A raise is always good news, but what can you do right now to ensure that you make the most of it? Try these ideas to stay mindful with your money in the new year.

Increase Your TSP Contributions

When’s the last time you looked at your TSP contributions? Getting a raise is the perfect time to review these amounts — and bump them up to take advantage of your extra income.

If you currently have no trouble making ends meet, consider putting your entire raise into your TSP. Raises have a tendency to disappear into thin air, with a latte here or a new pair of shoes there. Directing the funds into your TSP immediately is a great trick to make sure your money sticks around.

Pro Tip: TSP annual contribution limits may change each year. That means you may be able to save more this year than last — great news for anyone had maxed out!

Build Your Cash Reserves

Worried about inflation making everything in your life more expensive? You’re not alone. In case you missed it, inflation is up over 9.1% this year. If that keeps up, it basically wipes out your raise anyway. 

If you’re feeling unsettled by that news — or by your weekly grocery bills — consider pushing your raise into an easy-to-access savings or money market account. This will ensure that you can get to your money if you need it for an emergency or for unexpected expenses, while still earning a little interest on it.

You can also designate your savings for a future purchase, like a down payment on a house or new car. Opening a secondary savings account that’s purpose-driven can help inspire you to build your balance faster — and keep you from dipping into the extra money without thinking about it. 

Pay Down Your Debt

Got credit card bills to dispatch? You can also use your raise to increase your monthly payments on these bills to pay them off faster. This trick also works for paying off a car loan or mortgage. Instead of pushing your raise into savings, just add the monthly amount of your raise to one of your debt payments instead. 

If paying down debt doesn’t seem very exciting, try a debt calculator to see how you can save by paying a little each month. Not a bad way to put that raise to good use, especially if you’re already maxed out on retirement account contributions. 

New Year, New Goals

Using your raise well is all about staying mindful and really paying attention to where your money is going. The new year — and its new paycheck — is the perfect time to review your finances to make sure you know exactly what you’ve got coming in, and well as what your spending situation looks like. 

When you get your first paycheck, take the time to review your monthly budget, reworking it to reflect your new income. Then, take an honest look at your spending and update those line items as needed. This will give you important insight so you can plan your financial year accordingly.

If that planning feels overwhelming or complex, now’s the time to work with a financial advisor to get a clearer picture of where you stand — and what action steps you should take to get where you want to go. The right financial plan will help you make the most of income today and give you peace of mind about your future retirement plans. 

Need help understanding exactly how your TSP, pension, and benefits can all work together to fund your retirement? We specialize in financial planning for federal employees, and can’t wait to help! Get in touch today to learn more. 

Thinking of retiring from your job as a federal worker? Congratulations! You’ve put in a long career of public service, and now it’s time to reap the rewards of that great benefits package you’ve heard so much about over the course of your career.

Unfortunately, you do have to jump through some hoops to complete the retirement process and receive your pension. It’s a time-consuming process — and if you’re not careful, an expensive one. The truth is that the Office of Personnel Management (OPM) has a lot of paperwork to get through, and you won’t get your full retirement payments until they review it all. 

Though the OPM’s stated goal is to process retirement paperwork within 60 days, it often takes longer. Since the pandemic, the average processing time has been more like 90 days for retirees.

Why does it take so long? There are a lot of moving parts. 

Your Retirement Paperwork Timeline

Submitting your FERS retirement application is only the beginning. First, your department’s personnel office will have you sign off on several documents and begin the work of verifying your service — something that can take extra time if any documentation is missing. They also transfer your life insurance (FEGLI) and health insurance (FEHB) enrollment to the OPM. 

Then it’s the payroll office’s turn. When they receive your paperwork from personnel, they authorize your final paycheck and your payout of unused annual leave. They also forward records of your salary, retirement contributions, and service history to the OPM. 

Once OPM finally has your full paperwork packages from these other departments, they provide you a civil service claim number to keep track of everything. And then you wait for them to review your eligibility, calculate your annuity, and — finally! — send you that check.

So how long does all of this take? Here’s the general timeline as it stands today:

  • Day 1: Your retirement date. Congratulations! Throw away your alarm clock and start those hobbies you’ve been dreaming about.  
  • Day 30: TSP funds available for withdrawal. The payroll office will let TSP know you’re retiring automatically, and you should be able to access these savings without penalty within 30 days of retirement. 
  • Day 30-45: Annual leave lump sum payment sent. It takes at least two full pay periods after your retirement date to process this payment, and often up to six weeks to receive it. This is the responsibility of the payroll department.
  • Day 45-70: OPM sends first retirement letters. Somewhere between six and 10 weeks after your retirement date, OPM will send you your Civilian Service Annuity Number (CSA#), which you will need any time you contact them in the future. They will later send a letter with an online password for you to use to set up future communication.
  •  Day 45-70: OPM sends interim retirement check. After you receive your first letters, you’ll get your first annuity check — but this will only be for 60-80% of your expected annuity. This is just to tide you over while they process the paperwork and should get to you within six to 10 weeks of your retirement date as well. 
  • Day 90-120: OPM sends your full retirement check. Once they finally get through your paperwork, OPM cuts you a check for the full amount of your annuity. This catches you up on what you were owed from the interim check, minus insurance and taxes. It can take three to six months for this full check to arrive. 

