Retirement planning consists of federal employees employing strategies that place an employee on an unchangeable path once the process is initiated. There is no turning back once the process has begun.
The problem with life is that time and circumstances never stay and keep changing, which creates problems for your prior choices. We have done some research and come up with this list of six retirement selections that come under the unalterable category:
• Converting your traditional taxable IRA to a tax-free Roth IRA
• Choosing your retirement date
• Buy an annuity or select an annuity is the most irreversible retirement plan distribution option
• Picking the form of an annuity distribution
• Choosing a Social Security benefits start date
• Continuing Care Retirement Community (CCRC)
Let’s discuss these retirement decisions in detail and try to understand what choices can be made, analyzing if an escape window can be opened or if this decision is irreversible, and checking if there is an option available to reduce the final outcome of the issue.
Converting your traditional taxable IRA to a tax-free Roth IRA
Many federal employees will get an opportunity to convert their traditional IRA that is taxable when distributed to a Roth IRA (tax-free when distributed) under specified conditions. While making your decision, your major goal will be to minimize taxes on your savings. The rule of thumb, in this case, is if the tax rates are higher than switching to Roth will be a good idea. More specifically, we can say that switching to Roth means you are paying the taxes now to get a greater yield on your converted funds and not pay taxes when the funds are distributed. The break-even analysis focuses on whether the tax-free withdrawals surpass the time-value maintained price of paying taxes before. Unfortunately, once you switch to a Roth IRA from your traditional IRA, you are bound to stick to your choice. It is important to note here that Roth reversal is no longer an available option. In other words, it was possible to reverse ROTH conversion before the Tax Cuts and Jobs Act. But now, you are not allowed to convert Roth at the start of the year, but you can always reverse course later in the year if stock values drop and do the conversion when the stocks are at their lowest values.
How to reduce the impact of this unalterable decision? There is one strategy of Roth conversions that may help you to reduce the burden of the irrevocable nature of this transaction. The best thing you can do is to plan a series of annual Roth conversions so as to reduce the tax impact for each year. Or, we can say, use a strategy that can keep your taxable income below the next higher bracket. For example, your conversions will not be taxed at the 32% marginal bracket and will be taxed only at the 24% bracket. The multiple conversions will delay the irrevocable nature of the Roth conversion. The positive point here is that a planned strategy will give you time to adapt to the changing market situations. The negative side of this point is that mathematically, it may not work out if you take a long time because the overall yield on investment will be constrained by fewer years only.
Choosing your retirement date.
Another decision that falls under an unalterable, yet possible category is your decision to pick your retirement date. Once you give your retirement date in writing, it is almost impossible to reverse the action and restart your career in your future. The good news for you that we see here is that you get an escape window under this category, and your current employer or another employer may help you down the road and hire or rehire you.
How to reduce the impact of this unalterable decision? One way you can try with your current employer is to ask for paid leave. The second way to avoid surrendering your entire salary would be to surrender a part of your entire salary by looking for some phased retirement program. In many cases, the phased retirement program could benefit the retiree, and he or she gets an option to resume full-time work if desired. You always get an option to explore programs under the Family and Medical Leave Act (FMLA) that might be open for you.
Buy an annuity or select an annuity is the most irreversible retirement plan distribution option
Well, we must clarify here that Annuitizing retirement nest egg is not open for everyone. However, if you are interested, and you buy an annuity or choose an annuity distribution plan, then this decision of buying or choosing a plan is an irrevocable part of your retirement decision once annuity payments begin.
How to reduce the impact of this unalterable decision? One way to delay the impact of this irrevocable decision is to ladder purchases of single-premium annuities. With this, we can say that you can buy a smaller part of your annuities over several years and delay the process of losing liquidity on your funds. This way, you may end up reducing the risks associated with interest rate by delaying annuity purchases to the time low-interest rates rebound.
Picking the form of an annuity distribution
Another retirement decision we shall discuss here is picking the form of annuity distribution. There are two common choices between life-only annuities and joint and survivor annuities. Rest all annuities are the same, except a life-only annuity that provides a larger sum of the monthly payment, but it will not make any payment upon the annuitant’s death. A joint and survivor annuity is advantageous in this case and will continue providing payments to the survivor, assuming that the spouse lives longer than the annuitant. Taking an example, if you are 65-years old, and you are putting $100,000 in a life annuity, you might get a $706 monthly payment. On the other hand, life-partners both currently age 65, putting $100,000 in a 100% joint and survivor annuity might give a $586 monthly paycheck and will continue to give as long as one of the two spouses is alive. In both cases, once the selected payout option is entered, it cannot be changed.
How to reduce the impact of this unalterable decision? One way to reduce the impact of this decision and avoid the drop in monthly income is to activate the annuity pop-up feature that will help you to increase the annuitant’s income at the death of the non-annuitant spouse. This would charge a monthly income when this option pops up. Another way to avoid the drop in income is to choose the life annuity and get other assets available like life insurance to compete with the income that the surviving spouse would get if you had a joint and survivor annuity.
Choosing a Social Security benefits start date
Another decision that needs consideration is picking the right date to start your Social Security benefits. Most of the time, employees choose between 62 and 70. The general rule of thumb is to delay the start of benefits to get more monthly income. There are so many articles written on this subject matter, and the writers have always advised people to wait until 70 to get maximum benefits. However, the main purpose of this column is to guide people and make smart decisions to avoid falling prey to locked choices.
How to reduce the impact of this unalterable decision? One good thing about this option is that it gives you the flexibility to change your decision for up to a year after you register for benefits. Or we can say that you can withdraw your Social Security claim and re-file them to get more benefits at a later date. There are three conditions for employees: The first one being the alteration in the decision must come within 12 months of filing for Social Security benefits. The second one is you have to repay all the benefits that you received. The third and the last one is you can withdraw your application only once in a lifetime. You can raise your request for withdrawal using form SSA-521. Once the 12-month period passes, your decision to take a lower monthly amount from your Social Security benefits will become irrevocable.
Continuing Care Retirement Community (CCRC)
Some employees prefer moving to a Continuing Care Retirement Community CCRC to enjoy health care services and best amenities like one-floor living accommodations, cooked meals in a common dining hall, light-housekeeping, social entertainment, etc. The main problem with this service is the reduced monthly fee and an upfront lump-sum payment that you need to make. The good news about this service is that your lump-sum payment will be partially refunded for a specified time. For example, a payment of a $200,000 lump sum would be lost after 20 months. You could look at this option if your monthly rent for 20 months was appreciated by $10,000 a month because you died after 20 months! In simple words, we can say that a short-lived resident ends up making an irrevocable decision on the payment that would be lost despite paying a significant amount.
How to reduce the impact of this unalterable decision? The best way to avoid losing your lump sum is to watch your refund option when you pick a CCRC closely. The other way is to check if the refund is for an individual or a couple because couples who have one spouse living when the other one dies will get the lump-sum. The third option is to choose a CCRC with a higher monthly cost but lower lump-sum payments.
Retirement decisions that do not allow you to make changes once they begin should be made after careful planning only. You can always take time and delaying your decision to think more, but you may end up paying the price for that delay.
Contact Information:
Email: [email protected]
Phone: 8139269909
Bio:
For over 30-years Flavio “Joe” Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
