Ep #27: TSP and Social Security

 You can spend. You can save. What is the right thing to do? Federal benefits, great savings plans too. You can save your own way, with help from Micah and Tammy. You can save your own way. Save your own way.

Micah Shilanski:  Welcome to the Plan Your Federal Retirement Podcast. I’m your coach, Micah Shilanski. And with me as usual is the amazing Tammy Flanagan. Tammy, how are you doing ma’am?

Tammy Flanagan:        I’m doing great, Micah. It seems like it’s been a little while since we’ve recorded our podcast today, but I’m happy to be here and ready to go with some good information kind of stemming from some of the things we’ve talked about in the last few podcasts.

Micah Shilanski:  It is, right? For our listeners, it’s just one week to the next, but sometimes we batch our podcasts together to be more consistent and there has been a little bit of a separation, but I’m excited to get back into it. It’ll be a lot of fun.

Tammy Flanagan:        Yep. It sure will. And two of my favorite topics, social security and TSP, so I think this is going to be a good one. And I think it’s going to appeal to a lot of people who are in that window of what do I do about social security? What do I do about taking money from my TSP and how do I balance that? Because the nice thing about FERS, you don’t have to turn it all on at the same time. And I think we’re such in a mindset as federal workers because we’re still throwing back to the civil service single benefit plan that we think our retirement is a one-time event and it really can be a progression of events. And I think that’s kind of where we’re headed today. Isn’t it?

Micah Shilanski:  Boy, I like that. That is exactly what it is. It’s a progression of different things. You’ve got to have a timeline that’s out there. We’re going to talk about this a lot with how do your benefits coincide and what makes your benefits so unique or your retirement so unique as a federal employee versus non-federal employees. They generally don’t have this many moving parts into their retirement. So it sometimes becomes a set it and forget it for some retirees. But for federal employees, it’s a little different, especially that first years of, 10 years of retirement, there’s different things that are happening that you need to be aware of in order to get the most out of your benefits.

Tammy Flanagan:        Yeah. And I think the nice thing, as you were saying, Micah, that federal employees have a little different situation than people in the private sector because fortunately, federal employees have a pension. And when you read those things in magazines or you see them on different news reports about you need to have $2 million saved up before you retire, really, you got to throw that away because that really is not how you plan your retirement I think for anybody and especially not for federal employees, because you can’t just put a number on how much you have to have saved. You have to take into account all these different streams of income you can create, whether it’s from your pension, social security, IRAs, TSP accounts, and for some, military pension benefits as well.

                           So there’re so many different parts that you have to… It’s almost like putting together a puzzle, making sure all the pieces fit just right.

Micah Shilanski:  Absolutely. Now, if you missed our previous episode, it’s episode 25, we were talking about a safe distribution rate. Right now I’m using air quotes when I’m saying safe because it really depends on how much risk we’re taking, et cetera, et cetera, nothing in the market is really safe. It’s just, when do we need to access our money? But we talked about how to put together a distribution strategy. And the next evolution of that distribution strategy is that changing element, Tammy, as you’re just referring to with our social security benefits.

                           So one of the things you’ve got to think about is when you retire, of course, you’re going to have your pension that’s going to be coming in. You may have your first supplement coming in, which would be great. So the first supplement of course, is going to be a portion of your social security benefits. Tammy, would you run us through really quick, what are… I know we talked about this in other podcasts. So we don’t get to go into it in depth, but really quick, how do you qualify for the first supplement and about what’s the formula or how much do you get from the first supplement?

Tammy Flanagan:        Yeah, the supplement, or sometimes people call it the first special retirement supplement, it’s only going to be for people who retire from government service before age 62. So if you’re working and you’re already over 62, forget anything about supplement. You’re not going to get one. You don’t need it. But for someone who retires younger than 62 with an immediate rather than deferred retirement benefit, it’s not reduced for age. This is a benefit that’s paid by the office of personnel management that’s meant to kind of bridge the time from your retirement until you’re 62. So the supplement’s going to end no matter what happens, it’s going to end when you turn 62.

