Jason Parker interviews Dan Jamison who is a CPA and the author of the FERS Guide. This is an absolute must listen show for anyone who is employed with the federal government under the FERS retirement system.
We discuss:
FERS
TSP (Avoid MISTAKES)
Defined Benefit
Social Security
FEHB – Health Insurance – Important TIPS
FERS Early retirement
FERS Special Retirement Supplement (Social Security Supplement)
FERS Survivor Annuity vs life insurance
Court orders for OPM and TSP
Divorce
Learn more at www.FERSGuide.com
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Below is the show’s transcript:
Speaker 1: Welcome back America to Sound Retirement Radio. Where we bring you concepts, ideas and strategies, designed to help you achieve clarity, confidence, and freedom as you prepare for and transition, through retirement. Now, here is your host, Jason Parker.
Jason Parker: America. Welcome back to another round of Sound Retirement Radio. Thank you for making us your expert resource, for expert retirement advice. As you know, we are always looking to bring experts onto the program, who we believe, can add significant, meaningful value, to your financial life as you prepare for, and transition into and through, retirement. You are listening to episode, zero, five, nine. I’m going to have Dan Jamison on the program with us. He is the author of the FERS Guide. Website, the FERS guide. We’ll bring him on in a minute. This is going to be a great interview, that you’re probably going to want to listen to. If you’re driving down the road right now and you’re not going to have the opportunity to listen to this program in its entirety. I want to encourage you to visit sound retirement planning dot com, or sound retirement radio dot com. We archive all of this content for you. You’ll be able to listen at your convenience. I know how much you all like to have a joke that you can share with your grandkids on Saturday morning. I’ve got one here for you. Here it is.
How does the ocean say hello? It waves. Oh man, the jokes keep getting worse and worse on this program. Then the second thing I’d like to do, is I’d like to share a verse this morning. I have one here from Proverbs. Let me grab my Bible real quick. This verse is Proverbs 18, verse 22. “The man who finds a wife, finds a treasure and he receives favor from the Lord.” I think that’s important. It’s going to play into this program that we’re going to talk about because we are going to talk a little bit about divorce today. As a Christian, I love marriage, I love community, I love family but I know that, that doesn’t always work out. The reality is, when you’re doing planning, you need to have access to people that understand this other world. With that, I want to tell you how this relationship came about, or this guest came about. I have my wife … Her cousins were in town visiting. My wife’s cousin worked for the FBI for a period of time. During that period of time with the FBI, he started subscribing to a newsletter that was put out by Dan Jamison.
I don’t know if it was a newsletter as much as it was, this guide. This information that was put out. It was popular with the FBI. Dan Jamison is a graduate from the University of Florida. Spent twenty-one years, with the FBI and he’s been a CPA for twenty-five years. He’s licensed in Florida and Virginia. Dan Jamison, welcome to Sound Retirement Radio.
Dan Jamison: Thank you Jason.
Jason Parker: Hey I appreciate you taking time out of your busy schedule, to be a guest on the program here. Will you take a minute and help our listeners understand the FERS Guide. What it is you created, how it all came about. The back story there.
Dan Jamison: It was nothing I ever intended to do Jason, if that makes any sense. We often look back and wonder how we got to where we are and what circumstances brought us there. Back in San Diego, CA, where I was assigned as an FBI agent initially. We have all employee conferences. Back in 1996, fellow by the name of Jeff McKinney, came to me because I was the resident nerd, CPA of the office. Said, “Hey can you provide the employees with just a little bit of background on their retirement.” Being the new agent it was more like being voluntold. I said, “Sure Jeff, that sounds like fun.” I did that, gave a little one hour presentation to try to tie our benefits together. We’ll talk about later, our benefits are like a three legged stool. It’s a little confusing knowing where one picks up and the other leaves off. The following year when I was asked to do that, most of the office had been assigned to a large search warrant. I end up writing this stuff down instead of presenting verbally. Of course, I emailed it out to everyone in the office. Who in turn emailed it out to everyone they’d ever met in the FBI.
Through training classes, or through their new agent classes. The next thing you know, I was inundated with emails and questions. I thought, “Hey this is a pretty good idea. It’s being well received.” The following year, it became a regular annual addition and has remained so to this day.
Jason Parker: That’s awesome. For our listeners, there’s a lot of people driving down the street right now, listening to this Dan. Have no idea what FERS is. What’s FERS?
Dan Jamison: FERS stands for the, Federal Employee Retirement System. It replaced the former system, which was called CSRS. The Civil Service Retirement System. Which many of us, cleverly called the, “Clearly superior retirement system.” The Government never takes something away and replaces it with something better. When FERS came along, it affects all Federal employees that are civilian employees, that were hired on or after, January 1st of 1984. It’s been in place now for over thirty years. We’re starting to finally see the retirements of those persons who entered on duty, under these rules. That’s what FERS stands for. FERS is very different than CSRS because FERS employees pay social security taxes like any other wage earner, in America. Part of the benefit that a FERS retiree will receive, will come from the Social Security Administration. At least we hope so, right Jason?
Jason Parker: Yeah.
Dan Jamison: If they solve it. Then they also have a defined contribution plan as well. It’s unique in that you have a defined benefit, you have a defined contribution and you have social security. Very different than CSRS.
