Now that we’re in February, we’re going to call this episode “the love episode”—and there’s no love like survivor benefits. So today, Micah and Tammy discuss important planning decisions when it comes to retiring as a couple and planning for post-retirement transitions. You will also get a great look into survivor benefits, including what you should be looking out for and thinking about to allow that process to go smoothly.
Listen in as Micah shares what a successful retirement looks like and how he knows when his clients are going to be successful at it. Tammy also dives into the importance of the stages of life and planning for the next one before you get there. You’ll learn about the key areas where you and your spouse need to sit down and do some thinking, dreaming, and planning now in order to achieve that successful retirement.
What We Cover:
- Things you should be thinking about as you retire as a couple.
- How the planning stages for retirement should go.
- How to define a successful retirement.
- Why retiring as a couple is a team effort.
- What changes when both spouses are federal employees.
- Why you need to know where you’re at with retirement dates and cash flow.
- Common issues people run into when it comes to retirement planning.
Resources for this Episode:
Ideas Worth Sharing:
I say that if you can’t be a federal employee, just marry one and you’ll have all the same benefits. – Tammy Flanagan Click To Tweet
This isn’t rocking chair retirement where you sit on the porch and live life until the end. No, you’re going out, you’re doing things – maybe there’s a second career or going on adventures you want and giving back to charities. – Micah Shilanski Click To Tweet
Cash flow is the heartbeat of retirement because it really allows us to do what we want to do. – Micah Shilanski Click To Tweet
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Full Episode Transcript
With Your Hosts
Micah Shilanski and Tammy Flanagan
You can spend. You can save. What is the right thing to do? Federal benefits, 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 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. How are you doing today?
Micah Shilanski: Doing really good. Excited about our love episode because it’s airing in February, Valentine’s Day. Survivor benefits, no love like survivor benefits. Which is great.
Tammy Flanagan: I know. I keep trying to think of things while we’re both living to talk about, but somehow everything kind of digresses back to the survivor election. We’ll run with that, right?
Micah Shilanski: Yeah. Tammy, we can talk about more than just survivor benefits in this case. We can talk about retiring as a couple. What are some things that you should really be thinking about? How are the planning stages going to go? These are really important discussions that you need to have, because so often in our federal career, and, Tammy, let me know when you’re talking to people if it’s different, but you become a federal employee, you’re only going to stay for a couple years. 30 plus years later, you’re still a federal employee and your spouse may have had another career and you’re kind of two ships passing in the night. Now all of a sudden you’re going to retire and there’s so many new conversations to have. You might need to rekindle a little bit of relationship for one because you were not used to spending so much time together. We need to think about that. We need to think about the finance side. Then you’re going to think about the moving and grandkids, all those other things that come about in retirement. It’s all about retiring together.
Tammy Flanagan: Yeah. It’s not only financial, it’s personal as well as financial. I always use my version of retirement planning for couples. I say, “If you can’t be a federal employee, just marry one and you’ll have all the same benefits and get to enjoy the retirement benefit without having to do the 35 years of work.
Micah Shilanski: Well, 35 years of another work, but that’s a different story.
Tammy Flanagan: Yeah. My work is fun though. I like what I do. Perfect. My husband was counting down the days to his retirement. Even though he enjoyed his career, he still was happy to be retired. Where I’m still working and I love it. I don’t call it work.
Micah Shilanski: I know. It is a blessing when you can do things that you love. You know what? For your retirement, maybe not for your retirement, Tammy, but for our listeners’ retirement, maybe that’s what it is. Maybe it’s transitioning to another line of work that you absolutely love. You know what? “Federal service has been great. I got my benefits. I’m going to put that on a shelf and now I’m going to go off and do something else.” Which can be a beautiful thing.
Tammy Flanagan: Yeah. I mean, you have to do something. You’ve got 24 hours in the day even once you’re retired. Although from what I hear, people do fill up those 24 hours with many, many things, and most of them aren’t for compensation. But there are a lot of us who do have second careers or careers that last longer than most.
Micah Shilanski: Tammy, I always know with my clients if they’re going to have a successful retirement. Now I’m defining successful retirement as having money to do the things you want to do, having a good health to do those things, and living a long happy life. That’s how we’re going to define successful for right now. I always know clients are going to have that once they come to me 10 to 12 months after retirement and be like, “Micah, I am so busy, I have no idea how I had a job before.” That’s always a good sign because this isn’t rocking chair retirement, where you’re going to sit down on the porch and on your rocking chair and kind of live life until the end. No. You’re going out. You’re doing things. You’re engaging. Maybe it’s that second career. Maybe it’s the adventures you want. Maybe you’re giving back to charity. There’s so many amazing things you can do.
