When is the right time to retire? And what are the different options as a federal employee? While everyone wants to retire early, the fact...Read More
Today Micah and Tammy are opening up the mailbag to answer your most burning questions about federal retirement. A few people wrote in asking about their retirement dilemmas, from accessing TSP and early retirement to Roth conversions, social security, widow’s benefits, and more.
Listen in as Micah and Tammy share their insight in these areas so you can be prepared and equipped to make the best decisions on your federal retirement plan. You’ll learn why you might want to put off touching your TSP, the formula for figuring out your pension, and what you can start doing today to plan for your future.
You can spend. You can save. What is the right thing to do? Federal benefits, thrifts, savings plans, too. You can save your own way, with help from Micah and Tammy. You can save your own way, save your own way…
Micah Shilanski: Welcome 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. I’m glad to be here again for another episode of understanding your federal retirement benefits.
Micah Shilanski: Yes. Yes. This is such a good thing. And today is a fun episode. Well, it’s fun for us, hopefully it will be for our audience. One of the things that Tammy and I love, especially when we’re teaching a class, is we love questions because questions are such a good way for instant instructor feedback, right? “Were we clear in how we explained something?” is always great to get feedback on. But it’s also a little bit more interactive with the class, and not to brag a little bit, but it also allows us to show off. I mean, it’s like a pop quiz on federal benefits, and you never know what questions are going to come up. It could be related to the topic, or it could be completely unrelated to the topic.
So today, we’ve pulled a handful of questions that you have sent in. So thank you very much. Now, if you have a question that we didn’t get to today, but you want it answered on the podcast, then make sure you email us. You can respond to, you can go to plan your planyourfederalretirement.com/8, because it’s episode number eight. You can submit a question right there, or you can submit it to [email protected] We may have to find a way to shorten that up. All right, Tammy, should we jump in, ma’am?
Tammy Flanagan: Yeah, I think this is a great idea. And like you said, Micah, it is fun to answer these questions, and sometimes people have told us, and I’m sure you’ve heard this too, that, “Oh my goodness, how do you remember all that stuff? You must be a walking encyclopedia.” But I think having done this so many years, so we do get to hear some of these questions are very familiar. The first time we heard them, we had to go back and research it, and look it up. But now that we know it, it’s pretty much common sense to us now. So some of these questions we have heard many times over, so I think these are good universal questions that will help a lot of folks.
Micah Shilanski: Absolutely. All right. So let’s start off with the first one, and unfortunately, I cannot pronounce this individual’s name. So I apologize. I’m not even going to give it a shot, but it says, “I’m 65-plus years old. I work with the USPS … employee. I’ve been service for 17 years. I’m planning to retire on March 10th. How much will my pension be? Thanks for your earliest attention.” This is a great question. Now, we don’t have all the pieces in order to really give an answer on what that pension is going to be. But Tammy, walk us through the formula if you don’t mind, or do you see any concerns with A, the question of things we need to address? And then number two, what’s the formula for figuring this out?
Tammy Flanagan: Yeah. I mean, you can answer this very simply because the formula is second grade math, right? So from what this person has told us, with 17 years of service, we know that they’re under FERS, right? Because they wouldn’t have enough service to be CSRS, at least I’m assuming they’re FERS. The other thing they’re telling us is that they’re 65 years old, but they don’t have 20 years. So that tells me that their benefits’ going to be computed using 1% as the multiplier. And once you know the multiplier, you multiply that 1% times their salary or their high three average salary, times the fact they have 17 years of service. So roughly they’re going to get 17% of their high three. But, that’s the short answer.
The long answer is maybe there’s things we don’t know. Maybe there’s a period of service that they had prior to working for the post office, that maybe we can capture that, if they had maybe some temporary work or some seasonal work way back when. We need to know about their service credit, maybe they served in the military. We don’t know that for sure. So I’d want to ask them more questions before we would say for sure that’s a good estimate. But just the bottom line is FERS is a real simple calculation for the basic government pension. It’s either going to be 1% or 1.1% times your high three average salary, which is the average of your highest three years, generally your last three years of basic pay, times your length of service.
Now, it’s going to be years and months and sick leave gets added in. So like I said, it’s probably a little different than what I just said because we don’t know all those answers, but I’m pretty close, I would think.