                           For some people, it ends sooner because they go right back to work after they retire and just like social security, the supplement is subject to an earnings test. So if you start earning upwards of over $19,000 a year, then you’re going to start to lose that supplement because you’re making too much money. And it’s going to be the same thing with social security between age 62 and around age 67. Because until you reach your full retirement age for social security, it’s pretty easy to delay claiming social security because you wouldn’t get it anyway or else you’d get it and have to pay it back.

                           So we’re kind of talking about when that day comes, when you’re fully retired, you’re over 62 now. The supplement has stopped. Your second career has stopped. And now you’re trying to figure out how do I have enough income to live out my life after retirement?

Micah Shilanski:  Exactly. And this is really important. This is the reason we’re going to talk about this concept called a retirement income timeline. Now, in our workshop, three critical concepts for retirement, we go through how to do this. But it’s basically a graph that we like to lay out on a one-pager with our clients. This is great. When you retire, how much money do you want to spend? And then where’s your money going to come from? How much is your pension going to be? Net not gross, right? We don’t care about gross. That’s what the IRS cares about. We care about net. How much is deposited in your bank account? And then when’s it going to change? When do you get a cost of living increase? When do you get a first supplement? When does the supplement go away? When should you turn on social security?

                           And I really like to lay out this graphically, Tammy, as we’re talking with people, because now we can see it, right? You and I, we deal with this on a day-to-day basis, in our minds, it just kind of clicks. But if this is the first time you’re going through retirement from the federal system, you really need to look at that first 10 years in retirement and understand these changes because you don’t want them to catch you by surprise because when they do, the surprise is generally negative and that means you have less money or you owe more money in taxes than you anticipated. Neither which one of those we really want to plan for.

Tammy Flanagan:        That’s what planning is all about, right? Trying to keep your taxes at a minimum and your income at a maximum.

Micah Shilanski:  Now, if you have questions about social security, we did an amazing episode with a lady, Mary Beth Franklin. I believe it was episode 14. So if you go to planyourfederalretirement.com/14, that’s episode 14. You’re going to hear 30 minutes of her going through great social security strategies. So we won’t duplicate that today, but Tammy, let’s dive into a little bit kind of picking up from last time, someone’s retired. They have their pension coming in. They have their first supplement coming in and they have their TSP that’s out there. Eventually they’re going to get social security.

                           So this now becomes a question, what do they do when they’re turning 62? So before we get into that, on the supplement, Tammy, when does it stop? We said at 62, is that the month you turn 62? Is it the month after you turned 62? What’s the day your supplement turns into a pumpkin and goes away?

Tammy Flanagan:        Well, as most people… I think most people know that the check you get from OPM on the first of the month is the benefit for the previous month. So if the supplement stops when you turn 62, it’s going to be the following month. So you’ll get the supplement for the month you turn 62, which means you’ll get one more check with the supplement that first of the month right after your birthday, but then after that it’s gone. So you have to kind of prepare for that because for many people, that supplement could easily be 1,200 a month, for some people it’s 1,700 a month, 1,800, even 2,000 depending on how much time you worked under FERS.

                           If you worked 35 years under FERS, it’s going to be very close to your social security benefit payable at 62 without any COLAs because that supplement never got a COLA, even if you retired all the way back to age 57 or for law enforcement or firefighters, back to age 50. So there’s no COLA. So it’s whatever it was, that’s what it was for the whole time.

Micah Shilanski:  So Tammy, let’s talk about that. Let’s use $1,500 a month. It’s a nice round number. So if you’re getting… Now, this is an addition to your pension, right? So let’s just say your pension is 2,000 a month. I’m just making up numbers just for an example. So your pension is 2,000 a month. At 62, you still get your pension, nothing changes from one month to the next, but your supplement is going to turn into a pumpkin. So now you have that question that you have to figure out. When do you turn social security on? You just lost $1,500 a month in income. I’m going to say it’s when you turn 62, just it’s the month after, right? But just for an example. When you turn 62, you lost 1,500 a month.

