The year before retirement can be nerve-racking for many people. The career they’ve worked so hard for is coming to an end, they have to start making big plans for their work-free future, and there may be some financial anxiety coming up, as well. So, in this episode, Michael, Tommy, and John are going to be discussing what you can expect for the year before retirement and what you should have in place as you approach this next season.
Listen in as they explain the importance of having a plan for your retirement, including how you will be spending your extra free time and how to ensure you can afford a happy retirement, not just a basic retirement. You will learn the optimal time of year to retire, what to consider in terms of annual leave, and what you will find in an official retirement estimate.
Listen to the full episode here:
What you will learn:
- The benefit of bunching meetings. (4:40)
- How to navigate the approach of retirement. (8:30)
- The optimal time of the year to retire. (14:20)
- Why you should request an official retirement estimate. (18:20)
- What you should expect 6 months out of retirement. (25:44)
- The importance of having your divorce and insurance matters sorted before retirement. (33:20)
- What to consider if you are CSRS or CSRS offset. (40:00)
Ideas worth sharing:
“It’s not just a matter of 'can I afford to retire?' It’s 'can I afford to retire happy, healthy, and engaged?'” - Mason & Associates, LLC
“If you are in the year before retirement, we want you to request that official retirement estimate.” - Mason & Associates, LLC
“It’s important for everyone to feel comfortable and informed when they’re making these potentially irrevocable decisions.” - Mason & Associates, LLC ”
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
Michael Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Michael Mason, certified financial planner; John Mason, certified financial planner, and Tommy Blackburn, certified financial planner and certified public accountant.
Mason & Associates have over three decades of experience helping federal employees with their financial plans. This is episode 15, The Year Before Retirement. Guys, how are we doing?
John Mason: Well, Mike it's awesome. It's hard to believe that we launched our first podcast, Federal Employee Financial Planning Podcast, I think it went live early January, and there's six available as we record today — six available for our listeners. We're pretty proud of the downloads.
We've seen some from Alaska and across the country, so we're really encouraged to see that positive momentum. And I just can't believe guys, we're already recording episode 15.
Tommy Blackburn: It's pretty awesome to see how this has come. I have a feeling as we go back and listen to earlier episodes, it'll be fun to hear how it's evolved and maybe our tempo.
John Mason: And I think equally, as cool as we've actually had somebody reach out to us to say, “Hey, we really like this content. What does it look like to be a client of Mason & Associates?”
So, not only helping folks who we’ll never meet and never hear from, providing tremendous value that way, actually, now, starting to see that people are reaching out and connecting with us so that we can deliver financial planning and potentially, make them a client of our company.
Michael Mason: It takes me back to one of my favorite sayings that I didn't make up, one of my mentors did; cast your bread upon the waters, it'll come back in club sandwiches.
We can't possibly make everybody that might listen to our podcast clients, but we can make a difference in their lives. And we were reached out to from a lady from four or five states away from us and she'll have the opportunity for a great, one of the greatest tax loopholes known to man just by listening to the show.
So, it's kind of fun to change people's lives. You don't always have to be compensated for it cash-wise, you can be compensated in your heart.
John Mason: And also, I think kind of just good news, Mike is you and Bobby, my mom just got back from vacation, which was pretty cool. So, Tommy, you and your family both got back from vacation while I was manning the office here, Ken and I and Ben, and the rest of the team.
So, you guys had great vacations out and now, we're starting in on our strategic planning meeting season, which is just … I always get amped up this time of year. I think it's really exciting for us to meet with all of our clients, 350 to 400 meetings over the next eight weeks over April and May.
It’s such a fun time to reconnect with all of our clients, provide that tax planning, that retirement planning, and specifically, some of those people (I don't know how many) are in the year before retirement.
So, we're about to embark on all of this during that strategic planning meeting season, which is just super fun.
Michael Mason: Yeah, and it's exciting, but it's a lot of work. It's how many do we figure? 300 and some appointments over the next two months. We're doing it kind of different than we used to do these strategic planning meetings.
We used to do them based on your birth month and we thought that was a logical … it was a system. Whether it was the most logical system or not, it was a system and many people in our circles thought, well, at least you have a system.
