What questions do federal employees need answered before making major retirement decisions? In this mailbag episode, John and Tommy tackle listener questions about the FERS annuity supplement, Social Security taxes, Social Security claiming strategies, and retirement income planning. You’ll learn how returning to work after retirement can impact your supplement, how to manage Social Security tax withholding, and why retirement decisions require more than a simple one-size-fits-all answer.
You’ll also discover how financial planners evaluate Social Security claiming strategies, why delaying benefits may make sense for some retirees, and why the best retirement plan is one that works both financially and emotionally. Through real-world examples and listener questions, John and Tommy explain the importance of personalized planning, flexibility, and understanding the bigger picture before making irreversible retirement decisions.
Listen to the full episode here:
What you will learn:
- How returning to work affects the FERS annuity supplement. (4:45)
- Why FERS supplements do not need to be repaid after income changes. (7:20)
- How to request Social Security tax withholding. (11:20)
- Why married couples may consider different Social Security claiming ages. (18:00)
- How FERS and CSRS COLA calculations differ. (25:15)
- Why the best retirement strategy is personalized to each individual. (30:15)
- How to minimize taxes in retirement. (36:30)
Ideas Worth Sharing:
- “It doesn’t matter how good the plan is on paper. If it’s a plan that doesn’t sit well in your heart and your mind, it’s not a good plan.” – Mason & Associates
- “Life isn’t about always being optimal.” – Mason & Associates
- “We don’t know what the future holds. So we should always try to be flexible.” – Mason & Associates
Resources from this episode:
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Read the Transcript Below:
John Mason: Welcome to the Federal Employee Financial Planning Podcast and the Mason YouTube channel. This episode is a mailbag episode. Stick with us as we address listener questions, both from a live webinar as well as questions that are emailed directly to us at masonfp@masonllc.net. You can be a part of the next episode. Again, send your questions in advance to masonfp@masonllc.net. Connect with us on LinkedIn. My handle is johnmasoncfp. You can direct message me there, submit your questions in advance, and we’ll address them on the next mailbag episode. Tommy, welcome to the Federal Employee Financial Planning Podcast.
Tommy Blackburn: John, thanks as always. Another great intro lead-in there. I am pretty pumped about today. Always pumped about these; it’s a lot of fun doing them with you. And a mailbag episode—I may be mistaken, but this feels like a first or maybe second time that we’ve done this. I think it’s great. So thank you, audience, for sending these in.
We would really love to do more of them. Excited about the topic. And, John, happy to see us back together in different locations. We both just got back from a little travel. I think, while probably a little tired and just dealing with the stresses of travel and getting back into things, I’m sure it’s there, but also rejuvenated a little bit. So yeah, it’s great to be back at it with you.
John Mason: Yeah, man. Well, today is June 23rd, 2026. Audience, one of our favorite, one of our friends in the industry, when they record their podcast, they always say, “Dear listener,” like there’s only one person listening. I love that. So dear listener, if you’re out there, you know we love your questions. Again, that’s masonfp@masonllc.net or johnmasoncfp on LinkedIn. Tommy’s there as well. Mason’s on LinkedIn.
And you can check out our website at masonllc.net. We are right in the middle of office renovations, so I’m actually recording from the office today. We’re a few weeks into that project. Hopefully, we’ll be back in the office full steam ahead come maybe mid-July, August at the latest. This is for sure our first mailbag episode. I looked over the weekend, and we have pushed over 1,700 subscribers on YouTube, which is super cool. We have a significant amount of ratings and reviews on Apple Podcasts, which is awesome. I didn’t look at Spotify and others, but sounds like there’s at least a few listeners out there. So dear listeners, plural, thank you so much for the reviews, for sharing with friends, family, and coworkers. Really excited to see this thing grow.
I guess as a call to action on June 23rd, Tommy, we are in summer. We’ve enjoyed some travel. We enjoyed our strategic planning meeting season. Now audience, if you’re ready to onboard and become a new client, you can start that process at masonllc.net or 757-223-9898. We just ask that you be patient with us during the renovation, depending on when this airs. But we’d love to hear from you. We’d love to get started on your financial plan and get to work for you. Tommy, where do we want to start?
Tommy Blackburn: My thought was we would start with the one that I’m aware of that most recently came in. I think it’s just top of mind. If you want, John, I’ll go ahead—since you tossed it over to me—I’ll go ahead and read the question, and then you can respond. I’ll dovetail if I think I can be of any help there.
John Mason: Sure.
Tommy Blackburn: So first question that we received recently: “I retired, went back to work, and will earn enough to eliminate my first supplement entirely. Do I have to repay the supplement from when I started the job, or does it simply stop when I report it?” I led in just saying timely because these reports—these requests to report your earnings—come out, I think, between the April and June timeframe, so very timely. John may have already shared it, but we’re recording today on June 23rd, so kind of right in the middle of when this is actually happening, which is maybe why we received the question recently.
