Jason interviews Dan Jamison about the Federal Employee Retirement System (FERS) Guide and planning for retirement.

Dan is regarded as a subject-matter expert in retirement benefits for federal law enforcement officers and firefighters and those covered under the Special Provisions of FERS.  He has authored the FERSGUIDE for well over a decade.  The FERSGUIDE enjoys a wide circulation to thousands of federal agents in more than 30 federal agencies and military commands.  Each year, the FERSGUIDE is updated and expanded to cover more topics of interest to federal agents.  The FERSGUIDE became a fee-based service with the 2015 edition.

Dan’s CPA practice is limited to assisting federal employees/annuitants with all aspects of divorce, including valuations, court orders, settlement agreements and strategy.  Dan only accepts federal employees/annuitants as clients, unless hired by a mediator.  Dan does not offer financial-planning services nor does he offer tax-preparation services.

Since retiring in December 2013, Dan has provided retirement seminars to the Federal Bureau of Investigation, National Park Service, FEMA Firefighters, Department of Commerce, Nuclear Regulatory Commission, Department of Transportation, Federal Reserve Board of Governors, HSI Agents Association, HHS-OIG and several FLEOA Chapters.

Dan performs a limited number of in-person retirement seminars in the DC/MD/VA area.  If you would like to have Dan conduct an on-site retirement seminar in the DC/MD/VA area, please contact Dan at 804-364-7175 ordan@fersguide.com.  If your agency has VTC capabilities, we can conduct the training in  the DC/MD/VA area and link to other VTC-capable field offices.

If you are looking for a seminar outside of the DC/MD/VA area, please contactJohn Grobe at Federal Career Experts (FCE). You can reach John atwww.federalcareerexperts.com. Having conducted many of my prior seminars through FCE, I can assure you that FCE will provide a retirement seminar that exceeds your needs.  FCE boasts a cadre of experienced presenters, all of which are experts in federal law-enforcement retirement rules.  FCE is the only firm “licensed” to present my FERSGUIDE PowerPoint presentation and use my FERSGUIDE as the basis for the course instruction.

Dan earned a Master’s Degree in Accounting from The University of Florida and holds active CPA licenses in Virginia and Florida.  Dan was assigned to the FBI’s San Diego Division from 1992-2010 and retired from the FBI’s Richmond Division in December 2013 after 21 years as a Special Agent Accountant.  Dan continues to reside in the Richmond, Virginia, area with his wife and two sons.

To learn more please visit fersguide.com

Below is the full transcript:


Announcer: Welcome back America to Sound Retirement Radio, where we bring you content, 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: America, welcome back to another round of Sound Retirement Radio. Thank you so much for making this your resource for expert retirement advice. As you know, we’re always looking to bring people on to the program, who we believe can add significant meaningful value to your financial life. Before we get started I have a couple of things I want to share with you. First of all, I like to start the morning right by renewing our mind. I have a verse here. This comes from Proverbs 4:5. Get wisdom, get understanding. Do not forget my words or turn away from them.
Then, of course, I’ve got a joke for us. Why do bananas have to put on sunscreen before they go to the beach? Because they might peel. Oh man, I know the only reason you guys listen to this program is for the jokes. I know that is the truth. A quick recap. One of the things we’re trying to do in 2016 is go into really a deep dive on specific topics. For the month of January, we went into Social Security, and claiming strategies. For the month of February, we talked about the home equity conversion mortgage. Primarily for the purchase of a home and retirement, but also as a line of credit options for people looking for ways to tap equity in their home.
The webinar on that is going to be available for about another week. If you haven’t had a chance to watch the webinar replay, you can go to soundretirementplanning, and that’s still available. It’s on the right hand side. It says webinar replay with Tane Cabe. I encourage you to watch that while it’s still available.
Today I have the good fortune of bringing Dan Jamison back onto the program. This has been one of our most popular experts from the last year or so. Dan is a CPA, and he is the author of the FERS Guide, which you can find online at fersguide.com. Quite frankly, Dan probably knows more about the Federal Employees Retirement System than anybody I’ve ever talked to, and we wanted to bring him back on the program to answer some of the questions that he gets asked most frequently regarding the Federal Employee Retirement System. Dan Jamison, welcome back to Sound Retirement Radio.
Dan: Well thank you Jason. Thank you for having me back.
Jason: Absolutely, so starting out with the TSP, the TSP is this wonderful savings option for people while they’re accumulating assets and working. What’s your experience in terms of flexibility once people retire with the TSP?
