Are you thinking about retiring early? Join Tommy, John, Mike, and Ben in this episode as they explore the world of early retirement planning. They define early retirement in different sectors, spotlighting health insurance, taxes, and time management as key concerns. Beyond finances, they emphasize the need to discover a passion or something that will fill your time up when you retire so that you can continue feeling fulfilled.
Listen in as they discuss the emotional journey from considering retirement to being ready for it, offering strategies like gradual work phase-outs and building a social network. They also stress the importance of maintaining funds in your TSP, planning for taxes, health insurance, and accounting for inflation's impact. Don't miss these key early retirement insights and strategies!
Listen to the full episode here:
What you will learn:
- What does it mean to retire early? (2:50)
- Emotional considerations that often get overlooked when planning for retirement. (6:10)
- How long it takes to transition from knowing you can retire to being emotionally ready. (10:05)
- The importance of having a social network outside of work. (12:45)
- Why it is so important to keep money in your TSP. (16:45)
- Why planning for taxes and health insurance in retirement is key. (22:40)
- How inflation may impact your retirement plans. (26:30)
- The two types of retirement to be aware of. (33:45)
Ideas worth sharing:
- “You have to find a passion, something that is going to continue to drive you each and every single day during retirement, because for a lot of us during our working career, our jobs have become our lives.” - Mason & Associates, LLC
- “Sometimes retirement doesn’t mean quitting.” - Mason & Associates, LLC
- “Making sure you have a social network outside of work can lead to success in retirement.” - Mason & Associates, LLC
Resources from this episode:
Did you enjoy the Federal Employee Financial Planning Podcast? Never miss an episode by subscribing on Apple Podcasts, Amazon, Spotify, Stitcher, and Google Podcasts.
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.
John Mason: Welcome to the Federal Employee Financial Planning Podcast. I'm John Mason, President of Mason & Associates, and with me today, our usual crew.
We've got Tommy Blackburn, Mike Mason, Ben Raikes. And today, we have an awesome topic for you, it's called Planning for an Early Retirement, and we're going to define what early retirement means.
And this, I think guys, will speak directly to federal employees, maybe a little bit into military, and like always, I think we'll have some crossover into defining early for federal versus early for private sector, and maybe a few of those differences between the two. So, really exciting episode, Planning for an Early Retirement.
As we dive into the content today, a few immediate action items for our audience and also a word of gratitude. Thank you for being with us for these last 18 months, audience. We're really enjoying this content.
Not going to lie, it's pretty hard to come up with the episodes, it's pretty hard to come up with the time to record them, but as we've seen this spread across the country and the amount of downloads and the feedback we're getting, we know it's making a difference not only in our clients' lives, but yours as well.
So, thank you for being a part of our lives and thank you for the continued motivation for us to do this.
In addition to the podcast, we've started the Mason & Associates YouTube channel as well and we're just really enjoying putting this content out there for you.
If you like what you hear, do all the things; like, subscribe, share and most importantly, we're taking new clients and if you'd like to be one, you can start that process at masonllc.net.
So, guys, today Planning for an Early Retirement, we've got so many variables to talk about here. I think if you agree, it makes sense to define what are we talking about with early retirement, whether that's federal and private sector.
Tommy Blackburn: Yeah, actually, I wrote that down too. I thought that maybe defining early retirement is a place to start here today. And I think about it more of like in a global sense of what does it mean to retire early and typically, jump to like the private sector person.
So, a private sector person retiring early, I would say is really anytime before 65. That's because for most people, that's at least, we've made it to Medicare, the health insurance part of the equation has become a little more solvable. Anywhere before 65 is typically early, fifties is extremely early for private sector.
And then put it into context for our federal employees. And retiring in your mid to late fifties is not necessarily early. And in fact, working to 65 would be retiring late from what we see for a federal employee.
John Mason: I've wrote down, retiring on time for a federal employee is retiring extremely early for everybody else.
