What kind of protection does the spouse of a federal employee have? Does everyone need insurance—and how is it beneficial? In this episode, Tammy and Micah answer frequently asked questions sent in by listeners, addressing everything from survivor benefits to your high-3.
Listen in as they explain how to calculate your highest paying years, as well as where your income comes from when you retire. You will learn the difference between postponed and differed, when you can turn your pension on with benefits, and more.
What We Cover:
- What protection a federal employee’s spouse has.
- The benefits of health insurance.
- What the high-3 refers to.
- Where your income is coming from when you retire.
- The difference between postponed and differed.
Resources for this Episode:
Ideas Worth Sharing:
Not everyone needs insurance. – Micah Shilanski Click To Tweet
Health insurance can be a vital benefit for a surviving spouse. – Tammy Flanagan Click To Tweet
You can stay as long as you want. You will have a much shorter retirement to finance if you retire when you’re 80, but I don’t know that I would recommend that. – Tammy Flanagan Click To Tweet
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Full Episode Transcript
With Your Hosts
Micah Shilanski and Tammy Flanagan
You can spend. You can save. What is the right thing to do? Federal benefits, thrifts, 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 back to the Plan Your Federal Retirement Podcast. I am your cohost, Micah Shilanski, and with me as usual is our cohost the amazing Tammy Flanagan. Tammy, how you doing, ma’am?
Tammy Flanagan: I’m just great, Mike, and nice to be here again and looking forward to answering some questions from the mailbag this week.
Micah Shilanski: That’s right. Tammy and I always get together and we chat about what we want to go through, but it’s amazing how our excitement really picks up when we have a mailbag. I know that sounds funny, but being able to hear your questions and what are your concerns to be able to dive into those really gives us not only great information thinking going forward, what episodes should we have, what topics should be covered, but we feel like we can really reach to this microphone and help people one at a time. Thank you guys for that wonderful opportunity and jumping on the website planyourfederalretirement.com and posting your questions for us.
Tammy Flanagan: Also I like the fact that these questions that come in, even though they’re unique to one person, they’re questions that we hear over and over again. It’s a great opportunity for us to expand a little bit on the question and cover it from some different angles. I’m looking forward to the questions that we chose for today’s broadcast.
Micah Shilanski: Perfect. Well, Tammy, let’s jump into it. Well, I guess I should throw out before we jump into this, if you like these questions being answered and you’d like this information, of course share the podcast, right? Get it out there, share it with your employees, share it with your HR personnel, share it with your teammates, so make sure it’s growing, they’re getting great information. We’re also having a webinar coming up on December 16th called The Seven Classic Mistakes Federal Employees Make In Retirement Planning and this is really big. We had to limit it to seven, but these are these top seven that Tammy and I’ve gone through and said, “Wow, people really need to watch out for these so they can have a successful retirement.” If that’s something you’re interested in, jump on our websites, so you can get more information about it.
All right, commercials out of the way. Let’s go ahead and let’s jump into the fun stuff. We have a question from Jacqueline. Now some of these questions, we’ll try to read verbatim, some we’re going to paraphrase for you just a little bit. Basically, she says her husband is a federal employee and they’re looking forward to retirement. They have a little bit of an age gap. She’s 13 years younger than he is. “I’m a stay-at-home mom for 18 years and don’t have any retirement of my own. Are there going to be any issues that arise because of this? For example, if something happens to him, am I eligible for Social Security benefits until my full retirement age?” Tammy, what are your initial thoughts on that?
Tammy Flanagan: Yeah, so there’s a lot of protections to the spouse, even if the spouse doesn’t work outside the home. Under the spouse equity provisions that were implemented well over 30 years ago, there was concerned about that because there was a lot of spouses who were left destitute when their husband—
Micah Shilanski: Sure.
Tammy Flanagan: Even back then and as well as today, it’s oftentimes the wife who’s left as the surviving spouse. We really do want to make sure that we’re protected while there’s two of us and we also want to find out what happens when there’s one of us to make sure that we’re not leaving a situation where our spouse is going to have to either lower their standard of living or worse yet have to sell the house and move in with their kids. I hate to think that that would have to be the option. I think this is a great question and we should take it from a three-part point of view, looking at the government pension, the Social Security piece of it, and the TSP and maybe even a little bit on insurance. What do you think?
