Welcome to part two of a deep dive into federal employee retirement! In episode 118, Val addresses the most common misconceptions surrounding retirement benefits for federal workers. He also tackles the frequently asked questions and shed light on the complex details that can often be confusing or overlooked.
From understanding the intricacies of Bonus and Overtime Pay included in High-3, how to change your survivor benefits election at any point in retirement, when you should take Social Security, and more!
Don’t miss this episode if you’re looking to secure your financial future as a federal employee. Make sure to subscribe to The Federal Retirement Show for more episodes and leave us a review!
Have questions about retirement planning or other financial topics? Connect with Val and the topic could be featured in future episodes! Don’t forget to leave a review and share this podcast with anyone looking to boost their financial knowledge.
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1.17.25: Audio automatically transcribed by Sonix
1.17.25: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.
Speaker1:
Welcome back to the Federal Retirement Show. I am your host, Val Majewski with American Benefits Exchange. As always, I really appreciate you taking the time out of your schedule to join us to view our content, because it is for you, the federal employee that's looking for information regarding your benefits, your retirement situation, making sure you have all the variables so you can make the best decisions both now and as you progress throughout your working career. Um, we are into 2025. We're halfway through the first month, basically, and we talked about updates on our previous show, uh, updates in this new year. And I want to go back to a topic we did last year where we addressed some misconceptions and some of the things that I think federal employees need to get clear. And then we're gonna also talk about a few frequently asked questions, some FAQs. Because what? I'm talking to folks like you, either at an event that we're hosting or a benefits and retirement training, or whether it's a one on one session. There are a lot of things that I realize that either you guys get incorrect because it's not your fault, you just get wrong information sent your way, or you know somebody who's not an expert gives you their opinion or gives information, and you take it as fact. And there are a lot of questions that you ask that I believe, that can assist other federal employees in similar situations.
Speaker1:
So we're certainly not going to cover everything just with the time that we have. And there's a whole lot of questions that I get asked again on a daily basis, weekly basis, monthly basis. We could just fill up shows with questions that we get asked. But, um, today I want to talk about new misconceptions, misconceptions part two and and some additional frequently asked questions. So let's dive in and see which misconceptions and FAQs you all are asking About now when it comes to a misconception, right? Misconception. Just want to define this again of what we're talking about and why we're doing it like this. But a misconception, views or opinions that are incorrect based on faulty thinking or understanding may not be your fault, right? You may have heard something and I get this all the time in in other aspects of life, but when it comes to misconceptions, it might just be something that you heard that you took as fact or somebody presented as fact and not something that was fact checked, not something that was looked up. But you just held on to that, thinking that it was true. And it's not again, not your fault. You were just provided inaccurate information. It creates this false sense of security sometimes. And we'll talk about a couple of them. But it if you're basing decisions on this incorrect information, yeah, it can create this false sense of security or snowball to some other problems.
Speaker1:
It causes confusion or discouragement because you don't know what's true. You don't know how to make dollars and cents of all of this because you don't know who to trust. And that's where hopefully throughout our episodes, hopefully throughout this content that you've been watching, you can understand that this is what we do for a living. This is our area of expertise. As I mentioned, we're not going to claim to know every single thing. I don't think anybody should, but we know a whole lot. And if we don't know the answer, we're going to do the digging. We're going to do the work for it to make sure we get to the bottom of it and give you information, because things change. Also, it's not just you hear it one time and it's done. There are things that evolve that have changed. Legislation changes. There's different aspects of your benefits, your retirement situation that will change over time. So you want to stay up to date, up to speed on everything that is going on. And it could lead to improper or a lack of preparation. So make sure I say that a lot. But you want to make sure and sure that you are going in the right direction with the right information. You're basing your decisions on the right facts, the right. It's not these things that you took as fact. These are the actual facts, the truth, the whole truth. Nothing but the truth.
Speaker1:
Right. You want to just have all the information so you can make the right choices. So we're going to dive in and we're going to get into some of these things here. Uh, when it comes to the misconceptions that I've heard. First one, now you're going to see a little bit different tone today. Maybe you have you have other questions. We'll get to that here in a little bit. But um, misconception bonuses and overtime pay are included in my high three. Bonuses and overtime pay are included in my high three. This is what I hear now. Is this true or false? I want you to think about this for a little bit. Bonuses and overtime pay are included in my high three. I'm going to say mostly false, mostly false, and I'll explain why. For most federal employees, bonuses and overtime pay are not included in your high three when it comes to your pension calculation. Okay. Just really, what's part of your high three is your base salary locality pay? Those are the main things that are within your high three. Now for those that are within special groups, right. If you're a federal law enforcement, for example, you do get bonuses or a certain type of overtime pay that is included in your high three. So this is for certain special groups. But the majority of you out there that are federal employees will not have your bonuses and overtime as part of your high three.
