Ep #23: Best Day to Retire

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

Micah Shilanski: Welcome 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 doing good, Micah. How about yourself?

Micah Shilanski: It’s beautiful out. Someone flipped a switch in Alaska and now spring is coming. It was winter up until very recently. Now the sun is out, the snow was going away, so it is great. And we get a chat about benefits. So how could I complain?

Tammy Flanagan: Yeah, nothing better than spring and summer in Anchorage. I think that’s a… I was so surprised to see all the flowers when I was there visiting, couple of times, and I just never expected it to be that green, thinking of all the winter that you have there. So, yeah, I’m sure it’s getting to be real pretty at this time of year.

Micah Shilanski: Yeah. Turning into the land of the midnight sun. So that’s really nice. And it’s kind of, hard transition here, but kind of like retirement. The land of the midnight sun, the never-ending paychecks we want to have coming in to lots of fun that we want to be able to do. And there’s a lot of really important things that come into that.

Tammy Flanagan: Yeah. Just for waking up every day you get paid, what could be better than that.

Micah Shilanski: That’s all your hard work coming to fruition right there.

Tammy Flanagan: There we go. So now we just got to pick a date.

Micah Shilanski: Yes. Now, Tammy, this is an important one. What is the best day to retire? Now I like to blame you a lot when I’m talking to clients, when they come in and they say, “All right, Micah, what is the best day to retire?” Because you kind of started this back when you worked at the FBI and worked in the benefits and trying to put what best day it was to retire.

Tammy Flanagan: Micah, that’s when there was a best date to retire. There really was because back then everybody was under CSRS. They didn’t have a thrift plan. They didn’t pay into Social Security. So everything revolved around that one single benefit that replaced their salary. So the main thing people were trying to do back in those days was maximize their lump sum annual leave check, because OPM didn’t put people in special pay or interim pay. So you had to have enough money in the bank to pay three months of expenses before you started getting that really nice retirement check down the road. So we all made sure that everybody retired at the end of the leave year to maximize that lump sum leave payment. And we still find that a lot today where some employees carry over every year, 240 hours of annual leave.

Tammy Flanagan: And when they plan to retire, they try really hard not to take any leave that last year so they can still maximize that big lump sum payment, which does still provide that nice cushion of cash while they’re waiting for all the dust to settle from everything else. So that still is a very popular time. In fact, OPM calls that the surge, the end of the year, because they get about 25% of all retirements come in for that end of the year retirement date. So there’s something to be said there, but I know that tax wise and financial planning wise and just mentally, that’s not always the best time of the year to retire. I know you say that, especially for people in Alaska, right?

Micah Shilanski: Exactly right. So if you want to retire at the end of the year, you absolutely can in 12-31, but in January, Alaska has two things going for us. It’s dark and cold. So if all of a sudden you don’t have to go to work, is that really the best month that you want to retire into? And maybe the answer’s yes. Maybe you’re going to travel. Maybe you’re going to do these other things. Maybe that’s the soonest you can retire and that’s going to be the date. Great. But I like to say, instead of getting focused on the day, Tammy, less focused on what day is the best day to retire, what are you trying to accomplish? What are you trying to do? Says, “Well, Micah, I want to retire and I want to enjoy the summer.” Okay. Well, great.

Micah Shilanski: Well, we don’t have summer in January. We have summer in May. So do you want to retire at the end of May or the end of April to be ready for it? What is that best day? And it first starts with what goals are you trying to achieve instead of just maxing out the benefits? Because Tammy, you and I were chatting about this. And if your goal is to max out your benefits, then you should never retire because then they’re always growing.

Tammy Flanagan: Every day you work it gets a little bit better. Before you know it, you won’t have to finance very long retirement.

Micah Shilanski: So when we’re going in there, that first question, Tammy, that you brought up, which I thought was really good. Are you ready financially? And then number two, are you ready mentally to retire. And inside of that financial one, this really comes down to, and we talked to this before, but cashflow. Cashflow is king, cashflow is the heartbeat of retirement. What money do you want to spend on a monthly basis? This becomes really important, especially back to your point. How long is it going to take for OMP to adjudicate, to finalize your retirement.