Worth repeating: It can take up to six months before you receive your full retirement benefits. Because of this, it may be helpful to file your paperwork 60-90 days prior to your retirement date.

It’s also a good idea to have a financial plan in place to cover you while you wait for your annuity to kick in. You don’t want to fall into the OPM trap of using credit cards to get by for those months, so consider working with a financial planner to come up with a solid strategy to get you through this period.

Other Things to Remember

Although your life and health insurance premiums will eventually be deducted from your full retirement check and your coverage will continue as you await OPM processing, not all of your benefits will be covered automatically during the transition period. 

If you have additional FEDVIP Dental/Vision coverage or LTCFEDS Long Term Care insurance, you’ll need to contact those providers directly to make payments while you wait for your full retirement check to be processed. 

Likewise, any personal allotments you have set up through payroll will stop once you retire. You can resume these through the OPM once your final retirement check is processed. 

Finally, you will no longer be able to contribute to a Flexible Savings Account (FSA) once you retire. However, you can still access any remaining balance to get reimbursed for qualified expenses you made before your retirement date. 

Important Contacts

If you find that your retirement process is delayed past the dates on the timeline above, you’ll want to get proactive to find out what’s happening. You’ll also want to make sure you contact the right department for each issue you face: 

Thrift Savings Plan (TSP): (877) 968-3778 or www.tsp.gov

OPM: (888) 767-6738 or www.opm.gov

BENEFEDS (Dental/Vision): (877) 888-3337 or https://www.benefeds.com

LTCFEDS (Long Term Care): (800) 582-3337 or https://www.ltcfeds.com

FSA: (877) 372-3337 or https://www.fsafeds.com

Social Security: (800) 772-1213 or www.ssa.gov

Medicare: (800) 633-4227 or www.medicare.gov

The Bottom Line

Retirement planning for federal employees can feel overwhelming, but if you start early, you can make sure your paperwork is flawless for easier processing. You’ll also need to make sure you have a plan to cover your expenses while you wait for the OPM to process your paperwork and send that first full check. 

We’re here to help! We’re experts in the federal retirement system and can help you develop a wealth management plan that will let you enjoy your first days of retirement instead of running to the mailbox every day to look for that check. Get in touch to get started today. 

Life insurance can be a tricky subject. For starters, no one likes to talk about it — after all, discussing your own death isn’t exactly a fun conversation. Still, it’s incredibly important to take the time to figure out how much your family could lose if you died unexpectedly — and then take steps to get the right life insurance coverage to protect them.

As a federal employee, you’ve got some great options for life insurance as part of your benefits package. The Federal Employees’ Group Life Insurance (FEGLI) Program covers about 4 million people and the government picks up a third of the tab for Basic coverage, making it a great financial deal. 

But is the Basic plan enough? Here’s what you need to know to make sure your family is protected.

FEGLI Basics and Options 

Nearly all federal employees are eligible for FEGLI coverage, and you are automatically enrolled in the Basic plan when you are hired. That means that your cost comes out of your paycheck, and you probably won’t even notice.

Basic FEGLI coverage will pay your designated beneficiary one full year’s salary plus $2,000 when you die. However, there is an extra benefit for younger employees. If you are age 35 or under at the time of your death, the FEGLI benefit is 200% of your annual salary. Between the ages of 35 and 45, this extra benefit decreases by 10% each year until it disappears at age 45. At that time, you’re back to the standard benefit of 100% of your salary.

If you’d like to provide more for your family, there are three optional FEGLI plans to consider:

  • Option A: Pays out an additional $10,000 upon your death.
  • Option B: Pays out an additional multiple of your annual salary. You can choose coverage from 1 to 5 times your annual income. 
  • Option C: Pays out up to $25,000 for the death of a spouse and up to $12,500 for the death of a child if you choose to cover immediate family members.

It’s important to note that you’ll be paying the full premium for any additional coverage you choose: the government doesn’t subsidize FEGLI options, only the basic coverage.

The cost of optional coverage also rises as you get older. By the time you are in your 60s, the premium will be more than 10 times what you paid when you were 30, so it’s a good idea to review your financial plan regularly to make sure you aren’t paying for coverage you no longer need as you get older.

How Much Life Insurance Do You Need? 

This is a highly personal question, and a tailored answer will depend on many factors, including your age, your assets, the size of your family, whether you’re their primary source of income, and more. But in general, you can get a sense of your family’s needs by looking at your annual income and expenses.

For starters, how much money would your family lose if you died, and how many years of replacement income would they need? One easy calculation is to take your annual income and multiply it by the years you have until retirement. This amount would provide your surviving family members the money you would have provided until you stopped working.

But this might be more money than your family actually needs. If your house is paid off, you have no debt, and your spouse is working full time, full income replacement probably isn’t necessary. So as you fine-tune your number, consider how much your family may require. You can get an idea based on your annual spending right now, but make sure to consider additional expenses such as:

  • Childcare costs
  • College costs
  • Mortgage payoff costs
  • Consumer debt
  • Funeral costs
  • Health insurance costs (if your family loses coverage when you die)

Once you have a good idea of how much your family would need to survive without your income, you’ll need to decide how long they’ll need any replacement income to last. If you have young children, you’ll want to multiply their annual “need number” by as many years as your children will need support. For most people, that’s until they graduate from college at age 22 or so.