Micah Shilanski: It is. It’ll give us a good walk-around number. The only other thing I would throw out into this is they made the comment they’re going to retire on March 10th of 2021. You always pick the date that you want to retire, making sure you’re eligible, right? And this should be a good day for you, it should be a happy day. It’s a retirement day, so I get excited about that. But being March 10th, an important thing to point out, is your pension is effective the first of the following month. So that means roughly you retire on March 10th, you’re going to get 20 days of not being paid for because your pension would be effective on April 1st. So with FERS, you normally want to retire closer to the end of the month. That doesn’t mean you can’t retire on March 10th. That’s whole an eligibility discussion that’s there, but it’s something you want to think about.
Tammy Flanagan: That’s right. If nothing else, at least make it the end of a pay period so that you can earn your final leave accrual as well.
Micah Shilanski: That’s right.
Tammy Flanagan: And the other thing I’d tell this person, that they do have 17 years and they are 65 plus, they said, but if they stayed a couple of more years, they’d get a higher pension for having 20 years. But I hate to talk somebody into that whenever they still have a lot of good, healthy years ahead of them if they retire sooner than later. So hopefully they can afford to retire now.
Micah Shilanski: All right. Well, let’s get our next question from Thompson. And now, Thompson writes in also from USPS, says, “I have 31 years with military time, and I’m 53 years old. If they offer a VERA, Voluntary Early Retirement Action, will I be able to receive payments from my TSP without penalty, or do I have to wait till MRA? I understand that I will have to wait till MRA for my supplement. Is that correct as well?”
Tammy Flanagan: Mm-hmm. Yeah, so if they were offered a voluntary early out, they are eligible, because 50 with 20 years, any age with 25 years, they definitely meet the requirement. Sounds like they’re counting their military service, I’m assuming they paid the military deposit. The supplement is payable at their MRA. So they’ll have to wait a couple of years for that. The one thing I would question, I know I’m going to throw it back to you for the TSP question, but at age 53, to me, that’s the halfway point. I mean, you got possibly another 53 years of living left to do.
Micah Shilanski: Very much so.
Tammy Flanagan: So I would hate to see them start using their TSP this early unless they just have a ton of money in there, or they don’t need much to live on. I think it’s early in the game to start spending your retirement savings. But we don’t know all the facts, we don’t know what else they have.
Micah Shilanski: Right, right. That’s a good question. Now, with the TSP, the way that it works is if you separate … and this is non-special provisions, right? If you have a mandatory retirement, like you’re a law enforcement, or a firefighter, air traffic controller, they have some slightly different rules. So speaking for the rest of us that are out there, if you separate from service at 55 or older, you’re eligible to access your TSP without a 10% penalty. Converse, the IRA accounts, you cannot touch IRA accounts generally, unless you’re 59 and a half. So the TSP, you could access. However, the caveat here is she says she is 53 years young. So that’s two years’ shy.
If you separate under the age of 55, you do not get to access that TSP without a 10% penalty unless you did something that’s called a 72(t) distribution. I’m not going to spend a lot of time talking about it. This, it gets complex. It’s what’s called equal and substantial payments, where there’s a formula you have to follow from the IRS, and you can pull out X dollars out of your account every single year. And you have to do it for five years or until 59 and a half, whichever is longer. There’s a lot of strings with that, and it’s not any dollar amount you want, it’s a formula the IRS has. They’re going to tell you what that dollar amount is.
So Tammy, I really hesitate, and I really push back on people that want to do a 72(t) or early distributions for a couple of reasons, but the main one is just what you said. Most of the time you’re retiring too early. Now, I know that may sound like sacrilege, people always want to retire early, but are you really ready to be done? Maybe you’re done with federal service, maybe you’re done with the post office, maybe you’re done and you’re ready for that next chapter of your life, but maybe you’re not done with employment. And one of the things I see time and time again with people that set these up. They retire, they get their pension in, they take a 72(t) distribution to avoid that penalty, they have an income coming in. They get bored, and they go get another job.
And now they have more money coming in because of this other job, they want to turn off that 72(t) payment, and they can’t without a huge tax penalty that’s going to be there. So again, there are a few options. Be very, very careful with that.
Tammy Flanagan: Yeah, I would rather see them get a part-time job. It gives them a change of pace, they’re doing something different, and make enough money so you don’t have to touch your TSP. That would be what I would recommend if they were asking for our help with that decision.
Micah Shilanski: Yeah. All right. What’s our next question. All right, from Dilys. Dilys, it says you retired in the end of July. So, congratulations.
Tammy Flanagan: Yeah, recent.