Micah Shilanski: I think insurance really has to come into the play here because that’s really going to be, one, you may or may not need it. Just to be clear, not everybody needs insurance. In this case, we’re referring to life insurance, but there’s some other insurance as well. These are things you need to look at and you need to answer the questions before there’s a life-changing event, before retirement, before someone dies, before someone becomes ineligible for insurance. Tammy, I agree. Let’s jump into it first on the federal benefits side of it right now. We don’t have the service history inside of here, so we’re going to assume and making assumptions can lead to interesting things, but we’re going to assume her husband is going to have a full service. That means he’s going to retire with a full pension with no reductions whatsoever.
One of the first things is, if he does that and he elects for survivor benefits, now I say he elects, right? Really, it’s your decision, Jacqueline, the survivor benefits. Because you’re married, you have a right to a full survivor benefit. He cannot give anything less unless he gets your permission you sign off of for. The default option with that is going to be a full survivor, and by full, we mean half, right? A full survivor is half of the pension that’s going to be there. Now there’s a cost to that as we know for paying for that survivor benefit. It costs about 10% of the pension, but you are going to be eligible for that survivor benefit.
Tammy Flanagan: Right. I also wanted to add to that, Micah that we hope this doesn’t happen, but if he were to die as an employee prior to getting a chance to retire, there are death and service benefits she would also be entitled to.
Micah Shilanski: That’s right.
Tammy Flanagan: It is that 50% survivor annuity which is a lifetime payment to her adjusted by cost of living, payable at any age as well as there’s a basic employee death benefit under FERS that provides her with half of his salary as a lump sum and a certain lump sum. It’s around $34,000 in addition to that half of salary benefit, so he’ll have an adjustment payment. I call that an adjustment payment, so she has some money to get back on her feet, maybe pay off some of the debt that might have accumulated especially if there’s a sudden death, both if an employee dies in service as well as the election. Like you said, it’s not really an election because she has an entitlement to it for when he retires. That’s definitely some protection of that income from FERS. She’s going to need that also because it’s going to allow her to continue health insurance. Health insurance can be a vital benefit for a surviving spouse. She’ll have lifetime federal health benefits.
Micah Shilanski: Jacqueline, a couple things that you need to check on right now, one, make sure you’re in FEHB, Federal Employee Health Benefits. We don’t want to assume you are, you really probably are, right? I can’t see a case that you wouldn’t be, but definitely check to make sure you’re under that plan. The other thing to go through is check beneficiary designations. Tammy, I love the fact that you brought up while employed because you need to have the correct beneficiaries before you die. Now since we don’t know when that’s going to happen, today is the second option, right?
Let’s make sure beneficiaries are correct. We’ll put a link on our website that has a link to all four beneficiaries you need to make sure to update it as a federal employee. You’re going to have the last paycheck. You’re going to have the retirement benefits. You’re going to have the FEGLI, federal employee Group Life Insurance and your thrift savings plans. Those are different beneficiary forms that you really need to get updated. When we started work as a federal employee how many years ago, how often did we put our sister, our mom, our ex? Sometimes wrong information gets put on these forms, so I’m a very big advocate, please, please, please go update those beneficiaries because if something happens, that’s going to make sure that you are taken care of.
Tammy Flanagan: Right. We’ve all seen cases where the federal employee has neglected to do that. It’s a mess trying to get that fixed if at all possible to fix it after the death. Good advice. The other part of that would be, her question had to do with Social Security as well. As a surviving spouse as a widow, if she has young children, she doesn’t say how old the children are, but if the children are under age 16, she would get a widow’s benefit at any age and each of her children would also get benefits from the father if he passed away early. If the children are over 16, they would still get benefits until they’re out of high school. She, as the widow, can start collecting benefits without children at age 60. Instead of the retirement benefit being payable at 62, a widow can collect benefits as early as age 60, which sometimes is necessary if you’re a young widow and your spouse has passed away suddenly.
Micah Shilanski: Very much so.
Tammy Flanagan: At later ages, let’s say that, hopefully that doesn’t happen and the husband delays his Social Security until he’s 70 and then he dies at 92, as the younger spouse, she would be able to take over his benefit at that time. That includes those delayed credits. That Social Security benefit could be one of the larger recurring payments she would receive as a widow if he lives out his full life expectancy.