How to Get Help When You Need It

If this feels overwhelming, you’re not alone! It can be very challenging to estimate your family’s need when so many unknowns will affect the equation. Fortunately, a life insurance calculator can help take some of the guesswork out of your calculations and give you a better sense of the right amount of coverage for your family. It’s also a great way to fine-tune your coverage after major life events and as your needs change based on age.

When you begin to run the numbers, one thing is clear: most people will need more than just FEGLI Basic coverage to help their loved one through a difficult time. One year’s salary may simply not be enough. If that’s the case for you, explore your FEGLI options and comparison shop private rates as well. 

Finally, if you need additional help deciding what coverage is right for you, please get in touch. Life insurance is just one part of a comprehensive financial plan, and we’re here to help make sure you’re on the right track for a good life and a great retirement. Contact us for more help navigating your federal benefits today.

The whole point of a Thrift Savings Plan (TSP) is to put away extra money, little by little, to add up to big savings by the time you retire. When it comes to retirement savings, the first rule is not to touch that money until you retire, no matter how tempting it might be to dip into those funds for other purchases (or in case of emergency).

That’s sound advice, but there are exceptions to every rule. When it comes to the TSP, did you know that you’re allowed to take money out — penalty-free! — before you retire? And that it can actually be a good idea under the right circumstances?

Welcome to the wonderful world of age-based withdrawals. Here’s what you need to know to make them work for you.

What Is an Age-Based In-Service Withdrawal?

Generally speaking, your TSP money is off-limits while you’re still working in your government position. However, an age-based in-service withdrawal allows you to take money out of your TSP while you’re still working as long as you have reached age 59½. 

In addition to being old enough to qualify, you also need to meet a few additional requirements:

  • You can only withdraw from funds in which you are fully vested (i.e., you have enough years of service to do so).
  • You must withdraw at least $1,000.
  • If you have less than $1,000 in your TSP, you must withdraw the entire amount.
  • You can make a maximum of four age-based withdrawals per year.

What’s the Catch?

Keep in mind your withdrawal is subject to a 20% federal income tax unless you roll it over into another eligible retirement plan such as an IRA.

So if you plan to spend the money, you’ll be taxed on the portion that came from traditional TSP funds, but not Roth funds.

On the other hand, you have the opportunity to roll your TSP funds into an IRA account totally tax- and penalty-free.

Change your mind after you have moved money into an IRA? You can move your money back to the TSP as long as you keep your account open by maintaining a minimum balance.

What’s the Advantage?   

The TSP is a great benefit, but your investment options are pretty limited. Right now you can only choose from five different index funds, and you’re stuck managing that money yourself. This means that when you retire, it will be all on you to make sure your investments are well-balanced and that you time selling shares and taking distributions to minimize your taxes and make sure your money is invested as wisely as possible.

That’s a tall order, especially if you’d rather relax during your retirement than worry about your money. 

If you roll over your TSP funds into a private IRA, though, you can let an investment fiduciary take charge of managing your money. For many people, this comes as a huge relief. It allows you to streamline your retirement management and get great advice so you don’t have to worry about your TSP money in an economic downturn. It also gives you the freedom to invest in a much broader range of ETFs, mutual funds, stocks, bonds, annuities and more — anything that you and your advisor decide is right for your plan is now available outside the confines of the TSP.

An age-based withdrawal also provides you the opportunity to convert a traditional TSP to a Roth IRA. A Roth conversion will require you to pay taxes on the money you roll over, but once you do, you’ll never have to pay taxes on it again. Additionally, Roth IRAs are not subject to Required Minimum Distributions (RMDs) once you reach age 72. This is a huge advantage for anyone who is happy to live on their pension and would like to keep their IRA intact to pass on to their heirs — or just to keep it for as long as possible before spending it down. 

What’s Next?

To make an age-based in-service withdrawal, you’ll need to log into your TSP account and click on the withdrawals section. From there, you can complete your request for the withdrawal online. Funds are delivered via direct deposit, electronic transfer, or paper check. From there, you can transfer the money to your IRA — just make sure to hang onto the paperwork as you do so to show the IRS that your withdrawal was actually a rollover. 

Age-based withdrawals are often a “hidden” benefit of TSPs, and many people never take advantage. If you’d like to learn more about rolling over your TSP funds into a professionally managed IRA or making that Roth conversion to avoid RMDs, we’re here to help! Please get in touch to learn more about our specialized financial planning for federal employees today. 

Did you know that the Thrift Saving Plan is about to change? 2022 is poised to bring about significant adjustments for federal employees. While the new rollout isn’t ready yet, the latest reporting has these changes coming your way midway through 2022. TSP updates are still several months off, but it’s never too early to plan. Here’s what we know so far.

The New Mutual Fund Window

As a current TSP holder, you’re probably well aware of the limited investing options you have in this fund. Right now, there are just five options: 

  • C fund: An S&P 500 index fund 
  • S fund: A total U.S. stock market index fund
  • I fund: An international stock index fund 
  • F fund: A broad U.S. bond index fund
  • G fund: A short-term bond index fund

You can also choose from a series of L funds that automatically allocate your money among the above five funds and reduce your risk as you age. These funds are tied to the anticipated decade of your retirement (2030, 2040, 2050, and so on). More information can be found on these options at the TSP website www.tsp.gov/funds-individual/.