Tammy Flanagan: Yeah. There’s always those decades, I call them, of life where there’s really great decades and there’s some that are maybe a little more challenging. I know for some people, when they first retire, it might be to take on a caregiving role, whether it’s a spouse or a parent who needs help. But keep in mind, that once that role has been completed, then the next decade might be a better one. I know for some people, I want to cover kind of both sides of the coin where some people are not necessarily looking forward to retirement, but they’re kind of forced into it. There’s another thing that we need to talk about at some point. I think in a future podcast, we’ll cover the caregiving role as well. But today, let’s focus on the fun side of really looking forward to a happy, successful life after retirement that is what we all think of as retirement life.
Micah Shilanski: I love it. All right. Let’s jump into this. The first thing is, let’s talk about some planning points that we should be thinking about when we’re thinking about retiring with our spouse. Yes, it may be your federal career, but this is a team effort that you really have to think about. The reason we bring this up is, rules are different. There are different rules for federal employees versus non-federal employees about retirement accounts. When your pension starts, when it goes up, when it goes down? How are taxes going to be applied? How can you access your TSP? These are not the same in the civilian world. Even if that job has a pension, which is very, very rare by the way, but even if your spouse at a civilian job has a pension, that does not mean it works the same as the federal system. We really got to have some good planning together.
Tammy Flanagan: That’s for sure. I know one of the things we want to touch on today is, what if you’re married to another federal employee, how is that-
Micah Shilanski: Good point.
Tammy Flanagan: … different from having a spouse who works in the private sector or maybe a spouse who doesn’t work outside the home? There’s a lot of different ways to look at planning for spouses and retirement planning in general.
Micah Shilanski: No, I love it. All right. One of the first things that I always like to find out with my clients, Tammy, is when are they thinking about retiring? Now, if retiring seems like too big of a word, change it to financial independence. When do you want to be in the position where you don’t have to work anymore? That’s kind of the big question. I always want to find out for both husband and wife, where are you at with this? Because this is super important. What I’m looking for behind the scenes, if you could pull back the curtain, is I’m looking to see how close their dates are. Because what I’ve known in my experience, is the further apart of their dates, the more marital issues we actually might run into.
If all a sudden … Guys, I’m going to pick on you, so sorry about that. You retire early for whatever excuse, reason, blah, blah, blah, that you insert, you retire early, now all of a sudden you’re going off and doing a bunch of fun things while your wife has to go out and work every day because she’s not eligible, this can create a little bit of marital conflict. These are things to be aware of to say, “Okay, great. What do we need to do from a planning perspective to make sure we still have a good marital happiness, even though one spouse is retiring early?”
Tammy Flanagan: That’s right. I think also whenever one spouse is a different age than another one, things like social security claiming can change, medicare age can change. Even spousal benefits, elections and choices and decisions we make can be a little different when there is a 10 or even 15 or more year age difference between the spouses.
Micah Shilanski: Then also think about cashflow. Cashflow is the heartbeat of retirement because it really allows us to do the things we want to do. If one spouse, and I’m going to pick on the guy who’s going to retire early in this example, and the lady still has a another job outside of federal service, what does cash look like now? Also, what is cashflow going to look like when that job goes away? When all of a sudden her paycheck goes away because she doesn’t have a pension, how are we going to replace that income coming in? Is it going to be the same? Is it going to be less? These are things that we really need to focus on while you’re both still working.
Tammy Flanagan: Another thing I come across a lot of times is when federal employees are really focused on the benefits of retirement, meaning that I know if I’m a law enforcement officer, I can retire at 50 with 20 years or any age with 25 years. Or other federal employees who can retire as early as 57 with 30 years. I find people focus on that and think that is their stop work date. Sometimes it’s just not possible to live a long, comfortable, happy, healthy, lucrative retirement if you only have 30 years or 20 years of law enforcement. You really have to do some calculation, some financial planning to make sure that you’re set up if that’s really what you’re planning to do. It’s a lot better if you can think about, “Well, what if I get to that milestone where I’m eligible to retire?” But let’s look ahead to see how much different it’s going to look two years down the road or five years down the road.
I had a really good question today came in my email box from someone who’s 42 years old. They’re still, what, 15 years from 57. They already have, I think she or he, I don’t know if it’s a she or a he, said they had 20 years of service. By the time they’re 57, they’ll have of 37 years. The question was, what difference or how much difference would it make if I stayed until I’m 62. This is the best time to think about that. You’re still 15 years from the goal and you still have some choices to make. I said, “Wait until you’re about five years out and then revisit that question one more time to see if 57 still sounds reasonable or 62 might be that much better.” Because it’s still a young age.
