. It depends on the state you’re in, but despite the Social Security, you shouldn’t see that mentioned in any decree because Social Security benefits are not divisible by court order. That shouldn’t be in there. The part about no mention at all of the FERS benefit is a little troubling. I like to see that I mentioned that the benefit is there, and it’s being awarded to the federal employee. Not to scare you, but I’ve got three cases right now I’m helping people with, and miraculously all in the republic of California. They are just like that. I’ve got one guy, retired 21 years ago. There was no mention in the settlement agreement or the decree about FERS. They did distribute the TSP, and she, because it just happened to be, he was the federal employee, she was able to successfully argue to the court that that was still community property, even though it was 21 years later.
The fact that it wasn’t discussed, mentioned, or awarded in that decree does not change the characterization of that property. I’ll tell you most any other state, 20 years and nobody asked or questioned about it, the likelihood of that succeeding is near zero, so it just depends on where you’re at. It also depends on your recollection. If it really was the intent of the parties to do that, then you’re not going to have a problem. I also have issues, I’ve had a guy in Michigan who, 21 months after a successful divorce where no benefits were granted to the former spouse, she ordered a order to show cause why she should now receive that. She told the judge that she was on medication that inhibited her ability to know the implications of the decisions that she was making at the time. The judge agreed with her, and he awarded it. I don’t want to scare you. I don’t want to tell you a million horror stories. I just can’t give you an exact answer. I’d certainly give you a free consultation on that, as I do anybody, if you want to give me a shout or an email.
I will gladly read your decree and give you a little bit of my take on it. Again, I’m not an attorney. I can only tell you how I’ve seen other cases adjudicated in different states. If you’re in California, I’d be worried. If you’re not in California, don’t be worried. That’s my short answer to that one, but I hope it’s a followup with me individually.
Jason Parker: Okay. The next question is, timeanddate.com. How to compute with SL? Question mark.
Dan Jamison: On timeanddate.com, the thing you want to do on that is make sure you check the box that says, “Including ending date in computation.” Timeanddate.com is not going to help you with your sick leave. The sick leave, I have it in my guide, but also OPM has it right on their website. They have a 2,087 hour sick leave chart. If you Google OPM 2087 sick leave chart, you will come up with this eight and a half by 11 sheet of paper that has columns for numbers and credit. If you have 530 hours, you look down the column until you see 530 hours, and it’ll tell you how much credit that is in years, months, and days, and you’ll add that to the result from timeanddate.com, so you can’t use timeanddate.com to figure out your sick leave credit. That is going to be done on that 2,087 hour sick leave chart.
Jason Parker: Okay. Next question. How do you get an extension to avoid retiring at 57 as a 1A11?
Dan Jamison: It depends on the agency. The 1811s, which are your FBI agency agents, Secret Service, the federal law enforcement officers, they are forced at age 57 under the young and vigorous workforce rules, and that’s why we get a higher percentage, Jason, we get 20% for the first 20 years instead of 1%, because we don’t have the opportunity to have that longer career. It depends on the agency. The FBI is handing them out automatically right now. They’re handing them out like candy, and they’re doing that deliberately, in my belief, so that they can eliminate that special benefit at some point in the future. They want to go to Congress and say, “Hey, I’ve got 2,000 people who are over the age of 57. We’re working the FBI agent job without a problem. Why am I paying twice as much to OPM to support these richer retirements?” I don’t have any advice for the questioner about the 1811. It’s agency by agency. You generally have to be able to show that you’re working on a case, maybe in an undercover capacity where nobody else can replace you.
You have a set of skills that again, can’t be replaced. It is unique. You’re in a hard to staff location. You’re in Indian Country RA where nobody wants to go, and you’re willing to work another year. They’ll keep you there. 60’s the limit. When you get to 60, then it takes a presidential, not the agency, but the President has to approve that. I guess all I can say on that one is, it depends on the agency. You have to make it pretty clear that you’re invaluable, and that you have some reason that you need to stay that would benefit the agency and not benefit you. The key is, you need to show what benefits the agency.
