Ep #30: Why Mid-Career Is the MOST Important Time

 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 co-host, Micah Shilanski. And with me as usual is the amazing Tammy Flanagan. Hey Tammy.

Tammy Flanagan:        Hey Micah. Good to talk to you again, and today we’re getting back to basics.

Micah Shilanski:  Oh, you know what? It’s such key things that we talk about, and sometimes, and I’ll be completely guilty in this, Tammy. I will want to geek out on some very obscure tax rule, some very obscure federal benefits rule, and really learn the details inside of this.

                           But the reality is what helps most of our listeners,… And the reason we know this is because you, our listeners, are phenomenal at sending us questions. So thank you. And please keep doing that. You can email us at [email protected], because we were getting a lot of feedback in.

                           But Tammy, to your point, we have a lot of questions about, “How do the benefits apply to me in my personal situation?” And that’s the fundamentals of federal retirement planning. That’s the basics that we really have to have a great concept on, because there’s a lot of misinformation out there.

Tammy Flanagan:        Yeah. When you think of FERS as kind of like the old-fashioned three-legged stool, the foundation of it is being eligible for that basic retirement benefit, because that’s what lets you keep your insurance, your health benefits, your life insurance.

                           So once you have that piece of the puzzle in place, then you can build on that with Social Security and TSP. And it’s a matter of understanding what you’re eligible for at different stages of your career.

                           Anywhere from somebody who wants to leave federal service before they’re even eligible, all the way to somebody who might stay for 45 years, what’s the difference? What’s the break points. What are the places where there’s key decisions that have to be made?

Micah Shilanski:  Yeah, absolutely. Now where people can get in trouble of this, right? It’s not what you don’t know that’s a problem. Because a lot of times when people don’t know something, federal employees, you guys are good about asking questions, going to classes, finding out information.

                           It’s what you think, you know that just ain’t so that gets us into trouble. And Tammy, I don’t know about you, but I have seen this dozens and dozens and dozens of times, time and time again. And I’m going to say it’s a lot of water cooler which gets people in trouble.

Tammy Flanagan:        Yeah. And I remember in the early days of teaching, when I was just starting out and a little bit unsure of myself, even though I knew the material, but there would be that one person in the audience who would be so sure about me being wrong. They would say, “Oh no, no, no, you’re wrong.” And then I would have to stop and think.

                           Then I realized, “No, no.” I said, “You must’ve heard that from somebody. And it probably got passed around so many times that it became the truth to them.” So changing some of these common misconceptions, or, like we were talking beforehand, about these water cooler things that get kind of passed around from employee to employee.

                           Because we just don’t know who else to ask besides our fellow coworkers. And sometimes they only know what applies to them, they don’t necessarily know how it might apply to other people.

Micah Shilanski:  And I like to say a lot of this stuff, Tammy, when we’re looking at it, and I tell all of my clients, I say, “At any time, if you kind of question what I’m saying on the federal benefit rules, just ask and I’ll go back to the OPM Handbook and let’s pull it up. Let’s make sure I’m correct in these.”

                           Now, good news. The vast majority of the time we are, right? Because we’ve been doing this a while. But it’s always good to push back. And that’s what I would encourage people to do is, if Bob, if Sue, if somebody at the water cooler says A, B and C, don’t take it for gospel. Go find it in the retirement handbook.

                           Now, not just Bob and Sue. Also the HR people as well, because we’re all human. We can all make mistakes. And Tammy and I, you and I have the benefit of thinking benefits every single day. And quite frankly, I have the benefit of working with you, so I can reach out to you with questions and go through it. But it’s always important to have good resources that you know is the actual rules.

Tammy Flanagan:        Yes. I mean, we all learn new things every day. We all say things that could be wrong or misconstrued. So I always start my presentations when I’m teaching a classroom, I’ll say, “You know what, there’s nothing I’m going to say that you can’t ask me about for a reference.”

                           I said, “No matter who’s telling you something about retirement, if they can’t provide you a reference, don’t take it too seriously. Because it could just be hearsay. It could be something that’s been passed around.”

                           That’s the one nice thing about this area of retirement benefits. It either is, or it isn’t. There’s not a lot of gray areas where it might be, or it could be. It’s usually, yes it is, or no it isn’t. Or, yes, you have to pay for it, or no you don’t. So there’s a lot of that pretty much black and white to this, not the gray.

Micah Shilanski:  Amen. Amen. And those gray areas are a little fun, but they’re very, very rare. So don’t worry about those. All right.

