For some new retirees, the paperwork may be done, but the money still hasn’t arrived

Guest:	Tammy Flanagan
Title:	Principal with RetireFederal
Summary:	Thousands of federal employees retired at the end of the last fiscal year expecting a smooth transition, only to find themselves waiting months for their first retirement payment. That delay can turn careful planning into real stress, especially when questions about savings, TSP withdrawals and Medicare decisions all come at once.

The Federal Drive with Terry Gerton provides expert insights on current events in the federal community. Read more interviews to keep up with daily news and analysis that affect the federal workforce. Reach out to Terry and the Federal Drive producers with feedback and story ideas at FederalDrive@federalnewsnetwork.com.

Terry Gerton Let’s talk about TSP for a minute because there’s a lot of news every month about TSP millionaires and everybody wants to be a TSP millionaire, but not very many people really are… What’s going on with the balances there?

Tammy Flanagan Yep. It sounds like there’s probably a lot more than there are because you do hear a lot about everyone’s going to have a million dollars by the time they retire. And there are plenty of people who do. But if you look at the fact that there’s over 7 million TSP accounts, out of those 7 million, there’s less than 200,000 with a balance of greater than a million. So it’s certainly not the majority.

Terry Gerton For folks who have maybe a more modest TSP balance, how do they think about stretching that money over retirement?

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Tammy Flanagan Yeah, well, there are people who have plenty of money to get through retirement, even if it’s not a million dollars, because you have to remember you’ve got your FERS basic benefit, you have social security, and those after a full career, can produce 60% replacement of your income, considering you could easily get 30% replaced through FERS, and then perhaps another 30%, depending on your lifetime career history from social security as well. So the TSP has to serve a purpose of being that icing on the cake. You might be able to pay your bills with social security and the FERS benefit, but if you wanna really have a life after retirement where you might be able to spoil the grandchildren or take some trips or do the things people wanna do in retirement, even if it’s just to pay for care, you might be caregiving for a parent or a spouse, you need that extra money. So in retirement, people have to decide how they want to spend that TSP because they have a lot of choices.

Terry Gerton Well, you make a good point there that once someone retires, the TSP is just one tool among many to replace income, but should folks be thinking that they should leave their money in the TSP or move it or draw it down? What are some of the considerations that go into that?

Tammy Flanagan Yep, any and all of the above depending on the circumstances, right? So for some people, simplicity is key, which means just leave it in the thrift, elect a monthly payment, and have that add to your income. And that’s really an easy thing to set up directly through the TSP. A lot of people in retirement are now using the lifecycle funds, maybe the L income fund, which is really mostly G and F, but a little bit is still there in the stock market that needs to be there for growth. Because, you know, even a 65-year-old today may have another 30 or 40 years left to go with the life expectancies growing these days. So you want to make sure you’re not being too aggressive with the withdrawals, but certainly setting up a monthly payment, perhaps based on life expectancy, or if you’re over 73, based on the required minimum distribution withdrawals which are still fairly generous for those folks who have to take money out. Not necessarily have to spend it, but they do have to take those withdrawals and pay tax on the pre-tax money. So that would be easiest number one option. Otherwise, you can also move that money to an IRA, because with those folks with larger balances who are trying to do some tax planning and trying to avoid paying too much in taxes or getting up into that higher tax bracket or that higher Medicare payment bracket. They may want to move some money to a charitable distribution, which you can’t do directly from the TSP. So you’d need that IRA to serve that purpose. And also diversification. You know, the TSP does give you those five core funds that diversify across broad stock investments. And also we have the ever loving G fund, but in the private market, you can diversify even more broadly. You know, in a lot of financial planning accounts that folks have, even myself. You know, I could probably have 30 different funds that I’m diversified in and I’m using a planner, of course, to help figure out how much to put in each one. So the nice thing about using a financial planner is they can make some of those tough decisions, help you do the tax planning that needs to be done. And sometimes it’s easier to do that when it’s not tied up in the thrift, but you’ve got it someplace where it’s easy to manipulate, easier to access, you can get it quicker. And do perhaps some different things with it.

Terry Gerton I’m speaking with Tammy Flanagan, principal with Retire Federal. Tammy, we’ve been talking here about people using TSP to augment their FERS payments, but you’ve been taking to a lot of people lately who are recent retirees, folks who took the fork in the road or the DRP who still have not received their first annuity payment. What are you hearing there?

Tammy Flanagan Yeah, I was really surprised because I kind of reached out to some folks to find out what’s going on. And boy, I got some responses that really took me by surprise. There’s folks that retired September 30th that, as of yet — we’re in April — have never received a dime yet of retirement money. Some of them haven’t even received their lump sum annual leave payment. So the holdup is not just at OPM. It’s also at the payroll side of things. And in some cases, I had one lady tell me that she retired September 30th, and her application didn’t move from HR to payroll until February. So now it’s at NFC, their payroll provider, who told her it’s gonna be another 90 days, possibly, until it gets to OPM. So that’s now, so it’s not even at OPM yet. So it’s really a tenuous situation for folks who thought they did a good job preparing. They went to the pre-retirement classes, they’ve saved money, they cashed in a big lump sum of annual leave, but now they’re running out of money and they’re getting desperate for those funds to start coming in.

