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Does it make sense to stay a full thirty years in the federal government just to receive a better pension? Ten years (or more) before retirement, many employees begin to question whether it is worth remaining in their positions or if they should try something new. In this episode, Micah and Tammy discuss what your pension is worth and the rules around retirement eligibility.
Listen in as they explain why health insurance should absolutely be looked at and factored into your retirement and pension plan. You will learn why Tammy encourages people to think twice about leaving their position before they’re eligible for an immediate benefit. If you have been considering switching out of your federal role, this is the episode for you.
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’m your cohost Micah Shilanski and with me as usual is the amazing Tammy Flanagan. Tammy, how are you doing, ma’am?
Tammy Flanagan: I’m good, Micah, how are you doing today?
Micah Shilanski: I’m doing really good, excited. We got some wonderful things to talk about. It’s an exciting time of the year, right? With taxes coming up. Who does it?
Tammy Flanagan: Oh yeah. I bet you’re just thrilled being somebody who loves numbers. I’m not so much. Yeah. Taxes is one. My husband hands me a list of all the things I’ve got to provide him with so that he can do our taxes for the year and I hate it. I should do a better job of keeping track as each month goes by and I just never seem to get the hang of that.
Micah Shilanski: Sure. It’s not fun, right? But it is a required evil. So something we do have to do this time of the year.
Tammy Flanagan: Oh yeah.
Micah Shilanski: Well, slightly off of that note, we’ll talk about taxes on another podcast, but Tammy, you and I were chatting about some interesting things. We’ve got some questions recently from our audience, which we love to hear from. One of them was talking about, what’s the value of your pension? Does it make sense to really stay a full 30 years in the federal government?
There’s a lot of people that are getting that 20 year itch, we were calling it, right? They got 20 years in, it’s been real, it’s been fun, but maybe they want to do something else and should they stay for their pension or should they potentially transition to the private sector or something else?
Tammy Flanagan: Yeah. There’s always that change of attitude once you’re old enough to retire and you have enough service to retire, you feel this sense of freedom. But I think in that same note, before you’re eligible to retire, you get this sense of, “I just can’t take the final 10 steps.” Like you’re climbing this mountain and you can see the top of it, but you just can’t. You’re like talking yourself out of it.
So I feel like we see employees often, I see that a lot of times in my email box, you see it with what you get in, where people are thinking about while they’re still young and viable, marketable, maybe go into the private sector and then either coming back to the government or collecting a deferred retirement. What does that really cost me is what they want to know, and I think they’re surprised when we start to really add up the cost of leaving just a few years early.
Micah Shilanski: Yeah, it is. We’re going to talk about a lot of information on this podcast. So if you want a little bit of these numbers that we’re talking about, so don’t worry about writing them down. You can feel free to email us [email protected] and ask for Episode 16 and we’ll get you this information as well.
Tammy, with that though right, we were talking about … Sorry to get the housekeeping out of the way. As we’re talking about these numbers and we’re talking about that 20 years versus 30 years, so we have a lot of considerations, right? Not only do you have your pension, we have health insurance, you have TSP contributions, the match that you get under FERS. So there’s a lot of things that we’re going to start to dissect.
But before we jump into that, how about we review the rules real fast on retirement eligibility? So when is someone eligible to retire with a full pension?
Tammy Flanagan: Right, and that’s always a misnomer in a way when somebody says, “What is a full retirement?” It’s like, I don’t know how to answer that because there is no limit. You could work 55 years and you would keep accruing retirement benefits under FERS. There’s really no place where it maxes out, but there is what we call your first eligibility for an unreduced immediate retirement.
So unreduced means there’s no age penalty, no reduction to the benefit, and immediate means that you’re going to leave today and within the next 30 days your first pension check is going to coming. So that’s an immediate retirement is really where you get the benefit of health insurance continuation, maybe a FERS supplement, that’s really considered retirement when you’re eligible for that immediate benefit.
So when is it? Well, the first thing you have to look at is something called your minimum retirement age. So we used to just say 55, right? Under the old retirement system you had to be 55-
Micah Shilanski: It made it easy.
Tammy Flanagan: Yeah, but today we say, well, it’s somewhere between 55 and 57, depending on your year of birth. So for our younger employees, it’s 57. For our employees who came into federal service later in life, it could be 56 or 56 and four months. So it depends on your year of birth. Now, along with that, if you’re going to retire as young as your minimum retirement age, you’ve got to have 30 years of service. So that’s why a lot of people consider 30 years to be a full career because that’s the minimum service requirement if you want to retire at a young age.