Jason Parker: Yeah, kind of neat, unique in the sense that there aren’t many people in the private sector, that are still being offered benefits like that. Where you have a pension. When you say, define benefit, that’s what we’re talking about, is a pension. That’s still-
Dan Jamison: When I give my full day presentations Jason, you’re absolutely correct, I spend twenty minutes explaining to my audience, which is comprised entirely of federal employees, how well they are prepared for retirement and how fortunate … I don’t use the word lucky but how fortunate they are, that they have three different income streams that they can rely upon, in retirement. Versus the less than fourteen percent of Americans who are still covered by a defined, benefit plan. You’re absolutely right.
Jason Parker: As you think about this, in terms of our country right now. I just read recently, our national debt’s over eighteen trillion dollars. We’re providing a pretty nice benefit for federal employees, but the private sector’s not receiving that. Dan, do you think this is sustainable as you look out into the future. Do you think that new employees opting into working for the Federal Government, will continue to receive this type of benefit as we look out into the future?
Dan Jamison: Oh, I think you’re right Jason. I think you’re going to see some changes come about. Some of them have already happened. Most federal employees that were on board, pay eight tenths of one percent, of their pre-taxed … I shouldn’t say pre-taxed there. Post-tax income, for the FERS defined benefit. That percentage you get that’s based on your years of service and your high three salary. You do pay for that, as a federal employee. It’s point eight percent of your pay. Right? Not very much. For all employees hired after January 1st, of 2013, congress created a new group of employees called RAE. Revised Annuity Employees. Those folks are paying three point one percent of their payment.
Jason Parker: Wow. That is a big jump. That’s incredible.
Dan Jamison: Yes. From a percentage stand point, that is a very large increase. Wait it gets better. In 2014, congress created another group of employees called, FRAE. Further Revised Annuity Employees. They’ve increased that again. Now those folks pay four point four percent. Everybody who’s coming into the Federal Government right now, is paying four point four percent of their after tax wages, into this system, to sustain the defined benefit play. We’ve gone from point eight, to four point four in a matter of years. The goal of congress initially, was to balance the payment between the employee and the agency. You know how in a defined benefit plan, there’s an actuarial normal cost. The cost for a regular FERS retirement, is thirteen point three percent. That’s what OPM charges the agency, for the retirement benefit. What congress is trying to do is split that thirteen point three down the middle and have the employee pick up half and have the agency pick up half. You’re absolutely right, those costs are increasing.
Jason Parker: Wow. Dan, now you spend all of your time … The first guide that you put out … It’s such a great resource that I want to make sure we tell our listeners how to get ahold of that before we run out of time. Real quickly, will you tell our listeners the website that they can go to, if they’re interested in learning more about the Federal Employee Retirement System and the unique work that you’re doing, to identify these little nuances?
Dan Jamison: Sure. The website is FERS Guide dot com. Simply, www.FERSguide.com. That’ll bring you to my website, you can read about me, you can fool around the website and look at a few things. You will notice, some pages are members-only like my FERS Guide itself and some of the PDF materials. There’s a button on the front where you can subscribe. It’s ten dollars, a year. That membership also allows you to ask as many questions of me, by phone and by email as you wish. I do support my listeners with personalized questions and answers.
Jason Parker: That’s awesome. What are some of the nuances? What are some of the little tips and tricks, that you’ve learned about for federal employee retirees? Maybe questions you get asked a lot, or those little nuggets that when people learn it, they’re like, “Wow. We didn’t know that, was that way.” What are some of those things?
Dan Jamison: Well there’s a number of … As you can imagine. The first system just trails onto the CSRS system, which has been around since the 1920s. A lot of people don’t realize that [going back 00:10:46] to our earlier conversation about changing benefits. There is legislation proposed now to change a high three, to a five, to save the Government money. Did you know that CSRS used to be a high five system? It changed in 1969 to a high three system. That’s something that most people don’t know. This proposed legislation is just taking us back to where we once were. Another interesting thing is for people who are born on the first of the month and would like to retire without having to give up twenty-nine days worth of credit, OPM considers you to be the age of the following day, at the end of the previous day. That make sense? On March 31st, close of business, you are the age of the following day. If you need to retire on April 1st, you can retire on March 31st and you will be considered the same age.
Jason Parker: That’s a health nuance. Tell us about the social security supplement. That’s something we’ve run into and it’s, I think, unique for people that are retiring.
Dan Jamison: In my slide show when I do presentations Jason, at the end of that section, there’s a slide that says, “Why so many slides on the SRS?” That’s because I get more questions on that benefit, than any other benefit we talk about in the daytime. The special supplement is a unique thing to FERS. As we mentioned earlier, FERS is a three-legged stool of benefits. We’ve got our defined benefit, from FERS and we’ve got social security and we’ve got the thrift savings plan, which is our defining contribution plan. Which we do get up to a five … Actually it’s a four percent match and a one percent automatic contribution. Well if a person under FERS, a regular employee meaning non-law enforcement, non-firefighter. A regular employee, can retire at age fifty-seven with thirty years and receive an immediate annuity. One payable to them within thirty days of their last day. What’s the problem with that? You have no social security available at age fifty-seven, right?
Jason Parker: Health insurance benefits, is another big one there but yeah.
Dan Jamison: That’d be a great one to circle back to. Right, there’s no Medicare benefit because they’re not old enough but they’re certainly not sixty-two yet, they’re fifty-seven, so what do you do? Well part of FERS came up with something and it’s called, the Special Retirement Supplement. It is not paid to a very large group of people but if you worked thirty years at age fifty-seven and retired, you will receive a supplement. That supplement is an approximation of what your age sixty-two social security benefit would have been, at age fifty-seven. Kind of discounting it by five more years. It’s a very involved calculation that OPM puts together but you can estimate it for yourself very easily. If you get ahold of your social security statement and you look at the third line on the second page, that’s the amount of benefit payable to you, age sixty-two. You multiply that by the number of years, of federal civilian service that you have, divided by forty.
