Jason interviews Dan Jamison about updates to the Federal Employee Retirement System (FERS) Guide.
The FERSGUIDE is authored by Dan Jamison, CPA. Dan retired in 2013 from the FBI after 21 years as a Special Agent Accountant. Dan started writing the FERSGUIDE over 20 years ago, when the document lurked around only in the FBI’s email system until the advent of the Joint Terrorism Task Forces (JTTF) and then the FERSGUIDE spread from the JTTFs to the participating JTTF agencies where it quickly gained popularity outside of the FBI. Dan continuously updates the FERSGUIDE and adds new content. The FERSGUIDE now checks in at over 125 pages.
The FERSGUIDE was a free resource until the release of the 2015 edition following Dan’s retirement. The FERSGUIDE is published annually in December. The cost is $15 and the fee also provides website access until the end of the guide year. The website contains additional retirement resources such as a PowerPoint accompaniment to the FERSGUIDE. The 2018 FERSGUIDE will be posted to the website on 12/4/2017.
There are two versions of the FERSGUIDE, one for Special Category Employees (SCEs) and one for Regular FERS employees. SCEs are primarily law enforcement officers, firefighters and air traffic controllers. Within the SCE version, there is one edition for those SCEs at the GS13+ grade at retirement and one edition for those at the GS9+ grade at retirement. The GS13+ and GS9+ guides are identical in content, but feature examples using the respective GS pay levels.
If the FERSGUIDE does not meet your expectations, just send an email to them and your purchase price will be immediately refunded.
If you are a new federal employee hired in the last 12 months, you can obtain a free 2018 FERSGUIDE subscription to help you start your federal career out right. Just email them your name, preferred email address, agency name, and your EOD to email@example.com and you will receive an email from them with a username and password good until 11/30/2018.
To learn more visit: www.fersguide.com
Below is the full transcript:
Announcer: 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: America, welcome back to another round of Sound Retirement Radio. I just took a quick peek at our joke of the day right before we got started here, and it’s so ridiculous, but … You’re listening to episode 148. It’s my good fortune to be bringing Dan Jamison back on to the program. We’ve got an excellent program lined up for you today. Before we get started though, there’s two ways, as you know, that I like to get the morning started right. Number one is by renewing our mind. I’ve got a verse here for us. This comes to us, most of you, if you like watching football this time of year, you’ll probably recognize this one, John 3:16.
“For God so loved the world that he gave his one and only Son that whoever believes in Him shall not perish, but have eternal life.” I was thinking about that. I’m kind of curious to know the history and the background about how that verse ended up at the football stadiums; because you still see people today, … Even in this world we live in today, there are still people that are sharing that verse at the football games. I have no idea how it came to be, but I’d be curious to know.
The other thing is, we like to give you a joke, and here’s this joke that had me laughing this morning. How do you mend a broken jack-o’-lantern? With a pumpkin patch. … Okay. Dan Jamison from the FERSGUIDE, Dan Jamison, welcome back to Sound Retirement Radio.
Dan: Thank you for having me again, Jason.
Jason: Yeah. Dan, I’m excited. The work that you’re doing is really great. Before we get into some of the changes that are happening for federal employees’ retirement systems, would you share with our listeners the best way that they can … if they want to follow you and learn more about all the work and the research that you do, the best way for them to learn about that?
Dan: Sure. I have a website, it’s FERSGUIDE.com, F-E-R-S as in Federal Employees Retirement System, Guide.com. I market my 125-page retirement guide from there, which includes access to me if you have any questions; as well as a monthly newsletter. Thank you.
Jason: Awesome. Tell our listeners a little bit about you, so they have a little bit of background on what your career has looked like over the years.
Dan: I retired about three and a half years ago from the FBI. I was a special agent there for 21 years. I’ve been a certified public accountant in Florida and Virginia for 27 years. For the past 23 years, I have authored a retirement guide for federal employees, primarily for the Federal Employees Retirement System. I’ve had a pretty long engaged interest in federal retirement benefits. I’ve been doing that for quite a while now.