                           Tammy, let’s jump into this and I always love to start reviewing the rules whenever we get into the retirement. Because this is where a lot of misconceptions can take place. And why the rules may seem simple, where people have this problem, and it came up with a question that I had. Again, I’m going to blame this on a water cooler.

                           Is, I was talking with someone, and they go, “Hey, well, I only need 10 years in order to retire.” And that could be correct. That also could be incorrect, right?

                           So I was like, “Well, tell me more about that.” “Well, my buddy’s retiring and he only needs 10 years, and we’re on the same retirement system, so that means I only need 10 years.” No, that is not a correct statement, right? His buddy is over a certain age, so only needs 10 years service. He is dramatically younger than that, and so the rules are different.

                           It’s not what we don’t know, again, it’s what we think we know that just ain’t so. So Tammy, would you run us through what these rules are?

Tammy Flanagan:        Sure. I was going to say to the audience, if Micah and I were teaching a class, and I was on the first day, I would say “Today, we’re going to learn about when you can retire. And tomorrow when Micah’s here, he’s going to talk to you about when you can afford to retire, which could be a totally different thing.” That reminded me of that when you said about being eligible at 10 years. Yeah, you might be.

                           All right, so the basic rules are… And again, we’re talking about, not only just retirement, but making sure that you’ve run the numbers and you can afford to retire. Just because you’re eligible, most people don’t retire the day they become eligible. They just simply don’t, because they either aren’t ready mentally, or they can’t afford it yet, or they’re not eligible for some other benefit.

                           So keep in mind, this is your first eligibility. When somebody says, “I want an estimate of my retirement, but I don’t know what date to ask for.” Well, the first date you start with is your first eligibility date. When do you meet both the age and the service requirement to be eligible to retire?

                           And then you might want to ask for one that’s more realistic, maybe five years later, or maybe when you turn 62, perhaps. So it all depends. So the first eligibility for most federal employees is when they reach their minimum retirement age.

                           Your minimum retirement age, if you were born in 1970 or later, is age 57. Now, if you were born between 1953 and 1964, it’s 56. So it’s going to be somewhere, for most of our listeners, between 56 and 57.

                           Now, at that age, you’ve got to have at least 30 years of federal service to be eligible for an unreduced immediate benefit. For those people who came into federal service later in life, or maybe you spent a career in the military, you may not have 30 years when you’re 56 or 57. You might be lucky to have 10 years.

                           So Congress in all of their wisdom, came up with MRA plus 10. So MRA plus 10 means, you’re old enough to retire. You have that minimum retirement age, but you don’t have 30 years. You might have 10 or 12 or 15 or 20, but you don’t have 30. So you could collect an immediate benefit with less than 30 years, but there’s a catch. And the catch is, you’re going to suffer a permanent reduction to that benefit.

                           For someone who qualifies for MRA plus 10, as we call it, and doesn’t want that reduction, they have basically two choices. They can either retire and not collect the benefit right away. We call that postponing it. And the longer you postpone it, the less of a reduction you’ll take. In fact, you could wait until you’re 62 and have no reduction. Or you can just stay in government work longer to avoid the reduction, and you can just forget about the whole MRA plus 10.

                           So we have a lot of different choices, and that’s really what complicates FERS so much more than CSRS. We have a lot of moving parts between the three different pieces of TSP, Social Security and FERS. And within FERS, Congress did add this element of flexibility, but it does cause some confusion, I have to admit.

                           Sometimes it’s even hard to explain it, because we talk about somebody who’s going to collect a postponed MRA plus 10, and then we have something else called a deferred retirement, which is when somebody leaves the government before they’re eligible for any immediate benefit. And so they’re going to collect a deferred benefit. That’s usually when they resign before their MRA. In other words, let’s say they were 50 and had 10 years of service, then they would be collecting a deferred benefit.

Micah Shilanski:  And by those two names, right. You’re just looking and say, “Well, postponed, deferred. Therefore they’re synonymous. Therefore they are the same.” And these mean completely different things in retirement.

Tammy Flanagan:        Yeah, different context when it comes to this. So just keep in mind that if you’re not old enough to retire and you’re leaving the government, you’re probably going to collect a deferred retirement when you’re old enough.

                           And the problem with that is, you’re not going to be able to reinstate health benefits or life insurance or get any credit for sick leave. It’s okay. It’s better than nothing. But it’s not ideal.