Micah Shilanski: Now there’s a lot of things we don’t know, so we’re all showing them things out there. One of the odd things with Social Security throughout there as well is that if you’re a Social Security agent, have turned your Social Security on, for husband turned Social Security on and your children are minor children and in school, they actually get a Social Security benefit as well even when you’re alive. She said there’s an age gap. Also, she’s been a stay-at-home mom for 18 years. Maybe you still have some young kids. That could be something to think about, about when to turn Social Security on because there may be some benefits for your children while you’re alive. Again, it’s an oddball benefit that’s out there which is something to be thinking about.
Tammy Flanagan: Then of course, hopefully she’ll inherit his TSP as long as he’s kept that beneficiary up to date. With that inheritance, she would be able to keep that benefit in the TSP if she wants or move it to an IRA. There’s pros and cons to both of those elections. I guess another thing that would need to be addressed with her is, is that enough? What if he didn’t have long-term care insurance? What if at the end of life, he needed full time care? That could very quickly deplete that TSP balance, leaving her with very little. I think long-term care planning has to be part of this family’s retirement planning as well.
Micah Shilanski: The other thing I want to jump back on to Social Security real fast, Tammy, we talked about benefits to her if she were to pass away, but Jacqueline also has a Social Security benefit, even though she’s never paid into Social Security because she is eligible for 100% of her benefit or 50% of her spouse’s, right? Even if, let’s just round numbers, he’s getting $2,000 a month at Social Security, when she becomes eligible, she could at least get half of that, in addition, an extra thousand dollars a month.
Tammy Flanagan: Yes, but with the age difference, let’s say he does file at age 70 and now she’s just reaching age 62 at some point, so she may not want to wait until she’s 67 to get the 50%.
Micah Shilanski: True.
Tammy Flanagan: She can still get the reduced amount. It just depends on their overall needs as a family, but I might encourage her to wait for that spousal benefit until she’s full retirement age. As a widow, she can get 100% of the widows benefit, so yeah, there’s a lot there.
Micah Shilanski: It really is. A simple question, “Am I going to have money in retirement?” really expands to all of these what-if scenarios that are out there. The good news is, Jacqueline, yes, you are going to have some retirement income, but there’s a lot of decisions that need to be made. Tammy, I want to jump back on that insurance that you were talking about. I think a long-term care plan is absolutely critical. Now, Tammy and I are not saying, “Everyone, go buy long-term care insurance.” That’s not what we said, but we said you need to have a long-term care plan that may include insurance, it may not, but you need to have a plan, especially when we’re talking about such big age disparities.
The other part of this is, Tammy as what you said, a needs analysis. What do you really need? Jacqueline, how much a month do you need an income coming in, and God forbid, when your husband passes away, how much are you going to have coming in? If there’s not enough, then that’s where the life insurance comes in. Maybe it’s the FEGLI, the Federal Employee Group Life Insurance. Your husband has the federal benefits or maybe it’s private insurance or something else, but these are some questions you absolutely have to look into to make sure you are taken care of.
Tammy Flanagan: Right. I don’t know, did we do a webinar or a podcast Micah on the need for term life insurance versus whole life? If not, that might be something we want to cover at some point.
Micah Shilanski: I think we touched on it, probably our fourth or fifth episode when we talked about life insurance, but you’re right. We should spend more time on that. I think there’s probably a lot of questions and confusion, and quite frankly, probably a lot of people are overpaying for insurance they do not need. That’s something I see pretty frequent with federal employees.
Tammy Flanagan: That was a great question. Thank you, Jacqueline.
Micah Shilanski: Perfect. All right, Tammy, what’s our next question?
Tammy Flanagan: The one from Melissa and she wants to know, “If my spouse retired from federal service under CSRS,” or otherwise known as the old system, and he waived or actually, she would have waived the spousal benefit, so when he dies, which is I would think this is a question she should have asked before he retired, but nonetheless, he didn’t leave her a survivor benefit. Apparently, when he passes away his retirement ends when he ends. She’s under his federal health benefit insurance plan, so she’s covered under probably Self Plus One through him through his retirement. “Is there any way for me to keep FEHB insurance if he passes away before me or if we get divorced?”
Now, she goes on to say, this is the interesting part. She goes, “I am a federal employee and I would like to retire within the next one to two years.” She currently has 32 years of service, so she also has a full career of service. This is a what I would call a tandem couple, a dual federal employer. She doesn’t know if she’ll have to stay five years with health insurance. This is a five-year test question. This is a survivor benefit questions. Which one do you want to tackle first, Micah?