John Mason: So the first supplement, or the FERS annuity supplement, or the FERS Social Security supplement, or special annuity supplement—you know, pick a name, Tommy, it’s got several on Reddit and other places. But this is specifically the FERS benefit that says if I retire at 57, then I can get a Social Security replacement benefit from 57 to 62, kind of bridging the gap between when I am eligible for retirement versus when I am eligible for Social Security.
We have all kinds of podcast episodes and YouTube videos on this, but it’s important to note that the rules are different for law enforcement as compared to just a normal federal employee. So there’s hurdle rates we have to clear to make sure you’re eligible for the annuity supplement: 30 years and MRA (Minimum Retirement Age), or 20 years and age 60. You have to qualify for an immediate unreduced retirement. If you’re law enforcement, you can start that earlier, and there’s also a big difference between law enforcement and regular in that there is no earnings test prior to age 57, which is most people’s minimum retirement age under FERS.
It’s interesting, this question. We don’t know whether or not the person is law enforcement, but clearly they’ve retired. It doesn’t sound like they were working, or they could have been working and now they’re just now reaching MRA, so now the earnings test is actually applicable. But the way the earnings test works—let me just back up for a second—there’s a cap on your earnings, so it’s like $20,000, right?
Tommy Blackburn: I think $23,400, just—I have one of these notices up in front of me at the moment. So you’re right on. Perfect. But that’s the number for 2025.
John Mason: So $23,400. For every $2 you earn above that, you lose $1 of supplement. So that’s how the earnings test works. It’s not like if you go $1 over, you just, poof, lose everything. So I haven’t answered the question yet, Tommy.
Tommy Blackburn: It’s a lot of details to get through first.
John Mason: A lot of details and a lot of caveats. Did I miss anything?
Tommy Blackburn: I don’t believe so. I think you’re covering it well. I’m sure, you know, you went through many different nuances there speaking about FERS Special and some different treatment there, so I like to think you’ve covered it. There may be a nuance that we’re forgetting at the moment, but I think you’ve covered all of those details pretty well.
John Mason: Awesome. So the answer to this question is, with this gentleman going back to work, he’s going to report his income. Man or woman, I say gentleman—so Bob. Bob’s going to have to report his income. If Bob made too much money, they’re going to stop paying Bob his FERS supplement. But Bob’s not going to have to go back and repay all of the money that he’s received so far.
Then the second part, when we respond to Bob, is once your income drops, I don’t remember if the technical term is you can appeal or you can reinstate, but basically you can say, “Hey, the income went away. Start giving me my supplement again.” So in summary, you don’t have to pay it back. You do have to report the income. That’s when your FERS annuity supplement will stop. You can restart it again if your income drops. And what we’ve said for a long time, Tommy, is you get one year of FERS supplement for free, because you’re not going to get that first income test, and maybe it’s not exactly 12 months.
John Mason: But if you retire in January, or let’s say you retire in June, and they’re not going to ask you about your income until the following June, you could get one year of supplement before it’s income tested.
Tommy Blackburn: Absolutely. Yeah, you hit a lot of great information there, John. So it’s not retroactive back to when you first crossed it. It’s just from the time that they test and do this request that you submit those earnings. And just based on one—again, good timing, it’s also just the timing when this is happening, but a client sent one of these to me recently, so it’s very easy for me to pull this up as we’re talking.
It’s saying that the August payment is when it would take effect. So the reporting period was from April to June of when you have to get this report in, and then the message is that your August payment is the one that will reflect any changes based on this report. And this notice goes on to say that it goes both ways. So John, to your point, we have—I forget the technical term as well—where you can ask them to reinstate your supplement earlier if you can get them proof and go through that process. But if you don’t do an early one, when you submit this report saying, “Hey, my earnings actually fell back below that threshold,” the communication is August is when it’ll pick back up to what it should be.
John Mason: That’s awesome. Well, I think we’ve addressed that question perfectly. Audience, if you have… Well, perfectly is a strong word. I think we did a good job. I think we did a good job.
Tommy Blackburn: Somebody’s waiting to pounce on us out there. Please, yeah, I think we did a good job.
John Mason: Please don’t do that. Man, we did get yelled at one time. Do you remember when… It’s our YouTube video, it’s kind of a popular one, where we talk about the supplement, and we gave the estimated formula, which is years of service divided by 40 times your age 62 Social Security benefit. And somebody just lambasted us via email and phone call, and it was like, “That’s wrong. That’s not the…” I’m like, “Okay, you’re right. It’s not perfect, but you’ve spent a year of your life, and we’re only like $10 apart.”
Tommy Blackburn: Right.
John Mason: So I don’t know who’s right or wrong here. Like maybe you have the technical right answer, but I’m pretty sure I’m in the right that we got pretty close. And if your retirement hinges on this discrepancy in the actual estimate of your FERS supplement, chances are you’re not ready to retire.