Dan: The issue with the Thrift Savings Plan is they really don’t have any flexibility with respect to withdrawal options. In most IRA type settings, you have complete control over your funds, once your, of course, age 59 and 6 months. If you wanted to call them up in 3 months and ask for $20,000 for little Jimmy’s tuition, and 6 months later, you want to pull some money out to buy a car, you can do those types of things. The Thrift Savings Plan is a very unique beast, in that they have prescribed, based upon their own rules, there’s no IRS rule doing this Jason.
They just prescribe their own rules that you’re only allowed one lump sum withdrawal from the plan. If you’ve decided at retirement that you would like to withdraw $50,000 to buy a car, you better have your mind made up at retirement, as to the the timing of that withdrawal, because that withdrawal has to be done, before you can start monthly payments. In the Thrift Savings Plan, the only way to get your money out, aside from that one lump sum withdrawal, is to initiate a series of monthly payments, which if you’re old enough, you can prescribe the amount of the payment. If you’re not, of course, you can use one of the Section 72 T options, but that’s it.
Once you start those monthly withdrawals, let’s say you retire at age 57, and you want to change it 2 years later, you can change the dollar amount of that withdrawal just once a year, during an open season from October to December, and that’s it. You are forbidden to stop those once they start. You’d actually have to leave the Thrift Savings Plan Jason to stop that, so that’s not very flexible in my book, where you’re only allowed one bite at the apple, for your lump sum withdrawal, and the only way to get your money out is monthly payments. A long answer to your short question Jason, but that’s not very flexible, so I encourage most of my clients and subscribers to run for the hills, and leave the Thrift Savings Plan the moment they’re age 59 and 6 months.
Jason: Run for the hills even thought the Thrift Savings Plan, from an expense ratio standpoint, that’s probably one of the biggest advantages is they really help keep the fees low, but for the fact that they have more flexibility, you would advise people to roll over that TSP to a self-directed IRA.
Dan: I do. I believe that the TSP’s expense ratio is practically 0. As you know, last year it was .0029%. That is literally 0. They’re able to accomplish that because they’re able to keep the forfeited 1% agency contribution to offset expenses, which no private sector company can do. The TSP also limits people to just 5 investment choices, and they’re all index funds, so you move as the market moves. If you get yourself out of the Thrift Savings Plan and into an IRA, well you have a lot of options. You can invest in individual equities, you can buy gold, you can buy into a much wider array of mutual funds, that might be sector oriented.
I’m willing, at least that’s my metrics, I’m willing to trade that slightly higher, maybe 1% higher expense ratio for the flexibility of entering into an investment that might have a larger rate of return, than I’d be able to realize of that Thrift Savings Plan. Obviously, I always tell people, you got to make sure you can make 1% more for outside of the Thrift Savings Plan than you can by staying there. I tell my clients if you’re going to take all your money out of a C Fund, which is and S&P 500 index fund, move it over to another IRA company, or a custodian, and invest it in the same S&P 500 Index Fund, you might as well stay with the TSP.
Jason: One of the nuances that we’ve run into is we’ve learned that if people are age 59 1/2 still working, that they are allowed to take a one time lump sum distribution before retirement, and start that process of moving money over to an IRA early. Has that been your experience?
Dan: That is completely true.
Jason: Once they retire, do they also get another lump sum distribution at retirement, or are they stuck with the payment option only?
Dan: That age 59 1/2, they call that an in-service withdrawal, and that in-service withdrawal will count as your one lump sum withdrawal. That person who continues to work for the Federal Government beyond the age of 59 and 6 months, takes that in-service withdrawal. When they retire, their only choice then is going to be start monthly payments, or move those funds away from the Thrift Savings Plan.
Jason: They could exit the Thrift Savings Plan completely, and just take a lump sum withdrawal in that fashion, just to close out the relationship with the TSP, and then roll over the rest of the money to the IRA, that would be an option?
Dan: That would be my advice.
Jason: Okay, all right. What’s the deal with the Thrift Savings Plan becoming more responsive?
Dan: Because of some of the things we just spoke about, they come to realize that 48% of TSP participants separate from the Thrift Savings Plan within 1 year of retirement. That is a horrifically large exodus of people from the plan. I believe the Thrift Savings Plan is finally realizing that their lack of flexibility in allowing people access to their money. I have a TSP account still because of some reason that I’ll explain later, but it’s my money. I should have access to that money, and the rules that are prohibiting me from accessing it aren’t IRS rules, they’re TSP rules.