But later this year, the TSP will add a new mutual fund window, which is expected to offer 5,000 new mutual fund investment options for TSP investors. This is an enormous change, and one with the potential to provide investors exponentially more freedom to invest as they see fit. 

For example, it’s expected that many of these new mutual funds will provide ESG (environmental, social, governance) offerings to investors. These funds are built to help investors make socially conscious choices with their money (i.e. avoiding fossil fuels and the like). 

But there is an important caveat here. More choice also means more risk, and actively managed mutual funds tend to be more volatile than index funds like the ones currently available in the TSP. That’s because index funds are designed to mirror the market overall, while other mutual funds actively try to time the market for bigger returns. If you find yourself uncertain about your new options, it’s best to consult with an expert. 

What We Don’t Know Yet: It’s not yet clear whether there will be any limits on the dollar amount or percentage of investments that can go toward this new window, or if there would be any additional fees for the new investment options. 

New Management of Old Funds

There are also investment management changes coming to the old fashioned TSP funds as well. Instead of being managed by a single company, the C, S, I, and F funds will now have a primary and secondary manager. BlackRock will take charge of 80% of these funds assets, while State Street will be responsible for the other 20%. This is to reduce risk across the board. 

It’s important to note that in this case, risk isn’t to the money in the fund, but is more about operations. For example, if one company experienced downtime or delays that took them off line for a few days, TSP investors wouldn’t be left entirely in the lurch. This is all pretty deep into the inner workings of the TSP, and the average investor would never notice this change.

Modern Upgrades and Features

Finally, the changes to the TSP are designed to bring service into the twenty-first century. Here are some of the features expected to launch this year, thanks to a new vendor coming on board:

  • A mobile app for smartphones
  • Customer service online chat
  • Virtual assistant powered by AI
  • Online forms
  • Electronic signatures
  • Concierge service for common issues
  • Increased security and fraud protection
  • Biometric data (thumbprints and facial recognition) to log in
  • Updated record keeping

Any time your retirement savings plans change, it’s a good time to review your investments to make sure they’re working for you. Whether you’re wondering how to pick the best new mutual funds or need help developing an investment strategy that balances risk and reward, we can help. Get in touch for help with your federal retirement benefits today.  

Federal employees enjoy some of the best benefits packages around. In addition to a robust pension plan and health insurance to name a few, you also have the option to invest in a Thrift Savings Plan (TSP) to help fund your retirement.

Whether you’re a new employee or have been working government jobs for years, it’s always a good idea to review your TSP contributions and allocations to make sure you’re investing your money in the ways that will work best for you. Here’s what you need to know.

TSP Basics

When you begin your first eligible job at a government agency, you are automatically enrolled in the TSP plan, and 5% of your salary is pulled out of your paycheck to fund the account. This is the minimum amount you can contribute to remain eligible for matching funds from your agency. That’s free money, and it can make a real difference over time, so it’s a good idea to maintain this minimum contribution to take advantage. You can also increase your contributions at any time if you’d like to save even more.

Your TSP account functions like a 401(k) in the private sector and is subject to many of the same rules. For example:

  • Unlike a standard brokerage account, the TSP is a tax-advantaged account that lets your money grow tax-deferred or tax-free if the Roth TSP is selected.
  • There’s an annual maximum contribution limit of $20,500.
  • If you’re age 50 or older, you can contribute an additional $6,500 each year as a “catch-up” contribution.
  • TSP funds can be designated as Traditional or Roth contributions.
  • You can begin to take distributions from your TSP account at age 59½ without penalty.
  • You must begin taking required minimum distributions by age 72.

TSP Investment Options

One way in which the TSP differs from a 401(k) or IRA is the way in which you can invest your money. Instead of having unlimited mutual funds and investment vehicles to choose from, this government-sponsored plan has just five individual funds to choose from and several L Funds.

C Fund

The C Fund is the Common Stock Index Investment Fund, which is an index fund designed to match the performance of the S&P 500. This means that when the 500 companies in the S&P 500 do well, your investment gains money. You may also lose money if this index drops in value. Investing in the stock market always comes with some risk, though this fund’s focus on well-established U.S. companies mitigates that risk somewhat. The C Fund is considered a medium risk investment.

S Fund

The S Fund is the Small Cap Stock Index Investment Fund, which tracks the performance of the Dow Jones Industrial Average. This fund covers a broader range of domestic stocks, so while the fund is well-diversified, it also comes with greater risk. The S Fund is considered a medium-high risk investment.

I Fund

The I Fund the International Stock Index Investment Fund, which consists of stocks from Europe, Australasia, and the Far East. Investing in international stocks adds plenty of diversity to your portfolio, but also greater volatility. The I Fund is considered a high risk investment.

F Fund

The F Fund is the Fixed Income Index Investment Fund, which is a bond fund. Because bonds are generally backed by government entities, they are much safer investments. You won’t generally lose money in bonds, though the rate of return is often lower than the rate of return in the stock market. The F Fund is considered a low-medium risk investment.