Tammy Flanagan: Yeah, you’re talking about not only money for the long haul for your longevity risk and inflation risk, but just about next month. How are we going to pay the bills next month if we don’t have some money in the bank or we’re not going to cash in a large lump sum of annual leave. So you kind of have to have all of that lined up ahead of your plan to retire. Because we don’t know today how long it’s going to take for payroll to cut my last paycheck. We don’t know how long it’s going to take for OPM to adjudicate my retirement claim. So there’s a lot of unknowns. We can always hope for the best and things typically turn out well in the end. All’s well that ends well. But in the interim we got to make sure we’re preparing for that because there can be some delays involved, especially right now with what we’re going through.

Micah Shilanski: And Tammy, it’s one of the things we talked about before, when we talk about investments, we always say any money you need to spend in the next five years, any money you need to pull out of the stock market in the next five years, doesn’t belong invested in the stock market. And we say that because in 2008, nine, 10, 11, 12, 13, when the market went down, took five years to recover. But also part of that reason is for this here. Any money we need to spend, definitely in the next two years belongs in cash. Why? Well, when you go into retirement, what if all these things happen? What if HR doesn’t get everything to OPM? What if OPM has a delay? What if the department of OPM is shut down because they all got COVID?

Micah Shilanski: I mean, these are realistic things that have happened that have delayed people’s retirement benefits. And if you don’t get a check, you’re still going to have problems with your mortgage company. You’re still not going to have money in the bank account to pay your bills, or you’re going to have to go get massive amounts of debt. And this doesn’t make sense to do when a little proper planning would prevent these issues.

Tammy Flanagan: Right. So, yeah I agree Micah, financial preparing, not only for retirement all the way to the end of life, but just for the near term of these next six months, I got to make sure I’m ready on both fronts.

Micah Shilanski: A problem recently that we’ve seen with TSP… Now I love the TSP. They do a great job. They do many wonderful things. No one is perfect and no institution is perfect. So they all have their problems and so some of the things we always tell with our retirees that say, “Well, Micah, when I retire, I’m just going to go access my TSP.” Well, what if it doesn’t actually work that way? So you go to retire, then you go to access TSP. And I don’t know, let’s say TSP loses a check. It happens. Now TSP is going to say it’s the mail service that loses a check, but here’s the reality, came out of your TSP account, never showed up in your bank account. What are you going to do in that period in time when you’re in dispute, if all of a sudden you went to transfer your TSP and something is delayed?

Micah Shilanski: What if your HR doesn’t notify TSP that you’ve separated from service. This happens a lot that you go to retire and then you go to take money out of the TSP. And the TSP says, “Well, we see you’re not making contributions, but it still says you’re an active employee.” So your agency needs to go back and notify TSP. Again, this is another delay in getting money. So this goes back to that whole financial thing. Where’s your money going to come from? And if you’re relying solely on the TSP, this could be an issue. It may not, but it could be,

Tammy Flanagan: This is one of those occasions when cash is king, you want to have-

Micah Shilanski: You got it.

Tammy Flanagan: The money in the bank or money better yet in your wallet so that you can carry forward, regardless of what else is happening in the world. I mean, these days you just can’t count on anything. So it is something to consider. The other thing I’ve found with the TSP for employees. Oftentimes I meet employees who have borrowed from their TSP account, and haven’t quite paid it back by the time they retire. So now they’re stuck with this outstanding loan balance and the TSP will not process a withdrawal from the account until you let them know what you’re going to do about that outstanding loan. I think give you, what is it, 90 days after you separate?

Micah Shilanski: 90 days.

Tammy Flanagan: To pay it back where you can write them a personal check if you have the money laying there somewhere that you can pay it back. Otherwise, let them know if you’re not going to pay it back. You’ll declare that as a taxable distribution, then after that, after they get the word from you, then you can take distributions from your account. So yeah, it’s not going to be as quickly as you think to get that money out in all cases.