Jason: Awesome. Well especially here in our community, you may not know this, but here over in Kitsap County, we have a very large submarine base, and a lot of federal employees, both at the Bangor Sub Base, and at the shipyard; and all of the supporting businesses, or industry, federal employees, around that activity. Especially here in my community, we’ve got a lot of retirees that are really, really interested in understanding some of the changes that are being proposed, and some of the things that are happening. I was hoping we could start today’s conversation off with that, Dan. Just jump into the changes, and what you’re hearing, and why it’s important.
Dan: It is a scary time. As you can see, I’ve been a federal employee for a long time, and for the last four years … It’s been part of my job, just like you, I get a lot of emails. I’m getting 50, 60, 70 emails a day from panicked feds, either the ones that have already retired or ones that are near retirement, wondering just what’s going on with these proposed changes to federal retirement benefits. I’m sure you’re aware that the house proposed in its budget, certain retirement benefits with some specificity. In the senate version, that was proffered. There were no exact instructions on what to do, just that there should be changes and some savings. The Republican study commission issued what they wanted to have happened. Of course, President Trump’s budget had some items in it as well. That’s actually what kicked all this off, so we got four different sources of information about these proposed changes.
Just to sum up the ones that exist in all of those realms, the most dangerous that I think is that the … President Trump’s budget wanted to have no more cost of living adjustments. I’m sure from your standpoint, you understand what a difference that is. No cost of living adjustment on a 20, 30, 40 year pension; it would be just a dramatic change, financially. That’s certainly, I think, the most important of those changes. We also are looking at a possible change from computing our annuities, from a high three based salary level to a high five base salary level. We’re looking at a proposal to eliminate the retirement … retiree annuity supplement, that’s like that … There’s different names for it, Jason. It’s kind of a bridge between retiring from federal service and being eligible at age 62 for social security benefits.
That’s three so far. Okay, four.
Jason: Yeah, so wait, wait, wait, wait, wait. Before we keep going, though, let’s talk about some of these real quick. I can imagine the concerns coming in. What’s the number one concern that people have when they’re emailing you? Is it the no more [COLA 00:05:47]? Is the annuity supplement? Is it the high three to high five? What are you hearing so far? What’s the number one concern people have?
Dan: That’s a great question. Some might even think we rehearsed it, and we didn’t. The number one question coming is absolute panic about losing the retiree annuity supplement, the bridge, between the time someone retires from federal service and when they’re eligible to collect social security. If a federal employee with 30 years in at age 57 retires from federal service, they will receive, subject to an earnings test that’s identical to social security’s earning test, … but subject to that earnings test, they will receive an additional annuity supplement for up to five years; until they turn age 62.
For law enforcement, air traffic controllers, firefighters and others that retire as early as 50, and sometimes even earlier, they can end up collecting that for 12 years or more. That’s the number one concern I’m hearing, despite the fact it’s not the one with the biggest price tag.
Jason: I was going to say, yeah, I read in your newsletter, you said, “Geez, people, this is a small window of time that you lose out on this benefit.” You were pointing out the fact that the proposed changes to the cost of living allowance is going to have a much more significant impact over a long period of time. I really appreciate you bringing that up. Now, but the reason for the proposed cost changes is … Do you feel … I don’t want to … I always am careful to not make Sound Retirement Radio a political debate room, because we’re just trying to help people give people good information to make better choices about their financial life. We’ll leave the other folks out there that like to pound on the table and yell about politics to somebody else.
Do you think this is a Republican/Democrat issue, or is it really just a budgeting issue, Dan; because we’re spending too much money on federal employees, according to that CBO report that was put out? I don’t think CBO is … the congressional budget office. They don’t take a political stance, do they, in terms of the advice that they give?
Dan: They do not. The answer to your question is that I think it’s a little bit of both. I’d probably take some flak for saying that I think some adjustments are in order. It just depends on which adjustments we’re looking at. My number one frustration is, and I certainly won’t keep it political. I don’t think any elected lawmaker is going to be re-elected promising more benefits for federal employees. I think we could all agree on that. A lot of my subscribers are sharing with me letters they’re receiving back from their senators and representatives after they’ve contacted them with concern. These letters are pretty generic.
It just says, “We understand we need to watch costs. We’ll keep your issue in mind.” No one is promising, ‘I promise not to vote to cut these benefits.’ I think the biggest mistake is the lawmakers do not understand how federal benefits are funded. I wrote a column on that not too long ago. There’s 880 billion dollars in the Civil Service Retirement and Disability Trust Fund. That’s real money used to pay retirees. The CBO report, which you mentioned, they have unfunded liabilities of almost 800 billion dollars; 94% of that, Jason, is for the Civil Service Retirement and Disability … I mean, the Civil Service Retirement System, meaning the one that came before, first.