So audience, we love your questions. We do. And we love the critiques, and we always want to get better. We try to give the best information that we can give. We try to be 100% factual and accurate, but hopefully you know that this is a free-flowing podcast—17 years or more of information that Tommy and I have both been doing—and missteps can happen from time to time. So, again, we’d love to hear from you, and we welcome all questions or critiques, and you can send both of those to that same email address.
All right, question two: “Why doesn’t Social Security automatically withhold taxes, and how do I fix that?”
Tommy Blackburn: So John, my thought—I guess the first caveat here as I answer that question as far as the why—I don’t truly know. I have some suspicions as to why, but it is what it is. They don’t withhold taxes by default, just like on our FERS pension, they don’t withhold state taxes by default. Just is what it is. My suspicion for why Social Security doesn’t withhold is because they don’t know anything about your other income sources, and if you have no other income, your Social Security is not taxable. So that is my suspicion as to why it is that way.
Now, what do we do about it? It seems to be easier these days to do it, which is you go online, and you can now do it online in the Social Security portal. Use your login to go in, and you essentially file—I forget the form. I don’t know if it’s a W-4V, that’s the actual form number. That’s sounding correct to me, but maybe it’s some other version of a withholding form. But it’s essentially online in your portal now. So that has gotten easier to do. I believe you can also call them up and request it, and another way we’ve been told—and I think we’ve seen hit-or-miss success on this—is putting it in the comments of the Social Security application. So we will do that with clients when we help them file their Social Security application. Say, “I request 22% withholding.” If we think that is the method we want to go about for said client. My experience is that seems like it works sometimes, and seems like it doesn’t work others. But regardless, we can go into the portal and just do it right there.
John Mason: Good answer. It is—I Googled Social Security W-4, and it’s the W-4V as in Victor, revision date January of 2026. There are four withholding options, five if you count 0%. So you have 7%, 10%, 12%, 22%. And Tommy, I think you said this, but I’ll drive home the point that the bulk of people receiving Social Security benefits in the United States probably don’t even need to file a tax return. So what that means is if it’s your only income, like you said, Social Security is not taxable.
When you start thinking about the provisional income formula or what we would call the bad money, that’s like IRA distributions or a federal pension. When you start layering in those other incomes, all of a sudden Social Security taxation goes up, which is why for a lot of our clients and a lot of people that look and feel a lot like our clients, we say there is no such thing as the 12% tax bracket in retirement. Because the 12 is actually the 22 when you start layering in this IRA that made this Social Security taxable, and it’s just this wham-bam scenario. It’s not great, and sometimes you could even be at like a 42 to 44% tax bracket, if I’m not mistaken, once you enter like the 22%. For a small period, yep.
Tommy Blackburn: Yeah, you’re right. So what John is talking about is kind of the phantom income there, whereas yes, we’re technically in the 12%, but as that dollar of IRA or pension money’s coming in, it’s also pulling a dollar of Social Security income in, so it’s really doubling it. It’s creating—it’s doing a lot more than the 12%. So there’s a tax torpedo window, a phantom income window to be aware of there.
And John, maybe going a little further on this question, as I think about it too, I think it’s great that you laid out those set percentages, and that’s one of the reasons we may—we do it both ways. There are times where with clients we say, “Hey, doing withholding at Social Security works perfectly for your situation. Let’s go ahead and we’ll just do that.” But there are many times where it’s, you know, “I don’t like this set percentage.” So what we’re going to do is we’re going to either change your withholding at FERS, at TSP—probably not TSP—or your IRA. We’ll go about this a different way where we have more control. Our favorite usually is DFAS; between that and IRA distributions, we have a lot of control in dialing in that withholding amount. So just a little bit more information—it’s customized to each client as to how we approach that.
John Mason: Final thought is there are some financial planners out there, well-respected in the industry, that believe that you should have withholding on every source of income. And that is not something that we subscribe necessarily to. Now, there could be reasons like a second marriage or what have you, that would say we need to like equalize this among everybody. Tommy needs to pay a certain amount of tax, and John needs to pay a certain amount to make it fair. But generally speaking, if it’s just John and Tommy, and we’re just married, all we care about is that we owe 20 grand. It doesn’t matter how the 20 grand gets into the system. It could be all by IRA distribution. It could be all by Tommy’s CSRS pension. However we want to get there, we’re good. And frankly, it’s a lot easier for us to manage fewer withholdings, right? Like most things in life, the fewer tweaks we have to make, the better.
Tommy Blackburn: The easiest for us is, if the client’s situation makes sense—again, it’s all customized based on the fact pattern—is if we’re in control of it with an IRA distribution, if that’s happening. And the reason I say that is because we’re in control, we can serve you better. It’s one less thing for the client to have to, one, keep in mind, or go do with or without us. So if we can do it, we usually prefer that, because it’s just cleaner and easier for everybody. But it’s all situational.