So, I think as we discuss planning for an early retirement, we will compare and contrast two things — maybe not compare and contrast; we're going to touch on federal employees retiring at 57 have similar planning issues to private sector folks retiring at 57 to 60. Maybe not the same financial considerations, but similar emotional, similar life strategy things that we need to think about.
So, there is a planning aspect to that. And then there's the federal employees who may are retiring on a reduced annuity, an MRA+10 or retiring early where they're not getting like full pension benefits.
So, that's kind of a different thing. It's like one, 57 is early. Like no matter how you slice and dice it, 57 is early even though it's on time. So, we have to talk about that in I think two different ways.
Michael Mason: Yeah, I mean, private sector, 57, you have to be independently wealthy or very fortunate, maybe it's your second retirement.
We did say private sector, maybe you retired military and you've got that health insurance. But the biggest thing for folks like us is the health insurance. It's two grand a month for Bobby and I to have health insurance coverage, not 400 a month.
So, solving that health insurance is huge in private sector. I would say in the government, MRA in 30 is doable. If we're getting into a reduced annuity from there, MRA+10, well, then you just either have to be independently wealthy in other areas or a spouse that's retiring that's covering the rest of it.
John Mason: So, where do we want to take this, because I think we could go down a couple different paths, we can talk about like what are some emotional issues with retiring early? What are some financial planning and tax planning issues with retiring? Maybe we can just say pre-59 and a half or pre-60. We've touched a little bit on healthcare.
And then we can also talk about like the reduced annuity aspect. So, I think we can go a lot of directions here, where do we want to take this thing?
Tommy Blackburn: Perhaps we start with the emotional just because we kind of came out of the gate with that. And then let's get into some of the more probably fun for us. It's all fun, but into the numbers.
John Mason: Okay, I like that. So, if we think about Ben, somebody who's spent a career working, whether that's federal or private sector and they wake up today, they're 57, they had their retirement Armageddon moment, which is a YouTube video, you should check out.
They had their retirement Armageddon moment, they're ready to retire, what are some emotional considerations that we find people often overlook?
Ben: Just like you have built up a plan to get you to retirement, that you have all of your ducks in a row that you've been working with a financial advisor, that's honestly step one of the, “can I retire” picture?
You need to find out what you're going to do once you're retired. I think we've heard it around this table many times. I can only go and play 18 holes how many times per week.
You need to find a hobby, something that you're passionate about. Maybe you have kids or grandkids in the area. You have to find a passion, something that's going to continue to drive you each and every single day. Because for a lot of us, while we've had a 20, 30, maybe even a 40-year working career, our jobs have become our lives.
I get a ton of satisfaction and value out of being a financial planner, as we all do around this table. Our other clients might get that from their federal job or from their military job, or if you're a private sector, from whatever you may be doing and at retirement, when you flip that switch and that's no longer a part of your life, it can be really challenging to think about what's next.
John Mason: Well, like you said, it becomes your identity and as we do these podcast episodes, Ben, I think back to some of the ones we've done before, like we did Know Your Score or Know the Score. Why is that important?
Well, I don't even know if we touched on this in that episode, but if you know your score at 55 that you can retire at 57, now we can spend those next two years game planning for how I will fulfill myself and my family.
How am I going to stay busy? How am I going to stay motivated? What am I going to do? But if I can't see past, can I retire, If I can't see past the scary part of this, then I never get to go into any of these other areas of planning for my life.
So, knowing the score is super important. I don't know how long it takes, and Mike, maybe you're closer to retirement — not tomorrow, but closer than the three of us. I imagine if I was a client, I'd probably want to know I can retire and I'd probably want two maybe three years to think about how I'm going to exit my career, I don't think I could just wake up and leave.
Even though in the YouTube video, we talk about the Armageddon moment, I don't think I could just wake up and leave. I think it probably takes the average human two or three years to make that transition.
