Are you maximizing the true value of your federal benefits, or are you unintentionally leaving money on the table? In this special episode, John and Tommy present an updated version of a classic seminar originally created by the firm’s founders in the 1990s—now made current for 2026. They break down the unique complexities of the FERS system and expose the critical blind spots that often lead federal employees to make major, irreversible retirement mistakes.
Through clear mathematical breakdowns and strategic insights, they explain why standard, mainstream financial advice simply isn’t built for you. You’ll learn how to properly calculate the economic power of your pension, avoid common pitfalls within the Thrift Savings Plan (TSP), navigate the timelines of Federal Employees Health Benefits (FEHB), and master the nuances of life insurance and survivor benefits. Whether you are mid-career or approaching a mandatory retirement deadline, this episode delivers decades of fee-only financial planning wisdom designed to help you retire without breaking stride.
Listen to the full episode here:
What you will learn:
- Why federal employees are financially different from most Americans. (9:15)
- How to calculate the true value of your FERS pension. (14:00)
- Why your pension may be worth more than you realize. (20:15)
- Why financial planning is about more than investment management. (25:20)
- The most common TSP contribution mistakes federal employees make. (31:15)
- Why tax planning and retirement planning must work together. (45:15)
- What federal employees need to know about FEHB and Medicare coordination. (57:00)
- The survivor benefit mistakes that can create major financial consequences for families. (1:06:30)
- How survivor benefits and Social Security claiming strategies work together. (1:13:30)
Ideas Worth Sharing:
- “Your federal pension, your federal benefits, and your Thrift Savings Plan—those are likely your largest assets, not your house.” – Mason & Associates
- “A tax plan is a 30-year strategic vision designed for you to pay what you owe, but not leave a tip.” – Mason & Associates
- “You’re unique. Most of the people in the country today, probably 90% or more, do not have access to a defined benefit pension.” – Mason & Associates
Resources from this episode:
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Read the Transcript Below:
John Mason: Welcome to a special episode of the Federal Employee Financial Planning Podcast. We recently hosted a webinar titled Avoid the Common Financial Planning Mistakes Made by Federal Employees. The original presentation was created by our founders, Mike and Ken Mason, back in the ’90s, and Tommy and I have updated it for 2026.
During the presentation, we cover a variety of mistakes made by federal employees: mistakes inside of the Thrift Savings Plan (TSP), Federal Employees’ Group Life Insurance (FEGLI), declining survivor benefits, and much more. Don’t miss the beginning of the episode where we explain the true value of a FERS pension, why federal and military retirees are different from most retirees, and why so much of the financial advice out there simply isn’t designed for you.
Stay with us to the end as we answer questions from the live audience. We plan to host more webinars like this in the future, and invitations will be shared on LinkedIn and sent to the subscribers of our monthly newsletter. Finally, our Survivor Benefits e-book is now live, and you can download your free copy at masonllc.net. That’s masonllc.net.
Please do not make the mistake of declining survivor benefits before watching this episode of our podcast and reading our e-book on survivor benefits. Be someone’s hero. Share this episode with friends, coworkers, and family members who can benefit from this information, and let others know how they can download their free copy of the e-book before making one of the biggest retirement mistakes federal employees can make.
Enjoy this special episode of the Federal Employee Financial Planning Podcast.
Zoe: Hello, everyone. Thank you so much for joining us today for Avoid the Common Financial Planning Mistakes Made by Federal Employees. I’m Zoe, and I handle marketing for Mason & Associates. I’ll be your host this afternoon, but before we hand things over to our presenters, I wanted to talk to you a little bit about today’s webinar.
So, this presentation is actually an updated version of a seminar that the firm’s founders created back in the 1990s. So, what you’re getting today is decades of wisdom brought current for where federal employees are today. Mason & Associates is a fee-only registered investment advisor, which means no commissions ever.
Their only job is to work in your best interest, and they are currently accepting new clients. The goal for today is simple. The team wants you to leave this session educated and empowered to make real, positive changes to your financial plan. To walk you through all of it, please welcome John Mason and Tommy Blackburn.
John and Tommy are the firm’s leaders and the hosts of the Federal Employee Financial Planning Podcast. They know this material inside and out, and more importantly, they know how to make it make sense. John and Tommy, take it away.
John Mason: Awesome. Well, thanks everybody for joining in. We really appreciate having you here.
Tommy Blackburn: Thank you for being with us.
John Mason: Okay, so we’re gonna give it maybe just a few seconds. We have 13 people already or more in the waiting room, and I know there’s more coming in. So, thank you for being here. Again, this is Avoid the Common Financial Planning Mistakes Made by Federal Employees. John Mason, Tommy Blackburn.
It’s fun for me. I’ve presented this seminar now, or some version of this, for about 15 or 16 years. So, the first time was 2011 right out of Virginia Tech, updated to current. This is Tommy’s first time, so.
Tommy Blackburn: Yeah. Been working with this material for quite some time now, but the first time doing a webinar/seminar version of it. So, excited and grateful to everyone, John, as well as our audience, for being patient with me in the first presentation of this content in this format.
John Mason: So again, thanks for being here. We assume that everybody in the room is a federal employee covered by FERS (F-E-R-S). That could be one of the multiples FERS: either RAE, FRAE, or the original.
If there are any CSRS in the room, that would be good to know. You can drop that in the chat. If there are any military or retired military, you can drop that in the chat as well. If you’re from Virginia and you’re VRS, you can throw that in the chat. Zoe will kind of try to let us know if that’s applicable.
A lot of these pension systems have quite a bit of crossover, and we want to make sure that we can talk to all of these. Looks like we do have something coming through on the chat, so let me see if I can see what’s going on there.
That’s just Zoe. Perfect. So yeah, you can save your questions till the end, please, if you can. Again, if you’re CSRS, military, or have other things, please let us know, and then we’ll make sure to update the content as we move through the presentation. All right, well, I’m gonna go ahead and take it away.
Tommy Blackburn: All right. I’ll join you guys in a few.
John Mason: Awesome.
Okay, so this is Avoid the Common Financial Planning Mistakes Made by Federal Employees. Today, we’re gonna cover things like your FERS pension, mistakes with your Thrift Savings Plan, Federal Employees Health Benefits (FEHB), and FEGLI. Tommy’s gonna walk you through that section, and then we’re gonna bring it home—a jam-packed 45-minute to hour session—with survivor benefits and Social Security.
If you have seen us before on YouTube or our Federal Employee Financial Planning Podcast, you already know we’re giant fans of survivor benefits. We’re gonna talk a little bit about that more today. On the screen, you’ll also see at the bottom: email your questions to masonfp@masonllc.net. You can drop them in the chat or we can connect another time.
And we will have some questions at the end. We’re gonna go right till 5:00 o’clock, folks, so hang tight with us. We’re gonna get through a lot of content today. Jumping right in, how do we calculate your FERS pension? So, we’re gonna talk about the value of your FERS pension. We’re gonna move through quite a bit of examples.
But let’s just understand that for today, if we’re ever talking about examples, we’re going to use $100,000 as your salary. And the reason we use $100,000 is it makes our math really easy when you’re working in percentages. The other thing is we’re gonna typically assume a 30-year career. There’s reasons we do that, too.
We realize not everybody on this webinar is applicable in that exact situation, but it does keep our math easy, and that’s why we’re gonna present it that way this afternoon. So, to calculate your FERS pension, there are a couple of variables. One, we need to know your years of service. Then we need to know your high-3, and then we finally need to know your multiple.
The standard multiple is 1% for every year of service. So, for instance, 30 years of service equals a 30% pension. If you have 20 years of service or more and you hit age 62, every year actually counts for 1.1%. So, remember throughout the presentation today, we’re going to talk about a 30-year retirement. Well, if you hit age 62, it’s like you retired with 33 years of service, so the difference is actually a 10% boost to your entire retirement, 30% versus 33%.
Other things to keep in mind: sick leave counts. So, you take your years, days, and months of federal service—your actual time—then your sick leave tacks on top of that. You can also purchase your military time. So, any veterans out there who have 3 years, 8 months, 22 days, like my father had in the Air Force, that time is eligible for purchase.
The formula is 3% of base pay while you were active duty, and then if you don’t do it fast enough, there are some interest charges over time. But purchasing your military time is a great deal. Having your sick leave—we do encourage you to use your leave typically over your career—but just know that the rules changed sometime in the last 16 years that I’ve been doing this.