But then we figured if you were born in January, you were getting a different experience than somebody that was born in December and then we're rushing to get things done in December for that person.
So, now, we've crunched these SPMs as we call them (strategic planning meetings) into a two-month period, right about the time the tax returns have been done. And there are many benefits to this. I'll list one or two, and let the boys talk about the other ones.
But a similar experience for me as a 60-year-old financial planner and technology is not my number one suit, it’s I get to learn all this technology, the new systems, because I'm repeating. I'm repeating it on a regular basis. So, that's good. And I'm repeating a similar experience every day with the clients.
Tommy Blackburn: I think that's one of the biggest things, is it's very efficient for us and our clients. Everybody's getting a consistent experience. We hopefully, have a fresh tax return to work with.
So, just consistent message, consistent experience, and then it frees up the rest of the year for us to follow up and implement on any other action items that come out of those meetings.
And another part of this, of what has forced us to do with our business is currently, so we are taking on new clients, but those new clients are having to/or potential new clients are having to wait until the end of the strategic planning meeting season, as we refer to it.
Because right now, we're focused and bunching all of these clients, these existing clients into this window. We have to focus on our existing. After that, we're going to begin focusing on implementing, serving our existing as well as bringing on those new client relationships.
John Mason: I just think one of the coolest things guys as we dive into this topic on the year before retirement on episode 15, is that as we bunched — and Mike, you could probably relay this even better than me and Tommy.
But when we were meeting with clients based on their birth month, we were consistent and we were delivering value throughout the year. But when we started bunching all of our meetings into a two-month period, I think what it actually did is it made us better for a variety of reasons.
One, similar experience, but I think it's also allowing us to have more touch points with those clients throughout the year because we're reviewing their tax return before it's filed in Q1. Then we're having the strategic planning meeting in Q2. Then we're following up on the strategic planning meeting and quarter three and four, and then we're wrapping up the year with all of that good stuff and that final tax projection.
Whereas, when we were meeting with them on their birth month, you couldn't get everybody on that same track. So, it seems like bunching everybody into this one season has enabled us to actually deliver more consistent value throughout the year.
Michael Mason: Yeah, another point and then we'll move on to the year before retirement; but another great point is when we're doing these meetings, we're pretty much in the office together. And when we're preparing for these, if John finds something: “Look what I just discovered today,” well then he goes to the office and tells everybody, and now, we're all looking for that same discovery, that same action point for the next person we talk to.
But when you spread him out over 12 months, you're not going to have that same momentum. So, that that's kind of cool.
John Mason: Well, and I know we took us down a little bit of a rabbit hole there, but hopefully, our listeners guys enjoyed learning a little bit about how we run our firm here and how we're delivering that value.
So, as we start transitioning into the year before retirement, I think we'd be remiss if we didn't say that this year before retirement, at least in our experience, is pretty nerve-wracking for a lot of clients.
It's exciting that their career is coming to an end, but the fact that their career is coming to an end, we have some anxiety, whether it's financial anxiety, emotional anxiety. So, let's have some conversation around that.
Tommy Blackburn: Yeah, it's hopefully going to be one of the most rewarding and fun times in somebody's life as they enter that next season. But it can be a scary transition and we hope to certainly put the financial aspect of that at peace, but also help just kind of manage how do habits and lifestyle begin to change.
And as we think about when most people work a career, it's 20, 30, 40 years. That's a long time of forming habits and your identity and who you are, and people ask, “What do you do?” “Well, I do this at work. This is my role. These are the things that I'm an expert in and et cetera.” And so, now you have to begin to think about, well, when you take that away, what does my life look like?
So, hopefully, we are planning before that and we have a thought process as to what does retirement, just from how I'm going to spend my time, how am I going to apply my myself? Have a plan for that.
Peeking behind a curtain, what we usually see is most of our clients are even more busy than when they were working. They find plenty of things that are interesting to them and they're more committed than they were before. They're just not committed to an 8:00 to 5:00 or whatever those hours are.
Michael Mason: Yes, it's extremely important. I'm 60 … I’ll be 61 in August, and I'm looking not to retire before five to seven years from now, but to semi-retire because one, I love what I'm doing. Two, I don't know what I would do with full retirement.