Terry Gerton Right, this cash flow can be a real concern. So for folks who are in this situation, what do you recommend for short-term financial strategies or bridge options while they’re waiting for their case to get through?

Tammy Flanagan Right, well, a lot of people are taking those distributions from their TSP account. However, a lot of the folks who retired weren’t even 55 yet last year, because they took the early retirement. They might only be 53 or even age 50. So taking those TSP distributions encounters the tax penalty as well as taxes on those distributions. So if you can avoid that, if you have other means of taking money from other savings or perhaps even borrowing from relatives, perhaps in desperation, that might be a better option if you have that choice. Some folks have gone out and got part-time jobs even though they weren’t planning to work after retirement, so they’re supplementing it with income from driving Uber or just getting some type of part-time work so that they can pay the bills. So there’s things you can do, but none of them are what you probably had planned on doing.

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Terry Gerton Right, definitely not the retirement they envisioned.

Tammy Flanagan That’s right.

Terry Gerton Well, in that retirement, one of the other things that’s going to come up is Medicare and Medicare timing. You talked about some folks who are just barely or not yet 55 who are retirees, but typically you think about Medicare when you’re 65. Is that an automatic enrollment for everyone or are there situations when delaying Medicare actually makes sense?

Tammy Flanagan Yeah, so Medicare, like we know for people who are taking it based on age, the magic age there is 65. But we meet not only federal employees who took early retirement at age 50, but we also have a category of employees who work well beyond age 65. They’re still able to stay employed. They love what they’re doing. And so they can delay Medicare enrollment as long as they’re covered under what’s called current employment health coverage. So if you’re still a federal employee or your spouse is a federal employees and they have health insurance through their employer, not through their retirement, then they can delay Medicare without penalty and sign up when they retire. They have an eight month special enrollment period to get that coverage in place within that eight months following retirement. And there’s some folks who delay even beyond that.

Terry Gerton When federal retirees keep their federal employee health benefits into retirement, what are some of the most common Medicare enrollment mistakes that you see?

Tammy Flanagan Yeah, well, sometimes it’s just assuming that because we don’t have to take Medicare, of course, unless you’re postal employees, because some of those folks, most of those will now be required to enroll. But for those employees under FEHB, even after you retire and after you turn 65, you can still choose to just use your federal health insurance. And there’s about 20% of our retirees over 65 who did not enroll in Medicare Part B. That’s the one you have to pay the premium for that’s at least $202 a month, and oftentimes more if you’re a more wealthy retiree where you’re in those income-related premium adjustment categories. So those folks say, well, I’ll just stick with a good comprehensive health plan, maybe something like Blue Cross Standard or Compass Rose High Option, or Mail Handlers. There’s a lot of plans that are very good coverage and they give you comprehensive benefits nationwide, let alone worldwide coverage. So there’s nothing wrong with doing that. But you have to be prepared that it’s a pay me now, pay me later. So if you’re going to go it alone with just your federal health insurance, and you might be in really good health right now, keep in mind that 10 years from now, 20 years from now, your health can change. And not only will you meet those catastrophic caps, in some cases, year after year, which could be 8,000, 14,000 depending on the plan that you’re in, but there may be things that your federal health plan doesn’t cover that you might need beyond what the FEHB plans provide. In some cases, Medicare could have filled in those gaps, but if you chose not to enroll, you’re going to have even more out-of-pocket expenses. So as long as you have the means to do that, nothing wrong with taking the chance of having good health for the next 30 years, and if things don’t go well, you have means to pay for that care.

Terry Gerton Well, healthcare expenses, healthcare insurance can be such a significant expense. For those folks we were talking about who haven’t yet received their FERS annuity payments and they’re really trying to manage every single dollar, where did they make that choice?

Tammy Flanagan As far as Medicare goes?

Terry Gerton Right, right.

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Tammy Flanagan Yeah, so those who took their retirement, and like you said, maybe aren’t getting all their benefits yet, and they are trying to watch every penny, so they might be putting off the enrollment in Medicare. Even if they did wait another year to enroll, let’s say they said, I’ll just skip it this year, I don’t want to pay the extra $202 a month or more, so I’ll wait until the general enrollment period, which runs every year from January to March. So let’s, say I retired in September. That eight month special enrollment went by and I still didn’t pick it up because maybe I still haven’t gotten my retirement straightened out. So now I wait till next year. I’ll sign up in January, February or March. And I may pay a 10% late enrollment penalty, but you have to look at the flip side. I’ve saved $202 a month for over 12 months. So you have to kind of weigh the benefit of doing that versus the lifetime penalty that you’re going to incur. I don’t necessarily encourage people to do that. But it’s not the end of the world if you wait one year or even two years, that penalty can be sustainable and yet it’s still gonna take 17 or 18 years to break even. So you might feel good about that delay from that standpoint.

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