Jason Parker: Next question. Do you anticipate the US government to eliminate any of matching benefits?
Dan Jamison: I haven’t seen that so far. What I think is going to happen, even for onboard employees who are paying the 0.8% or the 1.3 as law enforcement officers, so I think we’re going to see an increase in that. I think it’s going to go up 1.2, 1.3% a year for a few years. The idea is to have the employee shoulder a larger part of that cost. I didn’t get into it, but the normal cost for a law enforcement officer is 31.4%, so 31.4% of the law enforcement officer’s pay has to go to OPM every two weeks to support the retirement. There are no unfunded benefits here, and if the employee’s only paying 1.3, who’s paying the other 30.1? The agency. A non-law enforcement retirement costs half as much, Jason. It costs 15.1%, so you could see why the FBI would be anxious to take its agents, its 13,000 agents, off of law enforcement retirement because of that. That’s one thing I think that the agency is working towards. I think you’re going to see higher contribution rate, but I have not seen anything that would indicate a lessening of the matching contributions to the TSP.
Jason Parker: Okay. Next question. If birthday is mid-month, when does Social Security supplement end when you reach 62?
Dan Jamison: Remember your benefits are paid in a rears when you are an annuitant, so the payment you get for March 1 is for February. If you turn 62 in the middle of March, for instance, your April payment would not reflect any … They don’t prorate that. Your April payment would not reflect any age 62 RAS for the month of March. Okay. Good question. I don’t think I’ve had that one asked before. It’s a very good question.
Jason Parker: Two LEOs, law enforcement officers. Only one person for married, right? The one that is retiring first currently has the coverage. Is this okay? I-
Dan Jamison: That kind of goes back to the one earlier, that if I were that couple, I would have the health insurance carried by the employee that is staying on in an onboard capacity, because it’s more than likely annual premium for their self and family policy exceeds $3,000 a year. If it’s less than $3,000 a year, it doesn’t matter, because the LEO that is retired can exclude about to $3,000 from their in, for those FEB premiums. However, let’s assume they’re spending $4,800 a year on health insurance. The retired LEO’s only going to be able to exclude $3,000, so they would be better off, in my opinion, of having the onboard employee carry that insurance until retirement, and then the LEO can take it over and enjoy the $3,000 exclusion.
Jason Parker: I’ve got another one here. What about a situation where someone who retires and at a later date gets divorced, and then remarried. Is the new current spouse just out of luck regarding an annuity and, or FEHB coverage?
Dan Jamison: Oh, not at all. That would depend on the divorce decree, and that’s a real situation. Certainly reach out and I’ll review that and tell you as a courtesy how that would affect you, but whenever you get a divorce, the survivor benefit you had in place at retirement is null and void. It’s gone. If there’s going to be a new one, it’s going to be in the settlement agreement or decree for that divorce, so it’s possible that your former spouse could be awarded a portion of your annuity, and a portion of the survivor benefit. If that’s the case, then it’s not available for the new spouse. The way the federal law works is, any benefit awarded to a former spouse, Jason, is satisfied first, and then to the extent there are benefits still available, they’re allocable to the new spouse. Is that the question? Did we get that right?
Jason Parker: I think so.
Dan Jamison: Okay.
Jason Parker: Let me move to the next question here. We’ll just do a couple more, and then we’ll go ahead and finish up here, but this next one is, my project … This person says, “My projected cash flow to current take home is 83.8% without TSP. I have about $700,000 in TSP. House is paid for. Kids out of college,” and so the question is, is that enough to retire? The one thing I would say there is getting back to having a good retirement plan, instead of making wild guesses or assumptions, I would say to work on getting a really good retirement cash flow plan built, if that’s something you’re interested in getting some help with. You can visit Sound Retirement Planning and visit the Talk With Me tab. That’s something that we do at our firm, and the second piece I would say to that is, cash flow is a two piece equation. One is how much income you have coming in.