G Fund

The G Fund is the Government Securities Investment Fund, which invests in short-term U.S. Treasury securities. Because these bonds are backed by the U.S. government, they are a very safe investment. When interest rates are low, the rate of return isn’t great, but it’s very reliable. The G Fund is considered a low risk investment.

L Funds

The L Funds are Lifecycle Funds that are designed to take the guesswork out of investing. These funds automatically divide your contributions among the five funds listed above, allocating your investment in a way that makes sense for your age. You simply choose the fund with the year closest to your target retirement rate, and the fund manager adjusts your allocations so that the fund becomes less risky as you age.

Choosing Your Allocations

Employees are automatically enrolled in an L Funds to begin, and it’s an easy way to manage your investments — you don’t have to worry about changing your allocations, as this is done automatically over the years.

However, if you would like to exercise more control over your investments, you can choose to divide your contributions among the other funds listed above. Because stock investments generally have a far greater rate of return than bonds, you’ll want to have at least some of your money in the stock market to allow your wealth to grow. But finding the right balance is key: if all your eggs are in one basket and the stock market crashes, your retirement could be at risk.

In general, younger people invest more heavily in stocks because they have many years to ride out the risk. Over time, the balance between stocks and bonds should be adjusted to rescue risk as you get closer to retirement age.

Of course, some people have very low tolerance for risk, while others can stomach the ups and downs of the market just fine. Consider taking a risk tolerance assessment to get a sense of your comfort zone when it comes to investing.

If you’d like to learn more about the best allocation of your funds to meet your personal goals, we’re here to help! Contact us today to walk through your TSP investing options and develop a wealth management plan that’s right for you.

 

If you’ve heard it once, you’ve heard it a thousand times: “Wow, you work for the federal government? Must be nice to have such a great benefits package!”

What people outside of public service don’t realize is that those great benefits come with a few strings attached — namely, the fact that sometimes you have to navigate some bureaucracy to access all those benefits.

This is particularly true when you’re ready to retire. Retirement isn’t just something you can decide to do one day and expect everything to fall into place in a few weeks. To maximize your benefits — and even just to get your pension payments in a timely fashion — you need to plan ahead.

Here’s what you need to know to avoid falling into the OPM Trap.

OPM Retirement Basics

The OPM is the Office of Personnel Management, and they hold the keys to the kingdom when it comes to getting your pension payments. This is the massive human resources department for all federal employees, so you’ve almost certainly dealt with them at some point during your career.

When you’re ready to retire, there are plenty of forms to fill out and decisions to make. To ensure that you have time to get all your financial ducks in a row, the OPM encourages federal employees to begin retirement planning as early as five years ahead of their proposed retirement date. Getting an early start lets you:

  • Plan ahead to maintain your FEHB health insurance for the five-year period before you retire, so that you can continue coverage into retirement before Medicare picks up the slack
  • Plan ahead to maintain your FEGLI life insurance coverage
  • Gain a clear understanding of your FERS Annuity (aka pension) eligibility and how your TSP retirement funds, annuity, and Social Security checks will work together to fund your retirement

When you get to a year out from your desired retirement date, it’s time to get serious about planning and applying. At this point, you’ll need to:

  • Review your Official Personnel Folder (OPF) to check dates or service, raises, and more for accuracy
  • Tell your supervisor about your plans
  • Choose an official retirement date
  • Attend a pre-retirement counseling session  to understand your benefits and the process
  • Elect survivor benefits
  • Get an annuity estimate to help you with your planning

Finally, you should apply for your FERS Annuity at least 2 months ahead of your planned retirement date. This allows time for your personnel office to review your files and complete their own round of paperwork verifying your service — this goes faster when your OPF has already been reviewed and is in good order. Your payroll office also has forms to complete, and then they will finally send your application off to the OPM. This all takes time, but the sooner you complete your paperwork, the sooner these offices can complete theirs.

When the OPM receives your file, they will send you a civil service claim identification number for reference — don’t lose it! It’s how you’ll be able to track progress and get any questions about your pension answered.

The OPM Trap

Once the OPM has your application, approval isn’t exactly instantaneous. They have to review all of the submitted paperwork, calculate your FERS Annuity, and finish final processing. This can take a long time.

Though the OPM’s stated goal is to process pension applications within 60 days, the reality is that it usually takes much longer. In July of 2021, average processing time was over 90 days. Since that’s an average, it’s possible that your application could take anywhere from two to six months to complete — or even up to a year.

So what’s the OPM trap?

While you wait for your pension to be fully processed, you aren’t receiving your full pension. Instead, you receive an interim payment, which can be anywhere between 60 and 85% of the actual value of the FERS annuity you’ve earned. These checks begin coming your way within 6 to 8 weeks after you retire. 

The OPM trap gets people when they retire without realizing that their full pension checks could be many months away. First, you’ll wait for up to two months without any pay until your interim check comes through. Then, you’ll wait several more months with partial pay until your pension is finalized.

If you don’t have a plan in place to get you through this dry spell, the OPM trap can be a painful reality check on your first year of retirement.

Strategies to Cover the Interim Payment Period

Clearly, you need to have some cash reserves saved up and ready to go to get you through this period of partial annuity checks. This is definitely a “better safe than sorry” situation.