Michael Mason: And we should remember this; sometimes retirement doesn't mean quitting, especially at that 57, 58, 59. Unlike the old civil service retirement system, you can retire at 57, 58 and then go out and continue to build one of the three legs of your retirement stool or really two of them; your 401(K), your pre-tax investments, and your social security.
So, maybe we ought to talk about, I'm just so frustrated in the bureaucracy of the government that as soon as I can get out of here and guarantee myself a pension and health insurance, that maybe I'll still do what I love, but it's going to be in a private world where the bureaucracy isn't just killing me every day to go to work.
John Mason: So, you're suggesting maybe like sort of like a partial or phased retirement where you give up the 40-hour week job and you become a consultant or you do something that is a little more flexible.
I think we've seen clients do that with tremendous success, but I'm curious, what do you think about like, how long does it take for a human to make that transition from knowing they can retire to being emotionally ready to retire? Because I don't think that happens instantly.
Michael Mason: And we're talking, I mean, full-blown, you're done. You're retired now and you're going to entertain yourselves in some fashion.
John Mason: I think that part-time work that you mentioned factors into that. So, I've left the government, I'm now either retiring full bore or I'm going part-time. How long does it take to make that transition to I'm done, done?
Michael Mason: I can't imagine that it can be like you with getting rid of coax cable, you just wake up one morning. I think it has to be a process, I would say a 24 month to 36-month process.
John Mason: I think our math and our data would probably support that. As we look at some of my favorite clients and we love all of our clients, but for whatever reason you connect with other humans on a higher level.
And as I think about a few of my favorite clients, a lot of them did right at two years part-time. 18 to 24 months part-time doing something at their previous job, whether it was helping with that peaceful transition or whether … some of them even went back to their same desk for a year or two after they retired.
And it seemed like the two-year mark was the second Armageddon moment where they were like, “Okay, I've officially had it. This is kind of cramping my style a bit and I really, really need to fully exit.”
Tommy Blackburn: So, and it's going to be different for everybody. But as I think on it, I think you're right. A lot of people have success with like slowly phasing out of it. But I almost think what it does is it gives them confidence that there is life after this and they begin to realize like, “Oh man, retirement's actually pretty awesome and I'm enjoying this.”
I want to shed some optimism here and that clients that I've talked with about this, most of them are now saying like, “I don't know how I ever worked. I don't know how I had time for it.” Because they are living like just a busy full life outside of retirement. They almost think it's just like a confidence thing of I'm just going to work part-time, and I begin to kind of see like actually, there is life outside of this.
And from what I've read, like one of the biggest things with retiring and being successful (I'm sure we've all anecdotally seen it) is relationships.
So, just having those social network relationships outside because when we're at work, that's kind of how we define ourselves, but that's also our relationship. So, just making sure you still have a social network outside of work is probably what leads to the most success.
John Mason: So, two big takeaways here or a couple takeaways; your retirement Armageddon moment is coming, we need to be ready for it. When you retire early, we have even more time where we have to figure out how we're going to stay busy.
Whether that's going to the gym, active in the church or other social networks, but how you're going to stay busy for the next 30 or 40 years, how you're going to fulfill and have that same sense of self-worth for 30 or 40 — you're going to be retired as long as you were working or maybe even longer. And we need to put adequate thought into that.
So, we need to know the score, we need to know that retirement Armageddon is coming, and we need to put a lot of work into this transition in life and hopefully, the earlier we know the score, the better we can do that.
So, let's now talk about federal employees retiring at Minimum Retirement Age (MRA). They're 57-years-old on time. This is an on-time retirement, but it's also early. So, let's talk about this from a tax planning perspective.
Tommy Blackburn: So, we're saying they were eligible for immediate annuity, immediate unreduced annuity.
John Mason: Yes. 30 years in MRA. That’s it.
Tommy Blackburn: So, you said from a tax planning standpoint?
John Mason: Yes, sir.