Bobby and I are talking about things. She may actually start taking some golf lessons but you don't want to become a couch potato. You don't want to become the guy that's hanging out at the country club bar all day long instead of just from 6:00 to 8:00 at night.
So, it's not just a matter of can I afford to retire? Is can I afford to retire happy, healthy, and engage? So, that's important to me.
One note that I wanted to make here, I went out and hit a hundred golf balls at lunch today and standing beside me is a retired doctor, and he was talking about the market volatility.
And he made a statement that I hear all the time. He says, “I'm just glad that this is not my first year of retirement.” And I kind of laughed at him and I said, “Well, if you plan on being retired 20 or 30 years, you are going to go through a bear market. It's going to happen. It shouldn't change your retirement plans just because it happened that first year.
In fact, maybe you just say, “Boy, I got that out of the way. I won't have to look at one of those for another 10 years or something.”
John Mason: And as we're recording this podcast on March 15th, I'm not sure exactly when it's going to be live, but right now, there's some volatility going on with oil prices. There's the Russia/Ukraine conflict.
There's a lot going on in the market and having a plan in place for these periods of volatility, especially as you're leading up to, or just now entering retirement, knowing that your portfolio can weather that storm, knowing that you have a war chest and cash or fixed income.
And oh, by the way, chances are if you're listening to this podcast, Mike, we've got great guaranteed income. So, chances are if this is your first year of retirement, maybe we don't even need a TSP or IRA withdrawal, which allows us to weather that storm a bit further.
Also, as we think about guys the year before retirement, I think there's a lot of decisions that we need to make like survivor benefits. Are we taking it? What are we going to do with federal employees’ group life? When are we turning on social security? And many of these decisions are irrevocable, which can cause a lot of stress and anxiety for folks who aren't working with a financial planner.
So, as exciting as it is, leaning into this last year of service, whether that's MRA, age 57, or maybe you just hit 62, and you're getting the 1.1, a lot to think about here. As we outline the show, I think we're going to talk about three things (correct me if I'm wrong): the HR perspective on how you plan for retirement, from our financial planning perspective, like how are we helping clients during that period.
And then the last one, which we're kind of hitting on already, is like that personal experience and who you are as a human leading up to this last year of retirement — or I'm sorry, the last year of work before you retire.
Michael Mason: Right, so let's talk about that HR perspective, and many people just defer to, “I'm going to retire at the end of the year.” But Tommy let's give FERS folks some ideas of picking that retirement date.
Tommy Blackburn: So, typically, we're going recommend retiring in the last one to three days of a month for our FERS folks for CSRS, if we want to address that. They usually do the same or retire within the first one to three days of the beginning of a month.
And the reasons that we do that is for first, is that your retirement is effective the following month of your retirement. So, if you retire on the first day of a month, you have to go through that entire month and then the next month it kicks in. And of course, it's also paid in arrears. So, you have an entire another month before you get that first check.
So, by doing at the end of the month, it's effective the next day, basically. And one month later, you've gotten your first check.
Michael Mason: What's kind of neat is as a federal employee, you can Google all these things. When we first started Googling CSRS, I would type in Civil Service Retirement System. Now, you can do something as simple as CSRS VCP, and it goes right where you want to go.
So, you can type in CSRS best retirement dates or FERS best retirement dates. You don't have to all the way always go back to this podcast and say, “What did Tommy say there?”
John Mason: And if you Google, the best days to retire under CSRS or best days to retire under FERS, Tommy, what we're typically going to find is those last three or first three days, like you indicated, but the optimal days is going to be when one of those days, last three of the month, coincides with the end of a leave period.
So, that's what you'll see like that optimal time throughout the year. So, maybe there's three, four or five, where at the last day of the month and the end of a pay period coincide, and then further, we also have some annual leave considerations.
Tommy Blackburn: Right, so those annual leave considerations, a lot of times what we see with our clients is they've banked up quite a bit of their leave. And if they do it optimally or they're kind of saving that leave, and that last year leading up to retirement, they're going to be able to sell that back to the government, so to speak, or they're going to get paid for that annual leave that they have in their bank.