When these guys look at the amount of money required for these unfunded liabilities, it’s all from the plan that pre-dated social security and was eliminated in 1984. FERS, when it was enacted, was a fully funded retirement system. There is literally no unfunded liability. A person like me, for example, I’ve been retired three years. The benefits I’m receiving, which include the cost of living adjustment that people are talking about getting rid, the annuity supplement, which I collect, my retirement’s based on a high three. Those benefits, the cost to provide that was calculated by OPM’s actuaries.
They said, “That cost 34.1% of Dan’s pay.” I paid a percentage, which was very small. The agency paid the rest. That money to fund those benefits, Jason, lives in that fund right now. How do you take away a cost of living adjustment from an annuitant, or even somebody with 20 or 30 years in? When in fact, from an actuarial standpoint, it’s already been paid for. That’s what frustrates me. They don’t understand that you need to leave the people alone that are already onboard, and focus their efforts … and I applaud the CBO for that. That was the first place I’d seen any type of number put out there for taking away defined benefit plan, and replacing it with fine contribution plan.
Jason: That’s what the CBO recommended, was to replace defined benefit. No more pension, basically. Is that what you’re saying?
Dan: Well, as you correctly pointed out, the CBO doesn’t take sides.
What they did is they said, “Here. Here’s five options we looked at. You draw your own conclusion. You make your own choice, but here are five options.” The last two options, option four and option five, … and I’m looking at the report and quoting it.
It says, “Eliminate pension and increase the government’s TSP contribution to 15%,” and the other was eliminate the pension and increase the TSP to only 10%. I think that that’s where the government’s going is putting private … I mean public sector employment with the federal government more on a par with private sector. You know that. You don’t see pensions out there anymore for new employees in the private sector.
Jason: No, not so. [crosstalk 00:11:35] I think that’s why the conversation’s being had, because the federal employees today. Going to work for the federal government for a lot of people means higher pay, better medical benefits, and a better retirement than you could get in the private sector. I don’t think that’s the way it was ever supposed to be. You weren’t supposed to be getting the cream of the crop by going to work for the government, because then everybody will go to work for the government. There’d be nobody to be incentivized to start a business and pay taxes to provide all of those benefits, right?
Dan: Some of those points I would certainly agree with. I have seen reports, Jason, that … I would agree with your statement. It depends on the kind of person you’re looking for. You’re looking for a high school graduate, or someone with a graduate degree. The US government hires a lot of different people. I think that in the lower end of the skill spectrum, that the employees that work for the federal government, for the most part, do make more than private sector counterparts. However, I think that some of the more highly educated and skilled workers in the federal government could certainly do better in the private sector; and many do leave, and many do go to the private sector for that purpose.
Dan: That actually segues back into the getting rid of this defined benefit plan. I think that if we get rid of the defined benefit plan, I assume if someone in the federal government does get a better offer from the outside, they’re gone.
Dan: I get those emails literally every day, ‘Hey Dan, I got 15 years in. I’ve got an offer for $200,000 to work for an IT company here on Wall Street. What do you think?’ Those people, they don’t have a pension to … That’s the only thing that keeps them there.
Dan: They’re gone.
Jason: Let’s talk about-
Dan: You’re going to see a lot less skilled workforce.
Jason: Let’s talk about the planning that people should be thinking about specifically if these changes go through. Now first of all, has any of this actually been voted on in the house or the senate? Is there a chance that any of this could be voted on this year, do you think?
Dan: Well, that is the funny part that nothing that we’ve discussed has become a law, or even into the form of a bill. Both houses have passed their budgets, and now they’re being reconciled with the oversight committee. We don’t know what’s going to come out of that, but the big thing people fear right now is that I’m getting is, ‘Dan, I was going to retire in April or May of next year, but I’m eligible now. Should I go?’ My answer is ‘yes.’
Dan: I have no problem giving that advice to someone.
Jason: Just to protect their retirement annuity supplement? Is that the primary thing they’re trying to capture by retiring now?