Micah Shilanski: Yeah. So those are really important things financially to figure out. Now I promise eventually we will get to what is the best day to retire. We’re working our way there. So that’s the financial side, but then it’s, Tammy, it’s also the mental side, transitioning a little bit, are you mentally prepared to retire?

Tammy Flanagan: Yeah. And I’ve met people who are actually afraid, a little bit afraid of that transition because face it you’re used to having a scheduled work day every day of your life since maybe since you were 16 years old. And all of a sudden the future is ahead of you with nothing scheduled. And so maybe your plan for retirement means to start making a schedule. I know when my husband first retired, he’s kind of that type of person. He wasn’t afraid to retire. He was really looking forward to it, but he knew he needed a schedule. So every morning, to this day he still does this. He keeps a little note pad and every day he’ll put things on the list. These are my to do things for today. And usually he doesn’t get them all done. So what? There’s always tomorrow, but tomorrow he’ll add things to the bottom of the list. So he always has these scheduled activities that he needs to accomplish that day. And that helps him stay kind of in a framework of, as he did when he worked, having something to do every day.

Micah Shilanski: And sometimes it comes from… I have some clients that have a hard time separating, and I really think it’s because their contribution that they’re giving back. And they mentally see themselves as this person who works, this person in this career that has this mission that is doing these things. And when they retire, they’re no longer that person. So that’s a huge mental transition that people need to do. It does seem to be a little bit more prevalent with some of my guy clients as they’re going into retirement. Ladies seem to be able to adapt quicker in many areas, especially in this one to move into that. But knowing who you are and knowing to say, you know what, maybe I need to postpone retirement. Maybe this is a phased retirement because I need to work into retirement or you work part-time in retirement. All those are fully acceptable because that mental is really, really important to get in that good mental state, to be ready to retire.

Tammy Flanagan: But I think in those cases, too, Micah you can think in terms of becoming the president of your HOA board, or you can become the CEO of the citizen organization in your community or the volunteer, the leader. So there’s ways you can still have that kind of title, so to speak, when it comes to that. But the other thing too, one more thing on the mental transition, and this is no joke, is that some people are afraid of being with their spouse 24 hours a day. They’ve never done that before. I mean their entire married life, they’ve both gone to work. They both come home and met at six o’clock at night, and now you’re going to wake up next to that person. You’re going to be with them all day long and all night long. So maybe you need to come up with some other activities or some places to be separate.

Tammy Flanagan: And there’s nothing wrong with that either. In fact, that’s my husband too. I’ll use that example is that every day, since we live in Florida, he’s outside, he’s at Home Depot, he’s doing something that’s not in my space. So we still have that separate separateness all day. And then we meet for dinner or for lunch or whatever. And we do see each other more than we used to, but there’s still that time when he does his thing and I do mine and that’s okay. I know there’s a lot of fear of that for some people. I had one guy who was actually in tears because he said, “My wife really wants me to retire.” He says, “but I really think she doesn’t know what she’s asking for. She’s never been around me 24 hours a day.”

Micah Shilanski: Yeah. And few people would like to, what do I do with that?

Tammy Flanagan: That’s right. So that’s a real fear too. And you have to accept that. And there are books, there’s books on transitions, there’s books on retiring happy, and kind of looking at that from a mental aspect. I’m trying to think there’s two that come to mind. One is called Retire Smart, Retire Happy. And it’s subtitled Finding Your True Path in Life. And that one’s written by a woman, her name is Nancy Schlossberg, PhD. Then the other one that I find really helpful when it comes to these mental transition is written by William Bridges and it’s called Transitions: Making Sense of Life’s Changes. So those are two that I recommend to clients often who are worried about that transition from this scheduled work life to a little bit more flexibility, a little bit more time with your spouse. If that’s the case that could help maybe just to read a little bit about how to make that transition.