Micah Shilanski: Yeah, I know. “I am 58 years old, will get retirement and my supplement. Ex-spouse is dying.” I am sorry to hear that. “Married for 21 years. If I take widow’s benefits at 60, will my supplement stop?” He’s referring to Social Security widow’s benefits. “My human resource officer says no, but things I’ve read makes it sound like if I take any Social Security, the supplement will stop.” Tammy, what happens?
Tammy Flanagan: Yeah, it’s it sounds strange because if you file for your own Social Security benefit, you will lose the supplement. However, if you’re eligible for any other pension benefits, any other Social Security benefits based on somebody else’s work record, such as a former spouse’s work record, you’re still going to get the supplement. So that’s not true when you actually qualify for Social Security. So when she qualifies for Social Security, she’ll either get her own benefit or the widow’s amounts, she’s not going to get both. But until she turns 62, she can collect the widow’s benefit directly from Social Security, and she can collect the FERS supplement from OPM until she turns 62.
So it doesn’t sound like it makes sense, and that’s probably why she’s questioning it, but I agree with her human resource office saying that no, she won’t lose the supplement.
Micah Shilanski: Now, is there any difference inside of here because it’s an ex-spouse claiming benefits?
Tammy Flanagan: No, it’s treated just like a current spouse.
Micah Shilanski: There you go.
Tammy Flanagan: Yeah, the only thing she has to remember is not to remarry before she turns 60, or she’ll lose that ex-spouse’s widow’s benefit.
Micah Shilanski: Right. As long as you were married for 10 years, then you’re going to be eligible for that survivor benefit through Social Security.
Tammy Flanagan: Yep.
Micah Shilanski: Okay. Yeah, and these are funny rules. And one of the things that I really like to do, especially when you come across something that’s a little abnormal. In your retirement folder, actually I print these rules off that are going to be there, and I stick them in there when we’re working with clients because years down the road, when you go to apply for your full Social Security benefit, is Social Security going to come back and say, “Hey, you weren’t supposed to get X,” or, “You over got paid, and why?” We’ve heard crazy things that have come down.
Tammy Flanagan: Oh, so I’ve heard quite a few just recently with people getting letters from both their agency, as well as from Social Security saying that they were overpaid. I don’t know if COVID is giving people working at home more time to look into issues or not. But in some cases, I don’t necessarily agree with these letters. So like you said, you have to have the rules so you can challenge that, or you can appeal it, or you can ask for a reconsideration, because sometimes you’re right. And just because Social Security or OPM or your agency says you owe them money, just make sure that that’s true. You might not.
Micah Shilanski: And don’t rely on OPM’s website not changing, and being able to find their rule book, or Social Security not updating something, and being able to go to find this rule, right? When we find it, I click print. Physically, we put it in the client’s file that’s going to be there, give it to them, and say, “This is the rule that you’re going to go back on.” And I do think that’s important because four or five years later, who knows what’s going to happen?
Tammy Flanagan: Absolutely, it’s important. Yep.
Micah Shilanski: Okay. So short answer is they’re going to be able to get both benefits, both incomes?
Tammy Flanagan: Yeah, till she’s 62. Yep.
Micah Shilanski: Uh-huh. Perfect. I agree. All right. Next question from Luk, is that how you say it? All right. “Can I open a Roth IRA? I am retired, and do not have any earned income. Can I transfer my TSP funds to my Roth IRA gradually? Thanks.” So Tammy, the rules on this? And as you know, with a Roth IRA, the question is an opening one. The question is what type of money are you putting in? So because you have no earned income, assuming you’re married or single, but there’s no other earned income coming in, then no, you cannot take money out of your checkbook and put it into a Roth IRA, but you absolutely can open a Roth IRA and do a conversion. And a conversion is taking money from another qualified retirement account, like your TSP, an IRA, a self-employed pension plan, anything of that nature. And you can convert that into a Roth IRA.
Keep in mind our tax buckets that we talk about. If you don’t know our tax buckets, jump on our website, planyourfederalretirement.com. Look at that tax bucket because anytime you take money out of the TSP, there’s a potential tax implication. And when you do a conversion like this, there is taxes. So just make sure you understand how that process works, that’s going to be there. But you can absolutely do that. There’s also no age limitation, you can always do a Roth conversion. Now, if you’re over 72 years young, then there’s a little bit more limits on doing it. But you can always do a Roth conversion, which is nice.