They’re just self imposed, and it’s all to keep costs down. The Thrift Savings Plan recently issued in July of last year its strategic plan for the next 5 years. I’ve read that report several times, and I believe they’re starting to finally understand that folks are fed up. They have issued in this strategic plan, their plan to allow unlimited lump sum withdrawal, so instead of that one bite of the apple, or that one in-service withdrawal, they’re proposing to allow federal retirees to bite at that apple as many times as they want to. That would be fantastic.
It’s your money, you should have access to it. That’s one of the things they’re planning on doing. The other is to allow a participant to change the amount of their monthly payment at any time during the year, not just during an open season, so literally 12 times a year, you could change the amount of your monthly payment. If you have that much flexibility, that’s literally like having 12 lump sum withdrawals a year, because you can change it every month. If they make those types of changes, then I might sing a different tune in terms of advising people to stay or to go.
One of the things they did not address in their strategic plan is the fact that the TSP Jason does not maintain separate accounts for Roth balances, and traditional balances. I’m sure you were aware of that, but some of your listeners may not be. Because they don’t segregate the Roth balance from the traditional balance, they are required to distribute funds to the participants in a pro rata fashion, meaning if someone has $100,000 in the Roth ESP, and $200,000 in the traditional, that’s a 2 to 1 ration, and that’s how you’re payments will come out of the TSP. If you ask them for $10,000, it’s going to be divided in that same 2 to 1 ratio.
If haven’t had your funds in the Roth TSP for 5 years, and attained the age of 59 1/2, it’s not a qualified withdrawal, right? Those withdrawals are going to be taxed again, so you’ve invested in the Roth TSP using post tax money, with the expectation it won’t be taxed again, but because of the way the TSP doesn’t maintain separate accounts, you’re going to get taxed on that again if you start your monthly payments, before the age of 59 1/2. They have not addressed that. It is a huge issue for the classes of employees that are allowed to retire before 59 1/2, such as air traffic controllers, law enforcement officers, firefighters, and people like that. That was completely absent.
Jason: The Roth option is somewhat of a new option for TSP participants. I have not personally seen a lot of people with Roth, after tax balances, that they’re looking to roll out, but how does it work for the folks that are looking to roll out of the TSP. Do they break it? Can they roll the Roth portion into the Roth, and the traditional into a traditional IRA?
Dan: That is exactly how they would do it. Your option at that point is to leave if you’d like access to your Roth TSP money without that allocation, because you may have tax planning strategies, where you’d like to dip into one pot of money for a particular year based on your average tax rate, or marginal tax rate, and maybe dip into your other pot of money in the year that you have a higher marginal tax rate. You can’t do that when you have the Thrift Savings Plan, so what you’d have to do is leave the Thrift Savings Plan, and transfer those monies to another custodian.
When they do that, the TSP does issue two separate payments. One payment represents the amount of money that was in that Thrift Savings Plan traditional, and one represents the funds that were in the Roth. Once they’re segregated at the new custodian, then you’re free to let your Roth IRA money sit there and age gracefully for when you are qualified to get it, and then use the balance that was traced back to the traditional TSP for your ongoing current needs. That is one way to handle that problem, but I’m hoping that the TSP at some point will take care of that.
One other thing they didn’t address is the fact that … Many people are not aware of the fact that the Thrift Savings Plan is not insured by anyone, meaning if there was a massive data breach that were to cause some accounts to be compromised now. I will give the TSP, it’s a very difficult system to steal form, but they could certainly be manipulated into withdrawals that were not authorized. There is no agreement with the US Treasury to reimburse the TSP. They do not have FDIC or SIPC insurance.
One of my subscribers wrote a letter to the TSP asking them about this, “What would happen if my account were compromised, and I lost a sum of money?” Their response was, “Call your local police department.” You can’t make this stuff up Jason, that’s the level of thought and care that the TSP has, in my opinion, for that particular subject area. Another reason to leave the TSP, your fund may be SIPC, or FDIC insured when they live somewhere else.
Jason: Folks if you’re just joining us, this is episode 087. I have Dan Jamison on the program, who’s the author of the FERS Guide, he’s a CPA, probably about the Federal Employee Retirement System than anybody I know. Dan has agreed to do a webinar for us at the end of this month, at the end of March, March 23, at 1:15. If you are an employee of the Federal Employee Retirement System, I’m going to highly encourage you, if retirement is on the horizon for you, to join us for that webinar. There’s no cost to do this. We’ll have a signup on soundreitrementplanning.com, on the right hand side. This is going to be really a great opportunity.