                           And Tammy, there’s a couple of options that federal employees can choose, is number one, they could say, “Hey, great. Let’s go to social security and let’s turn on our social security income.” Boom. We’re going to replace that income because it’s going to be higher than your supplement. Or the other decision is going to be, you could go to your TSP, IRA, et cetera, any investment account you have, and you could say, “Great. Now I need an extra $1,500 a month out in order to replace that difference.” I guess the third option is you could do both. That may not be a good financial plan, but you could turn on social security and take more money out of your retirement. So you have-

Tammy Flanagan:        I was going to say you could drive down the road to see all those help wanted signs and get yourself a part-time job.

Micah Shilanski:  Fourth options. Look at this. They’re being created all the time. That is true. And a successful retirement, what I define it is you never have to go back to work, whether you choose to, and a lot of people do, right? Because they want that experience. They want that interaction. They’re just not done giving back just yet. Man, I think that’s amazing. But a successful retirement is where you do not have to go back to work.

Tammy Flanagan:        Right. Exactly. I agree.

Micah Shilanski:  So Tammy, we have some big questions that’s there. Do we turn social security on or not? Now, one of the things that I really like, and most of our listeners are going to know hearing us talk about it in the past is when you defer social security or you delay your social security, it’s going to grow and it can actually grow quite substantially over the years up until 70 years young. Right?

Tammy Flanagan:        Right. So when you claim social security at age 62, you’re considered having taken it early because your full retirement age, if you ever noticed on your social security statements is usually around age 67 for most people listening today. So if you take it at 62, that benefit is going to be reduced about 30% of its full amount. And social security also builds in an incentive to delay claiming social security even beyond your full retirement age so that every year that you delay claiming it, your benefit for the rest of your life goes up 8% a year. So the difference between taking it at 62 and claiming it at 70 could easily be well over $1,000 a month difference.

                           So we’re not talking just about 10 bucks. So this is why this has become such an issue these days. And this is why so many people kind of debate this idea. Do I get it while the getting is good and take it at 62 in case I die early or what’s the benefit of delaying it? And I think when you talk to people who’ve already claimed social security, very few people delay it until 70. So you might start to think, well, nobody else is doing it. Why should I do it? But if you look back at even the last generation, our parents, our grandparents, maybe my parents and your grandparents might. I’m older, but that generation didn’t have a 401(k). They didn’t have a TSP.

                           So if they didn’t take social security, they couldn’t necessarily stop working. But we’re in a different place today. Many federal employees, I’d say most federal employees have a pretty decent TSP account. So you do have some flexibility. And I think that’s why we’re talking about this today is because is it really going to be the best knee jerk reaction just to file to get your social security just because the supplement stopped or just because you retired at age 63 and a half? Is that really the best move or do you have other options? What do you need to think about when you’re exploring your choices?

Micah Shilanski:  Tammy, I like to put this in a math perspective, right? And I want to talk about this and I want to talk about how do we use the TSP, IRA, et cetera, in this as well. And one of the ways that people do is they look at it in a life expectancy, and I’m not a big fan of this one that says, well, if I delayed social security until 67, I’d have to live until X years young, 72, 75, whatever that is in order to reclaim that money. If I delayed it to 70, now I get to live into my 80s in order to get that money back. And that’s one way to look at it. But I don’t think that’s the most accurate way because really what we’re doing is we’re making a choice because the number one goal of retirement is not having to go back to work.

                           But the number two goal right behind that is having the income you want in retirement. So this isn’t a question about having $1,500 less a month when you turn 62. If the supplement goes away, we need to make up that income. So the question is, where is it coming from? Not necessarily, do I have to make it up? The answer is yes, you got to make it up. But where is that money coming from? Now, if we compare that and I say, great, I could take money out of TSP. Let’s leave taxes out just for right now just to make this easy. I could take 1,500 a month out of my TSP account. Okay. That’s an option. Or I could take $1,500 a month out from social security if I turn social security on at 62.

                           Both are $1,500. Okay, great. But if I didn’t take one, what was the guaranteed growth rate? Now, the caveat on this word is that word guaranteed. So Tammy, what’s the guaranteed growth rate of the TSP?