It used to be that only half your sick leave counted towards your retirement. Now all of your sick leave counts. And if you’re really zeroed in, folks, you’ll retire with years and months. If you have 29 days, those 29 days don’t count for anything. So yes, you do wanna burn the sick leave whenever possible to try and get to full years and months, and just know those days aren’t gonna count for anything on the back end.
Side note, if you’re looking to retire, it is important under FERS that you retire within the last couple days of the month. We typically say the last 3 days. The reason being: if you retire on, let’s say, the 27th, then the first of the following month is your effective retirement date, and then your pension check will come the first of the following month.
Granted, there’s gonna be an adjudication process and take some time to go through interim status, but it is important if you’re thinking about retiring this year to pick a time towards the end of the month and then also try to maximize some of these other variables. So, before we go to the next screen, I want to play a game with you, and it’s going to be a little weird.
It was a much more fun game in person, but I hope I can do it justice today. So, I’m going to ask you a question—three questions today—and I want you to play along with me. And if you want to shout it—if you’re not at work, or if you’re at home, or you’re driving—try to shout out these answers and really participate with me.
So, the first question or the first statement is when I say, “How special are you?” I’d like you to scream out loud, “Very special.” So, I’m going to do it, and I know it looks silly. How special are you? Very special. I hope you said it along with me. Now, the next one is when I say, “They are not talking,” I’d like you to say, “To us.”
Are you ready? They are not talking to us. What am I talking about? Well, folks, as federal employees, we just went through a calculation on how to define and calculate your defined benefit pension as a federal employee. If you’re state or military or have another pension system, you fall into this category as well.
You’re unique. Most of the people in the country today, probably 90% or more, do not have access to a defined benefit pension. So, you are truly in the minority—maybe 10 or 15% of the United States population that has access to a defined benefit pension. If you turn on the news or you look in The Wall Street Journal, they talk about the 401(k) generation.
Many of you, you are the 401(k) generation. You had TSP. TSP didn’t used to be there for the CSRS folks, but you’ve had TSP and you have the pension, which is truly rare. So remember, you’re very special because you have something that nobody else has, and they are not talking to you. That’s the second part. So, if I was Suze Orman, or Clark Howard, or Dave Ramsey—not throwing stones, just saying, these are media personalities, kinda like what we’re doing now—these are media personalities who are trying to sell something. It could be radio show time. It could be a book. It could be a program.
If you were trying to sell something as one of these people, would you want to talk to the majority of the population or the minority? And you know they want to sell the most books that they can, so they’re going to talk to the majority of the population. We’re a little bit different at Mason & Associates because we intentionally speak your language, not ours, and we dedicate our time and our resources to maximizing federal employee benefits.
So, the takeaway here is understand you have something that nobody else has, and the next time you hear some sort of advice like you have to work until 65, or there’s no way you can retire at 57, or you need to be more aggressive in your investments, I want you to take a step back for a second and really think: does this advice apply to me as a federal employee?
So, keep that in mind as we move throughout the presentation. This last question I wanna ask you is really fun, and we’ve asked this to a lot of people. I wanna pretend you’re driving, you’re relaxing, and I just want you to shout the first answer that comes to mind. Dear federal employees that are on this webinar, what is your largest asset?
And I know at least one person out there said your house. Well, I’ve got news for you. There’s no way your house is your largest asset unless it’s a pretty awesome house. But even if it is, you probably can’t afford that house if you didn’t have a gigantic TSP balance, or a big TSP balance, or, as important, a very large defined benefit pension.
And we’re gonna talk about the value of a pension here in a second. But your federal pension, your federal benefits, and your Thrift Savings Plan, those are likely your largest assets, not your house. And we wanna set that tone for today because so many in America, you’ll turn on TV, and this is again why the media planners aren’t talking to you.
You’ll turn on TV, 2008 I was in college when this happened, and everybody was on TV saying your largest asset went down by 30% or 40%. Well, my grandpa was a CSRS retiree, and in 2008 to 2009, his largest asset went up by a cost-of-living adjustment the following year. So, your largest asset is not your house. It’s probably your pension followed by that TSP.
So, on the screen now we have three different examples of FERS. The first one on the left is normal FERS that was created in like 1986 or 1987. Moving into the center, you have FERS RAE, which stands for Revised Annuity Employee. And then finally on the right, you have the very creative Further Revised Annuity Employee that was created in 2014. So, ’87, ’13, and ’14 if I’m not mistaken.
And what we wanna walk you through on this screen is how to calculate your retirement under FERS. So, your FERS retirement is a three-legged stool. We’re gonna walk you through that now, and I’m being very intentional when I say retirement because your federal benefits encompass a lot more than just retirement. But on this screen, we’re focusing on retirement income only.
So, the first one, stay with me on the far left side. We’re contributing, again, a $100,000 salary. You’re approaching your 30-year career, and you’re paying 6.2% into a system, or $6,200 per year. And at the end of a 30-year career, at age 62, you’ve amassed a benefit of approximately $24,000 a year, cost-of-living adjusted for the rest of your life.
I’ll pause while you think about what that pension might be or what that benefit might be. For those of you who are very on it, that is 6.2% going into Social Security. And at the end of a 30-year career, at 62, you would receive about $24,000 per year in benefits.
The next one costs you 0.8%, and at the end of a 30-year career, $33,000 in benefits. If you guessed this one, you’re right. It’s your defined benefit pension under FERS. So, let’s just pause here for a second, folks. Everybody knows Social Security’s going where? Broke? Right. Everybody tells us it’s going broke.
You pay in 6.2% of your pay, the government pays in 6.2% of your pay to receive a benefit of $24,000 a year, and that system’s not solvent. How in the world do we get $33,000 per year of benefit on an $800 per year contribution? We have a theory on how this was calculated, and I’ll share that with you in a second.
So, Social Security is leg one, defined benefit pension is leg two, and then finally, number three is your Thrift Savings Plan balance, which for FERS employees, you probably are aware, you receive a 5% match. So, in that final tier, that final row, we’re having about $15,000 go into TSP. At the end of a 30-year career, maybe you’ve saved 400 to 500,000. So, at a 4% or 5% withdrawal rate, we’re producing about $18,000 a year of income.
17% of your pay, folks, went into retirement. $17,000. And at the end of a 30-year career, we have 75% or $75,000, cost-of-living adjusted for the rest of your life. Super strong.
Now, as you move from block 1 to 2 to 3, everything is constant except that middle tier. That middle tier, you’ll see that under FERS RAE, you’re contributing 3.1% for your defined benefit pension, and under FERS FRAE, you’re contributing 4.4%. So, what we’ve tried to do over time is the government has essentially asked the newer people to pay more into the system, and we have to assume it’s to keep it solvent.
So, I told you we have a conspiracy theory on how FERS was calculated, the 0.8%. So, our theory is this: in the early ’80s, there was this whole group of people called CSRS people, the old retirement system. They paid 7% into the CSRS retirement system. Well, then we had a bunch of these people who were senators making the laws of the land, introducing things like Social Security, making changes to things like Social Security, but yet weren’t paying into the system.
We believe that when FERS was created, we wanted these people to pay into Social Security like everybody else. So, they said, “Okay, great. We’re gonna create this brand-new FERS system, and we know beyond a shadow of a doubt they have to pay 6.2%.” Well, we can’t have FERS people not have it be fair. They can’t pay less than or more than CSRS. So, 7% CSRS minus 6.2% Social Security leaves you with—you guessed it—a 0.8% FERS contribution.
Folks, we’re being funny here, but the math checks out, and it doesn’t seem like $800 a year was ever an actuarially sound calculation. So, we said you’re very special, and they’re not talking to you. All those look great, but let’s compare you now to someone in the private sector. Now, this is not to make you feel like pounding your chest or anything like that. It’s meant to just show you that your financial planning considerations are different than the other 90% of the population.
So, if you look at block 2 here, which is the private sector, they still had the $100,000 salary. They still paid into Social Security. They received the identical benefit. Assuming their 401(k) has low fees like your TSP, assuming their employer is generous like yours and contributes 5% of their pay, they have a similar 401(k) balance at retirement.