There are several ways to do this:

  • Savings accounts and money markets: A simple, easy-to-access savings vehicle may be all it takes to see you through, especially if you began planning for the OPM trap a few years in advance. 
  • Your traditional TSP account: If you retire in the calendar year you turn 55 years old, you can begin to take distributions from your Thrift Savings Plan. This is money you’ve been saving for retirement, so it may make sense to begin accessing it while you wait for your pension to be complete.
  • Annual Leave Lump Sum Payment: One of the best ways to keep cash on hand as you wait for your full pension is to use your Lump Sum Payment of Annual Leave. You’re entitled to be paid for your unused leave time at your regular hourly rate, so this can be a great windfall that gives you cash without forcing you to raid your other accounts. This check usually arrives within a month of your retirement. Keep in mind that annual leave lump sum payment will have taxes withheld.

In fact, you can plan ahead to maximize your annual leave payment by taking fewer or shorter vacations in the last years before retirement. 

Pro Tip: Retiring on December 31 will ensure that your lump sum check comes in a fresh tax year, which may help reduce your total taxable income for your final year of employment.

The OPM Trap is real, but it doesn’t have to derail the beginning of your retirement. When you plan ahead for a long delay, you’ll ensure that you can sail through the waiting period without too much trouble.  And if you’ve over prepared, and your interim payment period is shorter than expected, even better!

Need help with your retirement planning? We can help! Federal benefits and retirement planning is what we do, so contact us for a consultation today.

Financial planning is a life-long endeavor, and there’s more to it and then just retirement. You also need to take into consideration your health and your quality of life. As people live longer, that means planning for many more years of life — years that could potentially be spent in decline.

No one likes to think of losing their independence, but most people will, at some point, require long-term care. These services can be in-home care provided by family, visiting nurses, or other caregivers, or these services can be provided by part- and full-time assisted living facilities. 

Long-term care is very expensive, and it’s not covered by medical insurance or Medicare. It is covered in some states by Medicaid, but that’s only available after you’ve spent all of your assets and are in desperate need. 

So how should you go about planning for your long-term care needs? Federal employees have an important benefit available, but it’s not necessarily a great choice for everyone. Here’s what you need to know.

The Federal Long-Term Care Insurance Program

The Federal Long-Term Care Insurance Program (FLTCIP) is a special insurance program available to federal employees as well as active or retired military personnel. The FLTCIP covers payments to nursing homes and other services related to long-term care, either in or out of your home. Rates are based on several factors, including:

  • Your age
  • Daily benefit amount (i.e., how much your policy will pay for each day you require care)
  • Benefit period (i.e., how many years of care your policy covers)

It’s important to understand that the FLTCIP is a use-it-or-lose it program: If you don’t end up needing long-term care in your lifetime, you will lose the money you paid out in premiums. Therefore, choosing the right amount of coverage is crucial so you don’t overpay. You’ll need to carefully research long-term care costs in your area and understand your needs. For example, women tend to live longer and spend more time in long-term care than men, and your health conditions can offer a clue about your future needs.

It’s also important to note that the premiums for the FLTCIP can increase over time as the cost of care rises. You’ll want to plan ahead for these increases so you’re not blindsided by them in years to come. Likewise, you’ll want to consider the impact of inflation on your coverage and adjust your policy as needed. The FLTCIP offers an automatic inflation adjustment option, or you can opt in to future increases. 

To better understand all of your options within the FLTCIP system, check out these informative webinars.

Weighing All Your Options

As a federal employee, you’re probably used to having your benefits ranked among the best in the country. However, you should definitely shop around when it comes to choosing long-term care (LTC) coverage. 

Private LTC insurance often takes into account sex as well as age, because women tend to need more long-term care than men. For this reason, women will often pay higher premiums. Because FLTCIP doesn’t take sex into account, women may be able to get a great deal through the federal program, while men can often save money by shopping around. 

Private LTC insurance and FLTCIP coverage can both hike premiums over time, leaving you short on cash if you’re not careful. For this reason, you may prefer alternative coverage for long-term care planning:

  • Shared LTC Plans: These options allow spouses to pool their LTC coverage. Spouses apply at the same time and can share benefits. This helps alleviate the “use-it-or-lose it” problem, as a surviving spouse can still access remaining benefits for the rest of their lifetime.
  • Hybrid Life Insurance/LTC Plans: This type of coverage combines a whole life insurance plan with LTC coverage. Your premium provides a long-term care benefit and a death benefit, so you don’t lose the value of your premiums if you never need long-term care. Hybrid plans are attractive because premiums don’t go up, but LTC coverage is often less flexible and more expensive than a pure LTC insurance plan. It also provides a death benefit to your heirs.
  • Long-Term Care Riders: Some whole life insurance policies offer additional riders that allow payouts for long-term care. These payments will likely reduce the death benefit to your heirs but can be a helpful option if you’re looking to avoid rising premiums.
  • Self-Insurance: If you’ve been saving diligently for your retirement and have taken advantage of your other federal benefits, you may be able to afford your long-term care needs on your own, without the additional expense of insurance. Your Social Security income, pension, and TSP savings may already provide sufficient coverage. You may also already have a life insurance policy with accelerated death benefits that allow you to tap into your benefit while you’re still alive to pay for medical expenses. 