Jason Parker: Hmm.
Dan Jamison: That will get you … It got me within five dollars.
Jason Parker: Wow.
Dan Jamison: On my calculation. It’s just an estimator. It’s not how OPM calculates it, Jason. It gets you so close. My clients tell me they get within, five, ten, fifteen, twenty dollars, of the amount that OPM actually awards. It can be substantial depending on the amount of [wage 00:14:18] you earn at the Government. It’s not uncommon for a special retirement supplement to be in the thousand dollar a month, range.
Jason Parker: Yeah that’s incredible but people aren’t obligated to start social security at sixty-two, if they take that social security supplement, are they?
Dan Jamison: No, they are not. The supplement from OPM stops at age sixty-two, regardless of whether the employee decides to start their benefits at sixty-two. I’m sure you and I both know, eighty percent of Americans do start their benefits at sixty-two but you would not have to. What I’ve noticed is someone who’s been collecting the special retirement supplement for five years, gets used to that income. You know the old fish bowl thing?
Jason Parker: Oh yeah.
Dan Jamison: [crosstalk 00:14:59] fish bowl, right? They’ve been collecting this thousand dollars a month, for five years. All of a sudden, that’s going to stop.
Jason Parker: Yeah.
Dan Jamison: At age sixty-two. What happens, if you apply for social security, you’re going to almost double that benefit in many cases. A lot of-
Jason Parker: One of the things we teach a lot of people, especially married couples, is how much potential money they’re leaving on the table by starting social security at sixty-two. We like to actuarially break that down for people and say look, “You can start it at sixty-two but this might be the lifetime cost in doing so.” I’ll tell you that makes a big deal for some people.
Dan Jamison: Absolutely.
Jason Parker: We have a calculator at sound retirement planning dot com, where we allow people to get in there and crunch some numbers to see what’s at stake. How much they could potentially be leaving on the table, by starting social security too early. Retirement’s all about cash flow. One of the things I wanted to let our listeners know, Dan. We have a webinar coming up on retirement cash flow. One of the questions we get asked frequently is, as people are making this transition into retirement, what are the nuts and bolts of a good retirement cash flow plan? For our listeners out there, if you are interested in attending a webinar, visit sound retirement planning. There’s a big yellow button on the right hand side of the screen, it says, “Retirement cash flow webinar.” Join us for that, we’d love to have you on there. I’ll show you step-by-step what a good retirement cash flow plan looks like. Dan in the notes, as I was preparing for our interview, I find that you’re retired now. Is that right?
Dan Jamison: That is correct. I retired in December of 2013.
Jason Parker: I should say, retired from the Federal Government but you’re in private practice now.
Dan Jamison: That is correct. It’s nice to be on the other side of the fence now. When I was doing a lot of the FERS guide authoring and my presentations, I was still an on-board employee. Now I’ve jumped over the fence and I’m an annuitant. I can give that perspective from both an employee perspect and then from an annuitant perspective. Especially when folks have questions about, exactly how does that process work by where OPM starts paying you, to not come to work anymore.
Jason Parker: Yeah.
Dan Jamison: That’s been very helpful. That’s what intrigued me the most about starting the FERS guide was getting through my head that these folks were going to pay me for the rest of my life, if I promise to never show up again. That’s a pretty good deal Jason.
Jason Parker: You sound like a really young guy. How old … Do you mind if I ask how you are Dan?
Dan Jamison: I am fifty-one years old. I retired the day I was eligible, when I turned fifty.
Jason Parker: Wow. That’s incredible. How many years did you work then for the firm?
Dan Jamison: Twenty-one.
Jason Parker: Twenty-one years.
Dan Jamison: Twenty-one years.
Jason Parker: You retired after … That’s amazing. That is absolutely amazing. I can’t think of very many places where you can retire after twenty-one years.
Dan Jamison: [crosstalk 00:17:38]
Jason Parker: I appreciate your service. I know you served at the FBI and that’s … I’m sure that, that is not easy work but that’s pretty incredible. You retire at age fifty and one of the light bulb moments that I was reading about was when you realized that you could have access to your TSP at age fifty. Tell our listeners a little bit about that.
Dan Jamison: This is the biggest thing for … This is for law enforcement officers and firefighters though Jason, this is not for everybody. But law enforcement officers and firefighters. There’s a new law that was signed on June 29th. It was originally called HR2146. What it does is it takes the existing age fifty-five rule which I’m sure your listeners have heard about. If you were working to the year of your fifty-fifth birthday and you leave your funds in your employers’ sponsored plan, right? You have access to those funds, penalty free. Not tax free but penalty free. That’s a great thing for the law enforcement, firefighter, customs and border patrol agents. In terms of the other non-special provisions employees, the thrift savings plan also allows a life expectancy base [inaudible 00:18:44]. Which is one of the options under section seventy-two T. Right?
Jason Parker: Yeah.
Dan Jamison: They call it requirement and distribution rule but it’s the same thing. It’s based upon your age. A fifty year old could expect to receive approximately three percent of their account balance, per year. If you had a four-hundred thousand dollar account balance and you retired at age fifty and you apply that … I like [geeky math 00:19:05] Jason. You apply the three percent to the four hundred thousand dollars, you get twelve thousand dollars. The TSP will send you a thousand dollars a month, penalty free, at age fifty. Here we are nine and a half years before that fifty nine and a half, magical number.