Ben: One of the things that comes to my mind is one, if you have all of your money that has been transferred into IRAs, into pre-tax IRAs and you now need that money to live on, what are we looking at before 59 and a half? Well, we're looking at potentially a 10% penalty on that money.
So, that's a reason to keep money in those 401(k)s or at least keep some money in those 401(k)s and TSPs. And we're also looking at your retirement years where you're probably going to be making less income in those first few years that you retire.
So, if our income is lower, it's possible that we're in a lower marginal tax bracket. That opens up looking at things like Roth IRA conversions, that looks at accelerating income when we can, and some really unique tax planning opportunities that come along with that as well.
Tommy, John, not sure if there's anything else on that list that you all might've thought of.
Tommy Blackburn: Well, I just want to say that gap year, that beautiful tax planning window from when we first retired to before social security starts, before we have RMDs, we definitely love tax planning, because I was thinking we could maybe go through like 55 and separate it from service, mention some of that stuff. But Mike, it looks like you're ready to jump in here.
Michael Mason: Well, I mean, Ben hit it well. First and foremost, if you're going to call it quits, not leaving federal government to work seven years full-time private, you have to do a whole lot of work to make sure that at age 57, you can do the right things.
Because you're going to spend about seven years waiting or five years waiting to get a cost-of-living adjustment on your FERS annuity. Let's not forget that you're going to have a FERS supplement with 30 years of service that's going to be 75% of your age 62 social security.
And even though we say we have a planning opportunity, 75% of that FERS annuity, that supplement is fully taxable, where only 85% of social security's fully taxable. And then if you need withdrawals from that TSP to meet your number, then I don't know-
Tommy Blackburn: You may not have a tax planning window.
Michael Mason: I don’t know that the number's any different left of 62 or right of 62.
John Mason: Well, the number left of 62 is arguably worse because you have less control. Social security at 62 is a decision that you get to make. Do I turn it on or do I not turn it on? FERS supplement’s not a decision, it is an automatic.
And I've never really heard anybody complain about receiving the automatic FERS annuity supplement, but from a tax planning perspective, it is forced income on you. You can't like defer that and double up on it later or anything, it's absolutely forced.
But you hit on this too, Tommy, I don't want to lose it, on the tax planning segment here is, the reason it's so important to keep money in TSP, there's a couple reasons. And I know I'm doing all kinds of shout outs to the YouTube channel, but we have, don't close your TSP, don't max your TSP.
We don't want to close our TSP for a couple reasons. One, if you have money in there, you can transfer money back as long as it's pre-tax money. But number two is if you're retired at 55 or older, different rules for law enforcement but penalty-free withdrawals from TSP, similar for private sector in a 401(K), separated the year you turn 55, we avoid the 10% penalty on those distributions.
Tommy Blackburn: And most people seem to be unaware of this, most people seem to think-
John Mason: 72 T is mandatory baby.
Tommy Blackburn: Or 59 and a half, I can't take distributions from anything until I'm 59 and a half. And that's why we say, well, if we're 55 and separated, we can take it from our 401(k) or TSP. And if we're law enforcement, it could be even earlier if we're first special under those provisions.
So, we want to think about that. That tax planning window, I guess what I'm thinking about is really, age 70 social security coming in and required minimum distributions. And fortunately, I suppose, most of our clients that we work with, from what I see is distribution is our discretionary.
So, a lot of times if they did nothing, I think we all see this, it would've just compounded until we got to age 75, at which point, we lose control.
So, if we have the discretionary control over the portfolio distributions, then it's a really nice tax planning window before you lose control. But if you're taking distributions to live off of, the math definitely changes as to whether Roth conversions and so forth makes sense.
Michael Mason: And that takes us back to … again, most of our retirees, 62 plus, they're not taking anything out of their TSP until RMD. It's that window of, “Okay, I did it.” No, maybe we're forcing it out because we want to delay social security, but they could have taken social security at 62 and met their obligations without a withdrawal.