John Mason: Love it. All right, next question, and maybe I’ll just read it and take the first stab at it, and we’ll just keep bouncing back and forth. This question is a completely loaded question that I don’t even know what we’re going to say, is: “When should I start taking Social Security benefits?”
My stab at this, my first one, is please, audience, Google Social Security claiming strategies, and you’ll see that there’s these YouTube videos. It’s unbelievable—millions of views, and I think it’s just because everybody wants to hear, “Start your benefit at 62.” So they keep clicking on all the videos that say start your benefit at 62, and then the videos go viral. You know, we release a video that says delay until 70, and it’s like snooze fest, you know? Thumbs down. “You guys are crazy.”
We tend to believe… Now we don’t know—let me read the rest of this question. Oh, no, that was it. We tend to like, for a typical married couple, claiming one benefit, Tommy, at 62, and delaying the other person’s benefit until 70. We’ve got some really cool software that models out why. It’s not the highest possible benefit, but it ranks in like the top two or three scenarios of highest benefits over a normal lifetime. We get to turn on one benefit now, which eases some pain. You know, it’s not so scary because we’re not delaying both, and then we’re typically delaying the higher benefit until age 70.
I know you know why, but the higher benefit delays until 70 because then at the first person’s death, you only get to keep one, and we like that spread to be the biggest between the highest and the lowest benefit. So that’s how you get there: you turn on the lower benefit early, you turn on the higher benefit later. It’s all situational. We are very fortunate, Tommy, that we have clients who are in or near retirement, a million or more saved, lucrative federal pensions, big assets, and some of them just say, “We want to turn it on at 62.” Maybe we disagree, but it’s not something that we’re going to shout from a rooftop or say, “We can’t be your planner if you go down that path.”
There are times where we’ve had to say, “No, we really think we need to delay one.” It could be things like: did we decline survivor benefits? Are we losing a military pension, a VA disability, and a Social Security check? How does all that factor into the financial plan? So your Social Security claiming strategy—sorry for being long-winded…
Tommy Blackburn: You’re good.
John Mason: …it’s not just, “When’s the government going to go bankrupt? Will they be able to pay benefits?” And it’s not just, “What’s my life expectancy?” Everybody on YouTube is talking about the internal rate of return or how the breakeven’s not the breakeven, you know, and the hurdle rate and all this stuff. It’s like, what does your total financial plan look like? Are you insurable? Are you not insurable? What’s your pension? What’s your guaranteed income? Is your house paid off? What’s your risk tolerance, right? If you’re an 80/20 investor, that’s a lot different than a 20/80 who’s got primarily all their money in bonds. You could make a case, Tommy, that if you’re very aggressive, turn on Social Security…
Tommy Blackburn: Continue to invest it, yeah.
John Mason: But on the flip side of that, yeah, if you’re very conservative, maybe you have to delay Social Security. All right, that’s enough for me.
Tommy Blackburn: That’s a really good point. Hopefully, what folks hear is it’s so customizable to your plan and your personality that we have to have these discussions. We’ll have our thoughts about what’s optimal, but we can be convinced by fact patterns to go outside of what we may have a preconceived notion about. We certainly will listen.
And like you said, John, if we can look at a plan and know that we have survivor benefits set up on other income streams, assets, investment horizons, tolerance, the spouse is taken care of—the whole gamut of things we’re looking at—we can certainly get on board with non-optimal or less optimal strategies, because life isn’t about always being optimal. We don’t know what the future holds, so we try to be flexible. Like you said, that’s a good general pattern we tend to like quite a bit, and I like it too because it gives the most flexibility. What if we die kind of early? Well, we’ve now locked in the highest benefit to protect that surviving spouse, which is what’s pretty important.
And it’s interesting, too, I’d like to see a statistic on this, but are the folks in the 20/80s—20% stock, 80% bond, conservative portfolio—are they the ones who are also clicking the “take it at 62” videos? Because they’ve probably got it backwards there. That internal rate of return on delaying Social Security is probably higher and better than what you’re getting on your portfolio, so you should actually let that guarantee run as long as possible. But that’s probably a little far into the weeds. So hopefully between the two of us, we answered it. I guess hopefully clients or those who are listening also see, to me, this is like a sign of real financial planning when we can’t just always come out and say, “Here’s the answer.” It’s just here’s a number of scenarios where we could see this answer going a different direction, and generally this is the answer, but it’s also situational.
John Mason: Two closing thoughts. Doesn’t matter how good the plan is on paper, if it’s a plan that doesn’t sit well in your heart and your mind, it’s not a good plan. So we may choose plan B, C, or D—let’s not say F, we don’t want to go to plan F. B, C, or D because that’s a plan that somebody can live with both financially and emotionally. Sometimes I can think of at least a few off the top of my head where if we didn’t turn on Social Security, they were going to be like eating cat food, you know? It was like they had a FERS pension, but they didn’t want to take an investment withdrawal, and they were just going to…
Tommy Blackburn: Spend…
John Mason: …not live correctly. And I say correctly, I just mean struggling for no reason, to their detriment. So we just had to turn it on; it was the only way. So that’s that.