The month of March, we’re trying to bring experts on in different areas. We’re going to have a mortgage expert on soon, to talk about the VA loans. We’re going to be talking about pension options from state employee pensions plans, and specifically some of the nuances we found there that are just mind boggling. You definitely want to tune in if you’re a state employee, or a federal employee, or a veteran, we want to dedicate the month of March to really trying to make your life better as you prepare for retirement.
Dan, talk about this glitch with beneficiary participant accounts. What are we talking about there?
Dan: What we’re talking about there is what happens to the money in the Thrift Savings Plan when you die. I’m a Thrift Savings Plan participant myself. If I were to die, I’ve listed my wife as my beneficiary of my account, so she has 2 options. She can ask the TSP to roll that money out to an inherited IRA, or she can leave it at the Thrift Savings Plan. That’s a relatively new feature, say 7 years ago, in 2009, that became law. If you keep a beneficiary participant account as a surviving spouse, the advantage is that you can take any amount of money out, any way you want penalty free, in the same method. It doesn’t matter that your deceased spouse was allowed to do.
The problem is, let’s say you don’t spend all this. Say my wife doesn’t’ spend all that money, and then she dies. That money that’s left in that account Jason, cannot be rolled into an inherited IRA. It is a taxable distribution upon, in my example, my wife’s death. That’s something that I like to make people aware of. If you roll that into an inherited IRA right away, then in that example, if my wife were to die, then my children could roll that money into another inherited IRA. You can keep the inherited IRA going. If someone inherits a large amount of money, and ends up dying and putting it into a beneficiary participant account, and dies soon after Jason, then that entire amount that’s left is a taxable distribution.
Jason: That is huge. That’s unbelievable.
Dan: It’s a huge … It was recently a topic of a couple of articles in the Federal Work Force web site. It is something that doesn’t catch people, and I’m not quite sure why the rules were set up that way, but I like to make people aware of it.
Jason: With all of the volatility that we’re experiencing in the stock market these days, the TSP does have that G fund that’s available, and last time I looked, it was paying better than any money market I could find, or even short-term CDs. Do you have any idea what the TSP looks like these days, the G funds specifically? Is that still a good option for people who are looking for safety within their TSP account?
Dan: It is a unique option. It is one of the few things that I do profess to take advantage of the Thrift Savings Plan. Those are unique securities, issued only to the Thrift Savings Plan, with a maturity, between 4 and 10 years. The G fund right now is about around 1.6 to 1.7 percent, in terms of a return. Certainly well above any money market return, and it is a little bit less than the 10 year treasury yield, which I believe is 1.76 right now, somewhere in that area.
There was a legislative attempt several months ago to change the TSP’s G fund, to pay a rate of interest equal a money market account. That did not go anywhere, but it does certainly show that Congress is aware of that, but monies really are invested in those securities, and if someone were to by that 10 year treasury outside of this environment, they would ear the same 1.76%, so I really didn’t understand why that was proposed to be taken away from federal employees.
Jason: Yeah, we won’t get into that, but obviously having your money completely liquid in the G fund, versus having to hold a 10 year treasury bond, there’s a big difference there.
Dan: I’d agree. Maybe you’ll have me back a 3rd time, and we’ll discuss it.
Jason: In terms of new rules regarding the TSP for withdrawals made by law enforcement officers, firefighters, air traffic controllers, what are some of the new rules that are out there?
Dan: Effective withdrawals made this year, just starting with January 1st of this year, there was a substantial change in the law, in June of last year, that was signed as part of the Trade Promotion Act. It allows firefighters, and air traffic controllers, and law enforcement officers, penalty free access to their Thrift Savings Plan, as long as they retire in the year of their 50th birth year, or later. Those categories are called special category employees, and those folks are allowed to retire at any age if they have 25 years of service.
You can imagine if someone came into that service at 23 years old Jason, at 48, they’re eligible to retire. If those folks retire, they’re not eligible for the rule because they’re not yet 50. I’m sure many of your readers are familiar with that 55 rule, where if you work until your 55th year and you need your money at your employer sponsored plan, you have penalty free access. Basically what this legislation did is take that law, and insert 50, instead of 55, and apply it to that special group of people. It is a very, very big deal for us, because as a retired law enforcement officer, the only way we can get funds out penalty free was to engage in the life expectancy base payments, under Section 72T, and of course you know, that locks you in for a long time.
This legislation, a lot of people like me who are already retired, but I was in my 50th year, to go back and elect out of that stream of life expectancy payments, into a stream of payments of my choosing. Very big news. It’s a very small group of course, but I’m sure there are a lot of firefighters out in the area there that would benefit from that.
