Avoid These Irreversible Mistakes with your Retirement Plan.mp3: Audio automatically transcribed by Sonix

Avoid These Irreversible Mistakes with your Retirement Plan.mp3: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Producer:
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Val Majewski:
They will come back to the Federal Retirement Show. I'm your host, Val Majewski, vice president here at American Benefits Exchange and really have enjoyed you joining us along our journey, talking about federal employee benefits, retirement information, the do's, the don'ts, the ins, the outs. Today we are going to be talking about mistakes. Now, we've talked at the beginning about the top ten mistakes that, in my opinion, federal employees make and how to avoid them. And we've gone over in more detail some of those specifics. But today we're talking about a different type of mistake. We're going to talk about an irreversible mistake. We're going to talk about a way that you can drastically affect your benefits, your pension, your retirement in a permanent way that you cannot change. So you want to make sure you pay attention. You want to make sure that you look at each of these and make sure that you're not making a single one of them. Why? Because it is permanent. It can drastically affect the course that you take going forward. So as we dive in, take some notes, if you've got questions, comments, what have you reached out to us? We'd be happy to dive deeper into your particular situation and make sure we help you avoid making these irreversible mistakes. So let's dive right in. First of all, what is an irreversible mistake? Well, it's something that's not able to be overturned or repealed or changed or modified.

Val Majewski:
It is a decision you make that is set in stone. It's something that you decided upon. You made a choice. And for the most part, and I say basically 100% of all of these, you cannot change the outcome once you've decided that. So you need to be educated, trained, informed as much as possible about each one of these things. So. You can avoid catastrophe when it comes to benefits, retirement, what have you. Now, it could have a drastic effect. These decisions on your retirement income, on your Social Security, on your TSP, on your spousal benefit, etc., etc., etc.. And we're going to dive into several of these. By all means. The ones that I'm going to list today is are not all of the irreversible mistakes you can possibly make over the course of your career as a federal employee and as you move into retirement. But these are some of the top ones that I've seen federal employees make that have, again, a drastic effect on their future. Dive in with us. Follow along. But we're going to start with things that have to do with your retirement and the first one. And you may or may not have heard of this, but it's called the Mirror Plus ten provision when it comes to retirement. Now, what is this? Well, this is only available to FERS employees, and this is a way that a FERS employee can retire voluntarily early and receive some sort of immediate pension.

Val Majewski:
Now, this is one of those mistakes that people don't know all the information about before they make the decision. They think, Oh, I'm eligible to retire early. Why not just leave early? If I'm eligible to do so, why not just get out while I can collect an immediate pension? I'm not going to be penalized in any way, shape or form what have you, and there's going to be some misinformation in there as to what's going to happen. And you need to be properly educated as to all the ramifications by using this provision. So let's see, how does this work? What does Myra plus ten stand for? As I said, it is for FERS employees that have hit their minimum retirement age, Myra, which is anywhere between age 55 and 57, depending upon your birth year. But you do not yet have the necessary 30 years of service to retire with full benefits, but you do have at least ten years. So minimum retirement age plus ten years of service, you can voluntarily retire early. What they may not emphasize or what you may not realize is that while you can retire immediately, immediate pension, voluntarily, early, using this provision, there is a permanent permanent 5% reduction for every year prior to your full eligibility. Well, I'll use an example to describe how this would work. So let's say you're 57 years old, that's your minimum retirement age and you have that ten years of service.

Val Majewski:
You can voluntarily retire early. Now, when would you be eligible for full retirement under those circumstances? So if you're a 57 with ten years of service, just doing some simple math, your first eligibility for full retirement would be age 62. That's where you satisfy that age 62 with at least five years of service requirement. In this example, FERS or OPM would calculate your pension as if you retired at age 57 with full benefits. So they would calculate and go through the calculation of your high three and years of service. Times the factor and get to a number. Now that number is going to be pretty low because you've only got ten years of service. Then it will be reduced 5% for every year prior to your full eligibility, which we just said was age 62. So in this case, it is a permanent 25% reduction of that calculation. So before you make that choice to voluntarily retire early, make sure you understand how that's going to affect your income. Not only is ten years of service for the calculation going to be small compared to your high three, but that will even get reduced further as a result of this provision. And it is permanent. It doesn't bump back up once you hit age 62 and hit your full eligibility. It is a permanent reduction. So the Mara plus ten provision, not something we normally recommend because of this permanent reduction.