Micah Shilanski: So Tammy, with that, again, we have the mental side, we have the financial side super, really important. Let’s say we checked both those boxes. We’re in a good spot. Now it gets to the day question. So 12-31 is of course where people are shooting for a lot of the times. And I think that’s just from the mentality of saying, “Hey, well our annual leave, I want to carry forward as much as I can. Then I’m going to bank all of my annual leave this next year. And then when it goes to cash out, it will cash out into the next year.” And there’s some pros and cons, but what are some other things that we need to be thinking about?

Tammy Flanagan: Well, there’s just the basic idea of when does your retirement commence? So I know that’s a weird way of saying it, but when I leave the government, if I’m a FERS employee, most of us today are under FERS, whatever day I choose whether I retire May 5th, May 15th or May 31st, my retirement starts June 1st. So my first retirement check is going to be dated July 1st for the month of June. So with that in mind, I generally steer people away from the first week of the month, because if you retire June 6th or 7th, there’s no compensation from the eighth through the 30th, there’s no paycheck because you left the government. There’s no retirement check because your retirement doesn’t start until the first of the next month. So I steer people towards the end of the month. Do you think that makes sense for most people to think about that last day of the month or towards the end of the month?

Micah Shilanski: I like the towards the end of the month. So if for whatever reason, if I’m picking up dates here, if their birthday is May 27th, I’m not going to say you have to stick till May 31st, if you really want to retire on your birthday. Okay, great. Let’s give up the next three, four days of pay, it’s not that big of a deal to meet that date. Now, if you want to retire on May 1st, I’m like, “Oh, is that the best date? Could we just make that April 30th?” Let’s not give up an entire month. So I love that towards the last day, towards the end of the month.

Tammy Flanagan: Yeah. And if you’re near the end of the leave period, there’s some advantage to that because most people nearing retirement are accumulating eight hours of annual leave every payday. But if you retire halfway through the pay period, you forfeit that. So I always call it the trifecta, if you can make it not only to the end of the month, but at the end of a pay period. And the end of the year thing would make it the trifecta. If you wanted to maximize that lump sum leave check. So those are the reasons why I picked those dates purely from a benefits point of view. But like you said Micah, there’s other things. There’s just maybe I do want to retire my birthday or maybe I do want to retire before this next project deadline or right after I finish this work on whatever I’m trying to get done before I go. So there’s more to it than just worrying about how much that first check is going to be. Because there’s going to be hopefully 300 more checks for the rest of my life that-

Micah Shilanski: That’s right.

Tammy Flanagan: Come on time.

Micah Shilanski: Now with that, how would we handle sick leave in retirement, Tammy? So how does it count towards your retirement? Then there’s that thought, should you burn your sick leave for retirement? Should you use it to increase your pension? How does it work, and then what should we be thinking about?

Tammy Flanagan: Well, sick leave can be used now under both FERS and CSRS towards the calculation of your benefit. So when you pick a date, let’s say you settle on May 27th, that’s the day I want to retire. So I’m going to calculate my retirement or have my agency calculate it for me. And they’re going to add on my sick leave. So when I get that estimate, it’s going to say, we’re crediting you with a thousand hours of sick leave and your retirement date’s May 27th. And here’s how many years, months, and days of service you’re going to have on that date. So as long as everything’s correct, as long as my service comp date’s correct, they’ve projected my sick leave to that date. Then I see what I’m going to have. And let’s say it ends up that I’ve got 28 days left over when they’ve added my sick leave to my service and I’m leaving May 27th.

Tammy Flanagan: Well, I might just decide to retire May 29th and add two more days to give me another month, which could be worth another 10 to $15 a month in my retirement check. So working two days is worth that over a lifetime, yes I think so. So sometimes if you really want to get down to brass tacks the sick leave can make a difference by not a huge amount, but it does add a little bit to your calculation. But going back to your point about, should I just use up my sick leave rather than get it added to my retirement? If I had the option, let’s say I’m facing knee replacement or some major surgery that would keep me out of work for the recovery period for two months, let’s say. So, should I have that done before I retire? Or should I go ahead and retire and then do it on my own time?