Tammy Flanagan: Yeah, and there was another change in the rules this year for COVID, people that are affected by COVID in some way, where they can take the money out of their TSP account and pay the tax on it over three years. But you have to self-certify that either you’ve been diagnosed, your spouse has been diagnosed, or somebody has lost income as a result of it, or childcare issues. So if you can somehow find a link between the COVID-19 pandemic, that might allow you to do this with a little bit more tax advantaged way of paying the tax on that withdrawal.
Micah Shilanski: And there’s a little bit of guesswork inside there, and we’re going to take advantage of that for several clients that that were affected, because not only can you pay the taxes over a three-year period of time, you can actually put money back in the account. So it gives a lot of flexibility inside of that. It’s a bit of a gray area, so I am not recommending it. I’m not saying I’m not going to do it, but I’m not recommending it, that anybody go and does this. About using those funds to do a Roth conversion, it’s from reading the rules, it is not a prohibited transaction, however it may not be with the best spirit of the CARES Act.
So the IRS does not have any guidance about that. So separate those two concepts out. I know it is a little complex, right? But a Roth conversion is taking money directly from a pretax account, a TSP, IRA, etc., converting it directly into a Roth. Okay, that’s above board, there’s no questions whatsoever. Using, if you’re an affected person, taking money out, stick it in your bank account or another investment account, not a Roth account. No issues with that, assuming you’re affected. Taking that money and putting it directly into a Roth, which a lot of people are talking about, the IRS has not given us any guidance yet on whether they would like that or not like that.
Tammy Flanagan: That’s true. Yeah, that’s true. Okay, next one.
Micah Shilanski: All right. I’ve got a question from Gary. “I’m not retiring until I reach full retirement age.” That’s what I just-
Tammy Flanagan: I think he’s talking about Social Security.
Micah Shilanski: Yeah, that’s what I was just thinking about, which one I was talking about. I know. “How will it affect my current health insurance that I have?” Oh, this is great, because this is a question for the military people, right? Because there’s a lot of federal employees that have military service that have TRICARE, and you have some great benefits. I mean, FEHB, Federal Employee Health Benefits is phenomenal alone, and you add TRICARE to it, and it really amplifies it. All right, back to his question. “How will it affect my current health insurance that I have, A, TRICARE Prime, B, Blue Cross Blue Shield? Reasoning for both insurance is because I have some physical that require access to certain doctors when needed while trying to figure out what is wrong. Will I be required to stop them, or can I delay using Medicare Part A, or any other health insurance?”
So basically, what I read into that question a little bit is he likes having two insurances because he has more control on his network, more control on what providers he can see. But Tammy, some pretty cool things happen at 65 with your TRICARE, with TRICARE For Life, with Blue Cross Blue Shield. You want to talk about that?
Tammy Flanagan: Yeah. So there’s nothing that says he can’t have three health insurances, he has two right now. So when he turns 65, he could in fact continue with TRICARE for life, because TRICARE Prime goes away when you turn 65, and you have to be enrolled in Medicare A and Medicare B to have TRICARE For Life. And if he wants to maintain Blue Cross, I mean, certainly he could pay for that, but I wouldn’t recommend it. I think what he’s going to find out is once he’s 65, and he enrolls in TRICARE For Life, Medicare becomes his primary insurance. TRICARE For Life will pick up as secondary payer, and he should be able to see all the doctors he’s seeing now that he’s using Blue Cross to see, he should be able to see those same doctors using Medicare as primary, TRICARE For Life as secondary. And he should find he has very little, if any out-of-pocket expense.
So what I would suggest is that once he does that, once he gets his TRICARE For Life in place, and Medicare A and B in place, I would suspend the Federal Health Benefit plan. Not cancel it, but suspend it.
Micah Shilanski: I was going to say you want to pull a couple things out of there, right? One of those is just that we are never recommending you cancel your Federal Health Benefits, FEHB. This is a pretty unique benefit for our military members that have TRICARE. You can postpone it, you can stick it on the shelf, it’s still there, you don’t have to pay for it. But later, if things change, you can reach it, pull it back off the shelf and activate that plan again, and you can have a lot of control. So why postpone it versus cancel it? Why cancel it? Why eliminate an option? Right? That doesn’t make any sense. We have no idea what TRICARE’s going to be like in the future, or Blue Cross Blue Shield, or anything else. Stick it on the shelf, so that way you have access to it, is really important.
Tammy Flanagan: Right? And I guess just as a quick little primer, Medicare A, we pay for with the payroll tax that we pay every two weeks. So that’s free, so to speak, even though we’ve paid for it.