Micah Shilanski: It’s very young. This is a little bit of, well, I don’t want to say myth, maybe that’s not the right word here, but a myth in the federal employee community that does not really exist in the private sector. If you go to the private sector and talk about retiring at 50, 55 and 60, Tammy’s laughing, that’s not the age. It’s 65, 70 that they’re thinking about retirement age. This early retirement, or once you hit retirement numbers and you’re done, then that again is something unique about our federal service.
Tammy Flanagan: It really is.
Micah Shilanski: Tammy, the other thing I was thinking about, when you had said that had that younger person that contacted you and let’s just say they’re 37 and going through this, one of the things that I love to do with the younger federal employees that are putting these together is to say, “Great. If I wanted to retire at 57 versus 62 …” If you’re in that same position, it’s great to say, “okay, what’s the difference in my pension, et cetera?” But another fun question, since you’re still 15 years out, how much more would you have to save in your TSP, save in your Roth IRA to have that same amount, but retire at 57? Is this a savings question versus a time question? Tammy, as you pointed out, because you’re 15 years out, you have time to answer that question. If I get that question one year from retirement, sorry, you’re not going to save that much to make up five years of earnings in one year.
Tammy Flanagan: But 15 years you could do wonders.
Micah Shilanski: It’s amazing what you could do. All right. Perfect. Age is really, really important as we’re planning for retirement. The other thing about planning your spouse’s retirement is the age that’s going to retire. Let’s say you both retire at the same time, but one spouse is 60 and one is 57. These are different rules. We’re retiring under. Why? Because how are we going to access money to live on? What are the rules for IRA accounts? When can we safely access IRA accounts without a 10% penalty. A few rules, basically it’s 59 and a half is when you can access your IRA money. Yeah, there’s some earlier options that you can do. They get complicated. I don’t really recommend them. So knowing the ages of when you’re going to retire and whose funds are you going to use first. I generally pick on the older spouse. We’re going to use the older spouse’s retirement accounts first, normally for a couple of reasons. Number one, they generally have access to it.
Again, if I take a 60 year old and 57 year old, the 60 year old has access to their retirement accounts without a 10% penalty, without any complex planning. That makes a ton more sense to access, so that’s going to be number one. The second thing is RMDs, required minimum distributions. I want to start doing that RMD planning, and it affects the oldest spouse first, because they’re the first ones that are going to reach 72. These are some things you want to think about. Now, emotionally, Tammy, some things that come up with our clients is, let’s take Bob and Sue and Bob is 60 years old and Sue is 57 and they retire, and Bob’s like, “Well, hold on a second. How come we got to spend all of my money in order so that we can retire?” All of a sudden we get to territorial.
It was our retirement plan a second ago, but once we start saying, nope, we’re going to live off Bob’s IRA and we’re going to deplete that by the time he’s 72, Bob starts freaking out about it and says, “How come we’re spending all of my money?” This an okay emotional response because money is emotional. That’s why you got to have these conversations and say, “Gary, what is the plan?”
Tammy Flanagan: I run into that sometimes when we have a conversation with couples about social security because I generally tell the older and sometimes higher income, depending on it, you have to kind of look at it both ways to see who’s older and higher income or if there’s a change, but anyway, to tell that spouse to possibly think about delaying their social security claiming until they’re 70. But the younger spouse and possibly less income spouse taking it earlier. Sometimes you run into a little pushback on that saying, “Well, wait a second. Why do I get the higher benefit and my spouse is going to go ahead and take theirs right now? How is that going to work out equally for us later on?”
I said, “Well, the benefit behind that is to allow that larger benefit to grow to age 70. So when there’s two of you, you’re doing great because now you have one social security check that’s been coming in all along. The other one is going to be a very large amount. But then when there’s one of you, no matter which one of you survives, the surviving spouse will take over that higher benefit.” You’re doing some pre-planning for the future by making that strategic move with your social security. But sometimes, it’s hard to wait. You have sometimes a spouse who says, “Well, I don’t want to wait until I’m 70.” But if you can show them—
Micah Shilanski: “What if I die?” Yeah.
Tammy Flanagan: Yeah. “What if I die?” Well, then you don’t need the money.
Micah Shilanski: That’s exactly what I tell them. Well, then you don’t need the money. It doesn’t matter.
Tammy Flanagan: That’s right.