It's just that 57, that's five years earlier. There's a whole lot of extra planning that goes into that.
Tommy Blackburn: You got to take a look.
John Mason: Can I jump in here real quick?
Tommy Blackburn: Yeah. I was thinking about distributions.
John Mason: So, I know we're going to record a future episode on distributions, like ordering of distribution, safe withdrawal rates and what have you.
And this is not only applicable for federal, but it's even more applicable guys for private sector. And it's like if you're planning on early retirement, and we'll just define that as anytime before 59 and a half, you need to have a war chest.
Like we probably need a little bit bigger savings account because we have a longer retirement life expectancy. We also need probably some money in non-qualified accounts, money that we can pull from an account that does not have a 10% penalty that we can access any time for any reason.
And then, which no federal employee really has this, so this is a private sector is those unused HSA balances, if you have stored receipts, that's an awesome way to facilitate a couple years of early retirement, is if you've banked 30, 40, 50,000 in medical expenses, now all of a sudden, we can extract that from an HSA and maybe that's enough to bridge you until we can get to those penalty-free withdrawals.
So, that's more for our private sector folks or is applicable for federal employees as well. Just not as often seen.
Tommy Blackburn: Absolutely. And then what we also want to be looking at, we mentioned safe withdrawal rates and maybe we'll get into this more later. And when we're delaying social security, which usually makes sense for at least one spouse to delay … each situation is going to be specific as to the strategy we deploy.
But it's not uncommon to see high distribution rates almost at the beginning until social security comes in. So, one rule that we like to put out there is, if we're delaying social security, it doesn't mean we're living on less. It doesn't mean that we're not maintaining our standard of living.
And the other is we pretty commonly see, you may start out in an early retirement situation with 5, 6%, maybe even a little higher. It gets a little uncomfortable there, distribution rates from the portfolio because we're delaying social security and that's okay. We wouldn't want to see that high of a rate over 30 years. But if we see it over a small gap in time, that's okay.
John Mason: And I would say to that Tommy, that that's probably one of the biggest issues with us having clients. And I know we're going to talk about COLAs and other things, but as I think about clients retiring at 57, and then knowing that delaying social security is probably the best bet for them, retiring at 57, immediately taking portfolio distributions and delaying social security, that's a lot, it's really a lot. And we're living that.
We've had two years now of flat or down stock market performance and those clients who are 57, 58, 59, their financial plan still says they're good and we know they are. But we may be singing a different tune when they're 62 and eligible for social security if the portfolio hasn't really held up as good as we would've thought it would during these first five to six years of retirement.
Tommy Blackburn: It’s nice to have flexibility and the decisions in our financial plan, and we also recorded an episode of don't let perfect get in the way of good enough. And this may be one of the ones where you have to bob and weave sometimes and say it'd be great for us to delay.
But sometimes, maybe the practical answer is for a peace of mind, our comfort, we're just going to turn it on and let's understand the ramifications.
Ben: I wanted to mention just one other piece with this that I think is important because we had talked about healthcare, obviously FEHB is what our federal employees will have, especially if they're at MRA+30.
If you are a private sector, we talked about the ability to accelerate income and how great it is to get income out at earlier tax brackets. One thing that our federal employees don't have to worry about, if we accelerate income for someone who's in the private sector and do big Roth conversions, it's not only going to cost them taxes, it could potentially jack up their premiums for the Affordable Care Act.
So, you might look at a hundred thousand dollars Roth conversion that costs you $30,000 in taxes, and $15,000 in extra healthcare premiums. I just want to drive home really how important this kind of planning window is, and how as federal employees, it's even I think a lot sweeter to have that window because of some things you don't have to worry about.
John Mason: Well, federal employee health benefits I think is, to your point, Ben, widely known, or at least in this room, the second-best benefit that our federal employees have, is that federal employee health benefits pension first, health benefits second.