Jason Parker: Boy.
Dan Jamison: You’re getting penalty free money from the TSP.
Jason Parker: I think one important thing for people to realize too, is the consequences potentially, of moving money from a TSP when they retire, to an IRA.
Dan Jamison: Absolutely. I can’t begin to tell you the dozens and dozens of emails I’ve received in the past from agents who said, “Hey, Dan just wanted to let you know I’ve retired. Thanks for the answering my questions. I just,” … This is a person who in the old rules, retired in their fifty-fifth year. All excited to get penalty free access to their money. In the amount that their choosing, not life expectancy but the amount of their choosing. Maybe take a lump sum withdrawal. Take out a hundred grand, buy yourself a car, or pay off a college debt, or something, right?
Jason Parker: Mm-hmm (affirmative).
Dan Jamison: Soon as you move that money from the thrift savings plan, to another custodian, that rule goes away. There’s no way to fix that. It’s gone for good. That is a very common mistake. The TSP, it’s not a bad place to be. I do urge my clients when they’re fifty-nine and a half to leave the TSP, quite frankly but you’re captive there until then, if you’re taking advantage of one. Of either, HR2146, or the basic fifty-five rule.
Jason Parker: Tell me a little bit more about why you urge people to leave the TSP, at fifty-nine and a half.
Dan Jamison: Well I just wrote a letter to Thomas Emswiler the director of participant operations. It’s on my website two weeks ago. They also issued a strategic plan recently, where they have realized the shortcomings of what they offer. The only way, to get your money out of the thrift savings plan Jason, is by monthly payments. Period. That’s it. You can’t call them up and say, “Hey give me twenty grand, little Sally’s tuition’s due this week.” You can’t call them up and say, “Hey send me thirty grand, I want to buy a car for my kid.” You can’t do it. “Hey send me fifty thousand dollars, I need to pay for a medical treatment that’s not covered by my insurance.” To me that’s outrageous, it’s your money. If you have legal access to it, you should have legal access to it. The TSP will afford you one life expectancy based withdraw. That’s it. You get one shot to take some money out and that’s it. You move that to another custodian, you can get ahold of your money anytime that you want. Also the TSP only offers five investment choices. The G fund and four other index based funds.
Jason Parker: CSINF and …
Dan Jamison: [crosstalk 00:21:47]. Exactly.
Jason Parker: CSINF and then a little bit of the life cycle funds that are within those.
Dan Jamison: Yeah mixtures of those. If you want to invest in a particular sector of the economy. If you want to invest in a specific equity, you can do that, outside of the thrift savings plan. I do advise my clients to beat feet out of there when they’re fifty-nine and a half. You can’t beat the … The thing that TSP has going for it, is the expense ratio.
Jason Parker: Mm-hmm (affirmative).
Dan Jamison: Point zero, two seven percent. You ask yourself, how do they do that? They do that with forfeited funds. Many new employees come on board, the agency makes the one percent contribution. Those folks don’t pan out. Six months later, one year later, they’re fired from government service. Guess who gets to keep that money? The TSP.
Jason Parker: Oh.
Dan Jamison: They use that money to offset their expenses.
Jason Parker: Wow.
Dan Jamison: You’re not going to find that in any traditional pension plan, or 401K plan in the private sector.
Jason Parker: Dan you …
Dan Jamison: That’s why [crosstalk 00:22:50]
Jason Parker: Boy this is an incredible interview. I’m enjoying our time. You have so much information in your brain, we could probably talk all day but we’re approaching our time limit. I do want to encourage our listeners … Dan if you’re okay with this, we’ll continue this conversation on for a couple of minutes after the radio portion of the interview ends because I do have some important questions I want to ask you. Specifically, about divorce and how that impacts federal employees and some of the things they should be thinking about. That’s your area of expertise and specialty now. Would you mind if we ask you a couple of additional questions, after the radio portion ends?
Dan Jamison: I would love to talk about divorce Jason.
Jason Parker: Okay, very good. We’ll be right back in a minute. With the TSP, the defined benefit, the defined contribution and social security. The three-legged stool your talking about. The one piece I want to ask you about quickly, because you retired early, is health insurance. It’s a big stumbling block for a lot of people. What’s the answer for people retiring there … Actually know what, we’re going to have to address that when we get back because we’re out of time. We’ll start with that question on health insurance and then we’ll transition into talking about divorce. We’ll be right back after this, for the people that want to listen online at sound retirement planning dot com. Dan, thank you for being a guest on the program today.
Dan Jamison: My pleasure. Thank you for having me Jason.
Speaker 4: Information and opinions expressed here, are believed to be accurate and complete. For general information only and should not be construed as specific tax, legal, or financial advice for any individual. Does not constitute a solicitation for any securities, or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, it’s representatives, or it’s affiliates, have no liability for investment decisions, or other actions taken or made by you based on the information provided in this program. All insurance related discussions, are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial an independent fee based wealth management firm. Located at 9057 Washington Ave. Northwest Silverdale Washington. For additional information, call 1-800-514-5046, or visit us online at sound retirement planning dot com.
Jason Parker: All right Dan we’re back. Thanks again for that interview on Sound Retirement Radio, for our listeners driving down the street. As we transition here into health insurance. It’s a big cost, a big potential problem. One of the reasons I find a lot of people continue to work close to age sixty-five is because they want to know, that they’re going to have Medicare available to them. For federal employees, what’s that look like?