But if you work until you’re 60, all of a sudden the service requirement goes down to 20 years because we do have people like, for instance, someone who retired from military service who comes into federal service at age 40 or 38 after they’ve spent 20 years in the military and now they can put another 20 years in the civilian side and retire as young as 60, as long as they have 20 years or more. They can certainly have 30 or 40, but they’ve got to have at least 20. But for the minimum requirement and this is to allow you to not only collect an immediate retirement, but also to keep your health insurance and that’s critically important to so many.
Micah Shilanski: And that’s a really important number. We’re going to diving into some of that because one of the things that I encourage all my clients to do, Tammy, I know you do the same, and we encourage all of our listeners, make an educated and informed decision, right? These are your decisions. What I really don’t like people to do is to feel that they’re stuck in one place. You’re not, you have choices.
Now, the consequences of making a change, you may not wish to go through, but figure out what these dollar amounts are. So do you stay for that full 30 years? Do you leave at 20? Do you try to come back? There are a lot of options. So Tammy, let’s start taking these numbers and go through a couple of examples of saying, great, what’s a pension worth? Then let’s talk about some health insurance. Let’s talk about that TSP, how it fits into that component and what are other options that people have besides just staying or leaving?
Tammy Flanagan: Oh yeah. I think this is going to be very helpful to a lot of people who are on the ledge. We get to talk them off the ledge or maybe help them understand what happens if they jump.
Micah Shilanski: I say, or push. I don’t know, it’s back and forth.
All right. So let’s dive in now, a couple of quick disclosures out here. There are no apples to apples comparisons period because if you stay for 20 years versus 30 years, there could be COLA, you could get pay raises, you could make a GS change. I mean, there’s all these other things that can be there. So we’re going to skinny that down as much as possible and say everything’s the exact same, except for years of service. So, nope, it’s not apples to apples. It’s just for something to get us thinking about, really what’s the value of that pension.
So Tammy, if we take someone who has 20 years of service, and I’m just going to say they’re 50 years young, just to pick a number, they’re at 20 years of service, 50 years young, and their high-3 is $75,000, then their pension is roughly going to be about that $15,000 a year, right?
Tammy Flanagan: That’s right because you’re going to take 20 years of service, right? You said 20 years times 75,000 times 1%. So that’s pretty easy math. I almost didn’t need the calculator for that one.
Micah Shilanski: I know but it’s being recorded, now we have to use it, right? Because that’s the time we totally make a mistake.
Tammy Flanagan: Yeah, but for people who don’t know, it’s a pretty simple calculation for FERS. 1% times your high-3 average, which you said was 75 grand, times your length of service, which we’re going to do years and months, but for today’s purposes, we’ll just take the closest year, just to make it simple.
Micah Shilanski: Yeah. Yeah. Simple. All right. So 15,000 ish a year is where that’s going to come out to. Now, if we change this up a little bit, and we say, instead of having a 20 year career, you had a 30 year career. So now you’re retiring at 60 years young, you got an extra 10 years or Tammy, as you said, an extra 10% in the calculation, right? It’s going to increase your pension pretty, pretty well, right?
Tammy Flanagan: That’s 7,500 a year. That’s a lot of money, and that’s for the rest of your life with a COLA.
Micah Shilanski: Yeah. So your pension went from 15,000 to 22,500 by waiting that extra 10 years. So an extra $7,500. What that’s going to mean math wise is you’re going to need somewhere between 125 and $150,000 extra if you didn’t work that 10 years. So if you decided to say, “Hey, I’m out at 20,” and now you want to replace that pension that you would have gotten, you need to save on top of what you’re already doing, on top of what you’re already doing in your TSP, your match, your contributions, your retirement savings, everything else, it has to stay the same. You have to save an additional 125 to 150,000 bucks a year, roughly another $1000 a month in order to make up that pension difference.
Tammy Flanagan: Yeah, and I guess that’s because Micah, since the new company you’re going to go work for, or whatever you’re going to do after you leave federal service, chances are, 99% chance there is no pension. So what you’re saying is that I need to save outside of my 401(k), or my retirement savings plan, money on the side that’s going to be there so that I can draw down from that enough to make up for the fact that I’m not getting that extra 10 years worth of FERS benefit if I leave 10 years early?
Micah Shilanski: Yes, ma’am.
Tammy Flanagan: I guess another factor, you might even have to save more than that because if I leave early, now my high-3 is what it was when I left, it’s not what it would have been 10 years from now and no pay raises, no pay adjustments during that time. So that’s a conservative amount I would have to save. I’d probably really need to save more.