Micah Shilanski: Well, let’s go to the five-year test because we get a lot of questions about this, and in fact, I got one from actual another financial advisor that was having issues with this as well a week or so ago. Tammy, run us through the two elements to the five-part test for the federal employee, as well as the spouse. Even though this is a tandem couple, a dual federal point, let’s try to answer it for both if that’s okay
Tammy Flanagan: Sure. There’s basically two requirements you have to meet in order for you as the federal employee to carry your health insurance into retirement. Now, the first one is you have to be eligible to retire. In her case, she’s got 32 years of service, she wants to retire within one to two years. I’m assuming that if she’s not eligible right now, she will be soon. She would meet the immediate requirement to be able to carry health benefits on her own. Even though she’s not currently paying the premium, she’s covered under his and she is going to qualify to retire. First step is I think the immediate retirement requirement is met. In other words, she’s not resigning.
The second requirement is the one that she’s probably confused about. The second requirement to carry your health insurance into retirement is to have five years of continuous federal health benefit coverage. That doesn’t mean you’ve been paying the premiums for five years. That just means you’ve been under the FEHB umbrella for that full five years without a five-minute gap in coverage. She has been. She’s been under her husband’s federal health benefit plan through his retirement probably for their whole career. Then if she needs to or if she wants to, she can carry the coverage herself. She can carry it for both of them. They can swap it out. Instead of him carrying it as a retiree, she can pick it up or they can both have to Self Only plans if they want to. That’s an option for this couple.
Either way, I don’t think she has to worry about ever losing health insurance, even though she wasn’t provided a survivor benefit because I’m pretty sure she’s going to be entitled to keep it herself. Even though she’s not paying for it right now, she’s still covered. She’s going to have to show at her retirement proof that she was under the Federal Health Benefit plan of her husband’s retirement. That’s not too hard to prove. Otherwise, I don’t think she’s going to have a problem.
Micah Shilanski: this is pretty standard, right? This isn’t the everyday kind of thing, but this is very common for HR office to go through of saying, “Hey, my husband is retired. He was under CSRS. I am covered on FEHB.” They can help with this. There’s nothing too oddball about this. The biggest key for her is making sure she could retire under some type of retirement eligibility, which I agree with you. More than likely, she’s already checked that box, but we don’t have her age, so we’re guessing on that one.
Tammy Flanagan: I will say Micah that OPM has told agency retirement specialists that one of the things they miss when these claims come into OPM is proof of that five years of coverage.
Micah Shilanski: Right.
Tammy Flanagan: I think Melissa’s important thing for her to keep track of is to make sure that her agency, when they file her claim for retirement, show that she was covered under her husband’s plan because sometimes that is left out. Whether it’s inadvertently or just not knowing, if I was her, that’s important to me to know, so I would want her to have that proof of that coverage.
Micah Shilanski: Absolutely. We put together a 180-day timeline, 90 days before retirement, the month of retirement, 90 days after retirement, and this is part of that 90 days prior to retirement before you get everything submitted off to HR, things you need to check, things you need to make sure are in your personnel record because after you retire, it gets sent off to OPM and your HR is out of it and making sure you have these records, I agree, Tammy, really, really important.
Tammy Flanagan: That’s right.
Micah Shilanski: Let’s go into the second part to the survivor benefit question that’s there. We see this a lot more with the old retirement system, CSRS, then really seeing it under FERS and maybe it’s an education difference or it’s because the survivor benefit election is so different under CSRS. You really had a much wider range of how you could leave a survivor benefit, but we saw often, maybe there was an age difference or maybe it was a dual income couple with no kids and they decided, “You know what? If I die, the house is paid off, so you don’t really need my pension.” This is a very common statement that I hear and I don’t know with the house being paid off has to do with anything, right? There’s so much other things going on than just the house payment that are going to be there, but really understanding what are your needs if your spouse passes away.
Again, it was the same thing with Jacqueline’s question above and, Melissa, this applies to you, you need to do what’s called the needs analysis. God forbid, but if your husband passes away, what income do you have coming in and is it enough because you do not have that CSRS benefit?