Micah Shilanski: Tammy, you bring up such a great point that we need to think about, is those survivor benefits that are there. We have to keep in mind because we get on this autopilot, and the autopilot could be, Hey, we have two jobs. We have two W-2 checks. The first and 15th or every two weeks we’re getting money in our bank account, so every week you’re getting a paycheck coming in virtually. Then we move to retirement and says, “Okay, now we’re only getting paid once a month.” Maybe twice a month with how the setup is going to be. That was a difference. Now God forbid that one of you passes away, and it’s going to happen, what income are you going to have coming in? It’s not the same. Often, especially early in retirement, we look at our retirement nest egg and say, “Oh my goodness, I’ve saved over a million dollars.” It almost becomes unfathomable with how much money you have.
Then you’re like, “Well, I can spend extra. I can do more.” Or, Tammy, God forbid the worst thing that I hate to see happen is, this is going to sound crazy, but you have a client that retires, have a little bit more money than they expected. That’s always great. They retire, and the next year the market goes gangbusters. They earn 20% in their retirement accounts. Now all of a sudden in their mind, they set in and says, “Oh my gosh, I can take out $200,000 and I’m never going to run out of money and I can do it every year.” We get this preset that’s in there, but we really need to be thinking about the future, whether that’s the future in distributions or that’s the future in the survivor benefits. When one of us dies, what’s coming in? What’s taking care of the survivor?
Tammy Flanagan: This is kind of a hard time we’re living in because we’ve been on this role of good returns, great, fantastic returns since what, 2009. After the big downfall, everything kind of went up and up and up, and very little in the way of downfall. There have been some downfalls, but not that many, so our returns, a lot of people think that 20%, 30% returns are commonplace for every year. We can just count on that throughout the next 30 years. I hate to say, I’ve lived long enough to know that’s not the case.
Micah Shilanski: To think about that, we were at 6,300 on the Dow, and I’m not sure of my numbers, I’m not looking at them so I’m sure they’re going to be slightly off, but we’re at 63,000 on the Dow and it’s gone up to 36,000. From 6,300 to 36,000 in 11 years, or whatever the time period is, it’s just crazy where we’ve seen that growth. Tammy, as you said, we’re not going to continue to see this. At some point it’s going to slow down, so you have to be looking at a longer horizon.
Tammy Flanagan: Right. Yeah. That’s the one thing I worry sometimes with clients that are 100% in the stock market and they’re 72 years old because they’ve enjoyed this long run of good returns. I say, “As long as you can stick with it and you don’t need all that money right now …” Like you said, Micah, it’s not always about the age, it’s about when you’re going to be using that money. I guess if you’re not living on it, you’re going to leave it behind as a legacy, then you could still afford to be that aggressive. But a lot of people just assume that’s going to continue. That’s a good fair warning to throw out there.
Micah Shilanski: It is. Tammy, let’s transition just a little bit and let’s talk about our dual federal employees, our tandem federal employees. If you’re a federal employee married to another federal employee, there’s some unique parts that are kind of unique just to you guys having two sets of federal benefits, right?
Tammy Flanagan: Absolutely. I know one of the big areas that we can talk a lot about is health insurance. Because we have a tandem couple, if one spouse is, or they’re both federal employees and they have children, one spouse is going to carry self and family coverage. That just makes sense because no sense in having one self-only and then one self and family. But once the kids are off the payroll, then does it make sense to switch to two self-only plans or should you stay self plus one? That all depends because sometimes one spouse will retire before the other one. Maybe a few years before the other spouse. In those situations, I say, keep the self plus one plan, but the spouse who’s going to continue working, carry the coverage. The reason behind that is because they don’t have to pay tax on the premiums where once you’re retired, unfortunately, the IRS doesn’t give you that same break. It seems like it would make sense that the government does give you that break, but they don’t.
Micah Shilanski: We don’t apply logic to government processes. We’d be a little …
Tammy Flanagan: Yeah. I think that was right around 9/11 when that rule had changed for employees. They were just getting around the legislation for retirees and 9/11 happened and everything kind of focused on the tragedy. But anyway, in those cases, I always tell the spouse who’s going to continue to work to carry the insurance. But once they’re both retired, then switch off to two self-only plans, because in many cases you’ll save some money. Plus when one spouse becomes eligible for Medicare, you can choose a plan that really works well with Medicare while the other spouse maybe has a couple of years left to go.
Micah Shilanski: Tammy, let’s chat about that real quick because I know one of the questions that I get whenever I bring this up to clients it’s like, again, Bob and Sue, Bob’s going to retire early, Sue, still going to work in this example. So telling Sue, “Hey, move to self plus one because it’s better.” Bob’s concern, because he’s been told if you don’t have health insurance at retirement time, you can’t keep health, and you got to keep it for five years prior to retirement. Bob’s concern is, “Micah, I can’t drop my coverage because now I won’t have health insurance into retirement.” Which isn’t exactly true.