Tammy Flanagan: If I knew that I had a valid reason to use my sick leave like that in a straight stretch for a month or two, I’d probably use my sick leave. Because while I’m on sick leave, I’m getting my full salary. I’m accruing more sick leave. I’m contributing to the TSP. I’m earning Social Security credits. What’s not to like? But if I just told my supervisor, “Hey, you know what? I’ve got a thousand hours of sick leave. I’ll see you in six months. And then I’m going to retire.” I might get fired before the end of six months because I have to have a good reason to use that sick leave.

Tammy Flanagan: And I always tell employees that your sick leave is really your short-term disability protection. So if you’re a younger employee who still has 15, 20 years left of your career, don’t use your sick leave that way. Don’t abuse it, because what if you got sick? What if you were in an accident? Nothing worse than coming back to work when you’re really not ready to come back to work. So if you get six months credit towards your retirement and it adds another a hundred bucks or $200 to your check, what the heck, that’s good news.

Micah Shilanski: Amen. Now there’s something you said earlier on that I want to pull out because, Tammy, it’s something that I hear a lot when I’m meeting with people for the first time and they look at their sick leave and I’m just making up numbers here, they look at their sick leave and say, “Hey Micah, I have six months and 20 days so I’m going to burn at 20 days of sick leave.” And I always kind of have them hit the brakes on that because when you did it, you did it of course correctly, what’s your total years of service? Because keep in mind when they’re calculating your pension it’s years, months, and days of service, plus years, months, and days of unused sick leave, plus years, months, and days of military time you bought back.

Micah Shilanski: And so you really got to be looking at that calculation to make sure you’re getting those full 30 day months. Because I’ve seen it time and time again, people want to burn sick leave to get the maximum out of their credit, not leave anything on the table, and end up penalizing themselves because they didn’t look at their actual service time.

Tammy Flanagan: Yeah, you really can’t do that calculation of what’s my use or lose sick leave until you’ve set your retirement date. Because once you change that date, everything else changes.

Micah Shilanski: Great points, yes ma’am.

Tammy Flanagan: You’ve verified all of your service, paid for any deposits you’re going to pay for, making sure everything’s documented. So you got to make sure everything’s ready to go. Then we can look at your balance of sick leave. So I’m saying within maybe three to four months of retirement, we can let you know, or you can figure out how much use or lose sick leave you have. And if you need to take a few doctor’s appointments or get that root canal done, do it while you’re still getting paid for your sick leave while you’re doing that. So nothing wrong with that, but just make sure, like you said, you’re using the right numbers.

Micah Shilanski: Absolutely. And especially after this last year of everything that’s been going on with COVID and workloads and a couple of the agencies especially been really worked. We’ve had several clients just say, “Hey, look, I need mental health days.” And talking to a supervisor, and they’re taking those a sick leaves. Because it’s valid. We’re not recommending the first flu. We’re just saying that if something has come up that you need it, it could be very good to use that versus just annual leave. I like that.

Tammy Flanagan: Yeah. The last year I always say, save your annual leave because it’s cash. I mean, if somebody said, “We’ll pay you for your sick leave.” Nobody would ever use sick leave because that would be wonderful to get paid for 2000 hours of sick leave, but that’s not happening.

Micah Shilanski: And it was kind of proof of that under CSRS because in CSRS, they almost never use their sick leave. I mean, they would go with more than a year of sick leave. It was very common. Tammy, let’s transition just a little bit, still talking about the best day to retire, but let’s talk about some pitfalls that can come up around this. And it’s one of things you and I were talking about offline is it’s not what you know that’s a problem, it’s what you think you know that just ain’t so. Or what other piece of the pie are you missing? And so one of the things that we’re often see is we call it bonus retirement. If you’re 62 and have at least 20 years of federal service, you get an extra 10% in your first pension, but there’s a lot of people that it can end up missing that because they’re focused on a certain day versus overall their entire benefits.