Jason: The other piece to that, that would be and incentive and reason to not roll money from your TSP to an IRA, because once you’re under those IRA rules, then you’re looking back at that 59 1/2. Is that correct?
Dan: Absolutely, and there are number of upset retirees that have contacted be about that. Whereas, on their retirement, they weren’t aware of this law, and they moved their money away from the Thrift Savings Plan and they’re not going to be able to take advantage of it now. For that special group of employees, which was just expanded to include 8 groups of employees that are all under the special categories. Those persons would be foolish to leave the Thrift Savings Plan prior to attaining the age of 59 1/2. You’re absolutely right.
Jason: Folks, if you’re just joining us, we’ve got Dan Jamison on the program. You’re listening to episode 087. All of these programs are archived online for your listening pleasure. We also transcribe them all, so if you want to just go back and read through the notes, you can do that as well. We’re coming up on 25 minutes, and that’s how long this program is for our radio listeners in the Seattle area, but Dan has agreed to be with us and answer some more questions, and I’ve got some great ones here. For our podcast listeners, you’re going to get an added bonus. It’s going to be a little bit longer than normal. Dan, I want to transition into the retiree annuity supplement.
Dan: What we’ve been discussing before is the Thrift Savings Plan, which is of course the defined contribution part of a federal employee retirement system individual. Now I wanted to talk a little bit about the FERS part of the defined benefit plan, of the part that’s based on your years of service, and how many years of your salary are there in those years.
When I give my full day presentations, I get more questions on this one topic than any other topic. One of my slides even says that. “Why so many slides Dan on the special retirement annuity supplement?” Because very few people understand it. As you know, a federal employee, who works 30 years, I mean not even a special category employee, just someone who works with the federal government in a non law enforcement capacity, works for 30 years, and attains the age of 57, they’re eligible for an immediate annuity, but FERS is really a 3-legged stool for the Thrift Savings Plan, the FERS defined benefit plan, and Social Security.
We pay Social Security just like any other employee in the country would be paying. When those folks retire at age 57, they’re not yet old enough to apply for Social Security, they’re 5 years away for their earliest opportunity. FERS includes something called a retirement annuity supplement, and it’s intended to be a bridge payment between the time that you retire under FERS, and eligible for Social Security.
It’s not an insignificant amount of money. It’s made to approximate what your age 62 Social Security benefit would be if it were allowed to be paid to you 5 years earlier. For many employees, this can be $500 to $1,000 a month of additional income that they weren’t really bargaining for. About 25% of the participants in my seminars raise their hands at the end and say, “I didn’t even know I got this benefit.”
Jason: Hey Dan. Dan, we’re going to come back and we’re going to continue this discussion but for our radio listeners we have to end. Thank you for being a guest on Sound Retirement Radio.
Dan: My pleasure Jason. Thank you.
Announcer: Information and opinions expressed here are believed to be accurate and complete for general information only, and should not be construed as specific tax, legal, or financial advice for any individual, and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in the program. Parker Financial, its representatives or its affiliates have no liability for investment decisions, or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the President of Parker Financial, an independent, fee based, wealth management firm, located at 9057 Washington Avenue, Northwest, Silverdale, Washington. For additional information, call 1-800-514-5046, or visit us online at soundretirementplanning.com.
Jason: All right Dan, Jason Parker here. We’re back. Are you still with me?
Dan: I’m still with you Jason.
Jason: Okay for our listeners of the podcast, you guys get the special bonus, with Dan Jamison. He’s agreed to stick with us here. Dan, we were talking about the FERS retirement annuity supplement, and how powerful benefit this is, and so many people don’t even know that it exists. You were saying it could be substantial, $500 to $1,000 a month, up until they’re eligible for Social Security at age 62.
Dan: That is correct. There is one little … Of course, there’s got to be a caveat, right? Anything that good’s got to have a little bit of a twist to it. In much the same manner that someone who collects Social Security benefits at age 62 is subject to an earnings tax, where you lose $1 of your benefit for every $2 you earn over the limit, which is $15,720 for this year. There is a catch to that, so if that person in my example retires and chooses not to work any more, they will collect the entire amount, but for every $2 they make over $15,720, they will lose $1 of that benefit.
By and large, by the time someone’s making about $40,000 a year in a retirement job, they will have phased out of this benefit. It does phase out based on earnings, so not everybody gets it. The government’s not going to pay you if you retire from the US Government, and go out and make $50,000 a year somewhere, then you won’t see this. For those persons who are truly retiring, it really is an extra cash flow that has to be considered in preparing for retirement. The number one misconception there, it is accepting this benefit, the retiree annuity settlement has no effect on your Social Security benefits.