Tammy Flanagan: That’s true, that’s not true. That’s true that that’s not true. Five years of coverage means five years … Think of it like an umbrella of Federal Employees Health Benefits. As long as you’re under the FEHB umbrella, it doesn’t matter if you’re paying for it, your spouse is paying for it, you’re each paying for self-only, as long as your health insurance has been an FEHB plan, and again, it doesn’t matter if you’re paying the premiums or your spouse is paying the premiums, you are still covered under that five year test. The same goes for switching plans within the health benefit plan. In other words, you could have Blue Cross this year, GEHA next year, and then you switch over to Aetna, you still have five years of FEHB.
The main reason that rule is there is that the government didn’t want somebody to have coverage under their spouse in the private sector who had free health insurance because that private sector company doesn’t offer that same coverage to their retirees, and then they come and jump back into the federal plan once they’re retired. That wouldn’t work. That would make everybody’s premium so much higher. Instead, they said, “We want you to commit while you’re still a young, healthy employee, and then we’ll let you keep that wonderful benefit with the government contribution to it in your years of retirement life.” Because retirees and active employees pay the same share of the premium for their health benefit plan. That really does make sense to have that rule.
Micah Shilanski: It does, and it’s a great benefit that’s there. I love your thought of the umbrella. As long as you’re in that FEHB umbrella for that five years, then you’re going to be covered. It works out really nice.
Tammy Flanagan: Yeah. I guess I should add one last thing for our military folks, because if they have TRICARE that is still considered part of the five years. But the catch is, you have to be in the federal civilian health plan on the date of retirement. When we just got through open season back in December and people might have jumped into federal plan getting ready to retire this year in 2022, as long as they’re in the federal plan, it doesn’t matter if they had TRICARE for the last four years, they can still carry that FEHB plan into retirement using TRICARE coverage as part of the five years.
Micah Shilanski: I love it. Now what happens? Let’s say they opted for that this last year, this last open season, which for November of 2021, it goes into effect in 2022. Now in this year, they’re under FEHB. If they want to retire in March or they want to retire in February or December, does that matter? Do they have to be in it for a year? Do they have to be in it for any period of time? Again, just military folks that were under TRICARE.
Tammy Flanagan: Right. No. They just have to be covered on the date of retirement. They could have technically retired January 2nd, that coverage took effect. They could have left that day. Now of course they would’ve forfeited a month of retirement, but they would’ve still had lifetime federal health benefits coverage.
Micah Shilanski: It’s such a great point. January 2nd, not January 1st. Because if you retired on January 1st and your benefits weren’t into effect, you wouldn’t be covered under FEHB. Is that right?
Tammy Flanagan: That’s right. Because this year, the leave year, it always starts on a Sunday for most federal employees. I think the only exception is postal workers. Sunday was the first day of the 2022 leave year, as they call it.
Micah Shilanski: Okay. Super important to know these rules and know these benefits. I guess on the military side, Tammy, can they change later? If they’re in FEHB in retirement time, then they want to go back to TRICARE, they want to do something else, what are their options they have? Again, only for military with TRICARE.
Tammy Flanagan: Right? When somebody retires with FEHB who has always used TRICARE, because, Hey, what the heck? TRICARE is health insurance and it’s very good health insurance in most cases. you’re retired with the FEHB coverage, if you really don’t need it, then you can suspend it. That’s not the same as canceling it. People who have TRICARE are eligible to suspend their FEHB. Which means, it’s kind of hang in there. You’re not paying premiums. You’re not covered by it, but it’s still there. In an upcoming open season, if something were to happen with TRICARE, you were to move someplace where TRICARE didn’t work as well as it does now, or whatever the case might be, you could cancel the suspension and re-enroll in FEHB during any upcoming open season. Suspending it is only open to people with TRICARE and a few other exceptions like with Medicare and somebody who might join the Peace Corps after retirement and go under their health plan.
Micah Shilanski: Such an interesting facet of the benefits because we have so many civilian federal employees that have military service and covered under TRICARE. This is a huge benefit. Now, you might be looking at it and saying, “You know what? It really doesn’t affect me. I have TRICARE. I like TRICARE.” I would say, “Hey, look, you like it today. But in your experience working as a federal employee, civilian or military, has the government ever changed a program that you liked at one point in time but now you don’t like?” Of course that answer is yes. Okay, great. Well think about that like TRICARE. We like it today and it’s a great coverage and I’m not knocking it, but I don’t know what it’s going to be like in the next 20 years.
If I can give you more flexibility, if we can give you more options of saying, “Hey, for the last year of retirement, the last 11 months, the last …” Whatever that time period is, “go pay more for health insurance.” Yes, I know it’s double coverage, but now all through retirement, you have flexibility that if TRICARE ever changes or you move or something happens you can jump into a phenomenal healthcare system, boy, that seems like a pretty good benefit to me.