Micah Shilanski: Probably. We’re trying to keep it somewhat simple on this, but I think you’re 200%, right? If you actually did the math, it would be more because COLA, pay raises, all those other things that are going to come up in the variability, right? So if you have a $75,000 government job under FERS with full benefits and you want to transition to the private sector with a $75,000 job, those are not the same, right?
We could get into other details, like what’s their TSP 401(k) options that are going to be there? Now, most companies have a 401(k), like hands down, the odds are they’re going to have it. Most of them will have a match. Most of the time, it’s three to 4%. Sometimes it will be more than 5%. Most of the time it’s three or four.
So great. Again, in this example, if you’re going to move from the TSP, which you’re putting in, let’s say 18,000 a year into, and you’re getting a 5% match and you moved to company to private sector, and they’re going to pay you 75 grand, you’re going to put $18,000 in, but you’re only getting a 3% match. You’ve lost money. So now you’ve got to be making even more money to save it because of what you would have been paid under as a federal employee.
Tammy Flanagan: Yeah. Like you always hear that federal employees are paid less than the private sector counterparts. There’s a good reason for that because you have to factor in the value of those benefits, whether it’s the pension, the 5% match on the Thrift, the government contribution to your insurance. There’s a lot of benefits that we don’t realize that people in the private sector don’t necessarily get those same benefits. Unless you’re the CEO or unless you’re in a large corporation and you’re in the upper management, but the rank and file, it’s the same.
Micah Shilanski: You just touched on another one, Tammy, that we need to focus on real fast, is health insurance. Right? This is another huge one. So in our example, assuming there was no early out, Tammy, if someone stops working for the federal government at 50 years young, with 20 years of service, not law enforcement, no early out, do they get to keep their health insurance in retirement through the feds?
Tammy Flanagan: It’s like COBRA in the private sector, but we call it Temporary Continuation of Coverage, or TCC for short.
Micah Shilanski: They had to come up on a nickname.
Tammy Flanagan: They always have to have a different name, just like TSP is our 401(k). So they always call it something a little bit different. But yeah, it’s limited and you’re not going to get to reinstate that health insurance, even if you collect a deferred retirement. So keep in mind, you’re on your own. You’ve got either find health insurance from another employer or go on the unaffordable affordable care market.
Micah Shilanski: That’s right. So you’re looking, rough numbers that I run with a client when they’re looking at this, I put an extra, Tammy, 900 to $1,200 a month extra for health insurance. Now, if you’re looking at quick math, you might say, “Well, Micah, come on, going from my Blue Cross Blue Shield FEHB it’s not an extra $1,200 a month to move on under the ACA, Affordable Healthcare Act, right?
Yes and no, because you have two components to it. You have your monthly premium, you also have your deductibles and your co-pays and those are higher in outside programs that are there. Also, how long does it continue, right? You could go to work and I see this a lot, being in Alaska, a lot of oil companies that are up here, of course, and we’ll see spouses that are federal employees not take the federal insurance and they’ll just go under their private sector insurance of their spouse because their spouse has a better health insurance plan.
Well, at first blush that looks great. What do you mean? Bob is only paying a hundred dollars a month for health insurance with XYZ oil company and Sue the federal employee spouse is paying $500 a month. Well, clearly that doesn’t make any sense, but with that federal insurance, if you keep it and retire with that immediate pension, you’re able to keep that health insurance into retirement. Under this other example, with Bob with XYZ oil company, that goes away when he stops working. Now, what are you going to do for health insurance?
Tammy Flanagan: So you’re 65 is one option.
Micah Shilanski: That’s really common, and I would say, Tammy, that’s another really big one you and I were talking about offline, right? We see this a lot that the mentality of a private sector is they’re really going to work till 65 for that reason. Whereas federal employees, they really want to retire, I’m going to say sooner than their private sector counterparts.
Tammy Flanagan: Yep. And generally, you can retire sooner.
Micah Shilanski: So quick math here, right? And again, these are just examples. You apply them to your own personal situation. But Tammy, we said, I’m going to round up. We said, in this example, just for the pension alone, you’d have to save an extra $150,000 in order to make up that difference plus the health insurance, right? And the health insurance is an extra 900 to a thousand bucks a month.
So really, if you do the math, that’s an extra quarter million dollars at least that you’re going to have to save because it’s not just up until 60, it’s for the rest of your life. Even when Medicare comes in, you’re still going to have to pay, and FEHB, as we’ve talked about on previous podcasts is a really important part even after 65, right?