The other one’s how much expenses you have going out. Having a good budget before you hit retirement, having a good handle on how much money you need every month to be able to live comfortably, is going to be an important part of that equation. Is there anything you’d like to add to that, Dan?
Dan Jamison: If that person is eligible, and they haven’t retired, I would probably order a mental health exam. [inaudible 01:54:23] but what I’m saying is, great job. If you’ve got $700,000 in the Thrift Savings Plan, and your house is paid for. I say that as a joke. I’m sure I would like to know a little more about that situation, but if you have reasonable expenses, and reasonable healthcare expenses, and no huge, $4,000 a month alimony payment, if you just live in a normal, kind of average life, and you have a retirement DDU under FERS, and you have $700,000 in your TSP, I wouldn’t hesitate for a moment to push you over the retirement cliff. Again, I want to learn a little bit more, but I’m a big fan of the … There are some subjective evaluation has to be done. You can’t pay your rent off subjective evaluations. I get that, but if you have the money, you have the objective part covered where you can survive, I can’t for the life of me think of a reason why I would want to continue to work for the federal government any longer than I had to.
Jason Parker: Very good. Let’s see. We’ll do two more, and then we’ll finish up. I know we’re maybe not getting to all the questions here, but this has been really great, Dan. We’ve been picking your brain for a long time. The next one is, well, let me just answer this question. Can we get a copy of the slides to share with our spouse? We’ve recorded this event. We’re going to make it available for a replay for a limited time, at least, and so we’ll send everybody an email out with a link to the recording so that you have access to this, to watch with your spouse. This question is, so is it advantageous to retire when you can to take advantage of the RAS, and no deductions? This could exceed your net pay when you were working, correct?
Dan Jamison: There are instances where depending on your tax situation, that really you don’t have too many negative implications of retirement. The annuity supplement, again, you’re going to have to take some TSP money out. Your FERS annuity and your RAS is not likely to exceed your pay that you were receiving as an employee. It’s just hard to do under FERS. If you worked 30 years, you get 30%. Law enforcement’s a little different. You work 30 years, of course, you get 44%, so if you’re not a law enforcement officer, and you worked 30 years, and you get 30%, even adding the RAS on there is not going to exceed what you’re paid. The key there is like in that earlier guide. You got $700,000 in the TSP, and I got no problem peeling $2,000 a month off of that guy, and then in that case, absolutely. You’d have more disposable income as a retiree than you would working, absolutely. I said I’ve been writing this retirement guide for about 20 years. Most of my experience was with the law enforcement officers, but the last six years, I’ve written a FERS guide for regular FERS as well.
I’ll bet I have had a thousand conversations with recently retired employees, and I have never had an employee or an annuitant contact me and say, “Dan, you rotten, rotten guy. I can’t believe you pushed me over the edge, and you talked me into retiring. I’m miserable. I hate myself. I hate you, and I wish I’d never met you.” What I hear is the opposite. I hear this. I hear, “I don’t know how I ever found time to work.” I hear, “If I’d have known then what I know now, I would’ve left the day I was eligible.” Those are the things I hear. Jason alluded to it earlier. You’re doing the same thing for 20, or 30, or 40 years, it’s very difficult to make that transition out. I was recently talking to an FBI agent who had $1.1 million in his Thrift Savings Plan and was going to put in for an extension. I was flabbergasted. I asked him, I said, “You got to tell me what’s going on in that head of yours, because anybody else would chop a limb off to have that kind of balance and walk out the door.”
He told me, he goes, “You know, Dan. I’m just afraid of feeling insignificant,” so that was a valid concern, and for many people, they don’t know what they’re going to do in retirement. They’ve been doing the same thing for 30 or 40 years. The easy thing is to stay. Great, that’s the easy thing. You got your job now, you could probably … Most people could do the job in half the time because they’ve been doing it for 40 years. They know all the tricks, so it’s easy to stay. The hard part is, is you jump off that cliff into the unknown, and trust people like Jason and other planners to give you advice that it’s going to be okay. You really do have enough money. Most people just don’t believe me. You can do this, and then they’ll call me up. I got one yesterday from one of my old classmates. Oh, my god. Dan, this is wonderful. I wish I would’ve gone earlier. All I can share with you is story after story after story of people like this, just telling me that they’re really enjoying their retirement, from especially the subjective part, the more time that they have.