Val Majewski:
I mean, if you hit the lottery or you have your dream job set up afterward, maybe it's going to be available for you in something that is right for you in those circumstances. But generally speaking, not something we normally recommend when it comes to retirement. Also, irreversible mistake number two is retiring on the wrong day. Now, what do I mean by this? You can retire at any time. Once you're eligible, you can set your retirement date for any day once you're eligible. Heck, if you wanted to leave tomorrow and you haven't even started filling out your paperwork, you can write, you can leave tomorrow if you want to. But knowing which day to retire and how it affects the timing or coordination of your effective retirement date and the payment of your retirement annuity is huge. So what are the best days before we go into a bad scenario? What are the best days to retire? Well, it depends on which system you're in. Now, if you're a CSRs employee, the best days to retire are either the first, second or third day of the month. Why is that? Because if you retire on the first, second or third day of the month, your effective retirement date is the following day. Then your effective retirement date is the first of the month after that, and your first payment check would be due the first of the month following that.

Val Majewski:
So let's look at an example. Let's say as of the date of this recording, this is April of 2022. Let's say you retired on April 3rd. Of 2022, your effective retirement date would actually be sorry, would actually be April 4th. And your first paycheck would be coming to you on May 1st. So April 4th would be your effective retirement date. First paycheck due on May 1st, you'd have at least a four week period about where you would go without a paycheck. Now, let's look at the worst case example in this. Let's say you retired on April 5th. All right. It wasn't or April 4th. It wasn't the first, second or third of the month. How would that work? So you retire on April 4th. Your effective retirement date would actually be May 1st, and your first paycheck then would be due on June 1st. So you go almost two months without a paycheck in retirement. That can have a drastic effect on paying bills and other things. So as a CSRs employee, I'd recommend the third day of the month. That way it minimizes the amount of time you go without a paycheck. Now, what about FERS employees? Well, the best day to retire is a FIRS employee is the last day of the month. Why is that? Because your effective retirement date is the first of the following month, no matter what day of the month that you retired on.

Val Majewski:
And then your first paycheck is due the first of the month after that. So if we were looking at an example of here, if I retired the last day of April because again in April of 2022, if I retired the last day of April, my effective retirement date would be May 1st and my first paycheck would be due June 1st. So I'd go at least a month without a paycheck. But if I retired on any day but the last day, my effective retirement date is still May 1st and my first paycheck is still due June 1st. So we want to minimize the amount of time that you go without a paycheck. Now, once you decide you're leaving and you're out, that's irreversible. You can't say, Oh, by the way, I'm going to keep working because I want to make some money and I do want to minimize those days. Let's look at a bad example so you can see here on the screen just using this year, if I had retired, say, my birthday as a federal employee, I was like, let me leave when I'm first eligible to retire, because once I hit my 60th birthday, I'm eligible to retire. So my birthday's on January 10th. I want to leave on January 10th. Well, in this bad example, instead of waiting till the end of the month, if I said January 10th, I'm out of here.

Val Majewski:
Well, my effective retirement date isn't until February 1st, the first of the following month. My first paycheck is then do the first of the month after that, which is March 1st. So I'm going to go nearly two months without a paycheck. Because I decided to retire my birthday instead of leaving at the end of the month. So just understand how that affects when your actual retirement date is and when your first payment is going to be due. This is extremely important. So knowing what day to retire, what day of the month is best for you depending upon your retirement system, is going to impact when you start getting money and how much time you go without getting a paycheck. Okay. Onto reversible or irreversible? Sorry. Mistake number three. And it has to do with Social Security and your timing of Social Security. Now, there's a lot of things that can affect your Social Security payment, the income that you put into Social Security, how much you earn over time, the amount of income you earn after retirement because there's an income based reduction of your Social Security benefits. But a big a big factor when it comes to your Social Security payment. Ultimately, how much you're going to get is the age at which you start taking Social Security. Now, the ages are between age 62 and 75, when you can take Social Security.

Val Majewski:
It may be very enticing to take Social Security as soon as you're eligible, but you have to understand that taking it earlier than your normal or full Social Security retirement age is going to leave you with a reduced benefit. A permanent reduced benefit. What do I mean by that? Well, let's say that your normal Social Security retirement age, which is anywhere between age 65 and 67, depending upon your birth year, let's say your normal Social Security retirement age was age 66 and you decided to take Social Security at age 62 when you were first eligible. Well, you're going to see a reduction of approximately six and a quarter percent for every year prior to age 66 that you took that benefit. So in this example, taking it right away at age 62, your Social Security benefits would be permanently reduced 25%. Now, just like that, Myra, plus ten provision after that reduction is permanent, it doesn't bump back up once you hit your full or normal Social Security retirement age. This is a permanent reduction. So if you're looking at ways to maximize or optimize your Social Security benefits and the amount that you're going to receive over time, it is important to understand how or Social Security benefits are affected depending upon when you take those benefits. Right. So consulting with your local expert, consulting with your federal expert, federal benefits expert, you can go through a Social Security maximization strategy and see what is right for you, your family, your situation to ensure that you're not shortchanging yourself or permanently reducing your Social Security benefits unnecessarily.