It won’t make them any higher. It won’t make them lower. This money is not paid by Social Security, it is paid by the Office of Personnel Management, and you don’t elect it. It is automatically paid to you if you are eligible. I wanted to make sure your listeners understood that.
Jason: Okay, well that is really good. The next think I want to talk about is health insurance, because this is a big issue for people, potentially a very high expense for people that are looking to retire early. How does it work for Federal Employees who want to take their FEHB health insurance into retirement?
Dan: One of the greatest benefits of being a federal employee, is the federal employee health benefits plan, or what we’ll call the FEHB. The federal government pays between 72% and 75% of the premium for its onboard employees for their entire career, so if someone has a $1,200 a month insurance plan, it’s going to cost the employee $300, and the agency $900. That’s an awfully good deal. The best part of that deal Jason is it continues into retirement. For the rest of your life, as a federal employee, if you retire on an immediate annuity. Somebody who worked 5 years and left the government.
Someone who worked a full career in the government will be able to take their FEHB into retirement, and the wonderful thing is that subsidy continues into retirement for the rest of your life. You’re just not going to find that anywhere else, as you know. I just saw the City of Chicago is not going to have health benefits starting in 2017 for its retirees. One by one, by one, health benefits are just not part of a retiree package. Luckily for federal employees, it’s legislated, and certainly the law is going to change, right? It’s legislated as a benefit for us.
The key is you’ve got to be in the FEHB for the 5 years immediately preceding your retirement. That trips up a number of people because let’s say I’m a federal employee, but my husband, my wife, my spouse works for a school system that give completely free health insurance to its employees. Many times that federal employees will say, “Hey, I’m going to put myself on my spouse’s plan, it’s free, and I won’t elect into the FEHB.” They think, “Well 5 years before I retire, I’ll get back in.” Sometimes they forget to do that. They don’t have the years right. Something comes up in their life where they need to retire sooner Jason, and they miss that opportunity.
I advise everyone as a federal employee, 5 years before you’re eligible, not when you plan to get out, but 5 years prior to your eligibility, that very first day you could retire, please make sure you are in an FEHB plan. You can buy the absolute cheapest, high deductible health plan in FEHB that you want. The idea is just to get your toe in the water. You’ve just got to be a participant. That is really neat. The other thing is …
Jason: I was just going to say, what if, in your example, husband and wife, husband works for the federal government, wife is the teacher, and the teacher is not on the federal plan but the husband is for 5 years. Does his wife get to grandfather into that system, or do they both have to be under the FEHB plan?
Dan: That’s a great question. The only person that need to be in the FEHB is the federal employee. The only risk to that is is if the federal employee were to die before retiring, and was not in a self and family plan, that would not convey to the surviving spouse. If that person in that scenario, each has their own insurance and that federal employee retires, during any open season, that federal employee can add his spouse back onto his FEHB plan. It would have to be done during the open season, but it can be done, absolutely.
Jason: When somebody’s getting ready to start Medicare at age 65, how does Medicare and FEHB coordinate with one another?
Dan: That’s another unique benefit of the FEHB. There’s actually no requirement under the FEHB to take Part B of Medicare. Part A, as you know, if you’re already collecting Social Security benefits when you turn 65, they mail you cards for Part A and Part B. You can’t refuse Part A. Part B, you can cut that card up and mail it back. You do not have to participate. Most of the federal employees that I interface with, choose not to elect Part B. They stay with their FEHB insurance as a private pay customer.
There are some folks that will use the FEHB as a medigap policy, but if you have both Part B, and FEHB, I’m sure you know that when you have Part B, that becomes the primary payer. There’s no way around that, so you have made yourself a Medicare patient, whether you like it or not. Not all doctors see Medicare patients, right?
Jason: In the future though, if there were some reason to transition off of FEHB, back to Medicare, but you didn’t sign up for Medicare Part B at the time, then you’re looking at future benefits down the road from Medicare’s standpoint? That would be the case.
Dan: That is correct, a 10% per year permanent increase in the premium. You definitely need to know at age 65 what your plan’s going to be so you can either elect Part B, or not elect Part B.
Jason: Part B isn’t very expensive, so what’s the advice you give people then, to not take Part B, and just keep the FEHB in tact as your primary.
