#99 Bonus Pod – Answering Question

Christian Sakamoto  00:48

Welcome back to the Plan Your Federal Retirement podcast. I am Christian Sakamoto. And today we have a special episode. JT Ferrin has joined me as well. How are you doing? JT?

JT Ferrin  01:02

Doing good Christian. Excited to be here and welcome to Alaska. It’s good to have you here.

Christian Sakamoto  01:06

Thank you. Yes, yes, for those who are watching this podcast I am not in my usual office in Washington, I’m up in Alaska. It’s really nice to be here, a little chilly of course, but it’s always colder in Alaska. Who would have known that but today is a special episode because Micah and Tammy asked us to record this episode to answer some of the questions that were asked in the last live podcast that they did. As you guys know, you guys were submitting some really good questions and they were answering those in that live podcast. But today, there was lots of other questions that just weren’t answered. And so we wanted to go through and spend time to answering those questions. So if it’s alright with you, JT, I’ll just jump right in. Kim had dropped in and asked “within a few months of retirement, should I move my tsp funds into the G or the 2025 lifecycle to protect what I have now?” So really good question. Kim. When it comes to the TSP, the main thing we’re looking at with not only the TSP but with our investments in general, is what is our investment rules say we have an investment rule that says any money that you plan to spend in the next five years that we don’t want it to sit in the stock market, we don’t want it to be in the stock market. And we’ve mentioned this before. The reason why is if we look at what happened back in 2008, when the market was down for five years, it’s not a good time to be selling our investments when when the market is down. Right. So that would say any money that we do plan to spend in five years that it should be in the sidelines, not in the market. And we utilize a kind of a buckets approach to this we’ve talked about before. We’ve got a cash bucket and an income bucket. Both of these are set aside not in the market. And then the rest of that money would be in growth. So if we go back to your question, Kim, we can say Hey, should we move it into the G fund or should we move into the lifecycle fund? I’ll just start with the lifecycle fund. lifecycle funds are a blend of G F. C. ‘s and I funds. Some of those are growth. Some of those are more safe, like the G fund and the F Fund, right? So if we moved it into a lifecycle fund and we’re retired and we start withdrawing money, then because of the TSP having proportionate distribution rules, then we’re not able to separate those dollars that are coming out as distributions. We’re not able to say I only want to take distributions from a G fund, or I only want to take distributions from my C fund. Right. And so because of that the TSP you know, it might have a problem if we just parked it. In the lifecycle fund. Similarly with the G fund as well. I don’t know you’re in this would be dependent on the investments that you have if there’s anything else outside of the TSP. But if we just put it in the G fund, and now we don’t have enough in growth with outside investments, that could be a problem too. So we have to look at it when whenever we’re looking at the TSP is seeing which tool that that is going to be used for the right job and it might not be that we use tsp exclusively in retirement in order to meet your goal because of those proportionate distribution rules. So something be thinking about a lot of times we’re looking at IRAs, for example, to where we can separate those dollars a little.

JT Ferrin  04:36

Yes, that it’s a great point, Christian, I think a couple things to point out there that the TSP is just another tool in the toolbox. And one thing that I like to always ask is how does this fit into the broader context of your financial plan? And how does it help you achieve your investment goals? What kind of going on to that next question goes right along with this question from Nicholas and says, “How much money do I need to retire comfortably?” Well, again, what are your investment goals? What are your retirement goals? This is a tough question because everyone’s different, right? I know some people that just retire on Social Security alone, they can live on $2,000 a month. Other clients, they need $20,000 A month. So it just depends on on you individually. Great place to start is to look at your current cash flow. How much are you spending today? We can use that number of your current monthly expenditures as a retirement income goal. And then what we love to do with our clients is build out a retirement income timeline. We start with that goal, and then we will sell all their sources of income over the long term and see how those sources of income are going to change over time. We have a tsp income coming in their tsp we have income from Social Security. We have income from their first pension, and maybe some others in some other cases right. But we can see where all those sources of income are coming from. And if it adds up to their current cash flow needs. I think that that’s kind of a good place to start and answering that kind of difficult question. 

Christian Sakamoto  06:11

Yeah, it really is case by case and we have to really understand Nicholas a little bit more on your personal situation. But I do think, JT, that’s good advice. Now, the next question comes from Young having to do with the the retirement the FERS retirement amount, he asked, “How do I calculate that yearly retirement amount?” And so really, it’s a formula that we look at, and we would take your high three, the highest three years or the average of that highest three years of working with the federal government, multiplied by your years, months and days of credible service, multiplied by your multiplier. And in some cases, the multiplier in most cases are going to be 1%. There’s cases where can be 1.1%. There’s cases where it can be even higher if we’re maybe special provisions. So this number this this formula gets us that own reduced gross yearly pension amount. So then if we took that amount, we divided by 12 then we know our monthly amount, but this is going to be gross and not net. So Young, we have to also look at what’s the difference gross versus net net is going to be what actually hits your bank account every month, and that’s probably the number that we want to look at closely and look and pay attention to a little bit more. So then we take that gross that unreduced gross pension, and we look at deductions that come from that. The first deduction that comes from your FERS pension would be the survivor benefits, whether we’re choosing the full or the partial if those survivor benefits are applicable to you. The next deduction would be federal taxes to look at if we live in a state where there’s state income taxes, that will be another deduction. Then there’s the other insurances that can come out FEHB the primary one then there’s possibly life insurance possibly Long Term Care, maybe dental maybe vision, right so you’ve got your gross pension then you take out the survivor, the taxes the insurance is then we get our our net number. That’s the number we need to really be looking at, but it’s really based on that formula there. Yeah. So hopefully that helps. 