Tammy Flanagan: Right, I think the confusion there is when you are 62, you only need to have five years of service to be eligible to retire. So you’ll find people who are ready to walk out the door with 19 years of service when they’re 62, not realizing if they just work another year, in fact, sometimes it’s not even a full year because your sick leave can get you closer to the 20 years. Having that 20 years and being aged 62 gives you a extra 10%, like you said, in the calculation of your benefit. I would stay an extra six months to a year if it meant that big of an increase in my overall retirement. So definitely something to think about. And I think when you’re thinking of these things of you don’t know what you don’t know, well, who does know? Hopefully it’s somebody at your agency’s benefits office.

Tammy Flanagan: You’re fortunate if you have someone there who can give you a little counseling, look things over to suggest some tips for you. I don’t know that that’s the case for most employees today. I think some of us are left, here’s the website, go do it yourself. I’ve met retirement specialists who don’t want to give, they call it advice. I don’t call it advice. I say, “Here’s the pros and cons.” I mean, you’re not telling somebody what to do, but you’re pointing out them, hey, if you just did this, this is what happens. And if you go this direction, this is something else that’s going to happen. So I do think it’s helpful if somebody has someone knowledgeable to talk to both about their benefits, as well as the tax and financial pitfalls that can happen making those wrong decisions. So this is a big thing, because most of us have only retired once.

Micah Shilanski: And this could sound like a shameless plug and it’s not what it’s designed to be for Tammy or myself. But we also see and have to get involved to fix a lot of problems that could have been avoided with a little bit of knowledge. So it’s our job to help you make an informed and educated decision about your retirement and about your benefits. And you got to make sure you’re finding someone to work with it. Just like a coach, just like a sounding board, especially when you get in your own situation sometimes you get a little bit of forest through the trees or your horse with the blinders on. You can’t see something that’s just slightly outside of your scope. So really talking to someone who’s been through this before is going to be really, really important when choosing the best day to retire. And we gave you several examples. What if there’s an issue taking money out of your TSP, because we’ve seen that happen and you can’t get it right away?

Micah Shilanski: What if OPM doesn’t get all the documents to your pension and it takes longer to get adjudicated. What if you burn up three too many days of sick leave and lose a whole month because you’re only looking at sick leave, not your entire federal service, there’s all these little things and these are your benefits you’ve worked for. Really make sure you understand them moving into retirement.

Tammy Flanagan: Yeah. I can’t tell you a client that I’ve talked to who I haven’t found 10 to 15 things, just little things, but here and there, little things add up. Anywhere from filling out the application wrong or picking a date that’s so close to getting another month of service or so close to getting some other benefit that they wouldn’t have otherwise known about. So yeah, you really have to pay attention, attend those seminars if they hold them at your agency. Listening to these podcasts is one way to kind of clue in on some of these tips that we think people should know about. So I applaud everyone who does listen and try to take some of this information and make use of it for their own retirement because they’re important.

Micah Shilanski: Absolutely. So Tammy let’s transition real fast to a couple of things that for our older retirees that are retiring, some things to be thinking about. So what happens if you retire after 65 or after 72? There’s some things we might want to think about with the best day to retire.

Tammy Flanagan: Right. So if you’re over 65 years old, you’ve got to make a decision not only on what date you want to retire, but what do you want to do about Medicare? Because once you’re 65 and retired, that’s the time you’ve got to make that decision of whether or not to pick up Medicare part B. And I think we’ve had a podcast where we did talk about Medicare. So you can go back and listen to that one if you don’t remember, but that’s a real big decision. Because a lot of people don’t want to take Medicare because you don’t have to, your federal plans will still cover you even without it. But I don’t want someone to have regrets 10 years from now saying, “Oh man, I should have done it. I didn’t realize what it was going to do for me to have that dual coverage of FEHB and Medicare.” Or suspend my FEHB to use Tri-Care.