But check this out: they saved 16.2% compared to your 17%, and they received $33,000 less per year in retirement income. Folks, there’s not a private sector person on the planet that wouldn’t sign up for $800 a year for a $33,000 cost-of-living adjusted pension. That’s the difference. That is the difference between your financial plan and everybody else’s.
Now, we can debate whether or not federal employees make more or less than private sector counterparts. I think the research indicates that it’s a little bit of both, depending on your career path. But even if that private sector person is earning more than you, I think we can all agree that some of those earnings have to go to taxes, and the other earnings have to go to replicate your other benefits, such as Federal Employees Health Benefits, sick leave, annual leave, and more.
So, a drastic difference between federal employees, state employees retiring, and military members retiring as compared to their private sector counterparts. This is what sets you apart. That’s again why we want you to take that step back and realize most advice is not pertinent to you.
I mentioned that I wanted to discuss the economic value of a federal employee pension. And what I’d like to suggest to you is if everybody went back to that first screen and you calculated your federal pension, we can assume different interest rates, discount rates, et cetera. But for the sake of this webinar today, for every $30,000 to $50,000 of federal pension, it is the equivalent of having $1 million in a Thrift Savings Plan or 401(k).
So, when you’re looking at your balance sheet—the next time maybe you’re sitting down at the dinner table with your spouse or you’re talking about your balance sheet with your financial advisor and you’re really proud of the number you see there—you probably need to add $1 million or $2 million on top of it to account for the economic value of that defined benefit pension.
Yes, it’s true, you can’t withdraw it all at once. You can’t swim around in it. You can’t throw it up in the air. But ultimately, what was the purpose of your TSP or 401(k)? It was to produce retirement income, and that is exactly what your federal pension does.
So, moving on from calculating and setting the stage there, we wanna give you a simple example on how to come up with a retirement goal for yourself. Now, retirement planning is significantly more complex than what I’m about to show you, but this gives you a good gut check, so when you leave this webinar, you can see whether or not you’re on track.
And we like this term that we’ve invented called modified current income. And the reason we created this is we used to have conversations with clients that would say, “Bill and Sue, how does a 70% income replacement sound to you?” And Bill and Sue would be like, “Oh my gosh, that sounds terrible. How am I gonna live on 70% of my current pay? And then John wants me to take survivor benefits too. I don’t know how I’m gonna do that.”
Retiring on 70% of current pay doesn’t feel right. What if we flip that script? What if we flip it and say, “Bill and Sue, how would you like to have 100% income replacement in retirement?” Everybody says that that’s what they want, or more, actually. The problem is most people don’t really understand what they’re making.
So, you can get there a couple of ways. One way that we can get there is we can look at every single deposit that hits our client’s checking account, and then assess that as the retirement goal. Add in additional expenses like healthcare, travel, vacation funds, weddings, you name it, we can add it into the plan.
A simpler version that doesn’t look at taxes, it just looks at gross income, is this modified current income calculation. So, what we wanna do is we wanna take the salary that you’re earning today, and we wanna begin to subtract off the expenses you have today that you will not have tomorrow.
So for instance, we already talked about Social Security is 6.2% of your pay. Medicare is 1.45%, but you also have to pay taxes on that earnings to be able to pay the Social Security and Medicare tax. So effectively, 10% of your pay is going into Social Security and Medicare. Assuming you’re doing a good job saving in the TSP, another 10% of your pay is going into the Thrift Savings Plan.
I threw up another one on here, and I called it other expenses: 10,000. Other expenses could be things like your kids were at home and now they’ve graduated. You were paying for college tuition, and now you’re not. You were overpaying for FEGLI Option B, now you’re not doing that anymore. The mortgage was paid off right at retirement.
So, you take the expenses you have today, you subtract it off of your current income. Sorry, income today, less the expenses that you won’t have tomorrow. So, in this example here, 70,000 is the example modified current income, or our retirement goal.
If we flash back to this screen, folks, the FERS couple—the FERS individual—has a $75,000 pension or retirement income, which is 75% income replacement. This person, we can confidently look them in the eyes and say, “Congratulations, you’re gonna walk into retirement without breaking stride. You have 100% or more income replacement.”
And the fact of the matter is—I think it’s almost all the time, but I’ll just say 99% to cover my bases—if your gross income is the same working as it is retired, your net income is probably higher in retirement because of things like how Social Security is taxed and some other favorable tax treatment.
That feels a lot better. 100% income replacement. And again, just pointing out that private sector person—they’re gonna have to save a lot. They’re gonna have to do a lot. And once they’ve maxed out their 401(k), they’re gonna have to do it in an after-tax brokerage account. Start earlier, save better, invest more aggressively. They have to do all of these things to match that pension.
Remember, the coolest thing about the pension is you could have 27 years of a salary that’s reasonable, and then if you had a big pop in those last three, it’s your high-3 earnings that make a big difference in that pension calculation. So, I hope that’s helpful.
This screen I’ve liked for a long time, and this is called the investment pyramid. And unfortunately in our industry, folks, many people look at a John, or a Tommy, or a financial planner, and they assume that the value that we’re going to provide to you is investment advice or managing your portfolio.
Is it possible for us to add value managing client money? Absolutely, it’s possible. Vanguard’s done studies on it. We could share reasons on how we can add value. But what we’re not trying to do at Mason & Associates is we’re not trying to beat the market, and that’s not why we want clients to hire us, and we don’t want you to hire financial planners to beat the market.
Unfortunately, when people hear “financial planner,” they typically hear two people. They typically hear “investment dude” or Ned the Head Ryerson from Groundhog Day who’s trying to sell them a whole life policy. They don’t typically think of a financial planner that helps you maximize things like your financial plan, your tax plan, estate planning, college education, insurance planning, and putting this all together for a cohesive strategy where all the pieces are actually talking and not butting heads.
We ran a radio commercial for a long time that basically said, “Does your financial plan sound something like this? You have a tax person, an insurance dude, an investment manager. Everybody’s giving you advice, but nobody’s talking to each other.” That’s what most people in America—their financial plan sounds like.
Really, when you see a financial planner, what you should demand is somebody that knows all of those subjects that we just talked about, and also, at the bottom, is your federal, state, military benefits. How do we coordinate all of those other things for federal employees? It’s one thing to know how it works for somebody with equity compensation at SpaceX or something, but like, how do all these rules in estate planning, how does that pertain to you, the federal employee?
How do we maximize Social Security for you? What’s the Medicare planning strategy for you? You’re gonna see Chuck Norris on TV selling Medicare Advantage plans. Is that applicable to you? Your financial planner should be able to help you with all of that, and if it’s somebody you’ve hired, great. If it’s you, great. Just make sure that you’re maximizing and coordinating all of these decisions.
So, let’s avoid the common financial planning mistakes. Forgive me if I took too long there. We are gonna get into some mistakes now, and these mistakes have to deal with the Thrift Savings Plan and its TSP contributions being too low, too quick, or too high.
Before we can go there, like normal, we have to actually define how these vehicles work. So, a traditional TSP—that’s the one that you’ve had access to for a long time. It was the first TSP available, and we also wanna refer to that as pre-tax or traditional. There’s three times in your life that you can pay tax: the beginning, the middle, and the end. And there’s—if you listen to other people—when you own it, when you buy it, all other times you can pay tax, too. But for these retirement accounts: beginning, middle, end.
A pre-tax TSP results in a tax deduction to you, meaning if you’re earning $100,000 and you contribute $10,000 to TSP, your taxable income starts at 90. It drops your income by $10,000. When you’re invested in the C, S, I, G, and F funds and your money is growing, you’re not paying taxes on dividends, you’re not paying taxes on capital gains, and you can trade as often as you want to because your money is growing tax-deferred.
When you go to distribute this money in retirement, boom, that’s when you pay taxes. So, you beat Uncle Sam two out of three ways.
Now, your Roth TSP, which is relatively new—Roth TSP, Roth IRAs, those are just the opposite. So, you don’t get the tax break up front, but you get the other two. So really, the question here is: where do you wanna pay tax, today or tomorrow?
A simple statement here, which isn’t always correct, but I’ll give it to you anyhow, is if we’re in a 22% tax bracket today and we’re in a 22% tax bracket tomorrow, maybe there’s really no difference between traditional or Roth. But if you knew beyond a shadow of a doubt that you were gonna drop from 35% to 12%, you’d certainly wanna be deferring as much as you could today. If you knew you were gonna go from a 12% bracket to a 35%, you would certainly wanna go Roth.