And to your point, private sector, you absolutely need those non-qualified accounts and those HSAs and those savings accounts because we're dancing, we're doing the dance where we're trying to make you look somewhat broke so that you get somewhat cheap health insurance.
But the second you're not somewhat broke, all of a sudden this health insurance isn't so affordable under the Affordable Care Act anymore.
So, it is a dance and federal employee health benefits, magnificent, retiring early. So, 30 years in MRA or on time, you get federal health benefits for the rest of your life, and you pay the same premium that you are always paying.
And this is often overlooked. A lot of federal employees don't realize it's the same cost and I think it's because it changes from biweekly to monthly, they think they're paying more.
Michael Mason: And the only thing, maybe it's after tax and then we want to make sure we acknowledge LEO (Law Enforcement Officers) and FERS special because many times, you're forced to retire earl, but again, you have a different factor.
You've got 20 years in the LEO system under FERS, that's 34%, that's 1.7% a year. So, that's a bigger number. And fortunately, as we're talking about health insurance for LEO, they also get a credit for their health insurance premiums in retirement that normal federal retirees don't get.
John Mason: So, you're talking about the tax deduction that they can take for health insurance premiums.
Michael Mason: Yeah, that's what I was remembering.
John Mason: I think it's 3000, Tommy?
Tommy Blackburn: Yeah, 3000 PSO (Public Safety Officer) deduction.
John Mason: So, now maybe we can talk about … Mike, I think this is good transition is federal employees under the FERS system, what are the rules to qualify for an immediate retirement?
And then tell us a little bit about COLA and how somebody who retired before 62 may have been impacted by the last two years of, I'll just use the word crazy high inflation or abnormally high inflation, or just inflation, maybe we've just never had any inflation my entire career in this business.
Michael Mason: So, the unreduced retirement is MRA in 30 years. It's 20 years and age 60 or five years and age 62. So, I think I've got those three right.
If you retire before age 62, you're going to possibly have that FERS annuity and the FERS supplement, and neither one of them are going to get cost-of-living adjusted until you reach age 62.
And we've never worried about it; 37 years of doing this modest to no inflation whatsoever and no COLAs. But now, we've seen 2022 and 2023 for FERS get about 14% cost-of-living adjustment, but as a retiree, you didn't receive that, and you can never go back and catch up to that.
And we talked before we started recording, and I always try to get human nature, and if we look at those two years, easiest is look January of 2020 to now, and what we've been through with COVID, and the stock market and whatnot.
But during that three years, the stock market's flat to up and you may be chomping at the bit retired at that time thinking, “Boy, I picked the right time to retire, didn't I?” Being facetious, the stock market hasn't done anything.
Well, the more important thing to be whining about is your biggest asset, your FERS annuity, didn't get 14% cost-of-living adjustment. That's far more impactful than the stock market not doing anything because the stock market can come back and replace all those gains you didn't have. But you can never go back and get those COLAs.
John Mason: It's highly frustrating and it's not something like you said we've ever experienced, but I'm very frustrated for clients who retired pre-62 and missed out on those COLAs. And it doesn't mean their financial plan's not still very successful, it's just insulting.
It doesn't get banked, it doesn't get stored, it doesn't get added on in the future. And it just seems like … I guess I'm not advocating for this, but the federal government's really put these people in an interesting position.
And we knew the rules, we knew there was no COLA, but you may see a bill that comes out in the future that kind of writes this because it does feel like these folks have kind of been a little bit wronged just in their decision to retire in the highest two years of inflation we've seen in decades.
Michael Mason: So, just to be the voice on the other side, you could've retired from Huntington Ingalls 10 years ago-
John Mason: And had no COLA ever.
Michael Mason: And you haven’t had a COLA and never will have a COLA.
John Mason: Well, I'm just saying, I wouldn't be surprised if something comes out to kind of right this, not that they've been wronged, but it, it just feels rather unlucky.