                           Where if you work until you reach your MRA, even if you don’t have 30 years, even if you only have 10 or 15, at least you left with immediate eligibility. If you postpone that benefit, generally speaking, you can reinstate your health benefits, your life insurance, the unused sick leave credit’s still going to count.

                           So that’s a better option in many cases than if you left early. But everybody has different reasons for leaving. They might be getting that 250,000 a year job offer that’s just too good to refuse. Everything works, just depends on make sure it works for you.

Micah Shilanski:  Yeah. Really getting to know your benefits in your personal situation. But Tammy, I just want to pull out one thing that you said to make sure our listeners attuned to that, right? Under a deferred retirement, means you do not get FEHB, federal health benefits, in retirement. In order to get that, you’d have to go to a postponed retirement.

                           And so when you talk about the differences, again, this is a huge difference. It’s not just, “When is my pension going to start?” It’s what are all the benefits that you’re going to get? And there are times where it may make sense to say, “Hey, I don’t need FEHB in retirement because I’m doing this amazing job and I’m going to make so much money I can pay for it.”

                           Great, but there’s also times to look at it and say, “You know what? Maybe I should put up with this for a little bit longer to make sure I get health insurance into retirement.” So just know your options.

Tammy Flanagan:        Yeah, especially for someone who wants to stop working before they’re age 65. Do you ever go out and try to price health insurance if you don’t have employer coverage?

                           So when we talk about continuing federal health benefits into retirement, I don’t know that everybody understands what a valuable benefit that is when the government’s contributing about three-fourths of the cost of the insurance, and you now have it for life for you and your spouse and your dependent children until they’re 26.

                           I mean, that’s just an incredible benefit that staying until your MRA can give you that option. Where if you leave early, keep in mind that you might be locking yourself into a career that’s going to last until you’re at least 65.

                           Which ask me, I’m 63. I don’t think that’s such a bad thing, but just make sure you understand that that is something you’ve got to consider.

Micah Shilanski:  You love what you do, which makes it really nice.

Tammy Flanagan:        I do. I love it. Because I do have lifetime health insurance through my husband, but there’s something to be said for working when you feel like it’s something you enjoy doing.

Micah Shilanski:  So I guess the big key behind this, Tammy, that I’m looking at, is almost one of the keys to success in my opinion. But it’s be intentional with your planning. And this is why mid-career is so important, because we can evaluate our options.

                           And when I’m working, and Tammy, I know you do the same thing, when we’re working with mid-career people, it’s not, Great. You only have one option. You have several things you can do. Let’s be intentional about your choices though. Where do you want to be at 55 at 57 at 60, at 65, right? What does that look like? And what is the best way to set that up?

                           And Tammy, one easy example that I know you and I run into frequently is, I get retirees that say, “Great, Micah. As soon as I retire, I want to…” Pick an example. Pay off the house. I want to do a world trip around the world. I want to buy an RV. I want to do something.

                           But all of those things… It’s really funny Tammy. They generally add up to $100,000. Whatever those things are, it’s normally 100 grand.

Tammy Flanagan:        I know you always hear somebody saying, “What if I took out 100,000 from my Thrift? Is that a bad thing to do? Or is that doable?”

Micah Shilanski:  Yeah, that’s right. It’s always that $100,000. Now that may or may not be a good thing. Can you afford to do that? This is an interesting question. One of the things that people forget about is just the taxes on that.

                           Because on the TSP, and I’m going to pick on it and say most of your money is probably in pre-tax, because that’s the vast majority of TSP money is in pre-tax. That means when you pull out that $100,000, you have to pay taxes on that 100 grand.

                           So one of the things that’s really important about mid-career, is saying, “Well, great. I know maybe in the future at some time, I’m going to want a large lump sum of money. Maybe I should create some options. Maybe I should have some money in a Roth account.” Maybe you just need a Roth IRA because it adds a little bit more flexibilities in how you can pull some money out. So maybe you look at those options.

                           Maybe you look at putting money in a non-retirement account, because you don’t want strings attached to the money. You don’t want to say, “Hey, I got to be 59 and a half, or I got to keep it for five years, or any of those rules. I don’t want to deal with those.” Maybe you open a non-retirement account to save or invest money. And now that’s going to be your $100,000.

                           So again, being intentional with where our money goes is really, really important, especially mid-career. Keeping your head down, throwing as much as you can in the TSP is not a bad plan, but it could be a better plan to pick your head up every now and again and say, “Hey, am I on the right track? Am I making the best of long-term tax decisions?”