But most of our clients, we find, are in very similar tax brackets both while they’re working and in retirement. So, it doesn’t seem like we have this giant arbitrage event where it’s super easy to decide pre-tax or Roth TSP.
Couple other rules. So, those of you who are younger than age 50, you can contribute $24,500 to your Thrift Savings Plan. This is new under the one big beautiful bill, I believe, or maybe, yeah, it created a new category that we need to worry about. So, those of you who are 50 or older this year, you can do a catch-up contribution of $8,000. It’s the year you turn 50. Even if you don’t turn 50 until December, you could be doing catch-up contributions right now.
But if you pay attention on this screen, there’s a weird age on there, and it’s 64. So, if you are greater than 50—not 60 to 63—64 and older, then that’s your catch-up contribution rules. And again, it’s all how old are you gonna be this year?
The third bullet down here is a special group of people who are 60 to 63 this calendar year. They actually have what’s called an enhanced catch-up contribution where they can put—instead of $8,000—they can do $11,250. So, tax code was supposed to get simpler. Tax code is getting more complicated in our opinion, and this is an example of it: a special carve-out group here that gets the enhanced catch-up contribution. And again, FERS employees still get that 5% match.
Would anybody on this webinar give yourself a 4% pay cut? And I know the answer is no, but unfortunately, we encounter federal employees every year who are not contributing 5% to TSP. The federal government is going to contribute 1% for you no matter what. But for you to receive that other 4% match, folks, you do need to contribute 5%. So, if you do your part, you contribute 5%, the government will match you 5% in total.
Now, even if you’re doing Roth—this is good for you to know—even if you’re doing 5% to Roth, the government contributions are gonna go 5% traditional.
Another way that we can give ourselves a pay cut unintentionally is some of us are very excited about maximizing or maxing out our TSP contributions earlier in the year. Maybe you read some time-value-of-money formulas and you realize the earlier, the better. Not necessarily for you, the federal employee, because if you max out before the end of the year, the federal government is actually matching you on a per-paycheck basis, which means we need at least 5% of your pay going in every pay period throughout the year, or you’re leaving some matching money on the table.
This was the case for a long time. I’m showing my age. I’m 38. It feels like I’m older sometimes, but it used to be that you could not physically pick dollar amounts to contribute into TSP. We are shocked at how many people still think that they have to pick percentages and don’t know that they can actually pick a fixed dollar amount.
So, we generally are fans of spreading out TSP contributions over the entire year. There are typically 26 pay periods, folks. So, whatever category you’re in: if you’re younger than 50, it’s $24,500 divided by 26. If you’re in that normal catch-up contribution, add your catch-up contribution, $8,000 divided by 26. And if you find yourself in that enhanced catch-up contribution, then it’s $11,250 divided by 26.
Percentages are nice, particularly when you’re younger in your career maybe, or you set it at 10% and every year you contribute a little bit more because your pay is going up. We like to be more intentional than that. We prefer the dollar amounts, and we think it’s a good way for you to go. Technically, you can do both: you can do percentages or dollars to both pre-tax and Roth TSP.
Last bullet on here, which is brand new for 2026 for you to be aware of, is if any of you on this call have FICA earnings, which is Social Security and Medicare earnings. So for instance, if you make $150,000 in earnings, but you contribute $20,000 to TSP, you have taxable wages of 130. That’s not what we’re talking about. We’re talking about Social Security and Medicare wages.
If those are $150,000 or higher, you actually have a mandatory Roth catch-up contribution, meaning even if it was best for your financial plan for you to do pre-tax—maybe you’re a doctor at the VA hospital, maybe you’re highly compensated somewhere and you’re in the 35% tax bracket—if your earnings are above 150, even if it’s best for you to do a pre-tax catch-up, we now have a mandatory Roth catch-up for everybody with $150,000 or higher FICA earnings.
So, we’re gonna transition into tax planning, because we’ve talked about too low and too quick as the mistakes. Now we’re gonna talk about too high, which is really too much into a certain category, or really the mistake here is not understanding the why behind what we’re doing with our TSP or 401(k) contributions and conversions.
So, we wanna talk about tax planning. In its simplest form, well, let me take a step back for a second. How you contribute to TSP is a tax plan. You are making a tax decision whether you do a pre-tax TSP or a Roth. Everybody is jazzed about in-plan Roth conversions, which kind of surprises us because the last time the federal government gave you something good, everybody was very scared of it. And I guess when FERS came out, everybody was very scared of it. So, it’s actually kind of interesting to see how many people are excited about these Roth conversions.
Our fear is that people are just gonna jump into TSP, start doing a bunch of Roth conversions, have big tax liabilities, and actually hurt themselves from a long-term planning perspective. So, your TSP or 401(k) contribution is tax planning. That is an intentional tax decision. If you are going into your TSP and doing an in-plan conversion, that is tax planning. It’s a tax decision.
I met with somebody earlier, a friend of mine, who did a big Roth conversion last year, and they had no idea how much taxes they were going to pay on the conversion. It was a surprise. I didn’t understand how an advisor could recommend a conversion to somebody and not communicate to them what the tax liability was gonna be on said conversion. To me, that’s backwards.
But the other thing that was even more troublesome or puzzling was he asked me if I could come over, because he’s a good friend, to show him what his retirement income would look like. I said, “Let me get this straight. Some dude or some woman or some financial planner asked you to do a conversion of X dollars, but you don’t even know whether or not you can retire, and we don’t know what your spending looks like in retirement, and we haven’t talked about your charitable giving goals. What was the basis of the Roth conversion?”
And I bring that to your attention today because it’s not that I don’t want you to be excited about the in-plan conversions, it’s just that we need to understand the ripple effects of our decisions.
So, taxable income in its simplest form is your income less your deductions. Most people in America take the standard deduction at this point. There’s a variety of reasons why, but mainly it’s because it’s gotten so high. So, $32,000 now is the married filing jointly standard deduction. We were a fan of that. It’s good for young people. It’s good for people with paid-off houses. Kind of levels the playing field for a lot of folks.
Other things that could be a deduction for you are things like your TSP, your dependent care FSA, or FSA. New for 2026 is a new standard deduction where you can take a deduction for charitable contributions. So, you can actually deduct $2,000 married filing jointly if you’re donating to charity, and that does not require you to itemize on Schedule A. So, that’s brand new this year. If you weren’t aware and you’re donating to charity, make sure you pick up that deduction come April of 2027.
Other changes this year include the new enhanced senior deduction, which is $6,000 per person 65 or older. Then we have some car loan interest, tips, and overtime that got swept into this new tax bill last year. So, we have a lot of deductions. All of this reduces your taxable income.
Itemized deductions are more rare, but we’re starting to see a little bit of an uptick here because a couple of things have happened. Under TCJA 2017, there was this thing called a SALT cap. SALT stands for state and local taxes. Well, what President Trump did during that tax bill is he said you can only deduct $10,000 of state and local taxes. So, people in New York, or in Virginia, or California who have very high real estate and personal income tax bills, they were capped at a $10,000 deduction, which effectively levels the playing field for the entire country. There are some states that don’t have state income tax, so it levels the playing field.
Under one big, beautiful bill, SALT has been raised up to $40,000, so we’re gonna start to see more people able to take advantage of itemized deductions. When I began my career—I’m gonna brag a little bit—I have an interest rate on my mortgage sub-3%. It’s kinda hard to itemize with a $10,000 SALT cap and a 2% or 3% mortgage. Well, now mortgage rates are 6% or higher, I believe. So now all of a sudden, a $300,000 mortgage at 6%—that’s 18 grand—plus a $40,000 SALT cap. It’s reasonable to think now that people actually are going to start itemizing again.
So, this is maybe for a first-time home buyer, or this maybe is somebody approaching retirement or relocating to a new home or buying a vacation property. It could be something where we’re gonna see an uptick in itemized deductions. And then I put a bullet on here just to bring it to your attention that still, charitable giving needs to be very intentional.
We know you don’t give to charity for the financial benefit, but if you are giving to charity, we do wanna maximize, I think, the financial impact to you and potentially lower your taxes when we can. We tend to find things like donor-advised funds and QCDs and bunching of contributions to be the most effective because that is when it actually bumps you over the standard deduction.
