Federal Retirement Questions – Part 2

Federal Retirement Questions – Part 2.mp3: Audio automatically transcribed by Sonix

Federal Retirement Questions – Part 2.mp3: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker 1:
Welcome back to the Federal Retirement Show. I'm your host, Val Majewski, with American Benefits Exchange. And as always, I really appreciate you taking the time out of your schedule to join us. That's what this is here for. It's for you, the federal employee, that's looking for accurate information when it comes to your benefits and retirement information. So we are in the middle of a series we're doing called F e Q's and FEQ stands for Federal Employee questions. This is compiling the top questions that we've been getting from federal employees, just like you, when it comes to different subjects within your benefits and retirement situations. And these are general questions. These are common questions. I will say, if you have more specific questions that we don't address during this series, go back to our previous episodes, and perhaps we've answered your question already. You can find an episode that discusses what you're looking to find out about. And if we don't have any information on what you're looking for, then reach out to us. Go to our website, Federal Retirement show.com, fill out the form. One of our experts across the country will be reaching out. If it's not me personally, and hopefully we can then answer your question with an one on one personal benefits and retirement review. But for the sake of this series, we're going back to the FAQs Federal Employee questions. And today is part two. So let's dive in to today's questions and see what you and people like you have been asking.

Speaker 1:
So as you recall from part one, if you have not seen part one, I'd highly recommend you pause here. Go back and find part one and see the questions that we've already asked. But we're going to get into today's and today's topics are Social Security and. Well, we'll get into the second one in just a second. But Social Security is where we're starting. And what are the questions that better employees like you are asking when it comes to Social Security? Biggest one. When should I claim it? What are the. What's the ideal scenario for me? When should I claim Social Security? Well, it's different for everybody and the general consensus or general themes for Social Security, I should say, is normally people are contemplating whether they should take it right away at age 62, wait until their normal or full retirement age, which is anywhere between age 65 and 67, depending upon your birth year or waiting until the end at age 70. This varies. It really does, depending upon situational circumstances. Now, um, when it comes down to it, what are some of the things that would lead me to recommend a certain time frame to claim Social security? It really depends on your income outlook or the income that you need in retirement. So a lot of federal employees, though, that I talked to and doing thousands of benefit reviews over my career.

Speaker 1:
Social security carries a lot of weight when it comes to a federal employees retirement situation. So most that I do talk to will take or claim Social Security right when they're eligible because they are needing it or requiring it to generate a good amount of income for them. Now, I don't know if you've seen recent news that has come down about Social Security and what's highlighted out there, but the outlook is not good as far as what Social Security is going to, um, provide for you down the road. There have been different reports claiming that the Social Security trust funds, the reserves will run out sooner than originally anticipated or thought. And this could mean less benefits for you when it's time to claim it. So first of all, when should you claim it? Everybody's situation is different, but when can you claim it? 62 is when you can start your normal or full retirement age between 65 and 67, depending upon your birth year and the latest generally age 70. And it can be anywhere in between. So what's right for you? That's where you need to really dive in and get a personal benefits and retirement review done to see which Social Security strategy is right for you. Which age is better? Well, again, that's back to the same thing of what is your circumstance look like. And we could run different scenarios that the best way is to go on to Social Security or ssa.gov, fill out all the information in there.

Speaker 1:
They'll have some accurate, um, earnings reports for you so you can see what your projected amounts are going to be. But look at those extra reports that are out there about the less benefits that could be paid out for Social Security. I don't want to be doom and gloom on here, but they're telling you in plain English, look, this is what could happen if no changes are made and there's no, uh, sub set or little, you know, extra words that are at the end saying, oh, by the way, but we're going to figure this out and we're going to fix it. That has not come across. So as much as they're saying, look, this doesn't look good. And if right now they're projecting that if no changes are made by 2032, that there could be a 28% cut in future Social Security benefits for those that are currently receiving and for those that are going to receive. Who knows if that report is going to get worse as time goes on, but there's no last paragraph at the end that says, don't worry. We've got a solution. We're going to fix it. That hasn't come across yet. So just understand this is what Social Security can provide now, but this is what they're telling us could happen down the road.