Tammy Flanagan: There’s a lot of things around insurance that you have to decide when you retire. So 65 or older is a critical time to think about those insurance decisions and not on the health benefits side only, but there’s life insurance things that happen once you’re 65 and retired. So that’s a whole nother discussion we can have. I’m not sure if we did a podcast on continuation of life insurance.

Micah Shilanski: We chatted about it a little bit, but looking at podcast I think number seven and podcasts… I’m sorry, podcast number four and number 10 are about Medicare. So if you want more information about those, we did two in two different segments. Podcast number four and number 10 really goes into depth, but Tammy, we’ll have to do one on insurance.

Tammy Flanagan: Yeah, I think that’s a good one for every age group, because everybody always wants to know how much life insurance do I need to maintain not only at retirement, but earlier in our career as well. So 65 yes, insurance is a big, critical decision point at 65 or beyond. The other one is TSP, isn’t it? But that’s not 65.

Micah Shilanski: That’s right. So it’s 72. Because remember it changed under the SECURE Act. The rule change from RMDs required minimum distributions from 70 and a half, to now it’s 72 years young, is when you have to start taking money out of your retirement account. So one of the things to be careful of with your TSP, what’s really nice about your TSP is if you’re still working and have money in your TSP, still working for the feds, you do not have to take an RMD because you’re actively employed from your TSP account. Now, if you have outside IRAs, you do have to take RMDs from those, but your TSP accounts, you can postpone those RMDs, which is, I should say, they’re waived. You don’t have to take them later. So the TSPs are waived until you retire. But when you retire, the year in which you retire, you’re required to take an RMD, a required minimum distribution.

Micah Shilanski: And one of the things to be careful of Tammy, we’ve had a couple of retirees separate from service after 72, then they say, “Hey, I want to take my TSP and I want to move it into an IRA account.” And you’ve got to be really careful when you do that. Because when you separate from service, the first distribution that has to come out of your TSP by IRS rules is that RMD amount, that required minimum distribution.

Micah Shilanski: Well, let’s say it’s $40,000 and let’s say you have 800,000 in your TSP and you say, “I want to take that 800,000 and I want to put it in an IRA account.” Well, if you go to TSP and you say you want to do a transfer, that 800,000, they will send all of that $800,000 into an IRA account. So you’re thinking, okay great that worked out. Well, not from the IRS perspective. In the IRS because you were over 72, the first thing you should’ve done was taken RMD, a required minimum distribution. That means 40,000 should have come out to you first. And then the balance 760,000 should have been transferred to IRA. If you don’t do it, then you have an access contribution. And that’s when the IRS likes to give out penalties. So the reason we want to bring this up, know the rules, know how this works so you can come up with the best plan for yourself.

Tammy Flanagan: And that penalty is pretty stiff too. Isn’t it 50% of what you should have taken out?

Micah Shilanski: That’s if you failed to take the RMD so we can fix that. So if you move the money to the IRA, we can pull it out and it still counts as an RMD, but you made an excess contribution into that. And so that can… I got to go back, I think it’s 5% a month or something like that. The penalty can be steep. I know that number is slightly off, but the penalty’s steep for an excess contribution as well. So these are things you want to get done correctly the first time.

Tammy Flanagan: Wow, yeah, you don’t want to… Yeah, that’s where you don’t want to mess around with your taxes. Because those penalties can be a little rough. Now the other thing I find that kind of conflicting with this December 31st date for someone who’s over 72, if you retire December 31st, of 2021, you’re retiring in 2021. Which means if you’re over 72, you’ve got to take your required distribution. And if you didn’t, the TSP will send it to you on March 1st of 2022, then you got to take your second distribution by December 31st of 2022. So I was talking to you about this beforehand and you told me that if you’re over 59 and a half, you can do an in-service withdrawal. So if you still have your heart set on retiring December 31st, and you want to avoid two RMDs next year, you can take your first distribution while you’re still employed. And that’ll still count as taking your RMD for 2021. Did I say that right?