Then one of our favorite sayings is, “Just because we’re delaying doesn’t mean we’re living on less.” So keep that in mind, audience. We’re not suggesting that you miss out on your go-go years, that you don’t take that trip to Antarctica or wherever you want to go because we’re delaying Social Security. We’re just saying let’s source the income from a different place while we’re delaying this one until 70. Doesn’t mean we’re not having the same quality of life or same disposable income.
So quick, before we hit the next one, I just want to call out to the audience. Thank you again for being with us on this journey. Over 100 episodes, well into that. Lots of activity on YouTube and the podcast. New to you is our Survivor Benefits e-book, which is available at masonllc.net. There’s a link at the top of the page, as well as the bottom of the homepage, where you can please provide your email. We will provide you a free copy of our Survivor Benefits e-book, and we encourage you to check that out. A, just for your knowledge; B, definitely before you retire and make one of the biggest mistakes that we think you could make, which would be declining SBP (Survivor Benefit Plan).
Finally, if you have any friends or family or coworkers who are about to make that mistake, forward them the link, forward them the book, and please let them get our take on SBP before they make an irrevocable decision. Closing thought there is just letting you know, audience, that if you give us your email, we will protect it. We’re not going to spam you. We’re talking like once a month, maybe twice a month commentary that you can unsubscribe from at any time, and we think you’ll enjoy the content. So one, you’ll get your e-book; two, you’ll get the updates; three, you’ll get invites to future events. So e-book, masonllc.net. Tommy, next question.
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Tommy Blackburn: “Why is the FERS COLA lower than what CSRS retirees receive?” And I know, John, at least I was chuckling as we skimmed these questions. But I’ll just go ahead and say, because my thought almost is like with the Social Security. That one I can make more sense of as to why they don’t withhold, but it’s like, I don’t know. That’s just how they wrote it. I do not know why, but those are the rules.
John Mason: I was going to say because. You know, I feel like… not that this is a childish question, but…
Tommy Blackburn: No.
John Mason: …for anybody who’s had a child, sometimes the answer is just because that’s the rule. I don’t know why, you know? And I don’t know that I’ve spent a lot of time fact-checking why it is the way it is. And yeah, I guess the answer here to fully flesh it out, Tommy—and I think I’ll get it right, so audience bear with me if I stumble a little bit. CSRS and military get the same COLA. It’s just CPI, or whatever version of CPI that they’re using with additions, subtractions, et cetera.
FERS—I think I’m right, Tommy—
Tommy Blackburn: I think you are.
John Mason: …from 0% to 2%, you just get CPI. And then if you’re between 2% and 3%, you get 2%. And then if you’re over 3%, you get CPI minus 1%. So there’s three different ways that your FERS COLA can be calculated.
And then CSRS gets a COLA immediately. FERS, you don’t get a COLA until age 62. And then, caveat, there’s the law enforcement thrown in there as well. How’d I do?
Tommy Blackburn: You did great, and I figured perhaps what you were going to layer in there—yeah, you covered that well—was that FERS gets a TSP contribution. So perhaps that’s why the inflation adjustment is a little bit less, and throw in some nuances about Social Security. We’re, of course, just trying to back into why it is this way. At the end of the day, I don’t know how much it matters—and it’s not to dismiss the question—but it is what it is, and I don’t know that trying to dive into why they did it this way does us much good.
John Mason: Agreed. We have a YouTube video, “FERS COLA” or something like that. It’s a fairly recent video if the audience wants to check it out. But when you look at a typical—I say typical, I don’t know if that’s a good word—for a federal employee retiring, it’s not completely uncommon to see a FERS pension, Tommy, that is pretty similar in size to a Social Security benefit. Meaning, a $30,000 FERS benefit and a $30,000 Social Security benefit.
So if the $30,000 FERS benefit is getting 2% and the $30,000 Social Security benefit is getting 2.8%, you’re not really getting all “diet COLA.” Like, you’re getting some diet COLA, but it’s not really all diet COLA because half your pension was getting the same as CSRS. And then to your point, maybe it’s even better being under FERS because we’re in control of our COLAs under TSP, and we could get political—and I’m not nearly smart enough to talk about all the different CPI measures and what is and isn’t included and what’s stripped out and what’s added back in. But personally, I’ve got a big old TSP, and if I say my inflation is up 10%, maybe I want to increase my own distribution 10%, and the government says it’s only up 2%. So pick your poison.
Tommy Blackburn: You bring up a good point. There’s the trade-off, but one is more control with the investments, and perhaps I’m actually growing those investments faster than the cost-of-living adjustment.