Before choosing any LTC insurance option, run the numbers. A thorough needs assessment will help you calculate the cost of long-term care in your area and show you several different scenarios based on how long you need care. From there, you can review your savings and investments to see if you can afford the costs outright or if additional insurance coverage is right for you. 

Long-term care is expensive, but so is LTC insurance. You don’t want to pay for coverage you don’t need, so don’t assume that the FLTCIP is automatically right for you. An alternative plan could save you money while providing substantial peace of mind.

If you’d like help planning for your future, we’re here for you! Get in touch today to discuss your options and come up with a plan that works for you and your family. 

 

Federal employees have a whole raft of benefits that touch on everything from retirement savings and pensions to health, life and long term care insurance. But what happens to those benefits when you die? No one likes to think about death, but it’s crucial that you know how your benefits will be distributed to your surviving spouse or children. If you plan carefully, you can leave loved ones a gift of lasting security.

Here’s what federal employees need to know about survivor benefits for spouses and children.

Thrift Savings Plan

The Thrift Savings Plan (TSP) is a defined contribution retirement account for federal employees. It has the same basic tax advantages as a 401(k) in the private sector, and you also receive matching funds from your agency while you are working.

When you die, your TSP account will pass to your designated beneficiary, which you must name on a TSP-3 Beneficiary Election form. If you designate your spouse, they will be able to keep the account open and use it for retirement just as you would have, with all the same rules and benefits. Any other beneficiaries, such as your children or grandchildren, would have to close the account and transfer the funds into an IRA.  Adult children will want to review the recent Secure Act changes to beneficiary/inherited IRAs.  Rather than being able to distribute inherited IRAs for their lifetime, adult children will need to deplete the IRA by the end of the 10th year following the passing of their parent.  The 10 year clock doesn’t begin for minor children until they reach age 18.

If no beneficiary is named, the account will be closed and funds given to the first person in line in the standard order of precedence. The surviving spouse is first, followed by children if there is no surviving spouse then parents.

FERS Survivor Benefits

The Federal Employee Retirement System (FERS) is a defined benefit plan that pays out a pension upon retirement. This is an annuity that provides an annual payment of a certain percentage of your most recent salary, depending on your age and years of service in a federal job.

There are three types of survivor benefits connected to your FERS account, each with different guidelines:

Basic Death Benefit

When a FERS employee dies, the surviving spouse is eligible for a lump-sum death benefit equal to 50% of the deceased’s current salary plus a one-time payment of $34,991. (Note that this is the approved amount for 2021, but it’s adjusted annually for inflation.)

To be eligible, you must have 18 months of creditable service, and your surviving spouse must have been married to you for at least nine months OR be the parent of a child born during your marriage (even if the child is born after your death). If your death is the result of an accident, these requirements are waived.

Survivor Annuity

Provided the surviving spouse meets the eligibility requirements above AND the deceased federal employee had 10 years of creditable service, they are also eligible for an annual benefit based on the deceased’s pension schedule. This benefit is 50% of the federal employee’s annual pension, with no reduction for age made if they died before retiring. This amount is adjusted for inflation each year.

The survivor annuity may also be paid out to children of the deceased, as long as the federal employee had 18 months of creditable service. Eligible children must meet the following criteria:

  • They are unmarried
  • They are claimed as dependents
  • They are under age 18, or under age 22 if attending college full time

The age requirement is waived for unmarried, disabled dependents, provided the certified disability occurred before the age of 18.

Note that children’s benefits are reduced by the amount of Social Security survivor’s benefits they are entitled to. In many cases, this cancels out the FERS benefit.

Lump-Sum Benefit

If a federal employee dies and no one is eligible for a survivor annuity based on the factors listed above, survivors are entitled to a refund of all the money that was contributed to FERS during the deceased’s service, plus interest. 

If this occurs, the lump-sum is paid to the designated beneficiary. If there is no designated beneficiary, the money is paid first to the surviving spouse, and then to children if there is no surviving spouse.

FEGLI Benefits

Federal Employee Group Life Insurance is an additional benefit that provides life insurance to federal employees. These benefits are designed to be paid out when you die, so the survivor benefits are much more straightforward. All funds are distributed to your designated beneficiary upon your death. 

If there is no named beneficiary, the funds are given first to the surviving spouse, next to surviving children, then to surviving grandchildren, and finally to surviving parents of the deceased.   

FEHB Benefits

The Federal Employees Health Benefits program is the health insurance plan for federal employees and their families. When a federal employee dies, surviving family members covered under the Self and Family plan can continue their coverage as long as they are eligible for a FERS Survivor Annuity. If you have a Self Plus One plan, your designated family member can continue coverage if they meet the same requirements. 

If you have a Self Only FEHB plan, there are no survivor benefits when it comes to healthcare, though your spouse and children may qualify for a Temporary Continuation of Coverage (TCC). 

Social Security

The Social Security Administration also provides benefits to survivors. It can be easy to lose sight of your Social Security eligibility in the midst of all the other benefits, but it’s also important. To be eligible for survivor benefits, you will have to have earned a certain number of work credits based on your age at the time of your death. 

A surviving spouse may be eligible for benefits as early as age 60, though it will be reduced. They are eligible for full benefits if they have reached their full retirement age. Surviving spouses can also switch to their own Social Security retirement benefits when they reach retirement age, in which case the survivor benefit would cease.