Tammy Flanagan:        There is none.

Micah Shilanski:  That’s right.

Tammy Flanagan:        There is none. It’s whatever it earns in the future. We only know what it’s earned in the past and there’s no guarantee that any of that’s going to happen in the future. So I think there’s a risk in not knowing that return.

Micah Shilanski:  Right. Now, you could, if I want to really just argue this, we could move all of your money into the G Fund. And then you get a whopping 1%, right? That’s going to be there. Okay. Well, we all probably know that’s not a great long-term strategy to have all of your retirement assets earning 1%. So with a TSP, there’s not a guaranteed return. It’s the stock market. It’s going to go up. It’s going to go down based on how you invest it. But social security has a guaranteed return. If we delay social security from 62 to your FRA, your full retirement age, either 67 or maybe even out to 70, it’s going to grow between six to 8% every year. That’s a huge guaranteed rate of return.

                           Now, why do I say it’s guaranteed? Because that’s what the US government says. They say, if you wait, it will be more. That means they’re guaranteeing that. And that’s it. If I could change this scenario, sorry, I’m geeking out about this, Tammy. But if I could change this scenario, and it’s what I say with clients is saying, look, if you had $100,000 and I said, “Great, can I take that $100,000 and I’m going to go buy a four year CD. And that CD is guaranteed to get 6% a year from the federal government, would you do that today?”

Tammy Flanagan:        Sure. Absolutely.

Micah Shilanski:  Yes. All of my clients were like, “Hands down, I would absolutely do that.” And I’m like, “Great. Because that’s kind of what delaying social security is.” With social security, we’re saying we’re not taking it now, we’re delaying it. And the government is saying, great, it will be more in the future.

Tammy Flanagan:        Right. And going back to what you were saying about this whole break even thing that a lot of people get hung up on, a lot of people like to look at that. And the way I look at it, and here’s the reality. The government says we’ll either pay you a smaller check for more years or a bigger check for fewer years because we think everyone’s going to die at 81. So if I had a twin sister and we both had exactly the same career and I decided to claim my social security at 62 and my twin sister waited until she was 70 and we both die on our 81st birthday, it wouldn’t have really made any difference because I would have gotten a smaller check four more years. She would’ve gotten a bigger check for fewer years, but in total we would have gotten about the same amount of money.

                           So who cares? What difference does that even make is how I look at it because I’m more concerned about not if I die early, because if I die early, I don’t need the money anymore. My bigger concern, I might’ve said this before, but this is really true. My bigger concern is longevity. What if I live a long time, because people today are living longer than in any other generation. So what if I make it till I’m 90? What if I make it till I’m 95 or even 100, or 105 is not unheard of. I don’t ever want to become dependent on the government or on my family to support me. So I want to make sure I have a stream of income that I can remain as independent as possible. Not only physically, because of course we all want to maintain our physical and mental independence, but we also want to be financially independent.

                           And so having that bigger check for all those years not only is going to give me more money overall, but it’s going to maintain that independence because my savings are a finite amount of money that’s going to grow hopefully. And depending on how I take it out and how I manage it, will determine how long it’s going to last. And if I only wanted it to last until I’m 85 and here I am at 95 still alive and out of money, at least my social security and my FERS benefit are still coming. So I’m an advocate for not everybody, nothing is all or nothing, but I’m a big advocate for getting people to think about that, to really consider your options. Because I think everybody just thinks I’m not working, so it’s time to take social security. And I think today we have some reasons to make a choice, both for longevity and also because we have savings.

Micah Shilanski:  Tammy, I 200% agree. And this is a choice, right? We want you to make an educated and informed decision. This is the key in this podcast is to look at it. And if we’re so narrow focused on there’s just one way, okay, you’re probably wrong, right? There’s more than just one way. There’s a way to do things. Is this the way for you is a very good question. So let’s get into a little bit of the how this would work, Tammy. So one of the things we talked about last time was a distribution rate from your TSP account and how much money could you take out? And we were talking about a 5% consistent distribution rate. But the principle that allows us to do that is what we call our buckets of money, right? We’re saying in our buckets of money, any money that we need to take out, any money we need distributions on in the next five years doesn’t belong in the stock market.