John Mason: “I’m retiring in about 1.5 years, but I don’t plan to touch my TSP until age 62. How should I be thinking about my allocation?” I don’t remember whose turn it is. Oops.
Tommy Blackburn: I think we’ll just take it together either way, but… “I’m retiring in 1.5 years, don’t plan on touching it.” I think we’re still missing a piece of information here, though: how long until age 62, if I’m reading this correctly? So, could be… are we retiring at 61 and don’t touch it until 62? I’m guessing there must be a substantial gap to phrase it this way.
John Mason: Yeah, I mean, they could be law enforcement retiring at 50.
Tommy Blackburn: Right.
John Mason: That’s a horse of a different color.
Tommy Blackburn: Yes, yes. Yeah, you’re right, because there’s so many factors that go into that. Um, yeah, so I’m assuming our answer is also going to be situational. How should I be thinking about my allocation? What’s your personal “sleep at night” comfort level? How much of that is an issue?
And then kind of, what does the plan say we need to do? Which is going to be dictated by, as John just said, like, are we law enforcement officers (LEO) with a cost-of-living supplement until we get to MRA? What other sources do we have going on here? What do we need to take, and what do we want to take? Dialing those questions in, I think, would be… that’s really how we come up with what your allocation should be.
I think for most—like just a general what do we see typically, plenty of exceptions here, so take this with a grain of salt—but typically you’re probably going to see somewhere between 60% stock / 40% bonds, and probably 70% stock / 30% bonds, maybe 80% stock and 20% bonds. That would be certainly on the more aggressive side of what we see most likely. But again, this is all very dependent upon the situation.
John Mason: Agreed, Tommy. In no way is this investment, financial planning, or tax planning advice, but generally speaking, we would start the conversation at 60/40 and see how the model of the financial plan translates into success. Success is not beating an index. Success is meeting all of your goals and not running out of money before you run out of time on this earth, right? So 60/40 is a good starting point. You start looking at the risk-return: how much up, how much down, can I sleep at night? The portfolio should be an all-weather strategy that you’re happy with in good times and in bad.
We’d be fibbing to ourselves if any of us said we were happy when we see red numbers, but you don’t get to enjoy big, good green numbers unless you can embrace the red numbers, and it’s a fool’s game if you think you’re going to be able to buy and sell and time the market. So number one is a strategy you can live with in good times and bad.
Number two point here is you may want to consider avoiding the Lifecycle funds because those are getting very conservative very quickly. Specifically, like the L 2030 right now maybe is not a horrible place to be, but by the time you get to 2030, it slams into like 75% or 80% G Fund. And if you’re going to be retired at 60 to 62, I don’t know that you want to be 80% G Fund for the next 20 to 30 years.
So the Lifecycle funds did you a good job, did a solid for a long time, but it feels like that’s not the answer for most people as we approach retirement. A more static or purposeful allocation where you set it on your own seems like it could probably be the place to be.
And then finally, there’s a lot of thought out there that federal employees could be 100% stock because you have big pensions and big Social Security, and that’s your bond allocation; therefore, you can be 100% equity in your TSP. But then the question is, why? Yes, in theory you could, but will you be able to sleep at night? Are you going to freak out? Do you really want to go down 30%, 40%, or 50% in a bear market? Most of our clients are going to come back somewhere between 50/50 and 80/20. And that’s also not set in stone.
I mean, I just had a client in SPM (Strategic Planning Meeting) season where we were 60/40, and we’re going to systematically dial it up to 80% or 85% stocks because we’ve come to the conclusion they’re not spending their money, and we’re going to be doing some legacy planning. Like, let’s just grow it.
So for this person—man or woman, we’ll call this one Suzy or Suzanne. Suzanne is about to retire. We don’t know anything about you, Suzanne, and if you were a client, you may tell us, “Tommy, this is how much I’m going to spend.” And we would model that in your financial plan, and we would design an investment strategy for Suzanne based on all of that. You wouldn’t be the first person, Suzanne, who maybe underestimated what they were going to spend or overestimated what they were going to spend, or overestimated the travel or underestimated something else. Life changes. So maybe at age 62, that may be the most conservative allocation you have throughout your entire retirement, because that’s also the longest life expectancy with the most period of uncertainty.
Tommy Blackburn: I agree. And I think you and I, and maybe the other advisors in the firm, have been having that conversation this past strategic planning meeting season. I’m sure we were having it previously, but I think just anecdotally, you and I with some of our clients who have lived retirement a little bit now, we’re having that conversation more. And it wasn’t a push, it was just a conversation of, “Well, here’s where we are, here’s what we’ve seen, here’s what the data is showing in what you’ve lived. Perhaps we should increase this just based upon the way things are looking and your behaviors, and it seems like your comfort, and let’s just have a conversation around that.”
To take this a little further, John, and kind of dovetail it too: if you want to get more granular, because we don’t know the age of this person. It may be dependent upon, like, where are we taking distributions from? So if we’re retiring before 59½, typically what we do is we roll money out of the TSP into an IRA so we can manage it for you, do the servicing, and bring the comprehensive picture together, but we still leave money behind in the TSP.