Tammy Flanagan: Yeah, absolutely. Yeah, absolutely. I really think that … but I see it more often than not someone who’s getting close, they’re 52 or they’re 57 with 10 years, they don’t have 30 years. So I really like to give them two estimates. I like to say, “Well, here’s what happens if you leave now, but look at the difference if you work another seven years.” Seven years goes by so quickly, especially when you are in your fifties or sixties, it seems like time goes by even quicker. But yeah, I really try to encourage people to really think twice about leaving before they’re eligible for that immediate benefit.
Micah Shilanski: All right. So again, I’m just going to recap the dollars then Tammy, let’s transition to options that people have, right? Because I don’t want to paint this picture that you’re stuck in a federal job if you don’t want it because you have things you can do. But again, educated and informed-
Tammy Flanagan: We do call it the golden handcuffs though.
Micah Shilanski: There’s a good reason why, right? So if we said around 150,000 for your pension and around a quarter million dollars, $250,000 for the healthcare benefit that’s there. Add them together. It’s about $400,000 difference in that last decade as you’re getting ready to retire. That’s a lot of money. You could buy a house, just to be clear, right? So this is a decent amount that’s going to be there. So it’s something that you need to weigh out.
Now, sometimes there’s good reasons why you want to transition. So let’s say Tammy, that that’s not the option, right? Whatever reason financially, that’s not the motivator. They want to do something else besides their current job. What can they do?
Tammy Flanagan: Yeah, well they could stay within the government and get another job. I’ve met people who have jobs that are pretty high pressure jobs in the government, they’ve got a lot of responsibility, money or people that they’re responsible for and they might not want that anymore. Maybe they’re just tired of jobs in the government pretty much mirror the private sector as far as that high-3 average that your retirement’s based on. Even if you take a demotion or a pay reduction that may not be the end of the world, that might be better than leaving the federal government altogether. If that’s a possibility for you.
Micah Shilanski: Yeah. I think we talked about in one of our other episodes, I want to say it was seven, right? So plan-your-federal-retirement.com/7 we talked about cash flow and if that’s what you want to do, there’s some great tips in that podcast you might want to listen to that goes through how do you get set up for that? But yeah, you could do a job transition. You could also go part-time, right? Who says you have to stay a full-time federal employee.
Tammy Flanagan: Yeah. If you can afford to live on a little bit less and what’s bothering you right now is the fact that you’re working too many hours. Yeah, part-time is a way to get you to your minimum retirement age, to get you to that 30 years of service because even if you work 20 hours a week, you’re working half time. But if you do that for 10 years, that’s still 10 years of service. So you don’t have to work 20 years part-time to get 10 years. 10 years of part-time is the same as 10 years of full-time as far as eligibility goes. It’s different in the calculation, but for eligibility part-time and full-time are exactly the same.
Micah Shilanski: I know we’re going to get too many details on that. But for eligibility, Tammy, they would still be able to maintain health insurance, right? Regardless of part-time or full-time?
Tammy Flanagan: Absolutely. That’s a big one. So if it’s not the money that’s really the driving factor, if it’s the health insurance, then maybe going part-time could do it. That can be another option.
Micah Shilanski: You know, another one, and this is a little bit of a lure or a myth. It does happen from time to time though, right? Is the, “Hey, I’m going to separate,” go to work in the private sector and then I’ll come back, right? So you do a deferred retirement. So you leave at 50, with 20 years of federal service and you say, “You know what? If I come back when I’m 59, if I come back at some point in time, I’ll get some more years, I’ll be eligible to retire or do a postponed retirement.” That’s something that we hear a lot, and that’s something I chat with a decent amount of people with. But Tammy, I’d love to know your experience because mine, not too many people go down this path.
Tammy Flanagan: Yeah. In theory, it sounds perfect. It’s like, “Okay, I’ll leave now when I’m 57. I’ll go out there and put in my application, come back to work for one year. I’m going to tell my new employer a whole different story,” because you might be someplace where you enjoy what you’re doing now. You might not have a federal job available where you’re living. I mean, there’s so many things that can go wrong with that plan.
So it’s a nice thought and it’s something you might aspire to, but count on there being roadblocks along the way that may or may not be the easiest thing to do. I’ve seen a lot of people who do that who never come back. I’m one of them.
Micah Shilanski: There you go, right?