And so, many people use this to … they're going to get this lumpsum payment when they retire the following paycheck, they usually get it, and that's going to help fund, it's going to help that cash flow until their pension … so that first interim payment shows up and even kind of help bridge the gap while they're in that interim status before their pay is fully adjudicated, and they've gotten the benefit of a full pension.
Michael Mason: Early on in this year before retirement, we want you to go out and go to HR and get a real estimate of your retirement benefits. The EBIS system, the GRB system as we've seen those work, they're asking the employee to punch in things like service comp date and whatnot.
And the service comp date can look two different things on your TSP statement. It can say one thing and on your LES, say another. Many times, this happens, John, with military time. They give you the military time towards your leave. But if you haven't purchased it, you may not get that military time towards your FERS or CSRS retirement.
John Mason: Oh, it's really hard. It's really hard to decipher through all of the Standard Forms and the action forms that have happened over a 30 or 40-year career. On the top of your pay stub, your LES, it says SCD for leave purposes.
So, were you hired in an incentive, was it they put back in time your leave dates, so that way you started accruing higher sick leave and annual leave more quickly? Does it align with your FERS vesting date on the TSP statement? Did you have that military time, Mike?
There’re so many different places. Oh, did you have a break in service? Is that being accurately reflected in GRB or EBIS or whatever benefits portals out there for you as a federal employee? So, even something just as simple as knowing service comp date, you could have conflicting data across the board here that official estimate's going to help.
Michael Mason: Yeah, and one other thing that's very important, I wouldn't say it's rare, we don't come across it every day. But you could have that dual career military now retiring from Federal Employees Retirement System.
It typically will not buy your military time if it resulted in a pension from the military. You're typically not going to give up the pension to buy that time towards federal. But little-known fact, if you went to one of the academies, those four years at the academy can be purchased. And four years are going to cost you pennies. You weren't making anything, so you can buy those four years and add them to your 150 to 170,000 High-3.
John Mason: So, we've talked about a lot already and the action here is you are in the year before retirement, we want you to request that official retirement estimate. And the reason that we ask our clients to do that, let's be clear here; is not because we need help calculating years of service times 1% times High-3.
That's not why we're doing it. That is why a lot of other financial planning firms ask clients to provide pension estimates because they don't know the formula. So, we know that. Right guys, we know how to calculate the first pension.
So, let's talk about what else we're looking for on these retirement estimates and why even when you know all the benefits like the back of your hand, why having these estimates are still super helpful for us and our clients.
Tommy Blackburn: Sure, one thing I'm thinking about that we'll see when they run that official estimate is if anybody's had part-time service. So, if they just go into, what is it called again?
EBIS or GRB, their HR system, I don't believe I've seen a part-time factor reflected in that report. But then if they ask for that official estimate, they're going to reflect, hey, there'll be little asterisks, there's a part-time factor applied to adjust your pension down for the fact that maybe you only work 20 hours a week or whatever your arrangement was. So, that you'll find in that official estimate.
Michael Mason: Yeah, what you won't find on the leave and earning statement, so if you just default to it and you say, look, this CSRS person has 40 years, I know what that's going to be, or FERS has 32 years, I know what that's going to be.
But what you won't find if there's a break in service or time that wasn't paid for, that's going to show up real clear on that official estimate. And John, you make such a good point, many people in our business, they want to manage your TSP, so they want to pretend like they know what they're doing but they couldn't calculate your first pension if they had all the right information.
So many people will ask you to bring them that estimate. I guess there's many people that won't even ask that. They'll just talk about how they could manage your TSP, right?
John Mason: Well, they may not even know that there's a pension involved in the federal employee retirement system.
So, wrapping up what else we're looking for on that official retirement estimate, quick bullet points here; sick leave. We like to see how much sick leave is going to add to your total credible service. The rule changed a few years ago guys — remember Mike, where only half of your sick leave used to add to your service before, I don't know, 2013 or 14.
And then it changed to now a hundred percent of your sick leave counts towards your creditable service for pension. But when you add up all of your days and your months and your years, only full months count.