And one of the reasons is we can do pre-59½ withdrawals—meaning 55 and older and separated from service—with no 10% penalty from an employer retirement plan such as the TSP. There could be other special things in there like state tax benefits. So it may be that we have a select amount at the TSP that we’re actually going to keep in the G Fund because that’s essentially a cash distribution vehicle for us in an interim period until the IRA no longer has some of those limitations. So again, it’s also situational as to how this question is fully answered.
John Mason: I love it. Next question—and I’m skipping one and going to the next one: “What’s the best order to draw down accounts in retirement to minimize taxes?”
Tommy Blackburn: I just feel like a broken record here of “it depends.” You know, you just say, “It depends on the situation.” The general answer—what generally models out—is to take from a brokerage account, a non-qualified, also known as a taxable account. That is an account where when we do buys and sells, we generate capital gains and losses, and it throws off dividends and interest. That type of account we tend to go through first, then we circle to an IRA, then we circle to a Roth so that the Roth gets the longest to grow tax-free.
But there are plenty of situations where that flips on its head, and it could just be year by year. It could be halfway through a year where we’re following a strategy, and then we’ve created enough income, or maybe we accelerate the Roth forward because there’s just some threshold we don’t need to cross. So that can be very nuanced. It can also be… you know, that is the general pattern that works. But if you don’t dial it in every year and make adjustments as we go, it just flips it all on its head.
John Mason: Did you mention Roth conversions? I’m sorry if you did.
Tommy Blackburn: I don’t know that I did, but let’s go there.
John Mason: Yeah, as we think about the totality of a 30 or 40-year tax plan… And audience, I had a good meeting today with a new client, and he said, “John, I just don’t understand why you keep talking about 20 and 30 years when I just want to focus on what’s happening today, and I don’t even know if I’m going to be alive then.”
And the whole reason we talk about 20 or 30 years is it’s a horizon of time. Yes, we’re going to focus on the things that we need to do today, but we’re also focusing on not tipping the IRS when we look at the total 20 or 30-year tax bill that you’re going to have. And then we wanted to talk about, well, what happens when one person dies? We’re going to be here for the other. What happens when the second dies? We’re going to help your kids. Maybe we can’t serve them in a financial planning relationship, but we’re certainly going to help them through the estate cleanup process.
So I just wanted to say that a little bit in the sense that, audience, you’re going to hear us talk about 20 or 30 years. That doesn’t mean you have to live that long. But realistically, we could be in your lives for 20, 30, 40, or 50 years, depending on the nature of the accounts and the family dynamics. So that’s pretty special when you think about it—that we can be working together with these families for decades, and we’ve proven to do that. I mean, we’ve had clients since the early ’90s that are still clients today.
So all that being said, the Roth conversion strategy has to be thought about as we’re thinking about the order of distributions. As we think about your charitable giving strategy, all of that factors into: do conversions make sense? How do we minimize taxes over time? I think I can probably say, although it won’t be 100% factual, generally speaking, I do not think that doing nothing until RMDs (Required Minimum Distributions) is going to be a good idea for you. Meaning, you know, Bob and Sue are retired, Tommy, and they’re 62, and they’re as happy as a clam not touching their investments. 13 years go by, they wake up at 75 years old, and now RMDs have kicked in. I don’t think that that’s a good plan. So maybe we should at least say doing something—whether it’s spending or converting or repositioning assets—probably needs to be happening at 60 to 65 years old, even if you don’t have an income need or a desire to spend your money, in order to minimize the long-term tax plan.
Tommy Blackburn: 100%. And I think it dovetails very well with that 30-year idea, right? As you were saying that, there are many reasons to say that—great how you covered it. I was thinking: many tax preparers and accountants are great people who do great work. This is not meant as a slam, but a lot of times they’re looking at just a single year. They’re probably looking backward and thinking, “How do we save the most taxes this year?” Our job is to think not just about that, but it’s really to think… well, it’s almost like investing. What does this do to us over 20 or 30 years? Because that’s how long we’re going to be paying taxes, most likely. And so maybe taking some pain today and not getting the lowest tax bill today is actually going to save us hundreds of thousands, potentially, or some significant amount of money long term. So that’s why we’re sketching this out over a long period of time.
Yeah, and John, we see that pattern you’re talking about all the time with clients, whether they’re taking distributions or not. If there’s a brokerage account, you’re trying to… and that’s another reason that order generally works (again, it can flip on its head in situations), is we can control income more because it’s probably not all gain, and even if it is, it can be taxed favorably. But let’s use that to either pay the tax on the conversion or to help with spending. Meanwhile, let’s do these conversions and move IRA money into a Roth, if the tax projection supports that conclusion—yes, there are times it doesn’t.