JT Ferrin  08:24

And that’s great Christian, I love the distinction between gross versus net, because those deductions can really add up and reduce that net number. Next question we have coming in is from Martin, and he says, “Does the government pension take the form of an annuity that I have to purchase or is it automatic after the retirement process is complete?” This is a great question because there’s some vocabulary here that can be a little bit confusing. An annuity versus a pension. Christian, you know that we love the word pension when referring to Your FERS annuity – we call it a pension, but there is an annuity that you can buy with your TSP. One of the options is that instead of taking income directly from your TSP, now, there’s a few options there we’ve talked about in prior episodes, but you can basically use your TSP lump sum to buy a MetLife annuity, and then MetLife would send you an income stream for the rest of your life. That annuity is different than Your FERS annuity, which we call a pension. So drawing a distinction between the two is really important.

Christian Sakamoto  09:30

Yeah, that’s huge. Especially because when we’re looking at the TSP annuity, that is with MetLife, that we’ve mentioned this before, that’s a irreversible decision when we end up going that annuity route and, you know, anytime we have an irreversible decision like that, that’s, that’s when we got to hit the pause button and really say, Is this going to be the right move or not? So just wanted to share that but as far as your FERS pension goes, your FERS pension that’s going to be automatic, assuming that you’ve met the criteria and are vested in the FERS benefits. Next question comes from Charles. He says, “I would like to work part time when I retire, would that affect my retirement?” Oh, good question, Charles. And I’m a fan of when clients are looking at retiring if they wanted to go do something else to maybe look at a part time job I have not posted I think that could be good for a lot of folks. So the things that how that can affect your retirement, we’re going to be mainly on the taxes side. So just making sure we are not only making sure that our enough is going to be withheld when we go to work part time, but also just seeing are we going to be jump at a tax bracket that we maybe didn’t plan on being in retirement, and that could possibly be a surprise there. I also say when it comes to working in retirement, even if it’s part time is are we working because we couldn’t make it work with our retirement cash flow with our pension with maybe Social Security with with our investments, or are we working and getting extra money above our cash flow needs? And in that case, if we’re if we’re working and we’re getting more money than we’re used to spending, that’d be very cautious to then say, Okay, go ahead and spend all that money. We just have to be really mindful to save as much of that as we can see, we’re not getting used to that lifestyle creep, that can happen to all of us. You know, and I’m not picking on you, specifically, that that’s just something that happens the more money that we make above what we’re normally used to spending that it tendency to spend more creep in there. And then other things to think about too would be you know, if you are receiving the FERS supplement if that applies to you, that could be affected with part time income as well because there’s a earnings limitation with that FERS supplement. And then also looking at those Medicare brackets as well. You know, if your income goes a certain goes above the certain modified adjusted gross income, then if Medicare applies to you Part D premiums, those could go up as well if you’re working part time, so just something to be mindful there. But I want to give you a very detailed answer there, Charles.

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JT Ferrin  13:05

Another question in from Beth. Regarding Social Security, she says “Should I wait until age 67 years old to collect social security” Here’s another great question. And the answer is again, it depends, right? Everyone is a little different. But all these depends questions we’d like to give you some considerations some things to think about when making this decision. The first big one for me is cashflow. We said cash flow is the heartbeat of retirement. Cash is king and cash flow is out of whack and nothing else really falls into place. The first thing is cash flow. Do you need the income? If the answer is no, it might be worth waiting. You know, Social Security grows at a guaranteed 6% From age 62 to full retirement age. And then from full retirement age until age 70. It grows at a guaranteed 8% That’s pretty good not aware of anywhere else in the market where you can get a guaranteed 8% growth. So again, kind of going back to cashflow do you need the income. Some other considerations are taxes. Social Security is up to 85% taxable as ordinary income. So how is that extra income going to affect your overall tax situation? Another thing to consider is survivor benefits whenever you lock in your Social Security benefit, should you pass away and if you have survivors, that’s the benefit that your survivors are going to receive. So if we lock in a low benefit, maybe at age 62, with some reductions in there, that’s the amount that will be potentially passed to your survivor and is that enough income for them? There’s a few ideas some things to consider in making this decision of when to draw Social Security.

