Can you afford to retire, ever? How will you know?


Too many people begin their retirement planning too late. If not necessarily catastrophic, it isn’t good. But regardless of your age now, sooner is better than later.

The dominant Federal Employees Retirement System covers most working feds. It’s good but it has several moving parts: A lifetime government annuity partially indexed to inflation, Social Security and a 401k (The Thrift Savings Plan) with an available 5% government match. While it’s a good problem to have workers who do some homework now can maximize their lifetime retirement income and, if they like, maybe retire sooner and in better financial shape then they ever imagined.

So how do you prep for retirement so that the decision, giving you the maximum, is yours, and so that you have several end-date options?

Tammy Flanagan
Federal retirement expert Tammy Flanagan

Enter benefits expert Tammy Flanagan. She’s been in the business of counseling feds, both as a civil servant and now a private consultant, for a long time. And she’s going to be our guest today on our Your Turn radio program at 10 a.m. EDT. Listen on www.federalnewsnetwork.com or 1500 AM in the Washington, D.C., metro area. If you can’t listen live the show will be archived so you can catch it later, or refer it to a friend.

Flanagan wrote a guest column to give a heads up as to what we’ll discuss this morning. If you have any questions shoot them to me before show time at mcausey@federalnewsnetwork.com.

Why do many federal employees have a difficult time knowing if they can afford to retire?

There are three parts to FERS which means feds have to understand decisions that can impact the value of Social Security, FERS retirement benefits and withdrawal options of the TSP. That’s a lot to understand.

They don’t know how much these benefits will be taxed: FERS has a small tax-free component, and is otherwise taxed as ordinary income (IRS Publication 721). Retirees file a W-4P for federal withholding and they can generally set up state tax withholding after their claim is adjudicated by the Office of Personnel Management.

The TSP is 100% taxed as ordinary income unless it is coming from qualified Roth contributions, in which case it is tax-free. Federal tax withholding can be elected, but not state tax.

Social Security is tax-free for many Americans, but not for most federal retirees. If your combined income is more than $34,000 for an individual return or $44,000 for a joint return, you will pay tax on 85% of the benefit for ordinary income tax. If you’re already getting benefits and then later decide to start withholding, you’ll need to submit a voluntary withholding request, also known as Internal Revenue Service Form W-4V. You’ll have the option of diverting 7%, 10%, 12% or 22% of your monthly benefits toward your income tax bill. You can also use the form to change your withholding rate or stop the withholding.

Your combined income is your adjusted gross income, plus nontaxable interest and one-half of your Social Security benefits.

On the state tax level it depends whether your benefits will be taxes. Some states tax all of the benefits, some exempt federal retirement from state tax, some states don’t have a state income tax and some states tax FERS but not SSA.

Feds may also be unsure about what withholdings will be deducted from these benefits. With FERS, it’s about taxes and insurance. With SSA it’s about taxes and Medicare Part B  for federal but not state. Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia collect state income tax on Social Security payments to at least some beneficiaries. How they tax Social Security varies by adjusted gross income or other criteria, so check with the relevant state tax agency.

There is also the matter of federal TSP taxes. Many feds have no idea how to figure out how much income will be provided by the TSP since they are in control of the withdrawal choices and some are afraid to start using this resource until required at age 70-and-a-half.

The TSP retirement income calculator can help.

What are separated participants doing with their money?

There are currently 5.6 million total participants with 3,431,672 covered under FERS (91.1% of all FERS employees) and 307,775 under the Civil Service Retirement System (78.2% of remaining CSRS employees), with the remainder being uniformed services, blended retirement system and beneficiary participants.

There are between 25,000 and 50,000 initial transactions every year since 2014 to begin monthly payments (3,000,000 ongoing monthly payment transactions). Partial payments are also occurring at the rate of 25,000-50,000 per year, and will most likely increase when they are no longer limited to one partial payment. Annuities are a very, very small percentage, maybe 5,000-10,000 per year, and ongoing annuity payments amount to less than $450,000,000 per year.

Outgoing partial withdrawal dollars amount to approximately $3 billion per year — about the same amount as ongoing monthly payments. Less than half of the single payments (over 150,000 per year) are transferred to IRAs or other retirement accounts. One-third are transferred and two-thirds are cash payments. These are presumably cash outs of the TSP and amount to over $12 billion per year total.