And your point about… you see this quite a bit with many federal employees, right? “I have a strong guaranteed income. I don’t really need much from my investments, and so I don’t take anything.” That really strengthens the argument for a Roth conversion because our accounts are just compounding until we get to age 73 or 75—we’ll call it 75—and all of a sudden, a tax bomb. That’s why I was moving my hand like this when you were talking about it, because the tax bomb goes off. All of a sudden, income has to be coming in. So we should have been accelerating that to smooth it out. We didn’t have to do it all. We need to be aware of charitable distributions. Exactly like everything you mentioned, just trying to dovetail on it.
And even just anecdotally—this happens with clients all the time—but even in my own family, we’ve been having these conversations both with my parents and my wife’s parents. When we were down at the beach on a trip, my father-in-law asked… he was thinking about something and was just like, “How do you think I should do that? Take it from the brokerage account or an IRA?” And as I quickly thought through their situation and what I understand about their finances, it was: yeah, take it from the non-qualified brokerage account. And the reason, John, is because we’re doing Roth conversions every year like you just laid out. It’s like, yeah, do that. We can control income. We can continue to do these Roth conversions until you get to that RMD age. So, just some anecdotal experience.
John Mason: I think what we have to understand first, rather than getting all wound up about the tax situation, is we have to get comfortable spending our money first. So before we can even talk about what account makes sense to draw down in retirement… I mean, the couple we met with today, we showed them kind of a light version of the financial plan as we continue to move forward in the relationship. And we were like, “We think your portfolio can support $90,000 to $100,000 a year in distributions.” And they looked at me and they were like, “And what are we supposed to do with it?” I was like, “I don’t know what to tell you.” You know, it’s there. You can donate more to charity. You can help your kids. You can go for a two-week trip instead of a one-week trip.
Like, I can’t tell you how to spend your money, but what I can tell you is that there’s no reason not to access the resources that you’ve worked so hard to save. And we’re going to tell another story later about a smoky Old Fashioned that I had the other day, but we’ll cover that on another episode. But before we even worry about the tax ramifications of what we’re doing, let’s just first get comfortable spending the assets that we’ve saved for our enjoyment, for our legacy, for our charities, et cetera. I think that people see this and they see the tax bill, and because they don’t want to pay any taxes, they also convince themselves that they shouldn’t spend any of the money they’ve saved, and that’s fundamentally flawed. One, let’s focus on how we’re going to spend it, and let’s focus on that first, and then we can figure out how to minimize the taxes. But if we’re worried about the taxes first, we never get to enjoy any of the money.
Tommy Blackburn: Absolutely. Don’t let the tax tail, you know, wag the rest of your financial plan. We’ve talked a bit about that—the idea of needing to be comfortable spending your money. And most people tell us they don’t have a desire to leave an inheritance. And we—John and I, and I think the other advisors here—have been talking to clients about: “You’re certainly on track to leave quite an inheritance, even though you say you don’t want to.” It’s cool, absolutely fine if that’s the goal, but you say it’s not the goal. So we have a conflict here, and part of resolving that is getting comfortable spending your money.
This is not perfect, but as we were talking, John, a construct that may be helpful for people in these situations—and it takes time, just like getting comfortable with retirement, you know, you have to have the capacity to do it and the mental wherewithal. Those have to cross for many decisions in life to work. Same thing with spending money from your portfolio. But I think in these situations, maybe it’s a decent reflection for some: what if I die in a year? What if I die tomorrow? What regrets do I have? And perhaps that will give us a little more motivation when we’re faced with mortality, unfortunately. Is the legacy really the goal, or are there some things that I won’t allow myself to do, and I need to just reframe things to allow myself to do them?
John Mason: I love it. Hopefully, audience, we’ll be able to share with you a guest that’s going to be on our podcast soon. And stealing a little thunder from that future episode, which I don’t think is too mean of me to do: what does winning in retirement look like to you? So pause for a second and write that down. What does winning in retirement look like to you? And then number two is design a perfect week or a perfect month in retirement. Actually write it down, what that is. Most people will say, “Tell me about your perfect day in retirement.” And this gentleman, he kind of flips that a little bit and he’s like, “Anybody can tell me about a perfect day, but give me a perfect month,” and that’s a lot harder.
So I think those are two good activities for the audience, Tommy, to take away from this: what does winning in retirement look like for you? And then if you were to sketch out 30 days of retirement—an ideal retirement—describe it, write it down, and let’s see if we can achieve that through good planning.
Tommy Blackburn: I love it. Man, that’ll be a fun one to record, that episode.
John Mason: Awesome. Well, audience, we’re going to take a wrap here. Thanks for the questions. Again, you can be a part of the next mailbag episode. Submit your questions in advance to masonfp@masonllc.net, or connect with us on LinkedIn. You can direct message us there. I guess all the kids today say “DM.” You can send us an email or you can DM us on LinkedIn. We’ll answer questions in a future episode.
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