Tammy Flanagan:        Right. Yeah, there’s always options, isn’t there? Whether it’s, “Do I take a 15-year mortgage? A 30-year mortgage? Do I pay it off early? Do I keep the mortgage in retirement?” Every decision you make with large sums of money, whether it’s buying a house, buying a car, buying an RV to travel in retirement, they all require considering options. What are the pros and cons?

                           Even the option of, “Should I stay in federal service until I can retire? Should I leave and work in the private sector?” Every time you hit that fork in the road, it really pays to stop and pause and make yourself a list. What are the benefits? What are the disadvantages? Because sometimes when the grass is greener on the other side, we’re giving up something to get that.

Micah Shilanski:  Yeah. And a lot of times when we’re making those lists, there’s two columns to that. Not just the pros and the cons, but there’s the subjective and objective, right? Subjective meaning feelings, right? How I’m excited about this new job, making a change, moving, et cetera.

                           But then there’s the objective side, which what can we quantify? And that’s the world that I like to live in, because I just like math. But we get to quantify these things and say, “Great. If I moved, what would it cost me? If I took a job change, what would it cost me? If I quit getting federal benefits, or now I have a deferred retirement, which means no health insurance, what does that cost me? What am I giving up?”

                           And this doesn’t mean you have to stay an indentured servant, or stay a federal employee for 30 years. A, that’s not really a bad thing, but you don’t have to do that. But know what your options are, because options make you free.

Tammy Flanagan:        Yeah. Yeah, and I think too, when somebody says to me that, “Hey, I’ve got this great job offer. I’m going to make 10% greater salary than I’m making in the government.” I’m like, “You might want to make more than 10% more, because you’re going to need to save to make up for the fact you’re losing the health benefits for life, or that company may not even contribute to your health insurance.” So look at that total compensation.

                           I love it when employees have that statement of their total federal compensation. Compare that to what your total compensation is going to be in that next career.

                           You know, sometimes it might make sense to retire from the government first, and make that be your second career. So now you’ve locked in your lifetime health insurance. You’ve got a basic pension benefit, maybe not enough to live on, but supplementing that with additional savings could be the trick.

                           So yeah, it’s really hard, what we’re doing today to try to quantify this for all different decisions, but it does make sense to really look at it and analyze it before you make that leap.

Micah Shilanski:  You know, and I have a lot of clients, nurses actually, that move back and become a direct hire. Which is different than a rehired annuitant in this case.

                           But they retire from the feds, and when we’re first chatting, they’re like, “Well, Micah, all they’re going to pay me as my hourly rate when I become a direct hire.” I’m like, “No, no, no, no. Because you don’t have all those beautiful federal benefits. You have them under the retirement category, but this is different under a direct hire.”

                           And so now when they’re going and looking for their jobs, et cetera, you really have to get paid more, and as a direct hire, you can. So all of a sudden they can get a lot more in their paycheck because they’ve already checked the box for all of their retirement benefits. They have the health insurance, they have everything else covered under the retiree side. So again, knowing your options is really powerful.

Tammy Flanagan:        That’s right.

Micah Shilanski:  Perfect. Some things to be thinking about before we want to trigger into some action items, because this podcast is all about action items and about you planning your retirement.

                           But before we get into that, make a plan. And maybe this turns into an action item. But make a plan for when you’re going to start reviewing your things. How much you’re putting into TSP. How much you’re putting into Roth. How much you’re putting into non-retirement.

                           Now my own personal opinion, I like diversification. That doesn’t just mean owning different things in your investments, that also means putting your money in different tax places as well. A lot of times, Tammy, you and I chat about this, federal retirees end up having a tax problem at retirement time because they’ve deferred all of their retirement savings.

                           That means they’ve got a big pre-tax TSP. Which is great. I love having it for them, right? But it means there’s a big tax bill. They have a pension which is taxable. Social Security, which is taxable.

                           Well, awesome. If you’re mid-career, guess what? You get to change that for your favor. So you might want to look at that diversifying between some Roth money or maybe some non-retirement money is also a great way to save.

Tammy Flanagan:        Yup. Yeah, and the TSP, I get the question sometimes where people aren’t clear about how much you can save in the Roth TSP. You can save the entire elective deferral limit, or you can split it and say, “I want to put some money in the traditional, some in the Roth.”

                           Keep in mind that all of your matching agency money, all of the automatic contributions from the agency, that all goes in the pre-tax bucket. So you will pay tax on that money when you draw it out. But your money, you can split it up. You can say, “I’ll take some portion of it and put it in the Roth TSP, some portion of it in the pre-tax traditional TSP.” So you do have some flexibility.