Micah Shilanski: It’s paid for. It’s not free, it’s paid for.
Tammy Flanagan: That’s right. And it covers you when you go in the hospital. So when the doctor says, “We’re admitting you, you’re going to spend the night,” then Medicare Part A becomes primary, and TRICARE For Life takes over as secondary. Medicare Part B is the one that does have a premium, and that premium can be anywhere from $144.60 a month per person per month, or it can go all the way up to almost $500 a month per person. So people who have higher income pay more for Part B. So it does get to be a little tricky of a question if you’re in the higher income brackets, which most people aren’t, but we have quite a few federal retirees who fall into that category. But Medicare Part B covers outpatient care. It covers doctor visits, lab work, physical therapy, durable medical equipment, all of that comes under Part B.
So the other thing that you don’t have with that combination, or at least not with Medicare, is dental, vision or prescription coverage. So you’re going to get your prescriptions through TRICARE For Life or through your Federal Health plan if you don’t have TRICARE. And then your dental and vision, you may want to pick up a supplement for those.
Micah Shilanski: Yeah, so those are all really good points. And we’re going to shortly-
Tammy Flanagan: A little extra on that one.
Micah Shilanski: Yeah. We’re going to dive into, I think, FEHB a lot in the upcoming weeks because open season will come out, and there’s some things we should think about. And don’t worry, we know you federal employees don’t make any changes to your healthcare during open season, but that’s not going to stop us from talking about it, right?
Tammy Flanagan: Yeah, and we might convince you that it’s time to change. You never know.
Micah Shilanski: There are some good options out there, yeah.
Tammy Flanagan: There are, and there’s times in life when it might make sense to change. So I think people just need a little assurance, right? We need to give them a little confidence that it’s okay to change, and there’s always going to be another open season next year.
Micah Shilanski: You know Tammy, that’s one comment actually I get a lot from clients when we’re postponing their FEHB. They’ve grown to love it so much, they always, “Micah, are you sure? I trust you, but are you sure we can do this?” And there’ll be a couple of weeks’ email, “Wait, I’m filling out this form. Are you really sure we can do this because we know it’s a good benefit and we don’t want to lose it?” And so it’s okay to ask those questions. We still got to move, you still have to do things to improve your financial position, but it’s okay to ask and make sure you know what you’re doing.
Tammy Flanagan: Absolutely.
Micah Shilanski: All right. We had a couple of more questions here, see if we can get to. All right. We had a question from Dwayne. It says, “Should the TSP loan be paid off before retirement?”
Tammy Flanagan: I think it was a $6,000 loan, he said.
Micah Shilanski: Oh, thank you. Yep.
Tammy Flanagan: So when you retire, or when you leave the government, I should say, because it doesn’t matter if you’re retiring, resigning, separating for whatever reason. If you have an outstanding loan balance, you’re in the process of paying back a loan, but it’s not fully paid off, you have a couple of choices. Number one choice, if you have some time before you’re leaving, you can accelerate the loan payments, make bigger payments, get the thing paid off so that that money can stay in your TSP account and continue to be invested, and hopefully grow tax deferred. Your other choices is … this is the only time that TSP will take a personal check.
So when you retire, if you’d like to pay it off and get that thing taken care of, write a check to the TSP, pay that thing off, and you again will put the money back in pretax. The third option is that the TSP will-
Micah Shilanski: Oh, wait. By pretax, not a tax deduction. You’re paying that money off.
Tammy Flanagan: Right, where it will stay tax deferred. Right.
Micah Shilanski: Sorry, I just want to make that clarification. Yes, ma’am. Yeah.
Tammy Flanagan: Yeah, that’s the financial planner.
Micah Shilanski: Yeah, the tax bells are going off.
Tammy Flanagan: … coming to that, that’s right. And then the third option is that the TSP will, once notified of your separation … I think it’s 90 days. I don’t know. Do you know that, Micah? Is it 90 days?
Micah Shilanski: Yeah.
Tammy Flanagan: They’ll give you a 90-day period to figure out if you’re going to pay it off or not. And if not, if you say, “Forget it, forever hold my peace,” then at the end of the year, you’ll get a 1099 showing how much you left unpaid because now that becomes a taxable distribution, and you pay the tax on it like you would with any other withdrawal you took from the Thrift. So should he pay it off? I don’t know. There’s a lot we don’t know about what else he’s doing.