Tammy Flanagan: Right. When you were saying that about the house being paid off, I remember one of the neighborhoods I lived in Virginia, some of the homes there were 60 years old, so they were built 60 years before we even moved in. At that time, there was a two-lane road out front. Washington DC was a long way south of that town. Well, fast forward 60 years, this is now a suburb of Washington, DC with a four-lane highway out front and the property values have skyrocketed. Some of those widows who still lived on that street whose husbands had passed away, the houses were paid off. They’ve been paid off for a long time, but the property taxes were now over $1,000 a month for some of those widows.
Some of them probably had to move because they could no longer afford the property tax. That’s not going away. That’s going to be there every year and continues to go up. Yes, what you need as a widow is more than just the mortgage check. You need food, you need shelter, all kinds of things and you still want to have some fun if you’re a widow. You don’t want to have to dress in black and walk around the town and mourning for the next 30 years. You’ve got to have enough money.
Micah Shilanski: There’s an aspect to it too that sometimes the costs go up when you become a widow or a widower because now you’re having the kids come over now. You’re paying for the grandkids for vacations to come with you. You’re leaving the lights on the house more because you don’t like to be dark and alone. There’s a good rationale that your cost could be higher in this, not just lower because the house is paid off. Yeah, I agree really looking at this.
Tammy Flanagan: That’s definitely a good question when it comes to the need for the survivor benefit as well as the need to have continued insurance coverage.
Micah Shilanski: Perfect. Well, let’s move on to our next question, Tammy, from Julie. Julie says, “Hi, does the High 3 refer to the last three years right before your retirement or does it refer to any consecutive three years they give you the highest salary, say this could be back nine, 10, 11 years ago when you make the most in your career in federal government position?” That’s a wonderful question because again the core benefits that you have is your pension which is comprised of your length of service and your High 3, even a portion of your age, right? Those are the main components and this High 3 is really good one.
Tammy Flanagan: Yes. I think we typically assume that it’s the last three years because we want our salary to do nothing but go up over our career. We don’t want it to be like the stock market where it goes up and down. I think for the majority of folks that I work with, and I’m sure same for you, the High 3 is the final three years. If you were going to retire on February 28th of 2021, you would go back three years to February 28th of 2017 and look at that three year or 2018, whatever three years is to look at that three year period, but what she’s asking, Julie says, “Well, what if I had a voluntary demotion or what if I had a temporary promotion nine years ago and I was a much higher salary at that point than what I am today? Can I use that three years if that provides a higher three year average?”
The answer is yes. It can be any three consecutive years. It just has to be three in a row. We can’t take 2020 and add it to 2001 and 2002 for example. It has to be three in a row, but yes, you can reach back. I’ve seen that as recently as last week. I had a gentleman who was in that situation where his High 3 was a few years back.
Micah Shilanski: Forgive me, the terminology is escaping, but sometimes we’ll see this in a career where you get temporarily promoted to take over your boss’s role for a while, right? You could get some pretty large increases for a little bit and sometimes that hits into High 3 factor because maybe you’re going to do that for a little bit, then you come back down. Well, guess what? You may get to include that in your High 3 … You always get included in your calculation, but it may be those numbers that really help in your High 3.
Tammy Flanagan: Exactly, and I’ve even seen people make moves in their career like they’re in a New York City or Northern California where it’s very expensive and the locality pays really high, but then before they retire, they move to their retirement location to accept a lower paying job at a lower locality rate, but yet their High 3 is frozen back at that last location. I’ve seen that happen both voluntarily and sometimes voluntarily, but yes, wherever the three years falls does not have to be the final three.
Micah Shilanski: Well, Tammy, us being up in Alaska, I remember before the whole locality thing when we still had COLA, the big discussion was moving out of Alaska for three years, right? “Let’s go pick somewhere that’s at a high locality,” so it would reduce up your retirement by 27% and then return back to Alaska. Of course, COLA doesn’t count. Yes, there’s all sorts of things to look at, but I also want to talk about, Tammy, and I know we didn’t talk about this beforehand, what I call the High 3 trap and I see this from time to time with federal employees that they say, “Oh, my High 3 just went up, so I should stay another three years to get more.” “Oh, my High 3 just went up. I had another step increase. I need to stay for that other three years.”
That can be really easy to do because you’re just looking at the High 3 number, but really what I would encourage you to do if you get caught in that trap, step back and put dollars and cents to it, right? I love that your pay went up. That’s a wonderful thing. It should be going up, excellent, great news, but sometimes it’s a $2 difference in retirement check versus trying to lock in that High 3 that’s going to be there. Let’s be cognizant about why we’re staying to increase our High 3. Again, let’s make sure it’s achieving our retirement goals, not just a more goal.