So, we've talked about a lot of things here. I think maybe now, we transition to early, early retirement planning for federal employees and this would be people who do not qualify for an immediate unreduced retirement.
So, that would be somebody at MRA without 30 years or somebody at 60 without 20 years of service, and talk about some of those planning considerations. We only have a few minutes left in this episode. I'll also put out there just on the record, that all the rules are different under VERAs and RIFs.
So, a Voluntary Early Retirement Authority or a RIF, a (Reduction in Force), rules change, and we cannot plan for those on this episode, but if you do experience a VERA, a VSIP or a RIF event, you absolutely want to give us a call or somebody like us to help you go through those planning considerations.
So, Tommy, what happens, I'm 57-years-old, I've served the government for 25 years, and I've just had it. Either I want to retire, retire or I've got a good job somewhere else. What are the rules in that scenario?
Tommy Blackburn: So, because we've gotten to MRA+10, we have some decisions to make. So, we can quit anytime any job anywhere. But under this one we can start the pension because we do qualify. However, it's going to be considered an early pension because we didn't have the 30 years of service yet.
The rules on that is, for every year before age 62, we're going to take a 5% cut. So, that can be pretty substantial when we're talking about at 57 doing that now, what is that? 25%.
So, that could be significant to take that large of a cut. So, we have to think does the cash flow situation dictate it or do we delay this so we don't have to start the pension, we can still wait until age 62, at which point we'd get that full unreduced pension.
John Mason: So, that decision rate is two things, we're looking at cash flow. Does it make sense to start now or defer? What else are we looking at in that decision?
Tommy Blackburn: I believe we're also looking at our FEHB, right?
John Mason: Absolutely.
Tommy Blackburn: So, in order to have FEHB, we have to be collecting an immediate annuity. So, if we defer our pension, so because we could have started our pension, we will be able to pick FEHB up later if we defer to avoid the penalty.
But until we start the pension, we will not have health benefits and now, we have to solve, how do we solve healthcare?
Michael Mason: Important to me, and it doesn't sound like it should be, but calculating that 5% penalty, you set it up, it's 25 years of service. So, we always use a hundred grand because it's easy math to work with.
So, 25% of a hundred thousand is 25,000. It's 5% of 25,000 times five years is the reduction. We don't take 25% off of your factor. We don't say “You have a 25% factor and we're going to reduce that by 5% a year” because you wouldn't have anything.
So, we calculate the number and then reduce that, and I just did the math, you would've had 25,000, and now, you have 18,750. That won't get cost-of-living adjusted for quite some time.
So, I just want to ask the question, who might do something like that? And we've got a client high level that retired with 10 years at, I think it was 40-years-old from a high-level position up in Washington, DC. Now, his is a deferred retirement, so he won't have health insurance when he gets to age 62.
Why would somebody do something like that when they have their entire career in front of them? And the only thing I can think about, and it worked out for him too, is a huge offer from private sector that said, “You're not going to have to worry about health insurance or anything because this is how important you are to me, and we're going to pay you this much money.” I don't know if that fits in this segment or not, but-
Tommy Blackburn: Well, maybe it still fits around he is vested in the pension. And so, he can still take an early reduced pension once he gets to MRA, and there'll be some decisions to be made at that point in time, but he’s not going to be eligible for FEHB because he left so early.
And his situation was, yeah, he had an amazing opportunity in front of him that worked out very well. We've mentioned at some point, military. A lot of federal employees are retired. It's not uncommon to see that there were retired military as well.
And I think that's one where you see too, where they've already got a military pension, so the federal pension from a cash flow standpoint is not as important to them. And in addition, they've got TRICARE, so they've already got health insurance solved for.
So, those are some of the people that maybe they make a different set of decisions around this pension.
John Mason: And I think too, guys, one of the rules that I cannot remember are the words that I cannot keep in my head is there are two types of retirement if you're going on like an early. One of them is deferred and the other's delayed.