Micah Shilanski: Now, one area that this makes it different than a distribution from the Thrift, because most of the time when you’re doing a distribution from the Thrift, and we can get into the rules at it, they’re going to withhold taxes for most distributions, right? If you have a loan, loans are tax free. So now, if you don’t pay that loan back, now it becomes a taxable event. So unlike a distribution, no taxes were withheld. So if you have a $6,000 loan, a $50,000 loan, if you have a loan that’s going to be out there and it’s unpaid, no taxes were ever withheld on that. So that could be a decent tax bill you’re looking at the end of the year.
So one of the things I would look at at repaying it, Tammy, run your taxes. Now, maybe you’re going to retire at the end of November. 90 days puts us into January. Great, well now it’s the next year I got to worry about the taxes, right? So are you going to be in a lower tax bracket, or are you going to move to a state that taxes you differently, right? There’s a lot of moving pieces to this question. Sometimes people go into retirement with the mindset that everything has to be paid off. I don’t have that mindset. It’s a cash flow question. How much money do you have coming in? Can you pay your debts? Can you do the things you want to do? That’s more important besides just having things paid off.
But definitely a concern, I always see loans out there as a concern, going into retirement. Well, TSP loans going into retirement as a concern.
Tammy Flanagan: Mm-hmm. Yep. At least it’s not a lot. At least it’s only $6,000 rather than $106,000. Yeah.
Micah Shilanski: Could be a lot, yes. All right. We got another fun one out here. And whenever I get these, I always get a little bit of pucker power starting up. We’ll leave their name off of it, but it says, “I think you’re wrong.” So I’m like, “Oh crap. What did I do now?” It says, “After 20 years of federal service, your pension is high three times years of service times 1.1%,” then it gives a link to OPM. “The multiplier goes up to 1.1% after 20 years,” and has some math inside of there. So rookie mistake. That’s a good comment that comes out. And this is a question that we get that’s going to be there. Now, one of the things that’s with this, and I think Tammy, we see a lot, is where does this 1.1%, where does this bonus retirement come from?
And what he’s talking about is after 20 years of service, and you’re age 62, this is an important caveat, then your pension actually increases, right?
Tammy Flanagan: Right. Yeah, I think I’ve gotten this question before from people who assume that once you have the 20 years that you get to use the 1.1%. But as you pointed out, Micah, it has to be the 20 years and the age of 62 which qualifies you for that benefit. I always thought that Congress, when they designed FERS, provided this 10% bonus, because now they don’t have to pay the supplement if you retire at age 62, because you’ll qualify for Social Security. I don’t know if that’s true or not, that was just my theory.
Micah Shilanski: Seems to line up.
Tammy Flanagan: That’s right. So I’m not sure if this person who’s bringing this up is already 62, so they’re applying it to themselves, or they just thought that everybody gets 1.1%. But you have to be 62, and you have to have 20 or more years of service. Because you can retire at 62 with 10 years of service, but it’s not going to be 1.1%. So it has to be both the age of 62 and the 20 or more years of service to qualify for that multiplier.
Micah Shilanski: And there’s a couple of things that just pull out of this question that’s there. One, what’s the correct answer, right? Which is, hey, this is why we get these comments and we love it. We’re not going to poke fun at this person for that comment whatsoever. It’s great to have it so we can discuss it. Gives us good things to talk about. But everyone’s situation is unique, and this is where listening to the water cooler can get you in trouble, because let’s say in their situation, they’re 62, 30 years. Absolutely, they get a higher pension. So they tell you, “Hey, if you have 30 years of service, you’re going to get a higher amount.” That’s not the entire picture. Getting financial advice at the water cooler can be a little devastating because you don’t get the entire picture of what’s going on.
So when you learn something, awesome, fact check it, submit the questions to us, have Tammy and I talk about it, look at it, run it by your HR. These are some important things to do to make sure that answer is correct for you. Maybe it’s correct for Bob and Sue, but maybe it’s not correct for you.
Tammy Flanagan: The other one that I get a lot of times is related to this whole concept of this 1.1%, is when you have somebody who let’s say they’ve got 19 and a half years of service and they’re 64.
Micah Shilanski: Oh, yeah.
Tammy Flanagan: So 19 and a half years, that’s not 20. So you’re going to get the 1%. But then they tell me, “Oh, I’ve got 1,500 hours of unused sick leave.” Well, that’s more than six months of sick leave. So once we add the sick leave to the 19 and a half years of service, guess what? We now have 20 years and they will get the 1.1%. And I’ve had even HR people argue with that saying, “Well, no, no, no, you can’t use sick leave to make you eligible.” That’s right, you can’t, but they’re already eligible.