So, what I mean by that is if your standard deduction’s $35,000 and your state and local income tax plus charity equals $35,000, you did not receive an economic benefit from those charitable contributions. You already had the $35,000 standard. But if we brought forward 3 to 5 years of charitable contributions, now all of a sudden, instead of having a $35,000 itemized, maybe we have a 60, 70, 80, or 100,000 deduction, and then next year we flip back to standard. So, very important to consider your charitable giving strategy as you think about your overall tax plan.
So, in America, in the United States, the tax code, we’re in a progressive tax system. On the screen, you’ll see the various brackets. The way this works is you pay through the bracket, right? So, if you have $212,000 of income, that puts you in the 24% bracket. That doesn’t mean that all of your income is hit at 24%. It’s only the amount in that range that’s taxed at 24%.
The reason I wanted to bring this up here is I wanna talk about three things specifically. One is the last two tax codes that we’ve had, which, it’s hard to imagine that Tommy and I are on our at least two new tax codes and maybe more over our 16-year career. What happened was the rates came down, number one. So, if you look at that 12%, folks, it used to be 15%. The 22% used to be the 25%, and the 24% used to be the 28%.
Not only were the rates higher, the brackets were skinnier. So, look at that 24% bracket. There’s $200,000 of income taxed at 24% before you move up to the next one. We didn’t see brackets that fat before these last two tax laws. So, brackets came down as far as percentages go, and they got wider, which means you had more money subject to these lower rates. So, it was a double win for a lot of folks.
The other reason that’s up here is we wanna give you a general takeaway. Remember, we’re not your financial planners. General takeaway here is that if you’re in the 24% or lower, we tend to favor Roth contributions. If you’re north of the 24% bracket, we tend to prefer pre-tax contributions. But that is much more complicated and nuanced than that because we need to know what every dollar is doing and how it’s having a ripple effect on your tax return.
So, here’s a quick example: you’re a husband and wife, you’re married, your kid’s about to go off to college. You have $180,000 of taxable income. You listen to this presentation. You say, “John says I should go Roth.” You switch your TSP contributions to Roth. You file your tax return next year, and your tax preparer says you’re $20,000 too much. You’ve been phased out of the American Opportunity Tax Credit—free 2,500 bucks that you did not receive from the federal government because maybe you didn’t fully understand your tax plan.
So, there’s the overarching tax plan, and then there are these annual tax adjustments. It’s not as simple as just saying, “Here’s my marginal bracket, and here’s where I should save.” In fact, we wanna introduce you to a concept here called your effective tax—sorry, your marginal tax rate on steroids, basically. So, let’s say you’re in the marginal tax rate of 22%. That doesn’t sound too bad. But the next dollar you earn, you lose some American Opportunity Tax Credit. The next dollar you earn, maybe you lose some Child Tax Credit. The next dollar you earn, maybe you’re starting to get phased out of the enhanced senior deduction.
So, your effective tax rate or your marginal tax rate on those new dollars is actually higher than 22%, because as your income is going up, you’re also losing what? Deductions or credits. We’ve seen retirees in the 40% tax bracket when they should have been in the 22% because of how Social Security and all these things work together. So, understand your marginal—what’s posted here—understand that, but then understand your true marginal or your marginal on steroids, which is when you start losing those deductions and credits, what really happens.
So, retirement and tax planning, the questions that you should be asking yourself here are: Am I putting too much in the pre-tax? Am I putting too much in the Roth? Am I doing too many Roth conversions? Do Roth conversions help or hurt, number one. We need to analyze that. Should I contribute to the Roth or the pre-tax TSP? And will I be in a higher or lower income bracket in retirement?
Folks, in order to be able to understand all of this, you actually need to have a retirement plan. If you don’t have a retirement plan that you built in a financial planning software or through AI—I don’t know if AI does that or not for you—but if you don’t have a real financial plan, it’s really hard to answer these questions. So, my objective right now is just to say: yes, it’s exciting. Roth conversions are there. They’re available. It’s a tool. It’s a resource. But before we go wild on doing this, let’s make sure we have these three questions answered.
Wanna leave you with a couple of statements as takeaways from today. One is you can’t have a retirement or financial plan without a tax plan. One of our most frustrating statements that we hear is when a financial planner says, “I can’t help you because I can’t give tax advice.” Well, everything we do as financial planners is giving tax advice. So, understand you can’t have a financial plan without a tax plan, and you can’t have a TSP plan, whether it be contributions or conversions, without a retirement plan.
Because ultimately, it’s your 30 or 40 years of retirement spending and your goals and your charitable giving that dictates the answers to all these questions. It’s not just me and Tommy sitting around a table flipping a coin saying, “Should Joe do Roth or pre-tax this year?” Right? I mean, at the end of the day, if you’re not thinking about 60 to 100 or 60 to 90 and you’re just making these choices, maybe it’s an educated flip, but it still could be just a flip of a coin.
So, what is a tax plan? A tax plan is a 30-year strategic vision designed for you to pay what you owe but not leave a tip. Okay? Pay what you owe but not leave a tip, and if we can, minimize the things that you owe. Followed with an annual tax plan, which is everything I just talked about. What am I doing this year? We need to ask the right questions. I’m gonna blow through that screen and show you this. This is an example of an annual tax plan, okay?
So strategically over 30 years—you can see 44 to like 89, so it’s a 40-year tax plan on this screen. The blue is their income, and the tax rates are those bars that go up and down the screen there. And you can clearly see here that the blue goes away around age 59 or 60. To me, what that’s saying, because this was just an example from our software, is the person retired, the couple retired. So, they had all these W-2 wages or self-employment, and then it dropped.
Then we fill up that 22% bracket with TSP conversions or Roth conversions at that time. And we do that from like 60 to 69, and then we stop. And then there’s our income over time after that. So, what I want to share with you here is: remember the question is, do Roth conversions make sense? The answer could be yes, but the answer could also be they don’t make sense today.
In this example, had you forced those contributions or those conversions earlier in the plan, you could have actually seen it going from adding a couple hundred thousand dollars of value to hurting in value by a couple hundred thousand because you did the conversions at the wrong time. Another way of saying this is, let’s say I am a business owner. This is not going to happen, but let’s say business revenue dropped to zero next year. That would be a really good year for me to do a Roth conversion. Let’s say that business income went up 5 billion percent next year—probably a really bad year to do a Roth conversion for all those other reasons we talked about. So, just make sure you have your long-term strategic vision and then you’re thinking critically about each year.
Another mistake we see with TSP, folks, specifically federal employees are often guilty of this, is too much money in the C Fund and not utilizing all the funds available. So, we want you to have a mixture to all five funds: C, S, I, G, and F, and have an appropriate risk tolerance that matches your financial plan. We don’t love the L Funds, folks, so we would kind of caution you against the L Funds, mainly because we think they get a little too conservative too fast.
I’m gonna bring Tommy on stage here, but I wanna go through one quick example for you, and it’s questions that we used to ask clients back in the day. Things like, “Hey, Joe, what rate of return are you hoping to get in your financial plan? What is your financial goal?” And then we would say, “Well, what rate of return are you or your advisor planning for?” And the answer we would get there was always, “The best we can get.” And we started realizing that maybe people weren’t comfortable with the risk associated with “the best we can get.”
So, we flipped this equation a little bit, and we wanted to make it a football game for you. So, let’s say I like the Washington Redskins. You’re coaching the game. I’ve gotten sick, and now you’re the coach of the Washington Redskins, and you are coaching them in the most important game of the season against the Dallas Cowboys.
And you don’t pay any attention to the first half because you’re getting autographs from the football players, cheerleaders, announcers, and everybody. Second quarter, third quarter, fourth quarter, much of the same. But finally, the Redskins get the ball back after the Cowboys kept the ball the entire fourth quarter. The Redskins get the ball back. It’s their own 20-yard line. There are two minutes to go in the game. They come up to you, the coach, and they say, “Coach, coach, coach, what do we do? Do we run or do we pass?” And what do you say?
Passing is more aggressive. Running is more conservative. It would’ve been a lot easier to make that decision if you knew the score of the game. Unfortunately, many federal employees across the country think that you’re losing the retirement game, so maybe we’re taking unnecessary risk. Maybe we’re trying to hit home runs or grand slams.