Micah Shilanski: You said it correctly. Absolutely. That would be a partial transfer. You got to be careful on how are you doing this, as a distribution, but you can still, because once you’re over 59 and a half, you can do an age-based in-service withdrawal from your TSP account. So you can do that so you don’t get double hit for taxes next year and have to take two distributions out in once. So again, these are good tax planning, things that you need to be thinking about in advance and then weigh it out. What’s your income this year and what would it be next year if I took two RMDs, maybe two RMDs next year is better. That’s a math game. Let’s look at this and make sure it makes sense for you.

Tammy Flanagan: Yeah. Plus if you took two RMDs next year, maybe you don’t have to take other money out of your TSP. Maybe you can postpone Social Security for another year. So that really might be the better option. But like you said, you have to look at it both ways.

Micah Shilanski: Well, if you’re taking two RMDs, cause you’re over 72, Social Security would have already started because you’re at 70. Oh, doesn’t this get fun?

Tammy Flanagan: I know, all these ages.

Micah Shilanski: The rules change. All right, Tammy, let’s transition a little bit to some action items because that’s what this is all about. Not just fun, great benefits information, but allowing you to take action on your benefits. So take it away. What’s the first action item that our listeners should do?

Tammy Flanagan: You got to figure out where these streams of income are going to come from and how much they’re worth. So get estimates, go to your HR, ask for a retirement estimate, go to SocialSecurity.gov, get your latest benefit statement, go to the TSP and use the retirement income calculator to give you some idea of a fair amount that you could withdraw from your TSP without running out of money when you’re 72. So have some realistic expectations of that income and know your withholdings. Because don’t forget about taxes and insurance that has to come out of those checks.

Micah Shilanski: I love it. Next thing I’m going to say is what day do you want to retire? Not based on some article, not based on some water cooler comment, but what’s the best day for you to retire. What are you solving for first, then great, then back into it. Is that really going to work? Should I work an extra day or two because of some other benefit? What’s that day for you and then look into it to say, all right, is that the most advantageous or not?

Tammy Flanagan: Right. You can list the pros and cons like with anything else there’s always going to… That’s why these decisions aren’t easy because just as many things I could find good about that date, we could find some negatives about that same date. So we’ve just got to find the best date. It’s not going to be the only date it’s going to be the best of the different ones we’re thinking about. So that’s important. That mental transition, there’s not much you can do really to prepare because you’ve never been there before. You can’t kind of try it out unless you’re going to do a phase type of retirement, but to read up on it or to talk to people who have been there, who’ve already retired. How are they managing their time? How are they managing having all this extra free time that’s unscheduled? Maybe that’ll take away some of the fear if you listen to other people’s stories.

Micah Shilanski: I like that. And then lastly, ask first, not afterwards. Yes, we can fix a lot of problems. Just don’t have the problems, ask first before you make these decisions, come up to what you think is the best answer. Ask other experts, ask other people that know what they’re doing in the federal community. And so you can say, “Hey, is this the best answer for me? What else am I missing?” I love it when people ask me that question, Tammy, it’s not just, is this correct? Again, someone could come to me and say, “Hey, I have 19 and a half years and I’m 62. Can I retire?” Well, the answer’s yes. You can retire from the federal system. Should you retire? Is there a better, date is another question. So always make sure you’re asking first and then saying, what else are you missing?

Tammy Flanagan: Yeah. I love that with my clients. Because I always ask them to give me a list of your top questions. And oftentimes they’ll put that on there. Tell me what I don’t know.

Micah Shilanski: Perfect.

Tammy Flanagan: It’s like that’s the perfect question.

Micah Shilanski: I love it. Well, Tammy, as always, this is a pleasure to visit with you and thank you so much for the information that you brought with our listeners today. I know they’ve got a lot of value out of it.

Tammy Flanagan: Thanks Micah, it’s been fun as usual. I really enjoy these podcasts and I hope our listeners do as well.

Micah Shilanski: Awesome, well until next time, happy planning.