Tammy Flanagan: Yeah. It never hurts to keep your options open when it comes to health insurance plans and choices, because this is such an area that is so high cost right now. It’s so subject to increases in the future. Even the military health plans, they’re not exempt from many of those changes. I agree with you 100%, having more choices is always in your best interest.
Micah Shilanski: I absolutely love it. Well, Tammy, we’re not going to get too much into the survivor benefit, so we’ll have to make that a part two, but we got a little bit of time left. What if we talk about something kind of unique to, again, sticking with tandem or dual federal employees, a federal employee is married to another federal employee, about their TSP. Now again, talking a little bit about survivor benefits here, they have some unique options available to them if a federal employee passes away and leaves their TSP to their spouse, who’s also a federal employee, right?
Tammy Flanagan: That’s right. You have a federal couple, we’ll start with husband and wife-
Micah Shilanski: That’s easier said.
Tammy Flanagan: … a federal couple. Let’s say the husband passes away, has half a million dollars in his TSP account, the wife is the one who’s inheriting that money, she’s going to have basically two or three options. The first option is to do nothing because the TSP will set up a beneficiary participant account for her so she can keep that money separate from her own TSP account in this spousal survivor benefit account. Only spouses have the option to have that. That’s option one. Option two, is she can transfer that money from her husband’s account, now that he’s passed away, into her own TSP account because now it becomes her money. She can move it into her account and kind of consolidate everything into one place. Then option three is, she can just take that money in the spousal account and transfer to an IRA outside of the TSP altogether. I thought what might be interesting is if we could point out just a few pros and cons about each one of those options. Do you want to start?
Micah Shilanski: Sure. Now, really important, this is only a spousal option that we’re talking about. If you’re a partner, it doesn’t count. Kids don’t count. This is legally married spouses that this is only applies to. This isn’t the TSP rules, this is actually the IRC, Internal Revenue Code, is how this is set up. A couple things come to mind. I give my standard CFP answer if somebody says, “Well, what’s best for me?” It depends. Let’s look at your situation. One is age, Tammy, could be really, really appropriate. I have one client who their spouse passed away and she’s 52, and we had a couple of options. One, we could leave it as his account and make her the inherited beneficiary of that account. Or we could move it to her name. Okay, well, what effect does this have? Let’s take the $500,000.
If we move the $500,000 from his TSP into her TSP, when can she access that money? At retirement or 59 and a half. Now I just tied that money up for seven and a half years or retirement, if that comes at 55 or later, but now I just handcuffed that money. I want to leave it in some type of inherited account would be something I’d look at. Now, an inherited IRA, an inherited TSP, I could argue back and forth from pros and cons of some differences, but I want to leave it in an inherited account because she is under 59 and a half. Why is that important? Well, the IRS is very kind and benevolent and they said, “When you die, we’re going to waive the 10% premature penalty distribution rule.” That means, if you die, your inherited account is not subject to a 10% distribution to your heirs.
The wife can access that 500,000 if we leave it as an inherited account with no 10% penalty. Yep, there’s some taxes on it, but no penalty. This gave her a lot of options. What’s another benefit about this. Does she have to leave it in that type of an account forever? Absolutely not. Once she hits 59 and a half, we’ll probably consolidate accounts and move it into her account. Why? Because now at 59 and a half, it’s just like it’s her money. She has full access to it. And we’ve made life easier with consolidating that account. There are some neat things that you can do. But if I just said, “Hey, it’s easier to put everything in your name.” It probably wouldn’t have been the best planning solution for her.
Tammy Flanagan: Right. When you’re saying to put it into one consolidated account, let’s say it’s an IRA that she decides to consolidate it in an IRA, that doesn’t mean it’s all in one fund in the IRA.
Micah Shilanski: Thank you.
Tammy Flanagan: Within that IRA, she could have 12 different investments because she still wants diversification. Whether she’s working or retired or just managing inherited money, it still needs to be somewhat diversified based on her needs and her future and her horizon.
Micah Shilanski: Thank you for that. The inheritance or I’m sorry, the diversification that we need to see coming is not in how many accounts you have, but, Tammy, as you said, what it’s invested in. I would also argue from the tax status as well, how is it taxed? In the particular case, one of the things we’re doing is, even though she doesn’t need the money from the inherited account, we’re actually taking money out every year. Why? Because I want to choose when she gets to pay the taxes on this. We can’t do a Roth conversion because it’s inherited money, but we can take money out every year and pay taxes on it. Now I get a basis on that. Now we’re diversifying from an investment and a tax perspective. Again, leaving it as an inherited account in this example was very powerful.