So, if you have 31 years, 10 months and 29 days, that 29 days counts for nothing. Getting that official retirement estimate is going to help you understand your user lose sick leave as well as to give you an updated estimate on what your annual leave’s going to look like.
We like it, even to have a High-3 calculation because we kind of infer that in our projections, but having that official document is nice to see the High-3. So, a wealth of knowledge can be gathered from those documents.
I think we also hit, if we didn't already, any unpaid or internship time or time that we need to make a redeposit for, we want to make sure that we have ample time to have those calculations correct, leading up to what most people have as a December 31 retirement date.
Michael Mason: And on top of that, we want to make sure that the High-3 has been calculated correctly. Usually, this is not an issue. If we have a history of pay stubs, we can go back there and recreate that High-3, but that's not that difficult. Usually don't find any issues there.
Sometimes, you'll get that estimate and you'll get a freak out moment because you'll see the cost of survivor benefits, you'll see income taxes coming out, you'll see maybe even continuation of FEGLI Basic and Option B. And it could almost derail your thought process: “Can I really afford to do this?” How do we help clients through that part of it, Tommy?
Tommy Blackburn: So, when we get that part of the estimate, we're going to begin pointing out some things that just because this is what this estimate says, you get to make some choices here, and this is not necessarily going to be the cash flow that you're going to receive.
So, one, we want to make sure we see a survivor, most likely you're going to want to make sure we see a survivor benefit reduction as part of that estimate. The biggest thing — what are we assuming on our FEHB, is that going to change at all?
And FEGLI, is usually going to be a big one too, if they have those FEGLI B, the optional multiples. That can be rather expensive in that estimate and depending on the advice there and what makes sense, that may not be a reduction that they're going to have.
So, pointing that out and beginning to … it kind of is going to begin to lay the stage for the rest of that financial planning adventure, that journey of tax planning, and so forth to kind of pull it all together.
Michael Mason: So, a couple of points here, Tommy; we mentioned FEGLI a lot. It's important to know that in different episodes, we're going to cover our suggestions for Federal Employees Group Life Insurance and survivor benefits and those things.
Also, it's important to note that we've got everything right. We've got our official estimate, and we're looking at that bottom line on that FERS annuity and we're thinking, man, I don't know that I can live off that.
Well, we have to understand that the government's not necessarily going to have your federal taxes correct or your state taxes. We're probably going to make a change to Federal Employees Group Life Option B.
But then you're also going to have a social security check if you retire before 62 and your FERS, a FERS supplement check, we're going to have a withdrawal strategy from TSP. If you're retiring with our good graces, you're not going to have to worry about whether or not the number's going to be the right number.
Tommy Blackburn: Absolutely. We want the good information off of that estimate there, but it is not a financial plan. It is going to be a piece of that financial plan. We already know some things that are going to change from that estimate based to what you experience in that retirement plan.
Another one that you're not going to see on that estimate is the state tax withholding or if you live in a state that's taxing that pension, we're going to want to account for that.
Our clients can of course rest easy, and we're going to bring that all together, have a grand tax strategy and cash flow strategy, distribution strategy, and working around your benefits.
John Mason: It's just not an accurate, as I think about it, just not an accurate reflection of like what their net cash flow is going to be in retirement. And we've even had conversations, Tommy, I know you and I have on a couple recently, where it's like, well, “John, Tommy, they're saying that I need to have $350 a month withheld for taxes.”
And we're like, well, actually it needs to be a thousand, but we're just going to make up for that somewhere else or actually it only needs to be a hundred. So, it is an estimate that's providing a whole lot of great detail, but we've got to zoom out and then put it back into like the financial planning and real cash flow planning.
So, as we go from that point, and now, we say, okay, we've got our estimate, now we're six months out. The next step that we would be doing at our office is actually having a meeting with a client to help them fill out the Standard Form for FERS or CSRS, that application for immediate retirement.
Guys, we've seen these hundreds of times now. So, we know where to initial for full survivor benefits. We know all of the kind of confusing questions, which schedule A, B and Cs are required. So, it looks like a big nasty form, but I think in real reality, the 3107 is like five or seven pages, and it's kind of a breeze for us.