Most in-service withdrawals are for financial hardship, out of almost 150,000 annual transactions, and less than 25,000 are age-based for employees older than 59-and-a-half years. Employees make more than 240,000 loan transactions from their TSP accounts every year.

Many federal employees don’t know how to diversify their TSP when closing in on retirement

I see many accounts that are 100% C, S and I stock funds. I see accounts that are a portion Lifecycle 2020 or other L funds, and a portion invested in the C or G stock funds or a combination. I don’t see many accounts with a clear strategy for investing. Most say they don’t know how to rebalance or diversify based on their time horizon.

I don’t see many 100% L fund investors even though the L funds were designed for 100% to be invested to perform according to their target date, i.e. 100% in L 2030 for a retirement or withdrawal planned for 2025-2034. Maybe having five-year incremental L funds in 2020 will help?

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Many employees are not in the best health plan for their family size, age and health

The majority of employees and retirees are in BC/BS Standard Option which is a great plan, but also one of the most expensive. There are other plans that work well with Medicare. There are high-deductible plans that allow for tax-free health savings account contributions and tax-free grown and withdrawals. There are basic, value- and consumer-driven plans that may work well for those who don’t have serious, expensive medical conditions.

Most employees do not take advantage of having 30-plus choices of health plans

It’s paralysis from too much analysis — they don’t know how their benefits will be adjusted for inflation. For FERS, it’s a delayed, diet cost of living adjustment. For the TSP it depends on the withdrawal option. Monthly payments based on life expectancy will be recomputed annually though could increase or decrease depending on year-end account balances and age. Monthly payments can be adjusted by the participant on a monthly basis.

Annuity options provide for increasing payments up to 3% per year when an election to purchase an annuity is made.

When it comes to Social Security, most people are aware that there are annual increases in benefits to offset the corrosive effects of inflation on fixed incomes. These increases, also known as COLAs, are such an accepted feature of the program that it is difficult to imagine a time when there were no COLAs. But in fact, when Ida May Fuller received her first $22.54 benefit payment in January 1940, this would be the same amount she would receive each month for the next 10 years. For Ida May Fuller, and the millions of other Social Security beneficiaries like her, the amount of that first benefit check was the amount they could expect to receive for life.

It was not until the 1950 Amendments that Congress first legislated an increase in benefits. Current beneficiaries had their payments recomputed and Ida May Fuller, for example, saw her monthly check increase from $22.54 to $41.30.

These recomputations were effective for September 1950 and appeared for the first time in the October 1950 checks. A second increase was legislated for September 1952. Together these two increases almost doubled the value of Social Security benefits for existing beneficiaries. From that point on, benefits were increased only when Congress enacted special legislation for that purpose.

In 1972 legislation the law was changed to provide, beginning in 1975, for automatic annual cost-of-living allowances (i.e., COLAs) based on the annual increase in consumer prices. No longer do beneficiaries have to await a special act of Congress to receive a benefit increase and no longer does inflation drain value from Social Security benefits.

Once they understand these things, then they can compare their net income from their paycheck to their net income from their sources of retirement income. It is nice when there is no change in their net income and better yet when their net income can exceed their net salary so that they can take partial payments from the TSP along the way for big expenses that come up and also include long-term care planning and the risk of longevity in the plan. Unfortunately, even those employees who will have more income in retirement than in their paycheck often don’t realize they are in such good shape. Also, unfortunately, there are some employees who are eligible to retire but their net income will be $500 – $2,500 per month less than their net paycheck. That will make it very difficult to remain in the same house.

This is not financial planning but more like common sense. Once they understand the above information about their benefits, then financial planning will be needed to accomplish the following:

• Estimate proper tax withholding from TSP, FERS, and SSA
• Determine if it makes sense to delay SSA and withdraw larger TSP payments while waiting
• Make proper allocations to the TSP based on time horizon, risk tolerance and other investments outside of the TSP
• Help decide whether an annuity, Roth conversion, monthly payments, etc. are appropriate for accomplishing retirement goals
• Look at joint income and investments of both spouses for proper planning
• Consider ways to reduce debt and expenses and increase income to afford retirement

Nearly Useless Factoid

By Amelia Brust

Forty-seven years ago today, “The Price is Right” premiered in its current format on CBS, with a daily daytime version — hosted by Bob Barker — and a nighttime weekly version — hosted by Dennis James though later by Barker as well until its end in 1980. The franchise originally aired from 1956-1965 on NBC and ABC and was hosted by Bill Cullen.

Source: Wikipedia

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