Finding your retirement date

Ask most federal or postal workers when they plan to retire and the most popular answers are December and January. Depending on which retirement plan they are under, anytime in December or before Jan. 3 are the best dates.

Timing it right allows you to carry over the maximum amount of annual leave, and in 2020 be paid for most if not all of it at the new higher 3.1% pay raise. Retiring in January will also mean a lower tax bill in 2021 for many people.  That’s why December and January are big months for retirement.

But ask the same workers who’ve got the month down pat what year they are going to retire. Odds are you will draw a blank — for good reason. Each year that they work increases their lifetime indexed-to-inflation annuity. But each year they delay retirement means 365 days less of doing what they want, when they want and where they want. In other words it’s a life-alerting decision.

Have you thought about where you will live in retirement? Do you live in a high tax state like New York, Massachusetts or Maryland? Have you checked out states with no sales or income taxes? Some don’t tax retirement benefits, others don’t tax Social Security.

How much will your income drop going from work to retirement? When will you need to tap your Thrift Savings Plan account to make ends meet? Will you need it to fill in the gap between salary versus annuity, or is it something you hope to leave, in whole or part, for the kids?

For many under the Civil Service Retirement System program, with its more generous annuity, money in the TSP is icing on the cake. For a majority of people under Federal Employees Retirement System, now the majority of all working feds, the TSP is an essential part of the package which includes the government annuity, Social Security and the TSP.

When in doubt, ask Tammy Flanagan. Many feel she wrote the book on federal retirement planning. She was a long-time fed and now operates her own fee-for-service business. Best of all, she’s our guest today at 10 a.m. EDT on our Your Turn radio show. The show is archived on our home page so if you can’t catch it live on our website or on 1500 AM in the Washington, D.C. area, you can always listen later and pass it along to a friend or coworker. Why should you check it out? This is what Tammy says:

“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 IRS 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.”

State Tax Roundup

Whether you stay in your current residence or move to another state often depends on family proximity, weather, housing prices and, very definitely, taxes. Some places may be much better, offering you a better lifestyle and more money to enjoy it. Checkout this excellent state tax guide provided by National Active and Retired Federal Employees, which represents both active duty feds and retirees.

Nearly Useless Factoid

By Amelia Brust

A solar eclipse once stopped a battle between the Medes and the Lydians in the early 6th century BC, in a region of what is now Turkey. The Battle of Halys, also known as the Battle of the Eclipse, was fought approximately May 28 of that year, six years into a war between the two sides. But when the sky suddenly turned dark, both parties interpreted the event as an omen and interrupted the battle. This resulted in a draw and they negotiated a peace treaty.

Source: Wikipedia

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Your Turn with Mike Causey

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THRIFT SAVINGS PLAN TICKER

Nov 25, 2020 Close Change YTD*
L Income 22.0527 -0.0044 1.01%
L 2025 10.9262 -0.0047 -
L 2030 37.7869 -0.0196 0.12%
L 2035 11.2457 -0.0063 -
L 2040 42.1678 -0.0252 -0.21%
L 2045 11.4628 -0.007 -
L 2050 24.9152 -0.0161 -0.56%
L 2055 11.8999 -0.0091 -
L 2060 11.9000 -0.009 -
L 2065 11.9001 -0.0091 -
G Fund 16.4945 0.0004 0.82%
F Fund 21.1087 -0.0033 6.30%
C Fund 53.9482 -0.0842 2.69%
S Fund 69.3425 0.2358 3.97%
I Fund 33.9987 -0.0519 -10.53%
Closing price updated at approx 6pm ET each business day. More at tsp.gov
* YTD data is updated on the last day of the month.