Tammy Flanagan: Right. I always get the question, saying, “How long do I have to work at this new salary to become my High 3?” It’s three years. By the time you stay three years, you’ll get another pay increase and you’ll have to stay three more years. Before you know it, you’ll have 65 years of service.
Micah Shilanski: That’s right.
Tammy Flanagan: That’s a nice thing and the not so nice thing is that there is no limit. You can stay as long as you want. You’ll have a much shorter retirement to finance if you stay until you’re 80, but I don’t know that I would recommend that.
Micah Shilanski: Yeah, it may not have been what we’re solving for right there.
Tammy Flanagan: That’s right.
Micah Shilanski: Tammy, we have another question from Selena, I believe, and this one I think I’m going to rephrase her question just a little bit. She’ll be 65 this year. She’s born in ’55. She’s been a federal employee only for five years this November and she’s had to take some money out here and there and she really wants to know where her income is going to come from when she retires. It looks like there’s going to be some Social Security, FERS, TSP. With having a short federal service only five years, what does that mean? Clearly, she’s vested. Clearly, there’s going to be something, but how do you start putting those pieces together for her federal benefits?
Tammy Flanagan: Hey, I think she timed it just right. She came into the government at age 60, worked her five years. She got vested. Five years of civilian service is all it takes. Once you reach age 62, five years of service will get you an immediate retirement.
Micah Shilanski: That’s right.
Tammy Flanagan: Five years of health benefit coverage, you’ve met the two tests to continue FEHB under retirement. Once she has her fifth anniversary this month apparently, she will be entitled to maintain Federal Health Benefits for life. She’s also turning 65 which means she’s qualifying for Medicare. She can use one of the nice FEHB plans that dovetails really nicely with Medicare and have the wonderful combination of full health benefit coverage once she’s retired. She’ll also have money in her TSP account hopefully. Now she has withdrawn money from her thrift it sounds like, so she may have an outstanding loan. Unless she took an in-service withdrawal, which she might have-
Micah Shilanski: Which she could have.
Tammy Flanagan: If that’s the case, she doesn’t have to pay that back, but she does pay tax on the amount she withdrew. She’s got a couple of choices here. Of course, she can turn on her Social Security either when she retires or if she can afford to delay it. She can delay that until 70. Of course, she doesn’t have to retire. She can work as long as she’s willing and able and enjoyed her work. She’s got a lot of options, but the key is that this month, she’s vested. She’s got that benefit payable when she does separate. She doesn’t just resign. She’s actually going to retire even with as little as five years of service.
Micah Shilanski: That’s really important, right? You spent that five years vesting, making sure accounts is really good. One of the things I think to check with this, Tammy, and please correct me if I’m wrong here, let’s make sure all those five years are for retirement, right? Hopefully, you weren’t brought on interim or some other thing that you have five years working for the federal government, but maybe not five years at count towards your retirement service. You really want to make sure you check on that.
Tammy Flanagan: That just brought back a memory. I remember one time a while back, I was teaching a class and this older gentleman was in the class. He showed me his leave and earning statements. He had his personnel file with me, all the records. He never had retirement coverage. He goes, “Why doesn’t it say FERS on my paycheck?” I said, “Because you’re not covered under FERS.” We checked with his HR office and he was a federal employee, but he was under these temporary appointments. Until he got FERS coverage, he was out of luck. He didn’t get TSP. He didn’t have health insurance. You do have FERS coverage. Coverage under the retirement plan is vitally important.
As Micah pointed out and as I gave an example, there are times when you can be a federal employee, but you’re not covered under FERS. These are generally temporary appointments or seasonal work. Be careful about that. Hopefully, that’s not the case for her.
Micah Shilanski: The other thing to be cognizant out there, Selena, as you’re going through this is that if you only have five years of federal service. Good news is if you have five years, let’s say they all count for retirement, that means you’re going to have 5% of your High 3. Well, you’re also potentially eligible for FEHB, Federal Employee Health Benefits, assuming you were in it for those five years before retirement. There’s a decent chance your FEHB premium could be more equal to or close to what your pension is going to be. You could be zeroing out your pension or have a negative pension having to pay for health insurance premiums that are going to be there. Just something to look at.