So, we may audience be using those interchangeably. One of them means you qualify for an immediate pension, you're just choosing not to, and the other means you don't have a choice, you will start your pension later.
So, deferred and delayed we may use those a little bit interchangeably. Just know that one of them says, yes, I can now or no, I can't until later. There is a difference between those two.
And I guess one other thing to talk about on this retiring early concept, guys, as we begin to wrap it up is, we're right there. We're at the finish line, we're at 57-years-old, we've come to see Mason & Associates, we know the score of the game, we know retirement Armageddon’s coming, but it's not here yet — what are some ways that our clients can begin living like they're retired today while they're still enjoying a paycheck?
And here's what's on my mind there. Federal employees have so much leave, whether it's sick leave or annual leave, and comp time and what have you. We are big believers and Ben, you say this very well, that the impact on retiring early is like 2, 3, 4-fold.
So, we retire early, means we're taking distributions. That also means we're not adding to our TSP. We retire early, which means we're not accruing years of service, we're not getting inflation adjustments on our salary and we're not getting a COLA on that pension.
So, retiring is a big decision. If you don't hate your job, if you don't hate it, if you don't absolutely hate it, like you can still do it. What about continuing to work and trying to be as happy as possible while you're collecting that paycheck?
Ben: Yeah, you hit the nail right on the head. If you can stay in that federal job for however many more years it is, maybe it's to get to 62 so you get the extra 10% kicker to your pension, or maybe it's you work just long enough that you don't have a reduced pension, and you've got all this annual leave banked up; why don't we make the time that we're still working more bearable?
Why don't we take more vacations, take time off, not feel stressed to push the pedal to the metal each and every single day? Because having that full pension, having that 1.1% kicker, sometimes that can make all the difference in the world to your lifestyle in retirement.
John Mason: It is actually possible. Like we have this video, Don't Match your TSP, that we caught some a little bit of grief for, but like literally, just doing your time, just doing the time.
Like I could even paint, we all could, a picture of you saving $0 in TSP, burning through a hundred percent of everything you make, and that's probably better for your financial plan than retiring early.
So, using your leave, using your comp time, not saving a dollar into any investment ever again, but not having to take distributions and getting that higher high three, just doing your time, you're winning so big.
Michael Mason: You are replacing, you're still working. If you're retire, you've got like maybe 40% replacement, maybe 50 at age 57 in MRA without taking money out of TSP. You're young, you're 57-years-old. How many vacations are 30 days in length? Not many of them.
So, if you took your big to week travels from 57 until 62 while you're making a hundred percent of pay, even if that meant you didn't put anything into TSP, now you're doing your two week cruise to Alaska land, and maybe you're spending the money that you're much more comfortable spending and you're much healthier, typically 57 to 62, and doing those big trips, then get them out of the way while you have full income.
John Mason: And even thinking about that, Mike, is where are we going to live in retirement? Maybe we're using some vacation time to explore the villages in Florida or exploring Colorado Springs or exploring Montana or Wyoming or wherever.
Trying to figure out where am I going to live once I actually pull the trigger and retire, and using your full paycheck and using your leave, and using all of this to make a really educated and informed decision is so much more impactful.
So, we're not saying that federal employees and our clients need to work forever, we're just saying that understand there are some advantages to continue working past 57 if you still find fulfillment in your job in some way. And that could be staying with the feds, or it could be going private sector.
Well, guys, I think what an awesome episode. Audience, I hope you've enjoyed this content, we hope you've enjoyed the content. Again, do all the things; like, subscribe, share, hit the bell notification, check us out on YouTube. Most importantly, continue to tune in every two weeks or twice a month as we release new content.
We hope you feel educated, motivated and empowered. And we hope that after 18 months of doing this, you're a better financial planner for yourself than you were beforehand. We're Mason & Associates, masonllc.net .
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.