Tammy Flanagan: Yes. I guess one thing I can say about whether you put it into an IRA account, which is outside of the TSP or whether she consolidated it with her own TSP money, is when it comes to withdrawing money from the TSP … We said the TSP is kind of like an IRA. It’s a bucket that holds all your money. In the TSP, most of us know there’s five funds. We have the G, F, C, S, and I. But what I don’t like about withdrawing from the TSP is that I can’t tell the TSP I just want to take my G fund money. I want to leave the C, S, and I money alone. I can’t do that.
In some cases, this might be a reason why some people consolidate money outside of the TSP into an IRA, because then you can really have more control over how you withdraw the money, when you withdraw it, and even the liquidity of it, of how easy it is to access the money as well. Something to think about. Not to say there’s anything wrong with the TSP as far as a place to keep your money in retirement, it’s just keeping in mind, flexibility if that’s something that’s important to you.
Micah Shilanski: Really important to understand how these things work. Now, Tammy, let me flip this scenario for you real quick on this as well. We just made an argument for why you’d want to have an inherited account. What’s a reason you wouldn’t want to have an inherited account? Well, let’s say you’re 68 and your spouse is 74 and your spouse passes away. Well, what happens? Well, at 74, or excuse me, at 72, you have to start taking these RMDs, these required minimum distributions. Well, if I leave it in inherited account, I have these weird rules that I am going to have to do with, with RMDs. Versus the spouse transfer it from the inherited account into their own IRA account, now we don’t have to worry about these RMD rules. Again, this is a very age particular question.
Tammy Flanagan: Right. It’s kind of interesting. I wanted to just highlight something, because I think a lot of us don’t understand that there’s such a thing as an inherited or sometimes they’re called a beneficiary IRA where you can take money that you’ve inherited, whether it’s from your spouse or from anybody else who might have passed away and left you money from a retirement account. That’s one type of IRA. But the other type is just an IRA. It’s your IRA. When a spouse dies, you can transfer that money to an inherited IRA, or you can transfer that money to a regular IRA that’s in your name that’s not based on the spouse’s age anymore. Now it’s your IRA. Or if you’re a federal employee or retiree, you can move it to your TSP account. Those are three different places you could transfer that money.
Micah Shilanski: Absolutely. This is where words matter because transfer is the only acceptable term. For one, in our office, it’s the only one really going to use. But spousal IRAs are not eligible for a rollover. What does that mean? If your spouse passes away and you say, “Hey, I want to roll over the money from my spouse’s account into my IRA.” That is a prohibited transaction because of the way a rollover works. The IRS just does not allow that. You really have to be particular and know the right words and say, Tammy, as you said, transfer. This is transferring from an inherited IRA, I’m sorry, from a TSP, IRA, et cetera, into an inherited account, 100% okay. We can do this all day long. But the minute you introduce a rollover, it’s now a prohibited transaction and it comes with some pretty steep penalties.
Tammy Flanagan: To clarify that, if I’m transferring money from my spouses who has passed away, my spouse’s TSP account, I would tell the TSP that I want to take that money from that account and transfer it, which means move it, directly into, whether it’s my IRA, an inherited IRA or my own TSP where I’ll never get the check in hand. Although they won’t send me a check, they’re going to send a check to that custodian of that account. It’s-
Micah Shilanski: One of the first step I say, and, Tammy, you’re 100% correct, the first step I see and actually I had a buddy call me the other day because his wife, father just passed away and rule number one is, don’t do anything. We have a rush to do things when someone dies and there’s really, most of the time, not a time commitment to do things. Number one, don’t make any quick decisions. Number two, and I don’t care if you do this for a profession or not, go get an outside opinion. You’re too emotional, even if you see it or not, to understand everything. Don’t just talk to the custodian. I don’t care if it’s Schwab, TD, Fidelity, TSP, et cetera, they are not licensed in a capacity to give you the advice you need. You need to talk to someone that understands these options because the little differences, like a transfer and rollover, all of a sudden could cost you massive tax implications.
Tammy Flanagan: Yeah. Once it’s done, it’s done. It’s too late. That brings to mind another spousal story, kind of a sad one. It was a friend of mine. Her husband passed away very unexpectedly and he had just bought a truck, a brand new Ford truck, all decked out, what he always had wanted. He had only made three payments on it by the time he passed away. As soon as he died, it was three days later I was riding in the car with her and we were going to do something to do with his passing, and she had a call and she answered the phone. It was the bank that owned the loan on that truck. They either wanted her to pay off the loan immediately, like 24 hours, or they were going to send a tow truck out to repossess the truck. Which I would’ve probably said, “Go ahead and come get the truck. I only made three payments. It’s not even worth what it …”
Micah Shilanski: It’s not on my credit by the way. Yeah.