Micah Shilanski: Eligible for retirement, mm-hmm.
Tammy Flanagan: Right, they’re eligible with five years of service at age 62. So this is strictly in the calculation. That 1.1% is strictly based on the calculation, not on eligibility. So yes, you can use your sick leave to get you to 20 years, but to use the 1.1%, you got to be 62.
Micah Shilanski: Yep. Can’t, got to hit both gates. All right. So last question that we have, from Black, and it says, “I qualify from FERS supplement. When will I begin receiving it?” Good question.
Tammy Flanagan: Yes, that depends.
Micah Shilanski: Yes, it’s like all of our answers, “That depends.”
Tammy Flanagan: So to be eligible for the FERS supplement, you have to meet a couple of conditions. You have to be eligible for an immediate retirement. So what’s an immediate retirement? It means that when you separate from the government, you’re going to start getting benefits, or you’re eligible to start getting benefits within 30 days of your separation. So that’s number one. Number two, you also have to be eligible for not only an immediate retirement, but an unreduced retirement. So that takes out the MRA plus 10 folks, because they’re going to either take a reduction, or to avoid the reduction, they’re going to delay it. So they don’t get a supplement.
The early-out folks, like we had that question earlier about the VERA, they are qualified for an immediate unreduced benefit, but for them the supplement’s not payable until they reach their minimum retirement age, which might not be until they’re 57. For people who retire, the normal category of MRA with 30 years, or 60 and 20 years of service, they will get the supplement immediately. So that’s who gets it. You’ll get it automatically with your FERS application. So there’s no separate application to get the supplement, it’s just part of your FERS retirement. OPM will determine if you’re entitled to it when they process your application. If you are entitled to it, it’ll come when they finalize your claim.
Micah Shilanski: And I don’t see a lot of mistakes with the FERS supplement for eligibility.
Tammy Flanagan: No.
Micah Shilanski: The only one that sometimes I’ll run into is the VERAs. I got one I’m dealing with right now. That a client went out on a VERA, and two months later they hit MRA. And six months later, OPM still hasn’t paid them the supplement. And it really turns out HR, when they filed the last SF-50, had the wrong code on it. So we’re working to get that fixed. So they’re going to go back and get the supplement because they were eligible for it. But most of the time, this is pretty much an autopilot thing on both ways, right? It automatically starts, and it automatically stops when you turn 62. I’ve never run into a case where they keep paying it to you.
Tammy Flanagan: No, but they do ask you about your earnings once you’re receiving it.
Micah Shilanski: That’s right.
Tammy Flanagan: And that’s an odd thing. Do we have time to talk about this a little bit-
Micah Shilanski: Sure.
Tammy Flanagan: … I think during this podcast? So let’s set up an example. Let’s say this person was 58 years old and they got 30 years. So they’re eligible for the supplement. They’re past their MRA, they’ve got 30 years of service. So they’re eligible for an immediate unreduced benefit. So they’re going to start collecting that. And let’s say they retire October 31st. So they’re going to get their first retirement payment for the month of November and December of this year. So they’re going to get the supplement regardless of if they go back to work or they don’t. But next April, OPM, the Office of Personnel Management will send them a letter, and they’re going to say, “Hey, what did you do November and December of 2020?”
And they’ll say, “Oh, I got this fabulous job. I make $5,000 a month, and I earned $10,000 for those two months.” “Oh, that’s fine. We have no problem with that because the earnings limit is going to be over $18,240, because it’s $18,240 for this year.” So the earning-
Micah Shilanski: Goes up a little bit every year.
Tammy Flanagan: Yeah, it may go up a little bit next year. “But for 2020, you made well under the earnings limits. So we’re going to keep paying you the supplement. No problem.” So all of 2021 goes by, you got the supplement all year, even though you continue to earn $5,000 a month from your second career. So now we head into 2022, and OPM sends you a letter next April, saying, “What did you do all of 2021?” You said, “Oh, I earned $60,000,” which let’s say that’s $40,000 over 2021’s earnings limit. And let’s say your supplement was only $15,000. So guess what? When you take $2 or $1 off of your supplement for every $2 you earned above the limit, you just lost the supplement. But you’re not going to lose it until your August 1st payment because that’s the payment for the month of July.
So you retired at 58, got it for two months, and another 12 months, and another six months before you lost it, even though you went back to work the day after you retired. So it doesn’t come and go when you think it’s going to. Just because you started working, doesn’t mean you lose it next week. You might not lose it for another year and a half. It’s a crazy thing.