Tammy Flanagan: But I always say the next best thing to being a federal employee is to marry one. So I did that—
Micah Shilanski: That’s perfect. With that, that takes a lot longer than you would think. Not just the marrying the federal employee, I’m sure that one’s too. That’s a long-term play. But for coming back to work, we had a client that did it. 2019 is when she actually retired and it took her about three or four years for her to convince herself this was the plan. But it took her several years to convince herself to come back as a federal employee because her husband was a federal employee and she saw all the bureaucracy.
She was a federal employee for like 22 years. She saw all the bureaucracy, she saw all the things that was happening and she was at a small, independent place now and she didn’t have to deal with any of that. So again, it’s different coming back, not just finding the job, but your own mentality. So don’t sell yourself a rosy picture that doesn’t really exist, right? I want you to make an educated and informed decision on reality about what might actually take place.
Tammy Flanagan: But on the other hand, I have to say, I have seen people do it and do it successfully. I had a guy one time, he was an FBI agent back in the day and he really wanted to be an airline pilot. So he left the Bureau after … I don’t know if he had 20 … I think he actually had 20 years in, but he didn’t have the age. So he left the Bureau, went off and became an airline pilot, flew for a major airline and then they went under. So now, what do I do?
So I said to him, I said, “You are still marketable in the government. You already have your 20 years of law enforcement,” and I ran him some quick numbers saying, “Hey, if you can get back in, look what you’re going to get.” He never realized that that’s how much his retirement would be worth if he just stepped back into federal service. So he did so, and he was going to do it for just a couple of years. He ended up staying 10 years and he thanks me every time he sees me. He’s like, “I am so grateful for you telling me and encouraging me to come back to the government because it was the best move I ever made.”
Micah Shilanski: No, I think that’s a great point. You have a great set of benefits. How do you maximize them for you, to get the most advantage of them, right?
Tammy Flanagan: Yeah. You got to run the numbers. You got to know a little bit about the formula, which like I said, with my $5 calculator, the formulas are not hard. There are really easy ways to look at this without getting into the weeds, without getting into spreadsheets and algorithms and all the things that you do so well, Micah. But just to look at things from a simple point of view, sometimes is all it takes.
Micah Shilanski: Yeah, very much so. All right. Let’s transition to some great action items because this podcast is all about you taking action in your retirement. It’s not just enough to listen to us every single week, and we really appreciate it by the way, but you must take action with this information.
So the first thing, Tammy, I’ll kickoff for our listeners. Number one, know what your options are. You are not painted into a corner with only one thing. Now some options are better than others, right? But you have options. Find out what they are. Do you want to stay for your career? Do you want to make a transition? If you do great, what’s the math?
Tammy Flanagan: And really think about this before you make a knee jerk reaction because I know some days you go into work and you’re like, “I can not do this one more day. I can’t deal with this person one more day.” But take a step back, take a breath, count to three and take the time to really look, like you said, look at those options, do some numbers, maybe get a retirement estimate, make some copies out of your personnel folder, like really get your ducks in a row so you’re making an educated decision.
Micah Shilanski: I love it. And what’s the value of staying, right? I really like to run this with clients, especially my ones that still have a decent runway ahead of them on a federal career, right? The next year or so, not so much. But if you have a decent career ahead of you, look at the value of your pension that’s there because I still think we missed that, Tammy, when you talked about this earlier about how much are federal employees paid versus private sectors. All we do is look at the base pay. We’re not looking at this huge value of a pension and you really should look at that because that’s a phenomenal asset that you’re building for your retirement.
Tammy Flanagan: I like it at some agencies’ payroll offices, they now put on the pay statement, “This is how much you’re paying for health insurance. This is how much you’re paying for retirement.” Then at the bottom it says, “Here’s how much we’re paying for your health insurance. Here’s how much you were paying for your retirement and your matching on your Thrift.” When you add up those bottom numbers, it’s like, “Wow, if you added that to my salary, I’m making a lot more than the salary that shows up on that GS pay scale.”
Micah Shilanski: That’s right. That’s right. All right. Last action item is vote early, vote often. Jump on iTunes or Google play wherever you’re at and give us a five-star rating, if you would be so kind. Share this with your friends and coworkers, the podcast is growing and we owe that to you, our listeners. Thank you very much. Tammy and I get together to do this for you and that’s very genuine.
So if you have questions, if you have things you want to know about the podcast or things you’d love us to answer, drop us an email [email protected] and that will come into our podcasting team and we’ll review it and potentially be able to answer your questions.
Tammy Flanagan: Sounds great. It’s been fun, Micah.
Micah Shilanski: Perfect. Thank you, Tammy. Until next time, happy planning.
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