If your surviving spouse is caring for children under the age of 18, they do not have to wait for the survivor benefits. 

Your children are also eligible for survivor benefits if they are under the age of 18 (or under age 19 but are still enrolled in high school). A disabled child can receive benefits until age 22. Note that these benefits will reduce or even cancel out FERS survivor annuities for children.

How to Get Help

Thinking about death is difficult, but it’s crucial to plan for your family’s wellbeing. If you’re a federal employee with questions about your benefits, please reach out. We’re financial planning experts with deep knowledge of the FERS system, and can help you with anything from designating your beneficiaries to helping you choose the right insurance coverage’s for your financial situation.

If you are a surviving spouse of a federal employee, we’re here for you, too. This Survivor’s Planning Checklist will help you stay organized as you complete all the necessary paperwork.  If you need additional help navigating the complex federal benefits system, get in touch today. We can help you make sure you understand what you’re entitled to and help you through this difficult time.

 

   

 

One of the biggest expenses in your life is federal income tax. Sure, writing the check for the payment on your home is a major milestone, but most people will end up paying far more than that in taxes over the course of a lifetime.

And yet, you’re probably not paying as much as you think.

You read that correctly! One of the biggest misconceptions people have about their taxes surrounds their tax rates and how they work. And this misunderstanding leads most people to think they owe more than they actually do.

The trouble comes from a complex tax code that uses tax margins to tax different levels of income at different rates. Understanding exactly how this works is crucial for making good decisions about your money.

So let’s clear up the misconceptions and misunderstandings. Here’s what you need to know.

What Is Your Marginal Rate?

Tax margins are the result of a progressive tax system, in which people with lower income pay taxes at a lower rate, while people with higher incomes are charged more. Higher tax rates kick in when you cross a certain income threshold, creating what we call tax brackets

Single Filer 2020 Federal Income Tax Brackets

Source: NerdWallet

Let’s look at an example. If a single person earned $45,000 of taxable income in 2020, they’d be in the 22% tax bracket.

But that does not mean they pay 22% in income taxes

In reality, they only pay 22% tax on part of their income — specifically, the part that kicks them over the $40,125 limit of the 12% bracket.

The best way to understand this is to imagine each tax bracket like a bucket. Everyone’s income is first poured into the 10% tax bucket. But that bucket only holds $9,875. If your taxable income is less than that, then you’re done — you only owe 10% in taxes. 

But if your taxable income is more than $9,875, it will spill over into the next bucket. This is the 12% bucket. This bucket holds up to $40,125, so our sample tax payer above has income that will also spill into the third bucket. But the 22% bucket is where he stops, because it holds more than $48,000.  

Our taxpayer will pay the taxes on each bucket, meaning he will pay 10% on the $9,875 in the first bucket, 12% on the $30,250 in that bucket, and 22% on the rest — but that 22% bucket only has $4,875 in it. 

So while this taxpayer has a marginal tax rate of 22% — the highest bracket he falls into — he won’t pay 22% on all of his money. His effective tax rate is actually lower.   

What Is Your Effective Tax Rate?

Your effective tax rate is the percentage of your income that you actually pay in taxes — and this is almost always less than your marginal rate. This is much easier to calculate: just take the total dollar amount you pay in income tax and divide it by your total income.

To see how it works, let’s calculate the effective tax rate for our sample taxpayer. He paid:

  • 10% on $9,875 = $987.50
  • 12% on $30,250 = $3,630.00
  • 22% on $4,875 = $1,072.50

That’s a total of $5,690 in income tax. That means his effective tax rate is:

  • $5,690 ÷ $45,000 = 0.126, or 12.6%

As you can see, our sample taxpayer doesn’t pay anywhere near 22% on his income — his effective tax rate is only 12.6%. 

This is great news, and it should hopefully lay to rest the myth that being pushed into a higher tax bracket suddenly takes all your money away, or that you could actually end up owing all the extra money you earn, making it somehow not worth getting a raise. This is simply not true.

Using Your Marginal and Effective Tax Rates to Make Good Decisions

Your effective tax rate is a snapshot of your total tax burden, which can be useful in monthly and yearly budgeting. For example, freelancers and other workers with 1099 income with no tax withholding can use their effective tax rate to plan ahead and avoid a shock when their tax bills are due in April. The same is true for retirees who want to have a clear understanding of what they’ll owe on their IRA distributions.

Your marginal tax rate, on the other hand, is important for making strategic retirement decisions. That’s because any additional tax deferred retirement account (IRA, 401k, 403b, TSP, 457) income you withdraw will be taxed at your marginal rate — that is, your current “bucket” that you’ve worked your way up to. If you have flexibility about taking a distribution now or later, using your marginal rate to compare options will give you a more accurate view of what those changes will cost and can help you save money in the long run. 

It should be noted that these calculations can get complicated. For example, you might want to figure your state taxes into your effective tax rate, or you may need help calculating an accurate marginal tax rate if some of your strategies push you into a higher bracket. We’re here to help! Tax planning is a crucial part of retirement planning, so please get in touch if you have additional questions about how your marginal and effective tax rates impact your retirement plan.

Services offered by Thompson Wealth Management