It’s still a good benefit. You’re still vested, you’re still getting your pension and it’s helping pay for one of your best benefits which is your health insurance FEHB, but those are just some things to pause that. Maybe look at open season because there’s some neat Medicare plans that work with FEHB that you should be looking at. There’s some good options there, which just again that’s just something that jumps out at me.
Tammy Flanagan: Just to give her an example, I did a quick calculation. We don’t know, but let’s say your High 3 average is $75,000. You got five years of coverage which gives her 5% and that comes out to about $312 a month gross before taxes and before insurance. What you were mentioning Micah is after she pays her taxes and health benefits, there may not be anything left. In fact, you may have to pay the health benefit premium out of pocket, but the good news is she’ll still just be paying the employee rate. The government still pays their share. If her retirement is not enough to cover it, she can pay the difference. It used to be you’d lose it, but nowadays, OPM lets you pay the difference out of your checking account, so you’d be okay. She can keep it.
Micah Shilanski: Perfect. Well, I think we got time, we’re going a little long, but this is fun. Just a couple more, Tammy?
Tammy Flanagan: Yeah, I’d like the next one. We reviewed that before we started. Let’s go ahead and cover that one.
Micah Shilanski: Perfect. Tammy, let’s jump in this one. This was the one, Tammy, I told you this offline, I was working with an advisor last week that did not understand a key definition term which was huge in a client case because they were taking terms that sound the same and thinking they mean the same thing for retirement like postponed and deferred. They mean greatly different things, especially with federal employees’ retirement. You really got to be careful with questions like these. You’re really got to understand the nuances or work with someone that understands these nuances because there can be a pretty big difference on what you’re actually eligible for. We’re not talking postponed versus deferred in the English sense saying, “Well, it’s relatively the same thing.” We’re talking about in the retirement sense which is greatly different between those two.
Tammy Flanagan: That’s right. This guy Craig has written into us and he said that in 2026, which is what six years from now, five and a half years from now, he’s going to be 57. That’s his minimum retirement age under FERS, but he came into federal service a little bit later in life. He didn’t come in right out of school. By the time he’s 57, he’s going to have 24 years of service.
Micah Shilanski: Right.
Tammy Flanagan: Now, under the regular retirement rules for FERS, if you retire at your MRA, you’ve got to have 30 or more years of service to qualify for an immediate unreduced retirement. Well, he might want to leave at 57. He’s eligible for an immediate retirement at 57, even though he only has 24 years, but it’s going to be reduced. That reduction is pretty significant. If he does claim that benefit immediately, he’s going to lose off of that 24% of his High 3, he’s going to lose another 5% for every year that he’s under 62. If he’s only 57, that’s a five times 5% reduction or one fourth of the benefit gets chopped off.
What he can do is he could go ahead and separate, resign, basically at age 57 and postpone receiving that benefit until he’s 60 because the requirement for an unreduced benefit at age 60 is only 20 years, he’s got 24, so he’d be good to go. His one option is he could resign it at age 57, postpone the benefit for three years until he turns 60 and then collect the unreduced benefit and, here’s the and, reinstate his federal health benefits because he stayed in the government until he was 57.
Now let’s say that Craig decides, “I’m not waiting until I’m 57. That’s five and a half, six years away from now. Let’s say I decide I get this wonderful opportunity to go out in the private sector I’m going to leave next year. Heck, I’ve already got 20 or 19 years of service. That’s a lot of service. I’m going to leave now and I’m not old enough. I don’t have enough service to retire at my current age, but what the heck, I’m going anyway.” In that case, he’s still vested. He’s right. He’s going to collect a deferred retirement, either when he’s MRA at 57 or he could wait until he 60 or 62, but the difference with a deferred retirement because he’s not eligible for any immediate benefit, he will not be offered to reinstate his health benefits unless he gets rehired.
On a deferred retirement, you’re not old enough to retire, you don’t have enough service to retire, you’re just resigning. You’ve got five years or more service and you can collect a benefit later, but it’s just a pension. On the immediate retirement where he can either take the reduced amount when he’s 57 or postpone it until he’s 60, that way he’ll either have immediate health benefits if he elects to take the reduced benefit or he can reinstate his health benefits at age 60 when he postpones that benefit to age 60. That’s a lot. Can you break that down and make it simpler?