The issue here is that the people around you can be very dangerous—whether it’s the media planners, the water cooler financial planner, or most recently for me, this dude, Sana Stock Picker. Every time I go on there, he tells everybody about the stocks you should buy, or you should buy, and how great of a return you can make. These are very dangerous people. We just need you to know, as federal employees, we don’t need to hit home runs and grand slams. We just need to stick to a consistent financial plan.
So with that, I’m gonna bring Tommy on board to go through insurance, and then we’ll wrap it up with SBP.
Tommy Blackburn: All right. Thank you, John. That was some great information. You were on fire there. Hope I do a good job following you up, and I love it—the Sana Stock Picker there. We certainly don’t wanna listen to that person.
We want a plan built around you. Thank you, everyone, again for being with us and sticking with us through this. We know it’s a lot of information. Trying to move a little quicker here on the back end to cover it all. So, John mentioned earlier, FERS is a lot more than just your pension. It’s all the other benefits wrapped up inside of it, and health insurance is one of those benefits.
That is tremendously beneficial. You work an entire career and get to keep it in retirement. We’ll get into that in just a second. But while we’re working, we wanted to hit on a couple of benefits available if they apply to you. One is if we’re on a traditional health plan, we can use something like an FSA, a flexible spending account.
Those are pre-tax dollars, so that means it’s gonna be 20% to 30% off. The government is essentially covering for us by putting this money into this pre-tax account. And if it goes through payroll, we get to avoid Social Security as well as Medicare taxes on it. So, maybe actually more like 30% to 40% off. It’s a pretty good discount that we get there by utilizing these vehicles.
Now, the flexible spending account, in conjunction with our normal health account, we can use this to pay for things like deductibles, copays, prescriptions, and other things like braces and eyeglasses. It’s a very long laundry list that we can use, and you can go into the program and view that laundry list yourself as to what works.
It is use-it-or-lose-it, so we’re not able to grow this money. We need to make sure we use it every year. We are allowed a graceful $500 we can carry forward every year. So, it’s not a complete use-it-or-lose-it, but it’s pretty tight there.
Another FSA-specific one is the dependent care. Wanted to hit on that one. That one is near and dear to my family in particular, and probably a lot of younger working professionals inside of the federal government. So, if both spouses generally are—we’re both working, and we have a dependent under the age of 13, we can take advantage of this to provide care for them so that we can go out and work.
They recently raised the benefit. I personally really enjoy this because, again, it personally impacts me. It went from $5,000 to $7,500. Again, we get that nice pre-tax discount to put this money in there. And for us, our children are in preschool, are in daycare, so we know if you have any, if you’ve had any recent exposure to those expenses, $7,500 is an easy… you’re gonna cover that ground pretty easily in today’s childcare costs. So, that’s an awesome benefit as well.
The 5-year rule is on the side. We’ll cover that one in the next one as well when we get into looking more at retirement. And then actually, for us financial planning tax nerds out there, health savings accounts are one of our most favorite vehicles out there if they make sense.
So, we’ve got the limits on there for you between single and family, as well as when we’re over age 55, we get to make catch-up contributions depending on whether we’re doing this as single or family coverage and if we do it the correct way. But what’s so cool about health savings accounts? So one, we have to have a high-deductible health plan, so not the traditional. This is the one where we pay a lower premium, but we have a bigger deductible where we have to be the first one paying those expenses. And then we get into coinsurance and a maximum out-of-pocket limit for catastrophic coverage.
But this health savings account that goes along with it is really cool from a tax planning perspective because it is triple tax-advantaged. John went over, “Hey, we’ve got IRAs where it goes in pre-tax and grows tax-deferred.” Roth is the flip side of that: grows tax-deferred, comes out tax-free. HSAs are a marriage between them. So, we get both pre-tax, tax-deferred, and for qualified expenses, tax-free.
So if we can, we recommend, if we have the capacity, let’s use this as another retirement investment vehicle because we can defer this until retirement, allow it to grow and compound, and then use it for those retirement medical expenses. We know we’re gonna have Medicare expenses. We’re gonna have different doctors, prescriptions, and actually what qualifies for medical is pretty generous. So, we’ll just use this if we can. Let’s delay it.
Another—I hate to linger on this too long, but a nice little unknown way to handle this is you can reimburse yourself for expenses that you incurred far in the past. So, another example here personally: my spouse and I, we’ve had two kids. There’s a lot of cost involved with having a child. We never took that money from our high-deductible account. And the reason is we know down the road we can always reimburse ourselves. So, save those receipts. You can always pull them out in retirement after you’ve allowed that money to grow. Pretty cool vehicle if it makes sense for your family.
So now as we go into retirement, again, this is one of the most awesome benefits. The pension is maybe the best, but the health insurance is a pretty awesome benefit to have there as well. Work an entire career, we can retire early. We don’t have to worry about the healthcare exchanges, playing with subsidies. We actually have a lot of options when it comes to Medicare time, but we can keep it fairly simple actually, or simpler than the private sector.
On this screen, you see that we want to elect family coverage at retirement. The reason we want to do this is if we want our family to have FEHB if something were to happen to us, they need to be covered when that thing happens. So, if they weren’t under FEHB and something happens, they’re not going to be under FEHB in the future. So, we want to make sure whoever we want to have covered if something was to happen to us, that they’re under this.
In addition, the other caveat there is we had to have a survivor benefit on that FERS pension in order for this to work. So, a survivor benefit is very important. Also important, we have them under FEHB, assuming we think this is something that we want them to have once we leave the plan if we go first.
The 5-year rule—had that on the other side. So, coming back to that, that means we have to have had coverage not our entire career, but we had to have it for 5 years, and we have to carry it into retirement. A couple of little caveats there that sometimes folks are unaware of: if we’re under TRICARE, military health insurance, TRICARE, that counts for the 5-year rule. Now, we still have to enroll in FEHB before retirement and carry it into it, but we don’t have to worry about having it for 5 because TRICARE counts. As well as if we were covered under somebody else’s FEHB. So, if we have two working federals, maybe we were doing family coverage because we have minors, et cetera. Well, that time counts for the 5 years. We just need to get that self-only plan before retirement, if that’s what makes sense for us at that point.
It does coordinate with Medicare Parts A and B. So, Medicare Part A, we’ve had the privilege of paying our entire career. So, once we’re at age 65, we can pick that up at no additional cost. It was not free; you’ve already paid for it. Part B is going to be an additional premium of right now $203 essentially per month. It goes up every year, and there are also these income surcharges, so depending on our income in retirement, it could be more.
But that’s Parts A and B, and then FEHB. So we don’t have to go on Medicare as a federal retiree. We can stick with just FEHB if that’s what we want to do. However, if we combine the two, Parts A and B are going to be primary—so hospitals, doctors, outpatient, that’s A and B combined—and then FEHB is going to be our supplement. So, when you get those things in the mail about “get a supplement, get a Part D policy,” you can trash them, because unless you decide to forego FEHB and go completely on A and B, you don’t need to worry with that. You’re either going to stick with just FEHB or do A and B plus FEHB.
We would say probably having A and B plus the Standard plan is overkill. Now, we could certainly see Standard without Medicare if we decided to forego it, which there’s some thought that needs to be put into that. I’m not going to try to go into that too much today, but that’s probably overkill to have both of them. What we see for many of our retirees is A and B plus Basic is a nice combination with very little to no out-of-pockets.
So again, A and B is primary, and Basic is your supplement, and Basic will also give you an $800 reimbursement per year for a person on it. So, if we’re both on Medicare Parts A and B and then Basic, we’ll get $1,600 back as kind of an incentive to combine those two. And now we have these FEHB Advantage plans. These are going to be lower-cost plans. We’re going to get more Part B reimbursement, so potentially no deductible, no copay. We’ll get more back towards paying that Part B premium. However, it is a cost-control structure, so we’re going to have to go more with the flow and more of the network. So, we lose some optionality by gaining these cost savings.
What’s neat is for many people, this may be a good fit, and by staying under the umbrella of OPM, we get to change every open season. So, that’s the nice thing about staying on FEHB amongst these options that we’ll have is we can kind of choose our experience. And a good financial planner, which we like to think we are, is going to be able to guide you and give you some information and education, help you make this decision. But ultimately, it’s going to be you who knows your health and your situation best. We have some awesome options, both before we get to Medicare as well as once we are there.
