If you have a simple departure strategy that gets you the best deal in retirement, there’s a good chance it’s flawed. That’s especially true for federal employees. As insiders know, the government is usually complicated and frustrating. However, it can also be very rewarding if you take advantage of the best exit options.
Many individuals don’t get the best bargain, whatever their objective or goal. That’s because they don’t know the regulations, questions to ask, or ideal time to buy an annuity. Retirement “ideal dates” vary. Primarily for taxes or a pay raise. There are ideal periods to retire depending on answers to questions that seem simple. But they aren’t simple at all.
A reader asked a “simple” retirement question. It was actually complicated, like most “simple” questions. So, here’s an example of why many individuals should seek assistance with retirement planning. The question appears to be “simple.” The correct response is everything but! A Defense civilian wonders:
“I’m a 52-year-old federal employee and have 30 years of DoD service. Since 1992, I’ve been investing in my TSP at max allowance. I’ll reach my retirement eligibility age (57) in 5 years. Is early retirement beneficial? I’m married with two sons aged 13 and 11, so they’ll be going or preparing for college by the time I can retire.”
Seems simple? Not really. Here’s the answer.
This employee has three retirement options.
She must estimate all three FERS sections (FERS Basic Retirement benefit; FERS Supplement or Social Security retirement; various TSP distribution options).
All three benefit streams are subject to federal and state income taxes.
She’ll continue paying insurance premiums monthly in retirement with after-tax money.
A spousal survivor election will reduce her FERS basic retirement payout by 10% if she’s married.
It’s also critical to plan for long-term care so that future care demands don’t disrupt her financial strategy.
When planning TSP withdrawals, be conservative with the future rate of return projections as the market will fluctuate and may not give returns seen in past bull-market years.
Lower returns years can be upsetting and unpleasant if her FERS and Social Security retirement payments aren’t enough to withstand the fluctuations.
Here are three options and some considerations for each:
· Resign before Minimum Retirement Age (MRA) and request for a deferred retirement at MRA.
o Her future benefit will be based on her high-three average pay at retirement.
o She won’t get cost-of-living adjustments (COLAs) to the FERS retirement benefit until she’s 62. If she retires at 52, her benefit will be the same for ten years. Consider your pay ten years ago. How different was it from now? If inflation is high, your FERS payout will lose purchasing power, and you may empty your savings too rapidly.
o It’s going to be hard to stop working and not earn income for the next five years. Life expectancy payments from the TSP based on $500,000 beginning at age 52 with a 3% future rate of return would be under $1,300 per month. Run scenarios with the TSP payment and annuity calculator (remember that these payments will be subject to federal and possibly state income tax withholding, depending on what state you live in).
o Other than life expectancy payments and life annuities, early withdrawals are taxed at 10%.
• Work until 57 (MRA)
· The FERS retirement supplement will be paid to give additional immediate income besides FERS Basic Retirement Benefit.
o The FERS supplement has no cost-of-living adjustments (COLAs), and the FERS base benefit is level payment until age 62, when COLAs begin.
o There won’t be a 10% early withdrawal penalty for TSP withdrawals, enabling additional flexibility.
o Based on the TSP balance, this may be the first realistic chance to retire with enough money to replace your net income while working.
• Work until 62
o Eligible for the 1.1% annuity computation factor for the FERS basic benefit, a 10% increase, plus more service and a higher high-three average pay from working longer.
o Eligible for Social Security retirement, which is tax-friendlier than the FERS supplement.
FERS and Social Security receive annual COLAs.
o TSP distributions are more likely to be sufficient for a 30-plus-year life expectancy, allowing for market swings and increased inflation.
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Retirement age and when you stop working
Social Security retirement benefits start at your retirement age. But many don’t stop working at this age.
The age you stop working affects Social Security benefits. Your retirement benefit is based on your highest 35 years of earnings and the age you begin receiving benefits.
What if you stop working before you begin receiving benefits?
If you stop working before you begin receiving benefits and have less than 35 years of earnings, you’ll affect your benefit amount. When calculating retirement benefits, years without earnings aren’t countedâ€â€no-income years lower retirement benefits.
Even with 35 years of earnings when you stop working, some of those might be low-earning years. These years are averaged into your retirement benefit computation, thus reducing it. However, you’ll replace low-earning years with high-earning years by continuing to work. Higher earnings boost benefits.
If you stop working between 62 and your FRA
Early retirement reduces benefits. The earliest age you can start collecting them is 62. If you file at FRA, you’ll receive full benefits.
If you stop working after FRA
You have two options if you work past Full Retirement Age (FRA):
• You can work and obtain full retirement benefits no matter how much you earn.
• You can postpone receiving retirement benefits while earning credits that raise your benefit amount.
Imagine if it was a complicated question. Gulp!
Contact Information:
Email: [email protected]
Phone: 3604642979
Bio:
After entering the financial services industry in 1994, it was a desire to guide people towards their financial independence that drove Aaron to start Steele Capital Management in 2013. Armed with an extensive background in financial planning and commercial banking coupled with a sincere passion for helping people, Aaron has the expertise and affinity for serving the unique needs of those in transition. Clients benefit from his objective financial solutions and education aligned solely with
helping them pursue the most comfortable financial life possible.
Born in Olympia, Washington, Aaron spent much of his childhood in Denver, Colorado. An area outside of Phoenix, Arizona, known as the East Valley, occupies a special place in Aaron’s heart. It is where he graduated from Arizona State University with a Bachelor of Science degree in Business Administration, started a family, and advanced his professional career.
Having now returned to his hometown of Olympia, and with the days of coaching his sons football and baseball teams behind him, he now has time to pursue his civic passions. Aaron is proud to serve on the Board of Regents Leadership for Thurston County as the Secretary and Treasurer for the Morningside area. His past affiliations include the West Olympia Rotary and has served on various committees for organizations throughout his community.
Aaron and his beautiful wife, Holly, a Registered Nurse, consider their greatest accomplishment having raised Thomas and Tate, their two intelligent and motivated sons. Their oldest son Tate is following in his father’s entrepreneurial footsteps and currently attends the Carson College of Business at Washington State University. Their beloved youngest son, Thomas, is a student at Olympia High School.
Focused on helping veterans and their families navigate the maze of long-term care solutions, Aaron specializes in customized strategies to avoid the financial crisis that care related expenses can create. Experience has shown him that many seniors are not prepared for the economic transition that takes place as they reach an advanced age.
With support from the American Academy of Benefit Planners – an organization with expertise and resources on the intricacies of government benefits – he helps clients close the gap between the cost of care and their income while protecting their assets from depletion.
Aaron can help you and your family to create, preserve and protect your legacy.
That’s making a difference.
Disclosure:
Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice has been filed, or is excluded from notice filing requirements. This information is not a complete analysis of the topic(s) discussed, is general in nature, and is not personalized investment advice. Nothing in this article is intended to be investment advice. There are risks involved with investing which may include (but are not limited to) market fluctuations and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making any investment decision. You should consult a professional tax or investment advisor regarding tax and investment implications before taking any investment actions or implementing any investment strategies.