Val Majewski:
Another irreversible mistake that we talk about when it comes to pension. Is choosing the wrong survivor benefit option. SBP, So the Survivor benefit plan options are available for both CSRs and FERS employees, but you need to understand how this option or how this selection that you make at the time of retirement, because this is something that you fill out with your retirement paperwork, how this selection will affect your pension no matter what survivor benefit plan selection you choose, it will reduce your benefit. It will reduce your pension. Unless you decide to not take a survivor benefit plan, then you get a maxed out pension, full pension. But if you choose to leave a benefit, a portion of your pension to your spouse, if you were to pass away first in retirement, then that's going to cost you something. Your pension is going to be reduced as a result. How much it's reduced, again, depends upon which system you're in. Let's use FERS for an example. As a first employee, you have two options of how much you can leave your spouse if you die first in retirement, you can leave the maximum, which is 50% to your spouse, and that's going to cost you 10% of your retirement check. Or you can leave the minimum, which is 25% to your spouse, and that's going to cost you 5% of your check.

Val Majewski:
Again, this is a permanent reduction in your pension, either 5% or 10%, depending upon which you choose. Now, how does the survivor benefit plan work? Well, in my opinion, and this is my opinion, you can do your own research and come to your own conclusion. The Survivor benefit plan is a bad piece of life insurance. What do I mean by that? Well, let's look at that pension. Right. And that pension reduction, that's a cost to you. It's not going to show up in your pension check as an itemized deduction. It is a reduced or a reduction to your pension, but it's a cost. Just like life insurance, there's a premium for it. There's a payment you have to make to keep your life insurance plan alive. Now, how does life insurance work? You die. Your beneficiary, your spouse, your kids, whoever you named gets a lump sum, tax free death benefit. Lump sum tax free death benefit. How does the survivor benefit plan work? You die your spouse, and this is, for the most part, 99.99% of the time is a spouse only benefit. Your spouse will get a taxable monthly benefit. No lump sum. It's not tax free. And you have you've paid this cost the entire time. There's no cash value built up. There's no extra value you get for putting all that money aside.

Val Majewski:
It's just a permanent reduction in your pension plan when it comes to the survivor benefit plan being a bad piece of life insurance. The reason I don't like it, there's limited options in both retirement and death. I'm going to explain this because it is basically a permanent or a set in stone election. There's a very small window that you have after retiring where you can make a modification to your survivor benefit plan election. But let's look at a scenario where, hey, you chose the the maximum survivor benefit. The 50% option is a former employee. Your pension is getting reduced by 10%. And five years down the road, both you and your spouse say, hey, this 10% coming out of your paycheck, it's hurting us. We don't need that survivor benefit anymore. Let's cancel the survivor benefit and get your full pension back. You cannot do that. You can't make that change. It's set in stone. It's permanent. It's an irreversible mistake if you chose the wrong selection. Now, if you understand how the survivor benefit works, you may think also that it's a bad piece of life insurance, but they make it attractive. The government does because they attach the federal employee health benefits to it. Now, what does that mean? Well, if your spouse is 100% dependent upon your health insurance and you do not elect the survivor benefit and you die first in retirement while your health insurance dies with you, your spouse cannot continue your health benefits.

Val Majewski:
So the other side of it, the irreversible mistake, could be that if your spouse needs 100%, needs your health benefits in retirement and you die first, you need to make sure you have at least a minimum survivor benefit selected so they can continue the health benefits. So it works both ways. Generally speaking, if you don't need the health benefits, I think it's a bad piece of life insurance. I think you can get a better deal outside the government. That adds more value, that is flexible. You can make modifications, changes along the way. It's not an irreversible mistake like choosing the wrong survivor benefit plan can be so onto the next. And you've heard us talk about this before. When it comes to irreversible mistakes, because I think this is the second worst thing you can do with your TSP, it's selecting the life annuity. Now, why is this an irreversible mistake? Because if you elect the lifetime income, the life annuity within TSP, you cannot change the selection. Once you've chosen to start the life annuity, you can't make any modifications, changes to that selection. It is set in stone, it is permanent. So understand all the causes and effects of this selection. Now what would cause you to choose it? If you look at your annual TSP statement, you might see a big, bold number on the front page of that statement.

Val Majewski:
That is TSP telling me that if you elect the maximum payment with the MetLife annuity, the lifetime income within TSP. This is what they're going to pay you for the rest of your life each month. It looks very attractive, or it could, depending upon your need of income in retirement. But they don't go over all the details of what that choice means and how it affects the rest of your TSP money. Let's say you have a good amount of money. You have 500,000 in your TSP and you decide to take a maximum lifetime income with the MetLife annuity within TSP. How does that decision affect the 500,000? Well, if you make it, no matter what income choice you choose, you have to cash in your balance. You have to give up all ownership, control, liquidity, access to your $500,000, your bag of money. You give that to TSB, they give it to MetLife and they'll pay you a check for the rest of your life. But you no longer have any rights, access, ownership or control of that bag of money you gave them. You made a deal. You traded in your money for a check for the rest of your life. Now that check will come whether you live two years or 200 years beyond retirement, obviously an exaggeration, but that check will continue to come for the rest of your life. But you've given up again, all ownership control to that.