Dan: My advice, it varies a lot, depending on the particular situation, and health of the individual. If you were in the FEHB plan and your out of pocket expenses are $500 or $600 a month, and you were to spend $105 on Part B, all of those out of pocket expenses usually would pretty much disappear, because when that coordination of benefits, if you kept your FEHB, and you purchased Part B, there’s a coordination of benefits, and of course, the FEHB carrier is delighted that somebody else is paying paying most of the bill, so they’ll pick up the rest.
In that instance someone could spend $105 on Part B, and offload $500 or $600 a month in medical bills. For that person, Part B makes very good sense. For the person who doesn’t have that issue, and wants to have the freedom to pick their doctors, their tests, where they choose to receive care, you can’t beat having control with the FEHB of your own insurance. Also if you travel abroad, as you know, Medicare is of no use to you. It does not work overseas. Your FEHB plan would of course, with some restrictions, insure you overseas.
Jason: That’s fascinating.
Dan: It’s a very specific decision, and you need a decision for each person. It’s hard to generalize, but the one thing I try to stress is that if you take Part B, there are subjective, and objective valuation factors. Objectively, anyone can tell you, and you can do your own analysis to see what the cost would be under each of those scenarios, but subjectively, you have to remember, you’re losing some control. You’re conceding control of your medical to Medicare, to some degree, and not every doctor is going to see Medicare patients.
Jason: With respect to military service, and the ability for military service to count for credit defers for eligibility and computation, how does that work?
Dan: One of the advantages of serving your country and then going to work with the federal government in a civilian capacity is that you can transfer that over. If someone worked … was in the Army for 4 years, and then transitioned from the armed service into a civilian career, those 4 years aren’t wasted. Really they would be normally, because you’ve got to finish your military career under the current rules to get a military retired pay. That individual from the Army can pay a fee. That fee is 3% of the salary earned. In that 4 year period if they earned $200,000 in pay, it would cost $6,000 to buy that 4 years into FERS, and upon retirement, that individual will receive 4% more times their high 3 for the rest of their life.
Jason, it is such an incredibly good investment. I’ve run the numbers for people. The paybacks can sometimes be as little as 18 months after retirement. I cannot think of a better investment to do with your money that to buy your federal time back. I tell people you can write a credit card check if you need to, to buy this back. That’s what a great investment it is, and how powerful it is. The one thing I wanted to convey to your listeners on this topic was that the law changed in 2014. You must have that deposit paid before you retire and separate from your agency. In 2014 it changed. Before that, you could just wait and the OPM would tell you when they adjudicated you that you owed money, but get that taken in now. It’s always better to pay for it as soon as you can, because there’s also an interest component. The longer you wait, the more it’s going to cost you.
Jason: I just met with a gentleman in this exact same situation. It was going to cost about $8,000 for him to buy back. He hasn’t done it yet. My next question to you is in that scenario, what if he dies before paying back those credits, buying those credits back?
Dan: What’s nice about that, buying the credit back, is that you can also do a payment plan, you can stretch that out over a 36 month period. Once you elect to do that Jason, the interest clock stops. They’ll calculate your interest and include it as part of that $8,000. Then you say, all right, I’d like to pay this back over the next 36 months. There’s no interest charged during the 36 month payback period. I encourage people not to necessarily write a check, that’s a large amount of money for most people to have to part with at one time, but if you can spread that out over 2 or 3 years, and you’ve got that much time before retirement, it’s really the way to go.
Jason: I’m just wondering, if he were to die right now, because he hasn’t initiated that process, that the payback, if his wife would be given the option to buy those service credits, or if she just totally loses it in terms of the survivor annuity that might be available to her.
Dan: I’m not sure of the answer to that. When the law changed in 20 … Prior to the change in the law, the surviving spouse would have that opportunity to make that deposit for the military service. I’m not sure after the 2014 change.
Jason: What happens to the FERS annuity after somebody’s death?
Dan: What’s nice about that is, it depends on whether the death occurs before they retire, or after they retire. For an in-service death, as long as that employee had at least 10 years of service, with the federal government, the surviving spouse, and the key word there is spouse, Jason. This money can’t be paid to an estate, or to children, or to any other designee, this is just to a surviving former spouse, or surviving spouse, either one. It can be an ex-wife. They work at least 10 years, and they die in-serve. The Office of Personnel Management will retire that person the day before they died, on the books.
If a person had 10 years in, that would be 10%. Most federal employees accrue benefits at 1% per year. In this example, a 10 year employee would have a 5% annuity payable to that surviving spouse for the rest of the surviving spouse’s life. Most importantly, if that deceased federal employee had FEHB, self and family, at the time of death, guess who gets to keep the FEHB for the rest of their lives, the surviving spouse, at subsidized levels.