Speaker 1:
Okay. Next question. How does my pension affect my Social Security? Now, if you understand that Social Security does have an earnings test attached to it. Um, and if you are prior to your full retirement age, there's only a certain amount that you can earn each year before seeing your Social Security benefit get reduced. The good news is, though, your retirement pension does not factor in to that earnings test. So it doesn't matter how big your pension is. And hopefully you work really long and have a lot of years of service as a federal government employee and create a big pension for yourself. But just understand that your pension does not. Your furs or CSRs annuity does not factor in. And same with TSP. By the way, that that counts as retirement income does not factor into the earnings test for Social Security. So the long and short of it is your pension will not affect your Social Security currently as it stands. Okay. How much Social Security benefit can I expect? Now everybody's situation is different. So it's not that there's a blanket statement. Oh, if you collect at age 62, it's going to be this. Or if you wait till your full retirement age, it's going to be that. Everybody's situation is different. But what factors into that? It's your top earning years and they look at your your top earning years and they come up with a formula.

Speaker 1:
And there's a that's a longer explanation than what I'm giving you here, but it's based upon your earnings and your top earnings over your working career. And then they'll come up with a factor that they use for your calculation. And they'll tell you, okay, if you retire at this time, you'll expect this amount. And if you wait till this age, you can expect that amount. That is why I'd recommend either talk to a Social Security expert that can run these reports, or go to Social security.gov or ssa.gov and get accurate statements. They used to send it to us all the time in the mail. They've stopped doing that. So you've got to log into your account or create your account. If you have not to determine how much you're going to be getting at different age brackets or different age ranges. So the second topic for today is TSB Thrift Savings Plan. Now this is a big and popular topic. And here are some of the top questions that we're receiving when it comes to TSP. How much should I contribute to my TSP? Now, if you've seen me on this podcast before the federal retirement show, one of the biggest mistakes that I see federal employees make is not at least putting in up to the maximum matching that the government gives you. And for those Fers employees contributing to TSP, the government matches up to 5% of what you contribute.

Speaker 1:
So this is the best type of money that I can recommend you get. It's free money. Um, so it says how much should I contribute? Well, you can contribute up to the maximum per calendar year, which is currently 24,500, unless you're above the age of 50. And then there's catch up contributions. And then there's the super catch up contributions for those that are age 60 to 63, but I'd at least recommend if we're going to talk about how much you should at least put in, put it up to the 5% matching if you are financially eligible or able to do that. And that means you're taking advantage of the free money, the most free money that the government will give you. And like I just previously said, I do not know any better money than free money. Um, which funds are best performing within TSP? Now, this is a matter of subjectivity because some people can look at these and determine, you know, which funds are better based on stats or feeling. I'm just going to go based on stats. And you can find these stats on tsp.gov. And by no means giving you investment advice and saying, these are the funds you should be in. I'm just reporting the news for you, but you can go to tsp.gov and see it for yourself. Now, the best performing funds in history, the stock funds, if we're just looking at the traditional five funds, the C, S and I of the stock funds, and then the other two being the G and the F.

Speaker 1:
But if we're looking at all five of these original funds and understanding that every L fund, because if you're saying, well, what about the L funds? Each L fund is made up of a portion of the G, F, C, S and I funds. So it just depends on how much of each fund is built into the individual funds. So let's go back to the G, C, S and I. Now the of the, the, the three stock funds, the C s and the I, the C and the S have been the best performing funds over history. You can look that up. You can see it. The I fund has historically performed about half as well as the C fund. Now that doesn't mean that's always going to happen. It doesn't mean that's what always does happen. But look at the history for yourself. And you can see that of the three stock funds, the C and the S have been the best performing while the I has lagged behind a little bit. Then if you want more to be a little more conservative, but not entirely well, the F fund is a bond index fund, and it's probably not the best performing fund if you ask me. But just if you look at history, it hasn't done as well recently.