Christian Sakamoto  14:45

Yeah, yeah. I love that. When we’re talking about the can work out cash flow wise with our clients. We’re always kind of on that side. That mindset that delaying it is going to be the best option because of that guaranteed growth, but also with those survivor benefits like you mentioned, I’m really a big fan of waiting to full retirement age and even later, maybe even to 70. Good news, though, is it’s not a decision that you have to make right now. It’s a decision that you can make every single year to say Should I turn this on now or not? Another social security related question comes from Elaine. Elaine says “My spouse wants to collect his social security, but we’re worried about taxes for payback. He is a year over full retirement and still working full time. We both work so we’re nervous of the taxes we might have to pay back. Any feedback on collecting and working after FRA, full retirement age?” So, Elaine, really good question here. And the good news is when it comes to collecting Social Security after your full retirement age, you no longer have that payback consideration or that concern. Once you’ve reached your full retirement age, there’s no longer that earnings limitation that somewhere around $22,000 I have to double check the number for 2024 but somewhere around $22,000 If you earn above that number that for every $2 you earn on Social Security $1 would get reduced. That’s only applicable up until your full retirement age once your full retirement age then that no longer applies. The only taxes would be just the normal taxes to consider here, which as you probably already know, up to 85% of your Social Security is taxable. What does that looked like? Let’s just say for an example here that we had $1,000 of Social Security benefits. And let’s say that we’re in that bracket where we’re getting up to 85% is taxable that just says that $1,000 a month that you’re receiving from Social Security that 850 would be subject to taxes, and that’s going to run through the marginal practice, you know, 10, 12, 20 to 24%. So on.

JT Ferrin  16:55

That’s a great distinction, Christian, that it’s 85% taxable not taxed at 85%. Right, right, right. Yeah. 15% is potentially tax free. Another social security related question. Social Security seems to be a hot topic right now. Donna writes in saying” Hello inquiring about what happens to my Social Security benefit if I expire, can my husband receive it?” So kind of going back to that survivor benefit there may be situations where a spouse may not qualify to receive a survivor benefit if there’s no Windfall Elimination Provision is government pension offsets, things like that. But generally, if both spouses are receiving Social Security, then in one spouse were to pass away, the surviving spouse would claim the larger of the two benefits. So Donna, just as an example, let’s say that you and your spouse are both receiving Social Security and your benefit is higher than your spouse’s, should you pass away, your spouse would inherit your Social Security benefit and forego their own. So there’s only one social security benefit coming in at that point, and it’s the higher of the two.

Christian Sakamoto  18:09

Very good. The last question that we have came in, we’re going to answer comes from Gina. Gina says, “What is the average time between retirement and your first full pension paycheck?” I think that’s a good distinction there. That is the first full pension paycheck. Because when you retire, typically within 45 days within about 45 days is when you would receive your first interim check. And that interim check pays you typically somewhere between 60 to 80% of what you would be paid once your pension is finalized. And in that case, that’s helpful but if we’re looking at OPM s website, it’s saying around 60 to 90 days is the average time it’s taking to process retirement. So you might get an interim check maybe once or twice and then you would receive that full pension check once that gets finalized within around 90 days. Now, good planning rule here is when it comes to retiring, what we’re always sharing with our clients is I like to plan for six months. And the reason why is you know what, if it takes longer, and we’re only planning it’s three months, but we don’t have the cash flow to support. If it’s longer. That’s something that we really need to make sure we have a good plan is that that cash flow plan, making sure we have that you know, at least six months of emergency there that we can pull from in case that pension runs a little bit longer. In good news if it happens to be the process it sooner that’s just even better, but I like to plan for six months there. You know, sometimes that can be longer for more complex situations. But what are what are those complex situations? Well, it would be more of a colored colorful work history. We’re switching from one agency to the other. Maybe there’s some part time there maybe there’s some leave without pay, right? We’ve seen a personal case with the client where they had a court order. You know, they had a divorce decree, and that really made things quite a bit longer. And so those are things to be thinking about as well. But if you have kind of a more of a normal work history, then plan for that six months but it could probably be a little bit sooner would be what I would say. So those are the questions that we wanted to answer today. Thank you JT for running through those. This podcast is all about action items. And so we want to leave you guys with something to be thinking about something and things to be doing. The first action item I would say for listeners would be go run that Social Security estimate. We are getting lots of questions on social security. So it would be a good time, if you haven’t done so at least for this 2024 year to run with those new Social Security estimates are it’d be interesting to see what they are. Get that little COLA adjustment there too, which is nice. Go to that ssa.gov website making sure we’re seeing what those up to date Social Security estimates are. JT what would be another action item for our listeners?

JT Ferrin  21:15

Yeah, I get a lot of questions around cash flow. You know a lot of these questions my answer was it depends. A lot of them go back to cash flow. We say cash flow is the heartbeat of retirement. I think this is something that we ask our clients every meeting, even if it’s every month, we’ll ask our clients we’ll start the meetings with this question. How’s your cash flow? Who’s worth looking at going back and seeing what how is your monthly spending? How much money do you have coming in? How much are you spending each month and then use that monthly spending amount as a retirement income goal and seeing where that income is going to come in retirement? Going through that exercise can help answer a lot of these questions like when should I draw Social Security. How much do I need to draw from the TSP? How much income do I need in retirement? 

Christian Sakamoto  21:59

Yeah, very good. Well, JT, this was a lot of fun. Thanks for going through these questions and answering them with me. Until next time, happy planning.