So, a mistake that we see—John led with some of the different mistakes that we’re seeing—is if we are a healthy nonsmoker, we sign up, probably thought we were doing something good, we sign up for optional group insurance. Now, Tommy, why would that be a mistake? Well, FEGLI Option B and VGLI base the premiums on age. It’s in 5-year brackets. Well, I just said, what if I’m in good health, I’m average weight, and a nonsmoker? Those are good factors for an individual policy. So, if those factors on screen work for you, you can go out and get an individual policy, and it will be cheaper.
In everything we’ve ever seen, it will be cheaper than staying on the group policy. And for those who, unfortunately, those factors don’t work in your favor, well, it’s more expensive, so you stay inside of the group. And this perpetuates the cycle because now the group is composed of folks who have negative risk factors, and it gets more expensive to insure that group, which is… that is, again, why we see these premiums are more expensive on the group policy. If you can, it makes a lot of sense to go get an individual policy.
Now, with all that being said, we’ll repeat it again: shop before you drop. We don’t drop a policy until we have a new one in place, or we’re absolutely sure that it makes sense that we no longer need that group coverage.
And you see it again on this screen. We just wanted to highlight age 50—those FEGLI Option B coverages start getting quite expensive. You see it almost doubles at 55 when we hit that next bracket, almost doubles again at age 60, and continues getting expensive. So, at age 50, if we haven’t already done anything, it’s time to shop. Again, it’s a license to shop, not a license to drop.
And on this screen, we have our illustration of that stairstep of those FEGLI Option B premiums getting more and more expensive. Particularly, you see at 50, it’s starting. And then on the right graph, you see the premium beginning to take that downward slope over almost 50 months—about 5 years, not quite, but almost 5—getting us out to almost age 70. What this is assuming is, hey, we had this until age 65. It was so expensive, there’s no way we were going to keep it at that point, so we took a 100% reduction. It’s declining over time, no cost at 65 as it declines. And when we look at this combined picture from 50 to 70, it’s essentially a 20-year period that we’re looking at of that Option B coverage. So, that tells us we want to be looking at a 20-year term policy to compare once we’re at age 50 because that’s essentially how long we would have kept this Option B coverage.
Now moving into FEGLI Basic, this is not based on age. This is just a cost per 1,000. It’s the same for all ages. It has some features we wanted to share with you. One is what’s called double indemnity. This is accidental death and dismemberment. So, if we got hurt on the job, double the payout for that happening.
One we want to pay particular attention to here is this accelerated death benefit. Now, this is true of many life insurance policies, and we hope you are still paying attention if you’re with us. Thank you for sticking with us and for the patience here. This is if we are critically ill, and we know we’re not expected to make it—we expect within 9 months something’s gonna happen. This allows us to get that life insurance benefit tax-free now. So, this could change somebody’s life or change their family’s life if they’re trying to provide care and you’re in that really difficult time period. And so, this is your chance to be somebody’s hero, because even if you don’t know somebody, you probably know somebody who knows somebody going through this, and they’re unaware of it. So, we do hope that this is one of your takeaways for today is this accelerated death benefit that’s on life insurance policies. And when somebody’s in an unfortunate situation, it could help the family through that difficult time period instead of having to wait.
And we’ve also got the permanent death benefit as part of FEGLI Basic, and that is because at age 65, we get to keep 25% of it for the rest of our life at no cost. And you can see our options here. We have 0% reduction, continuing to pay for it throughout with it staying level; 50% reduction, phasing down to half; and the one we generally recommend is that 75% reduction, so that it goes down 2% per month until 25% is left, at which point we have that cost-free for the rest of our life.
Generally, we don’t need insurance if we can afford to retire. If we’ve done the right things, generally with survivor benefits, we can afford to retire, we can afford to die. We don’t see the need for a lot of life insurance, but we may as well keep that free 25%. And with that, I’m gonna take it back over to John and let him go through some common misconceptions.
John Mason: So folks, we’re gonna wrap up. Thanks for hanging in. Maybe 5 more minutes, and we really wanna touch on survivor benefits here, both in-service and retirement. One of the biggest mistakes we see with federal employees across the country is not having any knowledge of in-service survivor benefits and/or understanding retirement survivor benefits.
So, if you die on active duty under FERS, there are a couple of things that happen. One, you get a $43,000 payment. You receive another payment that’s half your base pay. Those are taxable, and your survivor would actually have the ability to transfer them to an IRA. The better benefit is something called an in-service benefit, or in-service SBP. If the person, if the worker has 10 years or more of service and they die, they’ve earned a 10% pension, and their survivor is going to get 50% of that, or 5% for the rest of their life. And the nuance with SBP is you do not have to wait until 62 for a cost-of-living adjustment. So, why is this important? If you do not know about in-service survivor benefits, then your life insurance calculation is fundamentally flawed.
The mistake: failure to consider retirement survivor benefits at the mid-career level and then also electing less than full survivor benefits at retirement. So, we believe that 99% of the people out there should elect full SBP, and we’ll show you why in a second. But the problem is even if you are a candidate for an SBP replacement, that’s something you probably need to start thinking about at 40 to 50 years old.
Why is that? Well, we know our health tends to deteriorate over time. At 60, we call it the dangerous decade. So, if we’re going to purchase a permanent life insurance policy to act as our survivor benefit replacement, that’s something that we potentially need to buy at, like, 45 years old while we are in preferred or preferred best health.
Electing less than full survivor benefits at retirement is a mistake, and what ends up happening is if you don’t look at this… So, the mistake is we don’t think about it early enough, number one, and we know we need inexpensive, a lot of insurance while we’re young and we have kids at home. So, you go out, you try to replace FEGLI Option B, you select a term policy, and then unfortunately, maybe an insurance agent says, “Well, have you thought about whole life? What are you gonna do with the whole life? What are you gonna do with the permanent death benefit?” It’d be really good for you at that time to know that your permanent death benefit is survivor benefits. That way you can focus on buying the cheap, inexpensive term policy while you’re maximizing your investments and you’re not being sold or purchasing a product that you didn’t need.
On the flip side of that, if you don’t think about your SBP replacement early enough, at 62 when you’re retiring, you realize those whole life or universal life premiums are too expensive, so you buy a 10-year term instead, or you buy a 15-year term instead, or you don’t buy enough insurance because you don’t like the premiums. That’s not an adequate SBP replacement. So, the sooner we can commit, we would have you commit to full SBP, but even if you’re gonna commit to an alternative, that alternative needs to be in place before you retire. It needs to be in place probably when you’re in your mid-career.
And this goes hand in hand with what I was just saying: purchasing expensive term life or permanent insurance where term would have been more appropriate, or just purchasing the wrong amount of insurance for the wrong reasons at the wrong times because you didn’t know what your SBP plan was when you were going to retire at 57 to 62 years old.
So, there’s three options, folks, with SBP. Option one is no SBP, which means that your spouse would actually have to sign off on that. And what that means is you have a $33,000 pension, that’s the far-right column. There’s no cost to you, the federal employee, for that. But if you die, your spouse gets zero. That doesn’t really seem like an option because that would also kick them off of health insurance. So, we kind of rule out the 0% option very quickly.
Option two is 25%. The cost difference between 25% and 50% is pretty, pretty low in our opinion, so we really gravitate towards the 50%. A 25% SBP costs you 5%. A 50% SBP costs 10%. So, let’s just go down that 50% column here for a second: $33,000 pension. To you, the cost is 10%. That’s $3,300 pre-tax. If you were to receive that in your pension, it has to be stopped by the IRS. You have to pay 22% federal or more probably, plus whatever your state rate is. So, you’re not receiving $3,300; you’re receiving $3,300 less your taxes. So, the effective cost of this is maybe more like 6% to 8%, not the full 10%. Your pension drops down to 30,000 gross. Your survivor would receive $16,500, cost-of-living adjusted for the rest of their life.
That’s a good deal. We believe it’s a good deal. We have plenty of YouTube episodes and podcasts that talk about this. But the things I want to highlight here is: what if the person you’re protecting dies first? You get popped back up to the full amount. If you’re not married when you retire and you get married later, you can elect SBP. If you have SBP and your spouse dies, and then you get remarried later, you can activate it for that person. Survivor benefits, we’ve never had anybody come to us and say that that was a decision they’ve regretted.