Speaker 1:
Um, generally over time it's been fairly conservative, but there's no guarantee that it cannot lose any money because it's based on bonds. Um, the most conservative and the only fund that's guaranteed never to lose is the G fund. But if you look at that, it's historically performed between two and a half, 3% over the last ten years. So guarantee you cannot lose, but has not performed as well as the other funds in recent history. Now you can go go to tsp.gov and you can see the performance for yourself. Uh, there's a tab you can go down and you can see you don't even have to log in to see this. You can see the past performance of TSP funds and how they've done over the past year, five years, ten years, and over the course of their entire history. And you can determine which fund based on your risk tolerance is right for you. Should I use the traditional or the Roth bucket? Now, maybe you don't even know what this question means or what it's asking, but it's asking which bucket of money should I put my TSP contributions into? And if you don't know which buckets are available, you have two. You have the traditional bucket, which is traditional funds, meaning you get a tax break or you get a tax deduction on the funds that go into this bucket. Um you don't pay tax now, but when you do withdraw money down the road, you will pay tax on your contributions plus the interest earned in that bucket.

Speaker 1:
Now the Roth bucket means these are tax free dollars. You pay tax on the money you put in now, and the money grows and earns interest. And in the end, when you withdraw that money, all the dollars, your contributions, plus the interest that you've earned come out tax free. So when do you want to pay taxes? Now or later? What should you contribute to the traditional or Roth? Well, this is all preference. So I'm going to give you my personal preference. I like tax free dollars. That's just me. Your preference might be different. You might want the tax deduction now and have less taxable income now. But you're okay with paying all the tax on earnings and the growth down the road. That's up to you. But I like tax free dollars. So for me, if you're asking a personal opinion of where I would put my personal money, I'd like to put it more towards the tax free dollars into the Roth bucket. It's important to note two things no matter where you put your money. Traditional or Roth, the government's going to match you 5%. So I have seen this where I've had federal employees, they're putting 5% towards traditional and 5% towards Roth. And I look at their leave and earnings statement. I say, why are you putting into both what's the the reason they say, well, I wanted to put into the traditional.

Speaker 1:
So I get the matching money. Okay. That's true. But they really wanted to put into Roth, which is why then they put an additional 5% into Roth. So did you only put into the traditional because you thought that you had to in order to get the matching money? And they would say yes. So that's a misconception. But it doesn't matter where you put your money and how much you put elsewhere or in either bucket, the government will match you 5% on your contributions, but their contributions go into the traditional bucket. So no matter where you put your money, you are going to have a traditional portion of your TSB, a portion that will be taxed down the road. But for my contributions, I like the Roth. Again, that's just me. I like tax free dollars. I don't like Uncle Sam having a say in how much I'm going to pay him down the road. I'd like to prepay him now, get him out of my pocket for that and have the money come out tax free in the end. How should I withdraw my money in retirement? This is a great question. It's. Or it can be posed a different way of how should I utilize my TSP in retirement? And that comes down to another question that I need to ask the federal employee.

Speaker 1:
It's what do you want to use it for? What do you want to use your TSP for in retirement? And a lot of people will say, well, I need it for income because I've got my pension and Social Security, I need my TSP as that third leg of the retirement income stool, and I need to get income from TSP. And that's a whole nother separate conversation with how to best generate lifetime income from your TSP and create that other pension check for yourself. Now, maybe people need to just withdraw money for rainy day purposes, or they want to buy the boat or the car or whatever. Who knows? Maybe you want to take vacations with your TSP funds. Maybe you just want to let it sit and grow, and you don't want to take it at all. That's completely up to you. So if you're on the other side of this is you don't need it for income, how should you withdraw your money? You don't have to until you hit RMD age. Now what does that mean? That means you've you've hit your age where the government says you have to take out required minimum distributions. And this is currently anywhere from age 70.5 to age 75, depending upon your birth year. And the government says you got to start taking some money out so you can start paying some taxes on that money, and then you can do with it whatever you choose, but you just can just start withdrawing money and pay the taxes, or else we'll penalize you more for not taking it out.

Speaker 1:
Okay. But for those that need it for some sort of income, there are ways to and a lot of different options to take that money out. To do so, you do not have to just rely on what's available within TSB. So if you have questions about utilizing your TSB for income, reach out to us again. Go to federal retirement show.com, fill out the form. We can do a full evaluation and answer your specific questions when it comes to TSB. Also, if you don't want to withdraw money and you want to try to mitigate RMDs down the road or tax implications, there are other things that you can do to avoid that, namely Roth conversions. We've talked about Roth conversions during other federal retirement show episodes, but this is one way to prepay Uncle Sam. Get him out of your pocket. You will not owe RMDs on Roth money. And that way, now you can let your money sit and grow after Prepaying Uncle Sam, and you will not have to withdraw any of it down the road. Great conversations that we can have. If you have further questions about your withdrawal options or how to best utilize your TSB once you're separated from service or retired. How do I avoid running out of money in retirement? This is a great one with when it comes to retirement planning.