But for our clients, it's the first time they've ever done it. Having us there to hold their hand through that very, very scary process and answering these questions with supervision is very, very helpful. So, I love that pre-retirement meeting that reviewing the Standard Form 3107.
Tommy Blackburn: It's very true. When you have that experienced, knowledgeable person — it's like when we look at a tax return, how quickly we know what's happening on there. The same thing when we see that retirement application.
I'm sure, Mike and Ken can probably do those retirement apps in their sleep. They've seen them so much. And so, we're able to move efficiently through it and it's not a stressful thing to us just because we've done it so many times, we understand it pretty well at this point.
And it's really nice just to make it efficient and less stressful and comfortable for a client to just have us verify it very quickly and point out any things. And sometimes we're not even making any changes, but we might have some discussions of just, “Hey, this, when they're asking you about your FEGLI Option B, here are the things we could do. This is what we're thinking and why.”
And it's just nice for everyone to feel comfortable and informed as they're making these potentially irrevocable decisions.
Michael Mason: One of our favorite statements, I coined it, so I'll call it mine, but it's the team’s. And you only live, retire and die one time. Imagine if you retired 50 times, I would say on number 49 and 50, you're going to be able to fill out them forms with confidence. Well, this is your only time. It's nice to have somebody that has your back, that's helped clients do this multiple times.
So, I understand the stress level, your entire career is coming down to this moment and these forms. Typically, our clients are in advance of things. We encourage them to be that way. They're probably our clients because they're already that way. They have their application in four to six months in advance. It's an accurate application. They're not making changes once it's at human resources.
So, it seems like they go through the adjudication process quicker because of this as well. And I'll make one other statement; they also go through that adjudication process with less pain because they're not scared to death. “Oh, I understand the government's only going to pay me 50% of what I'm supposed to get.”
And well, you're never supposed to get a hundred percent, are you? Because you're going to have some taxes withheld, you're going to have survivor benefits withheld. So, it's just nice to have somebody hold your hand through it.
Tommy Blackburn: And so, I think every pay agency is different and how this process seems to go and when they want you to begin doing things.
I think our general procedure is we probably want to have that application in three to four months before we want to retire unless the agency is telling you something else for some reason. And we believe it's a good reason.
And then I think the question is, well, what does that adjudication timeline look like? And I think that can vary by individual and by agency as well.
John Mason: It seems to be recently clients have been coming in and saying like, “This adjudication thing is going to take 6, 12, 24 months” and they've come in very scared. And we've had to say, “Well, in our experience, this is not typically what we're seeing. We're typically seeing full adjudication in four to six months.”
I don't know if that's just a lot of Department of Navy, HRSC has it on lockdown here in Hampton Roads, Virginia. But in general, four to six months seems to be the length of time for an adjudication.
Maybe it's the accuracy of the Standard Forms going in. Maybe it's because we're including continuation of life insurance, suspending FEHB when it makes sense. But four to six months, Tommy, I think is accurate. Unless-
Tommy Blackburn: You’re reading my mind there — unless you have a separation agreement, a divorce decree on file.
John Mason: Well, can you tell us a little bit about that? Because that's a scary one.
Tommy Blackburn: Yeah, and we definitely want to know about this ahead of time with our conversations with clients. So, one, we can factor that into this is what your pension is … we estimate it's going to look like once it gets that reduction, if there is one. But it doesn't even matter. You could just have one on file and it's not going to reduce your pension at all, and it's going to slow this process down.
And I think what we've seen is you may want to buckle up for nine months to a year for this to get fully wrapped up. Your interim pay is going to be instead of probably 70 to 80%, you may be plan more around 50% of what you're ultimately going to get.
And it's because it gets kicked to a legal department and I don't know why it just … it slows the entire thing down as they're checking and trying to make sure they've got all their files straight, and that if anybody's entitled to anything on your record, that that's all being taken care of before they adjudicate this.
John Mason: I believe you were working one with a client a year or so ago who was approaching retirement. And I had one that I was working directly with a year or two before that.
I think my particular client, she was receiving about 30% of what she was supposed to receive. And the marital share was not 70%. Her ex-spouse was due, the spouse she divorced was due maybe a couple thousand dollars annually. I mean, it was peanuts in the grand scheme of things, but it held up her entire check so far that we had to reach out to legal, which I think is in Washington DC.