                           And like you mentioned a few minutes ago, Micah, you can also have an IRA. So if you have money you don’t know what to do with, nothing wrong with setting up an IRA in addition to the Thrift, that’s another whole level of where you can save for the future. Because I’ve never met anyone yet who says they saved too much for their retirement. Sometimes it’s the opposite, but usually people are not upset about saving too much money.

Micah Shilanski:  Amen. All right, so this podcast is all about action items. So we want to give you things that you can do this week to improve your success for retirement.

                           So Tammy, I want to kick this off, and I’m going to say, number one, know your plan for retirement. What’s your plan? Not what’s Bob’s or Sue’s or your coworkers’ and what they’re going to do. Neat to chit chat about, but know what you’re going to do and get that written out on one page.

                           I don’t want some elaborate 72 page scenarios, but what generally is your plan? How much are you going to spend? Where do you want to be? What age do you want to retire? What are your goals that you got to hit in order to get there? These are really, really important things.

Tammy Flanagan:        Yeah, and sometimes in order to have that plan, you have to be able to do some projections. So how do we project these numbers?

                           Well, Social Security makes it easy. You set up a my Social Security account, and you can plug in a couple of different ages and see what that benefit’s going to look like.

                           And yes, it will be there. I don’t know if it’ll be exactly the way it is today, but you will get something from that benefit. I can just about guarantee it.

                           Also, you can project your TSP account. You can use the simple calculators that are on tsp.gov. And in many cases, your agency’s payroll office will give you some projections of your FERS basic benefit.

                           And even if they don’t, that’s a pretty easy one to project. I think we’ve covered that in prior podcasts about how that benefit is computed. Basically, it’s your salary times your service times 1%, or if you’re lucky, 1.1%, if you work until you’re 62 with 20 years.

                           So project those numbers so you can kind of see what those pieces of the puzzle are going to look like, so you see how much income you’re going to have once you stop working. What is going to flow for the rest of your life? What’s going to get cost of living adjustments. What is more finite, like your TSP savings. So make sure you have a plan for distributing that over your lifetime.

Micah Shilanski:  I love it. And Tammy, I’m going to follow that one up as well with, know what the rules are that affect your retirement, right? So it’s one, have the plan, which is outstanding. But then you need to go to someone else. And this is like editing your own work.

                           You can’t edit what you’ve written, or at least I can’t. I mentally correct all of my mistakes, and it’s perfect, until I click that send button. Then instantly I see all of my typos. It’s amazing how that one works.

Tammy Flanagan:        Yup.

Micah Shilanski:  But this is the same as your plan. You need to bring it to someone else to evaluate. Someone that is dispassionate about your situation. So what does that mean? It can’t be a spouse. It can’t be a loved one, et cetera.

                           You’ve got to have someone that’s a little bit dispassionate about it. And someone that knows and understands these rules. No, this isn’t trying to be a shameless plug for us. Find someone that understands these rules and make sure what you’re planning on doing works within retirement rules.

                           I can’t tell you how many federal employees, they have this great plan to retire, but it doesn’t meet these basic rules we chatted about earlier and they’re not going to get the retirement they thought, because they don’t have enough creditable service for retirement. Maybe it’s they worked for the government for 30 years, but the first 10 were intermittent, and aren’t going to count the way that they thought it was. So these are really important things to understand.

Tammy Flanagan:        Yup. And I would probably end up by saying, don’t chisel that plan in granite, because life happens. There’s going to be forks in the road.

                           So reevaluate your plan, I’d say at least every five years. Check to make sure that you’re still on track with savings. Check to make sure that the market didn’t have a downturn and it’s changed your strategy a little bit, perhaps, for financial planning.

                           Be flexible and realize, give yourself a break that things do happen. There could be a marriage. There could be a divorce. There could even be a death in the family that changes things.

                           So be flexible and keep reevaluating. Eventually you’ll get to that goal and hopefully live happily ever after in your life after retirement.

Micah Shilanski:  I love it. And of course the last action item, which may or may not be the most important, it may or may not have a direct impact on your retirement. May not, but you’re welcome to give it a shot: share this with a friend and a coworker. This continues to rapidly grow because of you, our listeners sharing this and growing this.

                           And you know what? Tammy and I’s mission behind this is the more information that we can put out, the more good information that we can put out about federal employee retirement benefits, helps everyone have a better retirement. So help us in that mission, help us in that goal. And until next time, happy planning.