Dan: That is correct. That and they’re worried about a high five calculation. For most people, Jason, that’s not a tremendously huge whack. In fact, an earlier CBO report estimated if a person worked nine additional months for the government, it would make up for that high five to high three change. That’s the one I’m least concerned about. I think someone who were to leave the employment of the government on 12/31/17, the likelihood of being effected by any of this, I think is at or near zero. Whenever there is a change in the federal retirement or payroll issue, it’s always effective the first full pay period of the calendar year. If I were a fed right now, and I were eligible, I’d have my asset 3017 form for immediate retirement. I’d have it at the ready.
I’m not saying panic, but you don’t want to be trying to fill that out on December 30th, either, if something comes out of this. I would tell people to use caution, pay attention, read the news, write your congressman or congresswoman. Pay attention, it’s your life. It’s probably your … The federal employees I deal with are TSP and FERS, are their two largest assets they have, period. So pay attention, take an interest in it, right? If you see something coming down the road that’s going to cause you financial grief, retire.
Jason: Wow. Well, so-
Dan: In advance of the change; what I’m hoping is they just say, “Hey, any employee hired after 1/1/19 will be under a new plan,” or 1/1/20. Give a little notice. My big problem is you don’t pull the rug out from somebody who’s been working [crosstalk 00:15:32] …
Jason: They’ve done it though in the past. I mean, we’ve seen it with social security in 2015. They changed the rules overnight. They changed the file and suspend, and restricted application, with very little warning.
Dan: Yes, they did.
Jason: I want to ask you about health insurance. It’s one of the biggest costs that people face when they’re retiring, especially if they’re going to retire early. Will you share for our listeners that are federal employees that are trying to understand healthcare benefits, what that looks like before they retire and how to optimize and get the best health insurance they can? Then also, how that plays into Medicare.
Dan: On the federal employee health benefits, the government … I’m going to round a little bit, Jason. The government basically pays 70% of the cost of that premium. If you had a premium that was a $1,000 a month for a particular health plan, the employee’s paying $250, the government’s paying $750.
Dan: The difference is when you’re an onboard employee, you’re paying for that over 26 pay periods. We get paid every two weeks as onboard employees. As an annuitant, people like me, are just paying monthly. I’m paying my $250 a month. One of the questions I get a lot is, ‘Well, what happens when I retire? What’s going to happen to my premium?’ The answer is absolutely nothing. As an annuitant, your government subsidy for the federal employee health benefits plan is exactly the same. The only difference is you’re paying your premium monthly instead of bi-weekly. When you look at the open season and you look at the [FEHB 00:17:04] premiums, you will see two columns; one that says ‘bi-weekly,’ one that says ‘monthly.’ Monthly is for annuitants and bi-weekly is for onboard employees.
To answer your question there, there’s no change, just the method. Just the timing of which you make the payment. OPM will withhold it automatically from your annuity payment. You don’t even submit any paperwork. Whatever carrier you had when you retired, Jason, just continues into retirement. Simple as that. Now, in terms of … one of the proposals quickly that has come up as well is capping the rate of increase. Nobody’s talking about getting rid of the subsidy. They’re capping the rate of increase. Let’s say the cost of living goes up 2%, but the cost of healthcare goes up 6%. Well, the government’s picking up that 6%.
These budgets would like to roll that back and say, “No, we’re not going to pick up any more than the overall cost of living adjustment.” That’s what funding-wise, I haven’t seen anything with any … real meat behind it to completely eliminate the subsidy on health insurance. Many private sector employers also subsidize the health insurance for their employees, but not necessarily for their annuitants. In terms of Medicare, is that-
Jason: That’s what I wanted to go to, yeah; because that’s a big transition for people. Medicare is great insurance, but I know you’ve shared some controversial advice, in my opinion, about maybe not opting for Medicare and keeping your government insurance.
Dan: Yeah. Under the current rules for the FEHB, there is no requirement that an annuitant elect Part B. They could stay private pay FEHB customer for the rest of their life. In reality, many end up doing that anyway because even the folks that elect Part B typically still obtain some sort of prescription drug coverage and maybe some Medigap coverage. They’ll just keep their FEHB coverage as their prescription drug coverage and for their Medigap. The coordination of benefits between the Part B of Medicare and their FEHB carrier, typically the out-of-pocket cost falls to zero; but the advantage is there you’re getting a quote, Medigap prescription drug plan that’s still subsidized by the federal government.