Micah Shilanski: It is a lot. It is a lot. Craig, the short answer to your question is you hit your MRA, which is great, minimum retirement age, with more than 10 years. You could absolutely postpone and you’re correct again in your question, “At 60, can you turn your pension on with benefits?” Yes, you can. If you have 24 years of service and you leave an MRI, when you’re 60 years young, you go back to OPM, right? You wouldn’t go to your HR anymore. You would go to OPM. You fill out their … I can’t remember what that postpone retirement application. It’s off the top my head. You’d fill out their form and then you would turn on those benefits. Tammy, as you said, you’d get your pension and you would get back your health insurance enrollment.
Craig, just to be clear on that one to get back in, it means you did not have it for four years or three years. When you left at 57, you’re going to give up your health insurance. You’re eligible to come back into it assuming you’ve been in it for those five years prior to your separation.
Tammy Flanagan: Right. Some people what they’ll do with their health insurance when they separate in that situation is they’ll do temporary coverage, either until they find a job with benefits or maybe just for 18 months because you can keep temporary coverage for up to 18 months and then maybe still turn his retirement on a little bit early maybe.
Micah Shilanski: It looks like he’s looking for another job in the private sector. Maybe he just goes to the healthcare, right? We’ve done that with someone, it was through the healthcare exchange and buy the insurance. Yeah, it’s going to be expensive, but you don’t have the permanent reduction. What I love about that, Tammy, is that’s just a math question, which one is better over time, and you can just run the numbers out. All right. Let’s do one more from Donna because this one is an interesting one that’s come up a little bit. Donna says, “I’ve retired from USPS under FERS early voluntary retirement at age 53 with 32 years of service. Will I be eligible to receive the first supplement after I reach MRA at 56 and two months? I am now 55.”
Tammy Flanagan: Yeah, the Postal Service as we all have heard has been doing some downsizing. Donna was able to take advantage of that and collected her retirement earlier than her MRA. It was an immediate retirement. She probably kept her health insurance. It’s all great news for Donna. She might have even gotten a buyout, who knows, but now she wants to know, under FERS, there’s that bridge payment. We call it the FERS Supplement that’s generally payable immediately upon retirement, but in the case of an early out like she’s taken, you don’t get the supplement until you reach the MRA.
Yes, she will be entitled to. In fact, OPM should automatically start sending her the supplement as soon as she’s entitled to receive it, but she’s smart in questioning that because I would keep it on my calendar when that’s due. Just in case it doesn’t start coming right away, I’d have OPM’s number on speed dial to find out where it is because generally that’s set into their system automatically to start paying out, but if for some reason somebody didn’t key it in or whatever the case might be, you’re the one who cares most about it. I would make sure that I check on that and make sure it comes, but yes, she’s entitled to the supplement—
Micah Shilanski: Donna, one of the things that I tell my clients to do is, let’s say the supplement doesn’t get paid right on time, don’t worry about it. Contact OPM. Don’t worry about it because you’re eligible for it and you’re entitled to it. What does this mean? If they delay in paying you, you’re going to get paid back. It’s not like if OPM messed up in any way, you’re now permanently lost the supplements. You’re still eligible to receive that. We had it happened actually with the client under Avira, so what’ll happen to you because we already checked the box, it happened to someone else, but sure enough, when he hit his MRA, that supplement didn’t start and it took a few months to contact OPM to get it.
Now he’s getting back paid. He’s got a lump sum and everything’s fine going forward. Mistakes happen. Take them with a grain of salt. Understand your benefits. Talk to OPM and just about everything can be resolved.
Tammy Flanagan: Always stay on top of it yourself because nobody cares more about your retirement than you do.
Micah Shilanski: Amen. Perfect. Mailbag has been a blast. What a fun time to spend time learning more about our listeners, number one, right? Thank you so much for sending your questions. If you want the handouts that we’ve talked about a little bit like the beneficiary designations, if you want the timeline that we talked about as well, then you can jump on our website, which is planyourfederalretirement.com/13. This is the 13th episode, planyourfederalretirement.com/13 and that’s going to take you right to this episode. You can see those handouts that are there. You can also submit your question to see if you’re going to be eligible for the next mailbag that we go through. We might make this a little bit more of a reoccurring thing.
Tammy Flanagan: Sounds good.
Micah Shilanski: Well, perfect. Well, thank you guys so much for tuning in. We look forward to seeing you at our webinar which is coming up in December, The Seven Classic Mistakes Federal Employees Make Before Retirement, and until then, happy planning.
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