Micah Shilanski: That’s a weird thing.
Tammy Flanagan: And then if you stop working … let’s say he stops working when he’s 60, well then he better call up the OPM to say, “Hey, I stopped working. I want to get my supplement back,” and it can be reinstated.
Micah Shilanski: Is it reinstated right away, or do they wait till the next July?
Tammy Flanagan: No, they can reinstate it early if you didn’t work at all that previous year. So you can have it reinstated as of January 1st. It’s crazy.
Micah Shilanski: Yeah, that communication with OPM is important. And keep in mind that what catches, I think, people on this one, it’s not your net paycheck, it’s your gross paycheck, right? As people are looking at that $18,000 like, “Oh, I brought home less than $18,000.” Well, it’s the gross paycheck that you were paid, which is more important in this particular case.
Tammy Flanagan: And it’s earned income too. So a lot of people worry that, “Oh, I took money out of my TSP.” That doesn’t matter.
Micah Shilanski: Great point. Yep.
Tammy Flanagan: Yep. Just earned income.
Micah Shilanski: All right, perfect. Well, I think the most important thing as you get learning lessons out of this, for action items of what things should we be listening for, what things should we learn from this? And number one, first action item, go out and share this podcast. Help us grow, right? Share this with a friend, share it with a coworker. It is a ton of fun for Tammy and I, and the feedback we get since it’s not a live event, is we get it through reviews. We get feedback through sharing it, through growing the podcast. And we thank you for that. So thank you very much. Tammy, I would say the second action item I would really encourage people to take away from this is it’s not what we don’t know that’s a problem, it’s what we think we know that just ain’t so, right?
Tammy Flanagan: That’s right.
Micah Shilanski: And so it’s that aspect that’s here as we go through this, what do you think you know about your benefits that you really know for sure? What information do you hear from the water cooler that you need to say, “Is this the right answer for me?”? And you need to be empowered to go get those answers, whether it’s talking to Tammy and I, whether it’s talking to your HR, but doing something of that capacity to make sure you’re educating yourself and your benefits.
Tammy Flanagan: Yeah, and just because you hear something once or even twice, doesn’t make it true. This used to bother me in the early days, I’m talking way back when, when I first started teaching, because people would come in just convicted that I was wrong here, that I said something that was different from what they heard from their HR specialist. And they threw me off my game thinking, “Maybe I am wrong.” And I never hesitate to admit that I make mistakes like anybody else.
Micah Shilanski: Amen, yeah.
Tammy Flanagan: But when I’d go back and look it up, it’s like, “No, I was right.” So you have to make sure you get the source. I always tell someone, “If this is something that’s really going to impact your life or your retirement, or if it’s something you can’t change later, get it in writing, get a reference to a resource. Anything Micah or I say can be validated by the federal law. Everything dealing with your retirement is under Title 5 of the US code. So we can show you the reference to where it says it is or it isn’t.” So just like you used a cliche, I’ll use one, saying, “You don’t know what you don’t know.”
Micah Shilanski: Yeah, very much so.
Tammy Flanagan: Yeah, so ask questions. That would be my homework assignment, is that if you have something you’re wondering about, don’t hesitate to ask. Everyone will always preface their question saying, “This is a stupid question.” I don’t think any question’s stupid. We do very well with stupid questions. That’s our forte.
Micah Shilanski: Yeah, and we don’t mind being questioned by the way, because then the opportunity we get to learn something new, that’s amazing. I would love to, right? What do we not know? And the best way we find that out is by questions. So that’s great.
So with your questions, email them to us, [email protected] with hyphens in between, [email protected] Or you can jump on our website, planyourfederal retirement.com/8 for this episode, where you can get links to some of the calculators in order to help calculate what your benefits are going to be, and also some more detailed information on the podcast. Until next time, happy planning.
Hey, before you go, a few notes from our attorneys. Opinions expressed herein are solely those of Shilanski & Associates, Incorporated, unless otherwise specifically cited. Material presented is believed to be from reliable sources, and no representations are made by our firm as to other parties, informational accuracy, or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.
Content provided herein is for informational purposes only and should not be used or construed as investment advice or recommendation regarding the purchase or sale of any security. There is no guarantee that any forward-looking statements or opinions provided will prove to be correct. Securities investing involves risk, including the potential loss of principle. There is no assurance that any investment plan or strategy will be successful.
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