Tammy Flanagan: But like you said, Micah, she was emotional. This was her husband’s dream truck, so she had them transfer money. Luckily she had that kind of money in her bank account and paid it off. But that’s like you said, you make decisions that you didn’t have a chance to really think about. Most things, you don’t have to make a rush decision. But in that case, they were putting her up against a wall saying, “You’ve got to decide today.”
Micah Shilanski: Yeah. Boy, this is armchair quarterback. I think if my client would’ve got the call, I would’ve called the bank and be like, “Nope, that’s not how this is going to roll down.” I really would’ve pushed back on that one because it’s a death. Yeah, sure, make the payments. We shouldn’t stiff the bank out of the money, but, yeah, you get emotional about those things. Where are we pulling the money from and how are we doing that? Is this really a good decision when you’ve gone through such a traumatic life event and you’re being posed of saying, “Give me money now or I’m going to repo.” That’s just scary. This isn’t something that we deal with on a daily basis because we pay our bills on time. All of that emotional stuff can be pretty traumatic.
Tammy Flanagan: I think part of the issue with that one was that the truck was in his name only. It’s his truck. She didn’t care. She didn’t care if her name was on it. But I wonder if in hindsight it would’ve been better to have it in both names.
Micah Shilanski: Most banks will work with you, work with the spouse as long as payments are being made. Knock on wood, we have never had a client’s car repoed upon death even if it was in one person’s name. We’ve been able to contact the banks, mortgage companies, et cetera. Most of the time we can get to a manager that has a brain and a heart and says, “Look, we’re not trying to stiff you. Let’s make the payments. Let’s work this thing out.” Now, if you were delinquent in payments already, I’m not saying she was, but depending on who you were at in that position, they have the letter of the law, but most of the time you can get to somebody that’s going to work with you.
Tammy Flanagan: Yeah. It seems like they could have just changed the title to her name.
Micah Shilanski: Yeah. There’s 15 things they could have done.
Tammy Flanagan: Other than what they did.
Micah Shilanski: Yes. All right.
Tammy Flanagan: It’s one of those horror stories.
Micah Shilanski: Tammy, let’s get into some action items though because this podcast is all about action items that we want to talk about. I’ll go ahead and kick it off. I’ll say the number one things kind of we started off about, when do you and your spouse want to retire? Make sure you guys are on the same page. That doesn’t mean the same date. That just means the same page. You guys know when this is. This is something you guys should be chatting about.
Tammy Flanagan: Yeah, absolutely. Not only when do you want to retire, but where do you want to retire?
Micah Shilanski: That’s a great one.
Tammy Flanagan: Yeah. There are sometimes when a spouse will say, “What do you mean you want to move to Florida?” I didn’t say that. I was on board, but there are other people who said, “I didn’t realize that until the day we sat down with our financial advisor or our tax planner that that’s what they were planning.” Make sure you’re both on the same page with time and place and so forth. Another action item is to think through some of these decisions that you have to make as a couple, whether it’s electing survivor benefits, claiming social security, keeping health benefits in retirement. All these things can have effects on each one of you separately, but also together as a couple and in the future, when it becomes one of us, instead of two of us.
Micah Shilanski: I love that. The other thing I’m going to throw out there is, how can you sample retirement early? This is really, really important because so often in life we don’t think about everything until we’re actually in that situation. At least that’s what I’m like. You can think about some of it. Once I’m in that situation, now I’m thinking about so many more things. Great. How could I accelerate that? How could I put myself in that mindset that I was actually retired? If I was today, great, if I was retired, what decisions would I be making? What would I be doing? Start flushing out some of these things with your spouse. Whether it’s the location thing, whether it’s what you want to do every single day, whether it’s how you’re going to spend your money, what do those things actually look like to make sure you’re moving together towards retirement?
Tammy Flanagan: Start some of those things before you retire, whether it’s a hobby, whether it’s moving in to a second career, becoming self-employed as a consultant. These are things you can do part-time in the evenings or on the weekends in some cases. Learn that skill or begin that trade or whatever it is that you’re trying to do ahead of time so you’re ready to move right into it. Once the paycheck stops coming, you’re ready to roll into the next phase of your life.
Micah Shilanski: Perfect. Well, awesome guys. Well that is it for this week. Thank you so much for listening in. I think we’re going to have to dive into kind of part two next time because we didn’t get into all the survivor benefits that was there. There’s a lot of stuff to talk about on this topic. But until then, happy planning.
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