They were really great actually. They responded and we had to appeal that decision, basically, say, this is causing a hardship. We need to appeal that decision. We need to have this benefit boosted, but it was nine months to a year. I think yours was even more significant Tommy. I think your marital share was what, 5%?
Tommy Blackburn: Yeah. As far as that, it was only a 5% reduction. And it seemed to be a similar experience and when we did the same thing and that one of reaching out and saying this seems a little unreasonable. We're estimating it to be this, can we boost it up?
So, they're still not boosting it back up to the 70 or 80%, but at least let's get away from 30%. Can we get back up to 50? And it seems like they usually will make an adjustment if you kind of plead your case.
Michael Mason: So, the key takeaway here, folks, if you've got a divorce decree and have it on file and really, if you have a divorce decree and there was a piece awarded to an ex-spouse and it's not on file, well, that just opens up another barrel of monkeys.
So, you may even start this process or this thought process a couple years in advance if you're divorced. Make sure that divorce decree is on file and make sure you're prepared for that adjudication process to take longer.
And then finally here, I want to make sure many things require that five years, you must have your Federal Employees Group Life Insurance as long as you could have had it, or for at least the five years leading up to retirement. Fortunately, long-term care is not that way. You buy long-term care the day before retirement. You can buy it in retirement.
So, the five-year rule for your group health insurance and your life insurance, make sure that we're not throwing a boomerang there.
John Mason: And as we think about that, Mike, because what a great point on the five-year rules, is a lot of our folks have TRICARE, so they're active … or their retired military and they have TRICARE benefits.
The year before retirement, we may encourage them to sign up for Federal Employee Health Benefits so that they've already satisfied the five-year clock because TRICARE did that for them. But at retirement, we can also then suspend FEHB in favor of TRICARE and or TRICARE and Medicare Part B combined.
So, those five-year rules are huge. I'll just throw this out there: Tommy, your previous experience working at a different firm, health insurance was one of like the biggest issues for folks retiring pre-65. We don't have that with our clients and the government continues to pay over an excess of a thousand dollars a month because the health premiums don't change.
Tommy Blackburn: It is a great benefit. You're absolutely right. Even now, you can play some different games with the Affordable Care Act and if you control your income correctly, it's wonderful. Federal employees, when you retire, you get to keep the exact same coverage.
There's some different planning techniques we may bring to bear around what type of coverage you have, but you get awesome insurance, you pay the same amount, being able to retire in your 50s with great coverage. It's a very, very valuable benefit and it makes that early retirement doable.
John Mason: And retiring before you hit that five-year is probably not advisable.
Tommy Blackburn: No. Yeah, you want to carry that.
Michael Mason: So, now, we want to talk about the financial planning perspective of this. We've talked about the HR stuff. The financial planning perspective, we like to call it cash flow, cash flow, cash flow, that's king.
We want to meet your obligations in a tax-wise way, and we want to make sure that monthly cash flow it meets your needs. So, let's talk about the financial planning perspective.
John Mason: So, cash flow, Mike, is the heartbeat of retirement. I think that's a quote we got from Tommy. I don't know if that's your quote or somebody else.
Tommy Blackburn: Well, I think cash flow, yeah, it's the heartbeat of a financial plan. Probably applies across the board, but we should give a shout out, I think to Micah Shilanski, another financial advisor that we listen to his information, some particularly like practice management and so forth. But yeah, it's a great quote. It's a very true quote.
John Mason: So, as we think about the cash flow guys — we're going to have a whole separate podcast; maybe the next episode released called The Year of Retirement. So, this is the year before, then the year of, is going to be like that first year, as a retired person, what are we doing? What does that look like?
So, we're not going to dive too far into that today, but the first month of after you retire is the easiest month. And it's easy because if you've been getting up at 4:00 AM to get to your job at Norfolk Naval Shipyard, you don't have to do that anymore. You get to sleep in, it feels like a long vacation. So, month one is great, both emotionally, but also cash flow. You get your last paycheck, you get your annual leave. So, that month is pretty easy and pretty covered.