The subsidy that person receives is probably larger than the annuity benefit they’re getting. The FEHB is an incredibly valuable benefit.
Jason: Okay, wow.
Dan: There’s a difference when someone dies after retirement, the annuity dies with the person, if someone retires, and they’re collecting a $2,000 a month annuity, and they die, that’s it. It ends unless at the time of retirement, they need to allow a survivor benefit for their spouse. If they do that, it will accomplish 2 things. It will provide a string of income for that surviving spouse, and it allows that surviving spouse access to … You guessed it, the FEHB for the rest of their lives with subsidized premiums. If you have time, can a give you a little example of how that works.
Jason: I would love that, and also, I would like to know of the different options they have available for electing spousal benefits, which one do you think makes the most sense for people?
Dan: Oh absolutely. Let’s assume that a federal annuitant has a $2,000 self only annuity payable to them. They’re wise and they want to protect their spouse with an income, but most importantly the access to the FEHB. There are 2 options for FERS employees. They can elect to have their self only annuity reduced by 10%, which is a lot of money. If they elect to do that, upon their death, their surviving spouse will receive 50% of their self only annuity. In this example, with this $2,000 annuity, this person would have to spend 10% a month, or $200, for their surviving spouse to receive $1,000 a month for the rest of their life. That’s called a full survivor annuity.
The second option is just half that benefit level, you pay half, 5%, and your receive half of half, 25%. In that example the $2,000 a month guy is paying $100 a month for a survivor benefit, and the surviving spouse would receive $500.
The interesting part is, in that example where we had $2,000 being reduced by $200, and leaving $1800, the Office of Personnel Management is going to 1099 this person at the $1800 a month level, so what that means is we’re using pretax dollars to pay for that survivor benefit. I do caution people when they’re trying to decide between life insurance and the survivor benefit, keep in mind if you buy life insurance you’re going to be paying that with after tax dollars. If you’re using the survivor benefit, you’re paying for it with pretax dollars.
That being said, the answer to your question is, I advise most people to take the smaller of the 2. Take the 5%, because really what you’re trying to do here is secure health insurance for your surviving spouse. You couldn’t pay more for an income replacement stream than this. It has always … At least it’s been my experience Jason, it’s almost always less expensive, significantly less expensive to purchase life insurance to make up for the money part. What we’re to do is get that former spouse access to the health insurance part, so what I tell my client is, “Go for the smallest one you can get, which is 5%, run the numbers. If that’s not enough of an income replacement, buy life insurance.”
Don’t opt for the 10%. The only time I tell people, if I’ve got a scuba diving pilot that does all kinds of crazy things, that just not insurable from most life insurance companies, then sometimes you do have to go with the 10%. By and large, I advise people to use life insurance and buy the smallest survivor benefit possible.
Jason: Boy that’s interesting. In that scenario, if they’re only paying 5% for the survivor benefit, would you then recommend that they’re taking the 5% savings basically, and using that 5% savings for life insurance, or is it more you’re backing into the numbers and say here’s how much life insurance we need, and this is how much you need to buy?
Dan: Really I ask them to back into it. The older you get, your need for life insurance tends to diminish. The person who’s 2 years on the job with 3 kids and a non-working spouse, tends to have a greater life insurance need that someone who’s put their kids through college already. They have a paid off house, significant thrift savings plan assets, and Social Security access. Their life insurance needs may be a little bit less. Many people do that, follow exactly what you said. They will buy the 5% survivor annuity, and then just blindly, which is a good plan too, just blindly take the other 5% and buy as much insurance as you can, because you think, “Well I was going to spend it anyway. I might as well get more for my money in terms of a benefit for my surviving spouse.”
Jason: Then I suppose if the spouse dies first, then you just cancel the life insurance and you’ve got an increase to your spendable income for that person that’s still alive. Dan I just realized we’re out of time. Unfortunately if have to end our time, and there’s a couple more questions I was hoping we would be able to get to, but maybe we can address those on the webinar. I’ll remind our listeners, that Wednesday march 23, at 1:15, we’re going to be recording a webinar, and it’s going to be live, so listeners around the country can join us. We’ll have a live Q&A at the end of the presentation. I just wanted to say thank you again for being and expert out there, and agreeing to come on to the program, and share your expertise with our listeners.
Dan: It’s been a pleasure Jason. Thank you for the invitation.
Jason: All right, until March 23rd. Talk to you soon Dan. Take care.
Dan: Bye bye.