Dan Jamison: The beauty of being a federal employee that goes through a regular voluntary, or disability based retirement is we bring our FEHB, Federal Employee Health Benefits plan. We bring that benefit into retirement. Here I am, age fifty-one. When I retired, my plan came with me. The Government still pays seventy-two percent of the premium, I pay the remaining twenty-eight percent of the premium. That is the agreement that will continue for the rest of my life. Now, should I pre-decease my spouse because I left a survivor annuity, which is a topic for another show, to my wife. She will have that same subsidized FEHB insurance, for the rest of her life. Health insurance is not nearly the consideration for federal employees that you would find in the private sector. As long as the federal employee, had five years of federal employee health benefits plan coverage, before they retired, they can keep it for life.
I do run into situations where, an employee has a husband or wife, that works for the school system, let’s say and they get free health insurance. Then that federal employee, is on the school system plan. Then they find out a year before retirement that, “Oh no my wife’s plan, or husband’s plan doesn’t extend into retirement. I need to be in FEHB for five years.” They end up working for four years longer than they intended.
Jason Parker: Wow.
Dan Jamison: That’s a big consideration to make sure your clients and your listeners who are federal employees doing that … I can’t blame them, take advantage of the free plan. Five years before you’re going to retire, find the cheapest, high-deductible health plan you can in the FEHB. It used to be Aetna plan 228. Sign up for that. That cost them about a thousand dollars a year out of pocket. That gets you membership, in the FEHB.
Jason Parker: Wow. That’s a great tip. For our listeners too, remember Dan writes the FERS Guide. If you are a federal employee and you’re thinking about retirement. You don’t want to retire until you’ve had a chance to read through, all of these little nuances. All of these little things you need to be considering and thinking about. This is a gold mine of information. I hope that you take the time, to not just get the FERS Guide but share this with anybody you care about, that’s a federal employee, that’s thinking about retirement. We need to get the word out about this. I want to talk to you about divorce in this. Your area of specialty. Before I do, you just mentioned something that’s so critically important. I have to ask you about this too Dan, which is the survivor annuity. Often times you hear these life insurance guys out there, telling people to not take the survivor annuity and take the life insurance and maximize benefits, that way. What are your thoughts about the survivor annuity, versus life insurance?
Dan Jamison: Well you know Jason, under the old system CSRS, I would have agreed with that insurance person. If you’re just buying a survivor annuity through OPM, for the money part, your money is better spent buying life insurance in the market. Absolute, positively but under FERS, there’s only two levels that they allow. You can take a five percent reduction in your annuity, to provide your surviving spouse with twenty-five percent of what you used to get, or you can take a ten percent reduction in your annuity. Provide your spouse with fifty percent of what you used to get, for the rest of their life. The reason that you have to do a survivor annuity … I advocate the five percent level, the minimum amount to get by. The reason I advocate that is, if I didn’t have a survivor benefit for my wife and I pre-decease her, she will not have FEHB health insurance. It dies with me. As you said, the health insurance is such a big deal. I don’t want my FEHB to die with me, let alone the subsidy. The subsidy alone is worth a thousand, ten thousand dollars a year. Why would I want to lose a ten thousand dollar a year subsidy, over a five percent reduction in my annuity?
Now under CSRS and there’s still a lot of CSRS people out there and I’m sure some of your listeners are in CSRS. They can elect a survivor benefit as small as one percent. Which is what I would advocate. Take the smallest you can. It gives you membership in the club, it gives your husband or wife, that coverage. Go to one of the senior citizen center Jason and count how many old guys you find.
Jason Parker: Well I have to tell you …
Dan Jamison: They’re not there.
Jason Parker: Yeah, I know. It’s all women. Dan I have to tell you, my experience has been … I see people go both routes here, whether they take the pension, or they take the … They go and they buy the life insurance. It seems to me that the people that choose the pension option, it gives them a greater sense of confidence. Now, when you sit down and you crunch the number and actuarially, you say, “Well could life insurance be a better bet?” Maybe so but when it comes to a husband saying, “Hey I want to know my wife is going to have enough income, that’s going to be inflation adjusted and that she’s going to provided for.” The fact that you have a pension and that you can choose a survivor benefit, just so unique anymore. When I crunch the numbers, versus private annuity contracts out there … The annuity that’s offered through the federal employees retirement system, versus what you can buy privately, it’s hard to match that. It’s hard to find a private annuity that pays as good, as the federal employee’s retirement system does.
Dan Jamison: Think about this. What if I retired without survivor annuity, my annuity was reduced for one month and then I died. My wife gets that for the rest of her life, even though I paid one premium. Compare that with the cost of buying an annuity. You couldn’t be more right, absolutely. The other thing is … These are all from fifteen years of doing this. It puts a lot of stress, to have a five hundred thousand dollar life insurance premium, plopped in someone’s bank account. Right?
Jason Parker: Mm-hmm (affirmative).
Dan Jamison: What do you do with that? Now you’ve got to seek some advice on what to do. You may enter into a new relationship with another person who doesn’t have very strong morals and takes your money. I’ve seen people develop gambling habits. I’ve seen them develop drug habits. I’ve seen them develop a will to help every family member out and next thing you knew, five years later, the five-hundred thousand dollars is gone.
Jason Parker: Yeah.
Dan Jamison: The nice thing about the OPM annuity, as you mentioned, it’s paid every month, on the first of the month for the rest of your life.
Jason Parker: Yeah and …
Dan Jamison: You can’t outspend it and it’s cost of living adjusted.