Month two, guys, is where now we have to start pulling some strings and thinking about in advance, how we're going to start laying that foundation the year before retirement to satisfy those cash flow needs the year of retirement.
Michael Mason: Yeah, and maybe as simple as … understand this, if you're a client of Mason & Associates, you are going to have that non-IRA sizable emergency money fund to get you through adjudication. But if you haven't been a client of Mason & Associates, it may make sense to not fully fund that TSP the last year and instead, create that extra cash flow that's in your bank account.
Tommy Blackburn: Sure. Again, where else are you going to accumulate money right before we hit retirement?
Another one, not that we want to use it, but we usually don't mind having it in place, just as I'm thinking about this, is a home equity line of credit, a HELOC, usually very nominal cost, if anything, and it just gives you another source of liquidity. And hopefully, you don't need it, but it's there and it's very accessible.
John Mason: And having a plan the year before retirement on how you're going to drive income from your investments is very important. So, for example, guys, we cannot initiate a TSP withdrawal for somebody under 59 and a half until after they separate.
And then typically, it takes about 30 days for TSP to receive those retirement codes. So, now, we're like pushing into December 31, we're pushing February 15th before we can get that first TSP distribution. So maybe we need to have more liquid cash. Maybe we need access to Roth or these other things to make sure we have things that we can draw from.
If you're over 59 and a half and you're about to retire, maybe it makes sense to go ahead and get an IRA in place now. Maybe do a partial in-service withdrawal. Get that money out into an IRA, maybe with an institution like us, Mason & Associates.
That way, when you retire, we can immediately initiate any distributions with the exact amount of federal that we want and the exact amount of state tax that we want. So, having that IRA in place may be something that you want to do Mike, before retirement.
And I'm not going to put us on the spot too much with this, but for sure, if you are RMD age, when you're retiring, a significant amount of thought needs to go into how are my RMDs going to be impacted the year I retire, the year before retirement, and the year of retirement?
Michael Mason: Yeah, and I mean, that opens up-
John Mason: That's a can of worms. We can't go into that tonight.
Michael Mason: Right. I think maybe as we wrap up this episode, one thing we haven't driven home, if you're CSRS or CSRS Offset, and you are going to retire in the next 12 months and you haven't opened up a voluntary contribution plan, the sooner you do that, the better.
To fund the voluntary contribution plan, you have to fund it with after-tax dollars. You may not have them right now. You may not have substantial after-tax dollars. But you're at retirement age and at retirement age, you never know when you may have an inheritance or sell a rental or something.
If you don't need to fund it or can't, you didn't hurt yourself by opening it. But if you find the funds and you’re 30 days from retirement and you can't get it open, then you missed the greatest tax loophole in America.
John Mason: And last year, I think Tommy was the lead advisor on most of these, at least two, maybe three VCPs that we were still able to execute last year.
Tommy Blackburn: Yeah, it was a fun time. But one working just with VCP in general, but then with the build back better looming and it was supposedly, imminently going to pass and it was going to close that mega back door to us. So, we were working hard and we got quite a few done right there at the end of the year.
Michael Mason: Yeah, if I had to lay money on it, I would bet that if not at the end of this year, definitely by the end of 2023, that back door is going to be closed.
John Mason: So, Mike and Tommy, we didn't have time really on this episode to talk about like the emotional, like personal perspective of retirement. Let's just leave this with we'll probably hit that in another episode.
But just like we say that you don't have a financial plan unless you have a tax plan, you don't have a financial plan unless you have a plan with how you're going to keep yourself busy the year of retirement and every year after that.
So, as equally as important as it is, and I know you're going through this now thinking about like, wow, I'm going to retire at some point, what am I going to do? So, once we know the finances are taken care of, then we have to start checking these other boxes too.
Michael Mason: Yeah, so we need to do an entire episode on that. Maybe even get a guest speaker, who I'm thinking about that we might be able to bring in as a guest speaker.
John Mason: Absolutely, Mike. I know exactly who you're thinking. She may not join, but that's something we could for sure ask. This has been another episode of the Federal Employee Financial Planning Podcast, hosted by Mason & Associates; Mike Mason, John Mason, Tommy Blackburn.
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