Everybody is young and bulletproof when they retire; they think they’re going to live forever. And you can design a strategy, folks, around slide rules: What if I live till here? What if this happens? What if that happens? What you can’t quantify is the decisions you make and how much more enjoyment you can have out of your investments and your financial plan when you know that your spouse is taken care of.
Example: when you retire, you have a bunch of accumulated assets—houses, vehicles, CSRS, FERS, military pension, and what you’ve saved. When this happens, they don’t throw all the assets in there with you. You would not like your TSP if your assets went in there the second you passed away. But for some reason, people are okay with that happening to their FERS pension. We like to say that if your family was good here, if your family was good here, when this happens, your surviving spouse is going to be able to thrive because that big pension goes away and it comes back as survivor benefits.
There’s a variety of Social Security claiming options that we’re not gonna hit on today, but there is one specific thing that I wanna hit on, and it’s the coordination of survivor benefits and your Social Security claiming strategy. If you’re somebody that declined military survivor benefits, delaying your Social Security until 70 could make a lot of sense. Why is that? Well, if you and I are married, and my Social Security benefit is 50 and yours is 20, and I die, you only get to keep one of those benefits, and it’s the higher of the two.
The reason we generally like a 62 and a 70 claiming strategy is we like to have that delta be as big as possible. So that way, if I pass away first, you, my surviving spouse, receive that larger $50,000 benefit for the rest of your life. We find it interesting that when we ask people or consider delaying Social Security until 70, they tell us that they’re going to die tomorrow, and they need to get it now. And then we say, “Okay, great. You’re gonna die tomorrow. Let’s take survivor benefits under FERS.” And you say, “Well, wait a second. I’m gonna live for a long time. I don’t wanna waste all those premiums.” So, it’s just an example of how with the different pensions, we have these different biases, and that’s what a good financial plan should do is it should address all of these.
Your decisions should complement. They shouldn’t conflict. And unfortunately, that Social Security and SBP decision is just one example of decisions not really talking to each other. Instead, they’re banging against each other and not complementing your overall plan. So, we went over.
It’s 5:10. Thank you for hanging out with me. I’ll close down here and then open it up if anybody’s hanging out for questions. Remember, all of your decisions that you make in your financial plan should complement each other. Financial planning is so much more than investment advice, or tax planning, or retirement planning, or federal benefits.
Real financial planning that you’re gonna do for yourself, or that maybe you’ll hire somebody to do in the future for you, is putting this all together. Remember, you only live, retire, and die once as a federal employee. We’ve been through these things hundreds of times, which is why we’re so happy to share all of this with you, both here on this webinar, our Federal Employee Financial Planning Podcast, and our YouTube channel.
Please connect with us. Do all the things. Connect with us on LinkedIn, follow our YouTube channel, subscribe to that podcast. Thanks for hanging out with us today. We appreciate you.
Zoe: Thank you so much, everyone, for joining us today. John, Tommy, we had several questions submitted ahead of time, a lot of which we answered during this presentation. Some were more specific situations. So, what we’ll do, everybody, is we’ll kind of go through them together after this, and then if we have answers for you, we’ll send them out individually to everyone who registered.
We did have one clarification question from someone during the webinar. John had asked, back when we were doing the FERS calculation, just clarifying, is it 20 years of service and age 62 to qualify for the 1.1%? I believe the slide had indicated it was age 60, so he just wanted to clarify that.
John Mason: It is 20 years of service and age 62 to be eligible for the 1.1% kicker.
Zoe: Okay. Gotcha. Thank you, John. And yeah, I think I had just quickly done a little research there since I was hanging out, and the age 60 number that we had on the slide was incorrect. I think that was… is that 1%, John, Tommy?
John Mason: Yeah, I don’t remember what the slide was, but I think we were trying to show 30 years and age 62, because that also coordinates with the Social Security claiming strategy. So, it might have just been a typo.
Zoe: Okay. One more question just came in from Mark: How much does it cost to work with Mason & Associates?
John Mason: Great question. So, the process—we have podcast episodes on this that we can refer you to, but intro call is free, no cost, 15 to 30 minutes to just get to know whether or not we’re a good fit for you. We generally work with folks in or near retirement with $1 million or more of assets. So, intro call, no charge.
Intro meeting is an hour where we actually review your documents together and really determine whether or not a relationship makes sense. There’s no fee for that. Once we’ve moved past that part of the relationship, that’s where the compensation starts, and that’s where the planning really begins.
We charge 1.5% on the first million of assets that we manage. We’re fee-only, and that’s a quarterly fee, so 1.5% divided by 4. We like to say, Zoe, and for Mark if he’s still here, you hire us for the time that you want to hire us. You’re not held hostage. You’re not committed for any length of time. So, every quarter you’re gonna see that fee, and you’re gonna see our faces or our team’s faces, and you’re gonna say, “Is this team worth some multiple of the fee that I’m paying?” If so, we’ll work together another quarter. If we’re ever not adding that value that we think we’re gonna add, we’ll part ways as friends. We’ll help you transition assets back to TSP or wherever they need to go.
Tommy Blackburn: Yeah, it’s definitely meant to be a liquid relationship. We think we built it the way we would want it if—so both sides can be in this relationship hopefully for a long time, but nobody’s held hostage, so to speak, any longer than they want to be there. I love that you mentioned we typically don’t close TSP, so that if we ever want to go back to it, that door is still open, or we don’t close it until we’ve had a long relationship and things like required minimum distributions have come in.
The other part on the fee schedule worth mentioning, I believe: one, we bill in arrears, so only after we’ve served for a quarter do we bill the account and for the time that we’ve served. And it does—we do have—it’s a blended fee, but there are tiers that become more and more cost-effective. So, from $1 million to $2 million, it is 0.75%, and everything over $2 million is at 0.5%. So, we do believe the larger the account, it begins to get very, very efficient.
John Mason: It blends to like 1.1%, Zoe, at $2 million of assets. 1.1% is the blended fee between tier one and tier two.
Zoe: Okay, great. And follow—excuse me, follow-up question from Mark. He will be mandatorily retired in October. When should he think about reaching out for an initial call? And I think this is a bigger question as well. If someone is considering retiring or they’re gearing up for retirement, what’s a good window for them to engage with an advisor?
John Mason: Wonderful question. So, congratulations, Mark. I think we know what that means about mandatory. So, thank you for your service and everything that you’re doing. Now is the time. We’re entering our strategic planning meeting season, which is about a 6-week period where we conduct all of our client meetings.
So, what we’ll do is if you either call us at 757-223-9898 or schedule a call through our website at masonllc.net, we’ll have an intro call on a Monday over the next few weeks. Then what we would do is we would kick off your planning process middle to the end of June, and that would give us plenty of time to help you review your retirement application, review TSP allocations, review survivor benefit decisions, and more. So, we don’t have a lot of time with an October mandatory, but we have enough time. Generally speaking, Zoe, I think we would have preferred to have a full 12 months. But for Mark—I think, not just for Mark, but in Mark’s specific scenario—we have time to really add some value and clarify everything about his retirement before October.
Zoe: And I think to clarify, he said October 2027, so a 12-month perfect situation.
John Mason: Oh, wonderful. Yeah, that’s even better. So, yeah, Mark, you can reach out now or in June, but a 12-month runway together would be highly advisable as we… you wouldn’t be the first client that changes or gets more comfortable over 12 months, and then as you get more comfortable, you start learning more about clients, and you start figuring out more of their goals. So, the longer runway we have to really learn about you and your family, the better.
Zoe: I think that’s perfect. And then final question is where can everyone connect with Mason & Associates or with yourself?
John Mason: Thank you. So, our YouTube channel is youtube.com/@fedemployeefinancialplanning. You can find our podcast on all the major platforms. We have a dedicated podcast website, federalemployeefinancialplanning.com. My LinkedIn handle is John Mason CFP, so you can connect with us there. And so, YouTube, podcast, LinkedIn page, and masonllc.net.
Also, very, very cool, we have an e-book on survivor benefits coming soon. If you register for that, and maybe even just for registering for this webinar, we’re gonna send you some monthly commentary every month with value and invite you more to events like this.
Zoe: Perfect. Thank you again, everyone, for being here. This was wonderful. Thank you, John and Tommy, for your time, and have an excellent rest of your afternoon.John Mason: Thanks, everybody. Have a good night. Thanks, Zoe.
The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.
We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.