Jason Parker: One of the core concepts that we teach in my book, I say over and over again. Is that retirement is all about cash flow. It’s your income that determines your lifestyle in retirement, not your net worth. I really like that pension that federal employees have available to them. Let’s get into divorce. Now you ended up in a area of specialty with your background as a CPA. Tell our listeners how this all came about and how it is you are serving people today.
Dan Jamison: Quite honestly it wasn’t a market I was in, five years ago. I continued to get telephone calls from my readers. They end up going through a divorce. “I can’t find anybody who,” … Meaning an attorney. “I can’t find anybody who understands our benefits and can help me with this.” I got those calls and got those calls. I realized there must be something to this. I began to help people, initially with present value calculations. Many times for shorter length marriages. It makes sense for both parties. If you’ve got a five year marriage, maybe you want to offer a cash buyout to that former spouse. Now they’ve got a tangible asset. Right Jason, they can put on their balance sheet. They can invest it the way that they want to and probably do better than waiting for the OPM payment stream to start. That’s one thing I help people with, is those determinations of whether they want to offer a buyout. As you know, this OPM, there’s not like a private company where they can carve off the former spouse’s section and transfer it to them. You have to wait til the employee gets paid. It’s huge.
In the private sector under ERISA, an employee does not have to be retired for the spouse to start getting the benefit. The big difference and the biggest difference at all, if no one takes anything else away from this radio show, or podcast. Is that under federal law, OPM can not begin to pay a benefit to a former spouse, until the employee actually retires. Guess what, there’s no maximum age in FERS. It’s a game of survivor. If you want to work until your ninety to keep your former spouse from collecting, there’s nothing you can do about it. [crosstalk 00:34:03]
Jason Parker: I’ve heard stories of people doing just that. They’re so bitter and angry, that they say they’re going to work til the day they die because they don’t want their … That’s pretty sad.
Dan Jamison: That’s another good reason for a buyout. Let’s get rid of that anger, let’s give him, or her a chunk of money that they can invest themselves. What if they pre-decease the annuitant? Now they’re estate can at least disperse that money, that they would’ve likely never gotten. Because the other person is still working. That’s one of the things I do. The other is crafting court orders. I’ve learned that most attorneys, I would say ninety percent of them, do not write the court order that goes to OPM, or the TSP. They hire an outside firm to do it, with that specialized knowledge. I became one of those outside firms, with the specialized knowledge. I make sure that when those are crafted, that they do not unfairly represent one party of the other. It’s very common, that’s … Go ahead.
Jason Parker: You were going to say unfairly represent. What are some of the mistakes you see being made, on those letters?
Dan Jamison: Typically, the settlement agreement between the parties, or the decree of final judgement, will determine what share of this pension, if any … There’s not one federal law that gives anybody a dime. Everything that gets awarded is pursuant to the laws of the state and whether divorce occurred. Very different than in the military. In the military, you’re married ten years, you work ten years, he or she gets half of that. Very different at FERS. No federal law determines that at all. The big mistake is a settlement agreement that does not have specific language about the former spouse’s award. Then the attorney hires an outside company to write the court order. Well, ninety-five percent of the settlement agreements say, “The former spouse shall have the responsibility of paying for and obtaining this court order.” Ninety-five percent of the clients of these outside firms, are the former spouses. Who’s side do you think they take, when they write these court orders? They pick the side of the former spouse.
I have seen hundreds of it. I’ve seen this happen, hundreds of times. There’s no mention of the survivor benefit in the settlement agreement. Poof, there’s one in the court order. No mention of paying her estate, or his estate, if the former spouse pre-deceases the employee. Poof it’s in the court order. That’s the kind of stuff I’m talking about. It was never discussed, it wasn’t in the settlement agreement and then somebody puts it in there. Then once it’s in there and the parties see it, it’s pretty hard to take the candy out of the candy jar, once it’s been seen. What I bring to the table, was crafting a fair order the first time. That is based solely on the language in the settlement agreement and nothing else. It doesn’t benefit either party, more than the other. It’s whatever was agreed to.
Jason Parker: Wow, okay so the attorneys are still coming to terms with what the two parties are agreeing to. You’re just making sure that, that letter specifically represents that. Give us an example of somebody that messed this up. They filed for divorce and they didn’t have the correct language in this letter.
Dan Jamison: Wow. That’s a pretty … We could do a whole radio show on that. I’ll try to find a couple good ones. I’ve got three clients right now where their court order, was missing one word. It was missing the word marital in front of the word share. The settlement agreement was very clear that it was a martial share. It’s the ratio that the length of the marriage, bares to the length of the career. Which is very typical Jason, that’s ninety-five percent of the awards you’ll see. Whoever crafted it left that word out. OPM does a literal reading. They do not look at the intent of the parties. It’s what’s written in the paragraphs. Instead of getting twenty-two percent, I’ve got a client whose ex spouse is getting fifty percent. Half my work is crafting amended court orders, for OPM to try to fix these things. They also don’t realize that their former spouse was … This is a big one. Was awarded a full survivor annuity. There’s only one survivor annuity Jason and if the whole survivor annuity was awarded to the former spouse, what do you think new spouse has?
Jason Parker: Wow, nothing, huh? Wow.
Dan Jamison: If new spouse has zero, do you think new spouse has FEHB, if the employee [crosstalk 00:38:12]?
Jason Parker: No, wow.