                           Why? 2008, ‘9, ’10, ’11, ’12, it took a long time after 2008 for that stock market to recover. And this goes to the same plan right here. So if you decide this strategy is the right one for you, then we need to look at it and say it’s great. From between 62 and 67 or 62 and 70, where’s that money going to come from? And let’s make sure any money you need to spend in the next five years isn’t involved in the stock market. Maybe that’s the G Fund. Maybe that’s the F Fund, maybe that’s cash in an IRA or a CD or some other vehicle. But this becomes really, really important. Where people can get in trouble is where they keep all of their money invested in the stock market, they choose to delay social security. Then all of a sudden the stock market has a 30% hiccup and now they start freaking out in retirement.

Tammy Flanagan:        Right. Yeah. You have to be careful about this. You have to understand all the moving parts and how they behave both in the economy and also within your comfort level. Because how many people do you know, Micah, who took their whole TSP account just because they’re retiring and moved it all to the G Fund? So I think before you take advantage of any opportunities to manage this money, have some basic knowledge, get some basic education, get some help if you need it. Because it isn’t something that… This isn’t 101. This is kind of the 201 level of retirement planning that might need a little extra experience.

Micah Shilanski:  And this is where sometimes it’s bringing… And this isn’t a selfish plug to hire us. So please don’t take it that way. But this is where it could be really good to reach out to someone, even if it’s not us. And say, “Great, these are my plans. This is what I’m going to go do.” Let’s make sure it’s passing the straight face test because you have an emotional biased in your own work and what you’re producing. It’s like editing your own paper, right? Or when you read your own paper, you can’t see all of the typos. You got to have somebody else do it. It’s the same in your retirement planning process. You need someone on the outside to step in and really point out the different things. What are you weighing? Does this make sense or not?

                           As Tammy, as you said, it’s not the basic level of planning, but this is such a critical part to make sure you can have your successful retirement.

Tammy Flanagan:        Yeah. And it’s an opportunity. So you don’t want to miss an opportunity by not understanding it. So like you said, Micah, whether it’s your firm or some other financial planning firm, make sure you work with someone who is a fiduciary who’s not just selling a product and who understands government retirement systems, the TSP, the FERS system. So someone who works with federal employees is usually your best bet. And I’ll give you a plug, Micah. I recommend you all the time.

Micah Shilanski:  Well, thank you. And vice versa. Your information, you are my go-to expert on federal benefits. I have loved working with you. So thank you for all of your good stuff and your work with feds.

Tammy Flanagan:        Sure. And like we both said, we’re not the only ones who know this stuff. Thank goodness. It would be a big problem if we were, but just make sure you’re careful when you do hire someone to help you.

Micah Shilanski:  So let’s talk about, Tammy, a couple other planning points we need to think about, and then we can transition to some great action items for our listeners as well. So one of the strategies that, and I’ll share a little bit of a client story if I may. One of the things that I really enjoy about this of delaying social security is there’s a great tax benefit that can be inside of here as well that sometimes we miss. Social security is a little bit tax advantageous. What we mean by that is not all of your social security is subject to income taxes. For most federal employees, 85% of your social security will be subject to taxes. Not taxed at 85%, right? So that means if you’ve got $10,000 in social security, $8,500 goes on your tax return. And that’s what you have to pay taxes at 15, 20, 25%, whatever your tax rate is.

                           So there’s a little bit of tax advantageous nature to social security. So one of the things, Tammy, we’ve done with some clients is when they’re retiring from the feds, especially retiring early before 62. And our plan is to take social security out at 70 years young. Now, I know in the SECURE Act that came out, they changed the RMD age, required minimum distribution age to 72. A lot of people have been coming back with questions about when I turn social security on at 72, nope, that didn’t change. It’s still 70 years young. You get to turn your social security on. So we have between your retirement and 70 years young when you have social security, that can be a great time to either take just IRA distributions, because now we’re lowering that tax value in the future or Roth conversions.