Speaker 1:
Number one, you. You need to get a benefits and retirement analysis done. So if you want to avoid or plan properly so you do not run out of money in retirement. First of all, you need to know how much money you need to live on in retirement. That's number one. Now, once you determine that, now understand where that money is going to be coming from. So we say this is how much money you need in retirement. This is the amount you need to live on. Pay your bills on a monthly basis. Make sure that you're not running out of money each month or you're not in a deficit. You look at your pension, you look at Social Security, you look at TSP, and then we determine if you have other retirement income sources. Do you have a previous 401 K previous pension? Are your prior military do you have a VA benefit? All of these things factor in to your future retirement income. Then if you need to supply yourself with more income from, say, TSP or your other retirement savings sources. Now, how can you best position that money or turn it into transform that money into another guaranteed lifetime income stream, just like your pension and Social Security? How can you do that? There's a lot of different options and we need to discuss that.

Speaker 1:
We need to look at what is the best for you. Do you need that money to last just for you, or do you need to last beyond you for a spouse or whoever it might be? You can do that. You can set it up properly, but it takes planning. This is not something that you can just wing at the end. You need to plan ahead, look into the future. So if you have these questions about ensuring 100% that you're not going to run out of money in retirement, because that is the biggest fear for retirees. You may have seen those statistics. The biggest fear among retirees is running out of money. Number two, fear is debt. We've talked about this before. So people are more afraid of living without money than they are of dying. That makes sense. You when you're alive, you want to ensure that you have all your bills paid, all the money that you need to, to take care of your basic living expenses and then some. And anything left over is bonus money. It's icing on the cake. That's the travel fund. That's the new car fund. That's the spoil the grandkids fund, whatever. But you want to make sure that your daily living expenses, your monthly living expenses, everything is taken care of with the guaranteed lifetime income that you are going to receive. And you can set that up, you can be 100% sure that that's going to happen if you plan properly.

Speaker 1:
So talk to us, go to our website again, federal retirement show.com. Fill out the form. Will my pension keep up with inflation? Now this is pension and TSP and all of that stuff too. But will my pension will my lifetime income keep up with inflation is how I want to rephrase this question. So that's the question that we got. Will my pension keep up with inflation. But we can rephrase it. Will my lifetime retirement income keep up with inflation? Simple answer your pension. Yes. Your pension will get cost of living adjustments. Your Social Security should get cost of living adjustments as well. And you can set up any supplemental income, whether it's from TSP or other sources to keep up with inflation to to increase, you can do one of two things. A lot of times you can keep it at level income, which will give you higher income today and not grow in the future. It'll be level, or you can start with a lesser income today, maybe depending on how you set it up, and you can have it increase over time to help keep up with inflation. Now that depends on preference. Do you want a level income from your outside sources like TSP and others, or do you want that income to increase? We can run both scenarios and see which one works out best for you and which one is most and more desirable.

Speaker 1:
So those were our questions today when we were talking about, you know, the FAQs, right? Federal employee questions today was part two. I highly recommend if you've made it all the way through here and you have not yet seen part one, go back and view part one of our FAQs, Federal Employee Questions, and look out for our next installment when when that episode comes out. But we're going to continue to highlight what are the most common questions that federal employees just like you are asking? As I said earlier, if you do not see your question getting asked, then you need to reach out to us. Ask the question. We want to get you that answer as well as others, so that you have all the information necessary to make the right decisions as you go through your working career and beyond. We talked about this all the time. Federal retirement planning is not something that you can do last minute. You have to take advantage of all the time that you have. So it's never too early. It's never too late to start planning. So I hope you enjoyed part two of FAQs Federal Employee Questions. Be sure to look out for part three and beyond. Again, my name is Val Majewski with American Benefits Exchange, and you've been watching the Federal Retirement Show, and I look forward to seeing you on a future episode.

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