Their health improves. Their marriages improve. Their relationships with their children improve. Everything seems to get better when you’re not working, and when you reach that point, when you have enough assets, or somebody like Jason can convince you that you’ve got enough, why would you stay? It’s a tough thing. I tried to talk to my wife about it, and she’s eight years younger than I am, and she really didn’t want to talk about retirement. It brought images of death, and getting older, and bodies breaking down, and bad things, but it’s not like that. It’s a great, wonderful time, but we use the word repurposing in my house. We don’t say retire. We say repurpose, because I’m working more hours than I ever did through the FBI, so you got to keep yourself challenged. You can’t just retire and do nothing. You’ll be dead in three years. You’ve got to keep your mind engaged. You’ve got to keep your body engaged. You’ve got to be socially engaged as well.
You can’t just wake up at 6:00 a.m., go to the gym, hit golf balls. That sounds like fun, but in three months, you’ll be bored to tears, so this is just from people reporting back in the early years. You’ve got to have something to do, but I’ll get off my soapbox now, Jason. Just I’m a big proponent of if you can afford it, and you’re eligible, get out.
Jason Parker: The tagline of my book, Sound Retirement Planning, is delivering clarity, confidence, and freedom, a retirement plan to deliver clarity, confident, and freedom. Clarity is all about what’s most important in your life. You’re not your job, and so just having that purpose. Confidence to know that the numbers are going to work so that you don’t have to worry because worry is not a good thing, and then ultimately, freedom. We want people to experience a greater sense of freedom, and I think that’s what having a good retirement plan can do, and that’s one of the reasons we did this event today, is to be able to bring education to people, to empower them. Dan, I can’t tell you, the work that you’re doing is so important, and I know you charge a very small fee for people to sign up for the FERS guide as a resource. I highly encourage people. If you’re part of this program, a small investment in Dan’s expertise and knowledge, to be digging into all of these specifics for you all the time, plus Dan I think you offer people that are members of your FERS guide phone consultation, so if they have any questions with you, you’re a resource for them. Yeah.
Dan Jamison: Yeah. It’s $10 a year. I update my guide once a year, in December, and usually give it mid-year. My members can email me or call me with as many questions as they want. I usually get more accurate and more prompt responses than your HR department’s going to do. In fact, not only this slideshow, but the 180 slide full slideshow is on the website as well. I wanted to come on here to help you, not really to hawk my wares, but it is, it’s only 83 cents a month, and it gives you the ability to ask as many questions as you like, get a free divorce consultation if you need it, and look at the slideshow. I’ve got some other materials on there as well, so I appreciate that, Jason. It’s a …
Jason Parker: That’s incredible.
Dan Jamison: … It’s an easy way to … It’s 107-page book, so it’s really more of a book than a guide. I just don’t have it published, but it is strictly … There is one book for law enforcement officers and firefighters, and one book for regular FERS.
Jason Parker: Awesome. With that, let’s go ahead and finish up today. I know that there’s a couple of questions that we weren’t able to get to. If they’re specific to the federal government, I’d encourage you to contact Dan. He’d probably able to help you, either through email or phone call. If you’re looking for help with a retirement plan, again, visit Sound Retirement Planning. Learn a little bit more about our process, maybe read my book before you contact us, just understand what we do. If you’re looking for some help, we can talk some more about that as well, but Dan Jamison, again, thank you so much for being a guest on Sound Retirement Radio for the last … We’ve had you on there twice now. It’s been very well-received, and then thank you so much for all of the information you provided today. This is just a wonderful use of time, so thank you very much.
Dan Jamison: My pleasure. Thanks for having me, Jason.
Jason Parker: Okay. Keep up the good work.
Dan Jamison: Buh-bye.
Jason Parker: Bye.