Jason: The reason I say it’s a little bit controversial is just because the risk. There’s penalties associated for every year that you don’t opt in to Part B. If you ever changed your mind later and you wanted to go to the Part B plan, you could end up being paying penalties. Congress could always change the rules. Even though it’s a nice subsidy [crosstalk 00:19:43] now for the health insurance, if they change the rules in the future and you decide to go back to Medicare, you could end up with some penalties as a result.
Dan: That is correct. I would like to think that if the FEHB changed the rules and said, ‘at age 65, you must apply for Part B,’ the folks that did not do that would be hopefully grandfathered in, because the rule changed.
Now, it’s different if the rule doesn’t change and someone just changes their mind and says, “Oh, I shouldn’t have listened to Dan. I should have opted for Part B,” then that’s a personal mistake. Then of course, the 10% per year penalty is additive. It’s for every year you’re out. That can get very pricey. If the rules change, then I’m hoping that some allowance would be made to kind of have an open season to get people in there.
Jason: I heard that there were some changes coming to the TSP and potentially specifically to the G Fund. Do you know anything about that?
Dan: Yes. That is also one of the … I really didn’t lump it in with the first stuff, but is one of the proposals that has been put forth a couple of times. This one’s not new. That is changing the securities, that the G Fund, is one of the five funds that the federal employees can invest in. Changing the rate of return on the G Fund to really mimic a money market account, or a very short term security. Right now, I believe it’s the … It averages the rate of a four year US treasury note, if such a thing were even existed; because those are special … issue treasuries to the thrift savings plan. Other people can’t buy them.
Jason: Right, right.
Dan: It’s special issue to them. It’s always a safe haven if somebody wants to jump out of the other four funds and … jump in. It’s a guaranteed rate of return that exceeds the money market.
Dan: You don’t really see that in the private sector with pretty much zero expense. I think it’s .027% was the expense ratio last year, or the year before. You’ve got this basically cost free, risk free place to throw your money. If we issue different securities to the G Fund that bear a rate of return closer to a money, well of course, that’s going to lower the cost of the federal government.
Jason: Folks, you’re listening to episode 148. I have Dan Jamison on the program. If you work for the federal employees, or you’re part of the federal employees retirement system, Dan writes a newsletter called the FERSGUIDE. It’s a very small cost to be a member of that. I highly recommend you are staying in touch and tune with what’s going on with your federal employees retirement system. This is episode 148. You can come back and listen to it online.
Dan, are there proposals within the TSP rules to make it easier for people to access their money from the TSP? There’s some restrictions in there right now that are kind of wonky. Are they going to fix that?
Dan: There’s a senate bill that’s already been passed to make that happen, the TSP Modernization Act. They had to do that, and I’m delighted to see it coming. They already had in their 2017 to 2021 strategic plan most of what’s in that modernization act. The TSP quickly learned that 45% of participants leave the Thrift Savings Plan within 12 months of retirement. That’s staggering. Can you imagine losing half your customers every year?
Jason: No, that would be pretty tough.
Dan: No one would survive in the private sector like that. They realized people were leaving for the most part because of limited access. As you know, a TSP participant can only make … Basically, I call it one bite at the apple. When you retire, you can have one opportunity to take out a lump sum. Once you start a series of monthly payments, you can never go back and make a lump sum again. You can only change the amount of your monthly payment one time per year.
What this modernization Act will allow is for just to log in every month and say, “This is how much I want.” Instead of being stuck with a $1,000 monthly drawl, or $2,000 monthly drawl for an entire year until you can change it again. Let’s say you have an unexpected emergency or expense, Jason, and you want to just take out $10,000 in April, and go back to May to being $1,000 a month. You have that flexibility anywhere else, right?
Dan: … your account, and then-
Jason: Dan? Unfortunately with that, we’re out of time, but thank you for being a guest on Sound Retirement Radio.
Dan: It’s been my pleasure, Jason. Thank you very much.
Jason: All right, take care.
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Jason Parker is the president of Parker Financial, an independent fee-based wealth management firm located at 9057 Washington Avenue NW, Silverdale, Washington. For additional information, call 1-800-514-5046; or visit us online at SoundRetirementPlanning.com.