Val Majewski:
Now, you can't go down the road and say, you know what, I no longer need this income. Give me back whatever money is left over in my account. I want to I want to make a change of my choice. It is permanent. It's set in stone. No modifications, no changes, no alterations. And along the way, you can't say, well, I gave them 500,000. I've only gotten 200,000 out of it so far. I need to dip into that extra 300,000 that's left. You have no rights to it. You have no ownership control, there's no liquidity. You can't go in and pull money from it. Also that max payment that's advertised on your annual statement of TSP. That big, bold number that you see, that is the maximum single lifetime payment. If you die tomorrow or you're died 20 years from now, it is for your life only. There are no benefits, no monies paid to anybody else. If technically you gave them 500,000 and you only collected 200,000 before you passed away, the rest of the money is kept. It's not giving anybody if you chose the maximum payment. So understand what would cause you to choose that because it looks attractive. But all the effects on the back end you may or may not be aware of, or the effects of access, ownership and control of your money while you're alive. By making that choice, it is set in stone.

Val Majewski:
No modifications, no changes. So I said the second worst thing you can do with your TSB outside of taking all the money out and put it into your checking or savings account, is choosing that MetLife annuity because you lose access ownership control and you cannot make any changes once you make that election. Lastly, when we talk about benefits and retirement and irreversible mistakes that you can make as a federal employee. The last one I want to talk about is not speaking with an expert. If you don't speak with somebody who. Dives into federal employee benefits and retirement information studies. It is an expert in it. Has experience in it. Is able to speak that language. Where are you getting your information from and are they trustworthy sources? Are you having water cooler conversations with fellow colleagues that are giving you their opinions of how you should handle your benefits or retirement? Are you talking to financial professionals out there that have no idea about the four systems of TSP, supplemental retirement options or the first supplement or survivor benefit plans? They may be experts in their field, but are they experts in federal employee benefits and retirement information? Because I said some of these choices that maybe people in the private sector or just the general public may make are not necessarily the best things that are for a federal employee. Your situations are different.

Val Majewski:
So are you talking to somebody who has experience, expertise in federal employee benefits and retirement information? Can they provide you with estimates of your pension and retirement? Can they provide you accurate and honest information regarding the various parts of your situation? I'd ask them, you know, if you're if you want to test them or quiz them, one question you can ask is, you know what? All is counted in my high three. If they if they can't accurately answer that question of all the the parts of your pay that are included in your high three, if they don't know that that bonuses and overtime are not included or that leave, sick leave and annual leave are not included in there, and it basically just includes your base pay plus locality, your shift work pay if you're a lot of that does count towards your high three, but if they don't know what's in your high three, what else don't they know? What else are they not familiar with when it comes to federal employee benefits and retirement information? So irreversible mistake that you can make is getting guidance and advice and information from somebody along the course of your working career. That is not an expert in that area. Right. I'm not a tax professional. I'm not a CPA. I'm not going to give somebody tax advice because that's out of my lane. But I am an expert, subject matter expert in federal employee benefits and retirement information.

Val Majewski:
I won't claim to know everything, everything possible. Right. But I do know a whole lot. So who are you getting your information from? And are they a credible source? Are they an expert in federal benefits? Quiz them. Ask them about their expertise. Ask them about certain specifics and see if they speak that language. Because it would be beneficial for you in the long run to make sure that you're talking to somebody who's knowledgeable and has experience. And again, I'm going to use the word expert, but is an expert in that area. So I hope you enjoyed the irreversible mistakes that I've seen federal employees make, but hopefully you now have a greater understanding of what those are and how to avoid them going forward. Now, if you have any questions, comments, you want to review your situation and make sure you're not currently or going to in the future, make one of these mistakes. Reach out to us, visit us on our website, Federal Retirement Show dot com. Leave a comment. Share this information with your colleagues. Subscribe. Wherever you listen to podcasts, check out our future episodes and previous episodes on the website and we really, really look forward to speaking with you in the near future to go over your situation again. My name is Val Majewski, host of the Federal Retirement Show, and I look forward to seeing you on a future episode.

Producer:
And any examples used are for illustrative purposes only, and do not take into account your particular investment objectives, financial situation or needs, and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy. Fixed annuities, including multi year guaranteed rate annuities, are not designed for short term investments and may be subject to restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer.

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