Dan Jamison: Exactly. That’s a big deal. I try to get those changed to maybe a forty-nine percent share to the ex and a one percent share to the new. Those kinds of things are big mistakes that people make. They also don’t think about limiting the salary adjustments, it’s the time of the divorce, rather than at the time of retirement. Cost of living adjustments. What happens if the former spouse pre-deceases the employee, while as an annuitant? If there’s a survivor annuity, which typically there is on longer length marriages. The settlement agreement doesn’t have anything about who’s going to pay for it.
Jason Parker: Is that right?
Dan Jamison: Well if it’s [silent 00:38:51] to that, why don’t you guess who has to pay for that.
Jason Parker: Yeah.
Dan Jamison: Yeah the employee, exactly. Instead of splitting the cost, or having the former spouse pay it … Which is only fair because of their the beneficiary of this.
Jason Parker: How long does a marriage have to last typically, before there is a survivor benefit?
Dan Jamison: That varies a lot. There is no federal law and there’s very few direct state laws. If I had to give you this as strictly a pay-in, you’re not going to typically see a court ordered survivor benefit on marriages less than ten years.
Jason Parker: Okay.
Dan Jamison: Doesn’t mean it couldn’t happen. Remember to tell my clients, your settlement is going to be whatever you and he agreed to, or you and she agreed to. The two parties. If you agree that it’s going to be, x, y, z and it’s stipulated, there isn’t a judge that isn’t going to sign that. It’s going to be whatever you want it to be. The problem is, is when the parties can’t agree on what they want as a settlement, then a judge will agree for you. When that happens, that’s when you run the risk of the survivor benefit being added. If you asked me on a twenty-five year marriage, yeah you’re going to see that.
Jason Parker: After everything’s all signed and buttoned up and closed down, is there any way to go back to OPM and request that it be amended after the fact? Is it something that you got to get right the first time around?
Dan Jamison: It can be amended. I do quite a few amended court orders. The only thing that can’t be amended is the survivor benefit. You can not amend the award of the survivor benefit, after the retirement, or death of the employee. If somebody has an issue with their survivor benefit, retires and then calls me for help, I can’t fix that. Federal law bars those types of amendments. But I just had this happen where the parties agreed that the original award was a little steep and that the former spouse was willing to take less, based upon her new employment and so forth. The parties agree to change the amount that the former spouse was to be paid. I drafted an amended court order, they signed it, sent it to a judge. Didn’t even need an attorney. Took it over to the judge, the secretary had it signed, filed it at OPM themselves and poof it was done.
Jason Parker: Wow. What about TSP? How does TSP play into this picture, this divorce picture?
Dan Jamison: That one’s pretty simple. Though, I’d say ninety-five percent of my efforts are on the FERS side because that’s a little bit more of a nebulous target. There’s no annual statement from FERS. We don’t know … As you know there is no … It’s just a promise to pay. On the civil service retirement disability fund. There is no actual asset, allocable to an annuitant that they can point to. However, as you know, the TSP’s like in the other 401K plans, we know exactly what it’s worth on any day of the week. Typically what you see there, I would say ninety-nine percent of the time … Absent any other horse trading that’s going on … Is the courts will look at the value of that plan, on the date of marriage and the value of the plan at the date of separation, or final divorce, depending on the state. It looks at basically the growth, during the marriage. Kind of a community property way of looking at it and then they’ll divide that by two. If the plan increased by two-hundred thousand dollars over the course of marriage, each party’d be awarded a hundred-thousand.
Jason Parker: As somebody that’s a recipient. You’re retired, you’re an annuitant, you’re receiving benefits, you’re receiving health are. You talk about the FERS system, being a promise to pay. It’s the government saying, “Hey we’re promising to make good on this.” Are you concerned at all, given the state of our country and our debt and the management of our resources, that we’ll be able to make good on that promise, for the rest of your life?
Dan Jamison: I feel very comfortable about the FERS. I don’t feel so comfortable about the social security part. One of the reasons that CSRS changed to FERS Jason, was because CSRS was an unfunded plan. The agencies pay OPM as the employees retire and draw upon it, okay? Very different. When congress created FERS, effective in 1984, they said, “No more unfunded liabilities.” Every time a federal employee gets paid … Let’s say a regular federal employee gets paid, meaning non-law enforcement, non-firefighter. Every two weeks, when they get paid, their agency sends a check for thirteen point three percent of their employee’s gross pay, to OPM to fund that retirement. There’s eight-hundred and fifty billion dollars right now, in that fund. Now, CSRS is different. They get a fifty million dollar influx from the treasury this year, to help pay those off. As well as agency contributions. Folks under FERS should feel good. A law enforcement, or firefighter, the agency pays thirty-three point three percent of the employee’s gross pay, every two weeks, to OPM. That’s a staggering leap. That’s how expensive that plan is, Jason, think about that. Thirty-three percent of my gross pay, went out with an agent, every period being sent over to OPM to fund it.
I feel confident about the funding part of FERS. I don’t feel so confident about the funding part of social security. They’re going to have to either pay a smaller benefit portion … We’ll pay eighty percent of stated benefit, limit the wage base, or increase the tax, or cut out some of the program. I don’t know what they’re going to do but it’s unsustainable. I don’t think anybody would argue that point.
Jason Parker: Okay well that’s interesting. It is interesting though when we’re spending five-hundred billion dollars on … Half a trillion dollars more in our country than we’re bringing in, in revenue. Ultimately, the money’s got to come from somewhere. If we’re going to continue to hire people to fill these positions. You can’t keep spending money that you don’t have, without there being some type of consequence at some point. We look at other countries like Greece and we say, “Okay jeez.” We promise them the world, we promise them the stars and then we can’t deliver. It doesn’t seem sustainable to me. Whether it’s social security, or … I hope you’re right that the Federal Employee’s Retirement System is fully funded and it will continue to be. I’m having a hard time wrapping my mind around how we can spend, as a country, we can spend five-hundred billion dollars more than we bring in, in benefits and still be able to continue to promise more social security benefits to more people. More Medicare benefits to more people, without there being some kind of fundamental change. I’m having a hard time figuring that out.