                           We have one client that we’ve structured this in a way that over eight years, we’re going to convert almost 90% of her assets into tax-free money. When she’s 72 and she has an RMD, it’s going to be almost zero and she’s going to be in between a zero and a 10% tax bracket all into retirement. Now had we had not done it this way, she’d have been in a 25% tax bracket. So you’re talking about savings of hundreds of thousands of dollars over her life by correctly structuring how to take money out and delaying social security. So again, this went from a 201 concept to a 400 level concept real quick when we add taxes to it. But now all of a sudden, we’re not saying, “Hey, great, you’re saving 5,000 a year.”

                           She’s going to save over $200,000 in income taxes in her lifetime because we’ve restructured how she’s going to take money out. This is huge because that’s $200,000 of your money you get to keep versus giving it to aunt IRS because we were looking ahead.

Tammy Flanagan:        Yeah. In some cases it’s more than that, Micah, because when you add into that, the cost of Medicare, if you make above a certain amount, the fact that I know someone who’s doing exactly what you said, so they have very little taxable income. They got the stimulus checks and they have beautiful home and they have all the nice things everybody else has, but they did tax planning so that they’re not really paying a lot in taxes. They qualify for benefits that people with lower incomes qualify for. And it’s not saying that you want to take advantage of the government. You just want to take advantage of the rules as they pertain to everybody.

                           And so these are things you can do legitimately and these are not immoral. I always feel like when we talk about saving money on taxes, we’re talking about getting out from under something, but we’re not. This is just making sure that you’re not overpaying. Pay your fair share. Just don’t pay too much.

Micah Shilanski:  I have a friend that says, “You know what? We want to pay you 100% of your bill, but don’t leave the IRS a tip.”

Tammy Flanagan:        Right. Exactly.

Micah Shilanski:  Well, Tammy, let’s transition to some great action items for our listeners because this podcast is not just about great information, it’s also about action items for you as well. So the first one that I’m going to throw out there is build what we call a retirement income timeline. Now, if you don’t know what that looks like, you’re welcome to email us [email protected] and just say you’d like a copy of a retirement income timeline. We can show you an example of that, but basically it’s a one-pager that just shows where your income is going to come from in retirement so you can see those planning opportunities.

Tammy Flanagan:        And I would say for those people who may have already turned on their social security who said, “Oops, maybe I shouldn’t have done that.” There is a little bit of a do-over. For instance, if you just filed within the last 12 months, you can cancel it and repay what they’ve paid you and start over at a later date. And if you’ve been receiving it for more than 12 months and you’re over your full retirement age, you can suspend your payments until 70 and pick up those delayed credits of 8% a year. So even if you’ve already claimed your benefit, put that on your action list to look into either suspending or restarting it if you’d like to take advantage of some of what we’ve talked about.

Micah Shilanski:  I love it. I think that’s going to be great. On that note, I’m going to take a real easy one that all of us should absolutely do regardless of age, jump on and create a my Social Security account and look at your statement. Were all of your wages reported? We have still seen this missed from time to time, your wages don’t get reported to social security. That’s not social security’s fault that they don’t have it. They weren’t reported there. So let’s make sure that that’s accurate and you’re getting all of your benefits. So regardless of your retirement age or not, jump on my Social Security and create an account.

Tammy Flanagan:        Yeah. And I would say, especially that’s important for someone who may have been placed in the wrong retirement system.

Micah Shilanski:  Oh yeah.

Tammy Flanagan:        Because I’ve seen people who were converted from CSRS to CSRS offset or CSRS differs. And those social security records never got fixed even though your retirement coverage was fixed 10 years ago. So really do look at that because it’s important and it can take some time to make those corrections.

Micah Shilanski:  Absolutely. So those are just a couple of great action items that you need to go through and do. And of course the last action item that you’re welcome to do: send this to a friend. This is growing, we’ve crossed over 10,000 downloads a month because of you, our listeners. So thank you so very much. That is great feedback for Tammy and I, that you guys like what we’re doing. So please continue to share this and grow this. We want more federal employees to make an educated and informed decision about their retirement. And until next time, happy planning.