Dan Jamison: Yes. That’s the basic problem. It’s fewer employees supporting a larger number of retirees. The ratio is askew-ed. My bets are on the elimination, or very large increase in the wage base. What it is it, one-hundred and eighteen thousand this year?
Jason Parker: Mm-hmm (affirmative).
Dan Jamison: Hundred and eighteen thousand, seven something like that. You’ve got a guy making five-hundred thousand dollars a year, he only paid social security in that first hundred and eighteen thousand, right?
Jason Parker: Sure.
Dan Jamison: I think you’re going to see that going up. That’s my opinion.
Jason Parker: Yeah for sure.
Dan Jamison: Away. That way they won’t say they’re raising taxes because the tax rate is the same, they’re just changing the base to which it’s applied. Kind of weasel words it, politicians seem to like …
Jason Parker: Absolutely. We’ve had some folks from the Social Security Administration on the program before and they have said, “You know what we’re doing is unsustainable and there’s probably going to have to be a decrease in benefits and an increase in taxes.” It’s probably going to be a little bit of give and take. We’re already starting down this path of saying, “Hey based on your asset level, maybe you should pay more money for Medicare and these different things.” It wouldn’t surprise me one bit, if they start means testing some of the benefits. Based on other resources, they start changing who is eligible for what. That wouldn’t surprise me one bit.
Dan Jamison: Wouldn’t surprise me at all, either. [inaudible 00:46:47] amendment, it wouldn’t surprise me.
Jason Parker: Dan, again, our listeners I want to direct them to the FERS Guide dot com. Is there … We’re going to finish up our interview here but is there any last thoughts? Anything that is important that you want to make sure, you convey to our listeners before we end our time together.
Dan Jamison: The most important thing would be to understand what your benefits are. Some of the elections that you make at retirement are irrevocable. Some of the decisions you make, like health insurance, can’t be fixed after the fact. Things like military pay, if you had military time and you needed to buy that time back. The law changed last year, you can’t buy that time back after you retire. It has to be done before hand. Those are the kinds of things that do trip up some of my readers, some of my subscribers. That’s why all that stuff is in my FERS Guide. Everything you need to know about, how not to screw that up. If you’re somebody who’s been through a divorce, know what the claims are against your annuity, before you retire. Some of the things, if you need to change them, can’t be changed afterwards. I have dozens and dozens, of clients who swore to me that there was a court order at OPM. I said, “Hey, give them all a call, 202-606-0222. Call them, find out.” They call and say, “Oh yeah somebody sent an order in nine years ago. We sent it back because it wasn’t certified. We never got another copy.”
Jason Parker: Wow.
Dan Jamison: You got to fix that stuff, before you retire. I got a client in Texas, who’s eight months now in non-pay status because he checked a box on his retirement form, that says there’s a court order out there. Yet, there was no court order at OPM, so they don’t know how to resolve that, so guess what? He’s getting no pay.
Jason Parker: Wow.
Dan Jamison: Those are the kind of things in closing, that you need to … You can’t assume anything when it comes to the Office of Personnel Management. They are awful. [crosstalk 00:48:31]. I don’t mean that on the retirement side, Jason. On the court ordered benefit section. Awful. They make mistakes and they’re slow. They’re understaffed as well but I’m willing to make those statements so you’ve got to make sure that’s done right before you leave.
Jason Parker: Dan Jamison this has been an amazing interview. For our listeners again, if you’re driving down the road, or if you’re listening to the podcast. This is episode zero, five, nine. Dan Jamison talking about the FERS Guide. Go to FERS Guide dot com. Sign up for it. Dan, when would you recommend people buy the guide and start digging in deep? Is it somebody that just started working for the federal employee system, or somebody within five years of retirement? What’s that critical point, where they need to access this information before it’s too late?
Dan Jamison: I think there’s three critical points. As a new employee, I give a complimentary subscription, for a year. If anyone who came on board in 2015, sends me an email. There’s a contact us box on the website. I will give you a complimentary subscription because I want you to know what your benefits are. I think when you get mid-career, it’s a good idea to check in and see if there’s been any new changes in the laws that you were relying on because it’s going to happen. Then of course, anybody five years out, is when you really need to start churching up on your retirement. The one thing that I want to say from your comments, is that you nailed it with the cash flow. I have the hardest time getting that to be an understood concept in my seminars. It’s cash flow that pays your bills. Not your balance sheet. The number one question I get is, “Well Dan I’m making a, x dollars a year now. How many dollars a year do I have to make at my other job?” My first question is, “Why do you want another job,” and secondly, “Have you looked at that … What’s your cash flow going to be?”
You’re not paying social security, or Medicare on your annuity. That’s ordinary income. You’re not contributing to the TSP anymore. Next thing you know, you’re at ninety-percent of pre-retirement income, without a job.
Jason Parker: Yeah. That’s amazing.
Dan Jamison: Cash flow, cash flow, cash flow. You are absolutely right.
Jason Parker: Awesome. Dan Jamison, thanks so much for being a guest on the program today.
Dan Jamison: My pleasure. Thanks for having me Jason.
Jason Parker: All right take care.
Dan Jamison: Buh-bye.