Speaker1:
It's really just going to be your base pay plus your locality that is part of your high three. But again, I will reiterate if you are part of some of these special groups and I'm just mentioning one as an example, federal law enforcement officers, your overtime or bonus pay if you will, is included in your high three. So but mostly also figure out what group do you belong to and to and understand what is part of your high three? If you need further clarification, reach out to us. Schedule some time. We can review the situation. Misconception number two I can change my survivor benefits election at any point in retirement. I can change my survivor benefits election at any point in retirement. Can you do this? Is this something? So I've had federal employees come to me and they're saying I'm going to choose the survivor benefits option. I'm going to leave the maximum as a first employee, 50%. And if we don't need it down the road, I'm going to get rid of it. But I want to make sure that we have it because they heard that you can decrease, but you just can't increase. Okay. Can I do that? Can I change my survivor benefits election at any point in retirement? I'm going to say again, this is mostly false. Mostly false. So if you thought that you could for any reason that is false. However, I will say if you did choose a survivor benefits choice, whether it's, let's say for Fers employees, the 25 or the 50% option and your spouse predeceases you, this is the only time that you're able to change that from.
Speaker1:
Yes, I have it to getting rid of it. If your spouse dies first, you can get rid of the survivor benefits choice that you made. Okay. Now, if you did not choose a survivor benefit and let's say you were a single at the time of retirement and you got married in retirement, that's another life changing event. You can then add the survivor benefit to your now new spouse. But let's just say in a traditional setting, you are a first employee for this example and you chose the 50% option. And if you know anything about the survivor benefits when you choose that there is a cost involved with the survivor benefits election. What's the reduction amount for 50%? It is a 10% reduction of your pension. Now, if you go five years down the road into retirement, and both you and your spouse are sitting there saying, wow, you know, this 10% out of the paycheck or out of the pension is killing us. We want to get rid of this survivor benefit and regain that 10%. We don't need this anymore. Let's get rid of it. Unfortunately, you will not be able to. It's essentially set in stone at that point. So make sure that you choose the right survivor benefit election, because you are not going to just willy nilly be able to make changes to election.
Speaker1:
Once you selected. It makes sense. That is mostly false. There are a couple life changing events where you can make a change to your survivor benefit election, but mostly a false statement. I cannot just for any reason, make a change to my survivor benefit at any time in retirement. Another misconception, and I get that this is phrased in a lot of different ways. So just you can take it the way it's phrased here. I just kind of tried to sum it up in what I hear from federal employees. All I need to do is work 30 years and I'm set. The government will take care of me. People have heard. Now, you know, it was said years ago, get a job with the government. It's great. Government has great benefits. They've got a pension. Put your 30 years in your set. And I've heard this from a lot of federal employees and they said, I've heard. Look, all I have to do is work 30 years and I'm set. If I put in 30 years, I should be able to make the same money in retirement that I was making prior to retirement. That is a misconception. I don't know who taught that or where they heard it, or if it was an advertisement or somebody said it over coffee or at the water cooler.
Speaker1:
But all I need to do is work 30 years and I'm set. The government will take care of me. I put my time in, I retire, I leave, I'm going to be set for life. Is this true or false? I am going to say false. False. Especially nowadays with the first system. It's a three part plan. Three part plan. And you're going to get not only your pension, Social Security, but also your TSB is another income source in retirement. So in a traditional sense, it's a three part plan. You have three income sources. And that last one, you've heard me talk before. The TSB is your wild card, meaning you have to take control of this thing. You have to make sure that you are, uh, managing it yourself so that you're going to have enough money that TSB is going to give to you in retirement. So you can make up the difference, because I can tell you, your pension and Social Security are not going to get you back to even in retirement. Tsb is going to pick up the rest of the slack there. So you can't just work 30 years, do nothing and be set. And it's not just set for everybody. Now in the old system, it wasn't really 30 years. It was more like 42 years. You put in 42 years in the CSRS system. You might be set because you can get 80% of your high three in your pension.
Speaker1:
That's pretty darn close to your full retirement or full income in retirement. When it comes to pre versus post, but as a first employee of being a three part plan, there's a lot of choices involved. The amount of years you work is one when you take Social Security is two. There's a question about that here in a little bit. And then TSP being three. So it's not as simple as there's a certain time frame. You check the boxes I'm counting down the days. I put in 30 years I'm out. It's different for everybody depending on how well you prepare. And if you did not prepare well in Social Security with TSP and your Social Security strategy that you're willing to take, then you may not have as much money as you think you're going to have in retirement. And we have a scenario. There was a guest we had on one of our reps, Mr. Tim McCluskey. You can go back and view the episodes that he had. But he talked to a federal employee who had this misconception and thought, man, I'm going to put my time in. I'm good. And when they ran the numbers, the guys, well, how am I doing? It's like going to the doctor. How am I looking, doc? And and Tim, our rep said, hey, looks like if you want to want to hit the numbers you want to hit, you got to work another ten years and they got ten years.
Speaker1:
Oh my God, I thought I put in my time. I'm set. I'm good. This is a misconception. You got to prepare. And we had another rep. Her name was Miss Brandi Person. She came. And I love the saying that she had. She said you are preparing for retirement from day one from day one. So take advantage of all that. All that time, all those minutes, all those hours, all those days. Take advantage of all of it to make sure you are prepared or as prepared as possible for when you retire. Do not rely on the government to take care of that for you. You have to do some work during your time. Yes, putting in time is good, but you have to work during that. It's not just hit the number, hit 30 years and you're set. So from a misconception standpoint, those are our three misconceptions today that I've been hearing about. Um, we do have some frequently asked questions that I've been getting recently. And in talking to individuals just like you, doing benefits reviews and just answering questions, guiding people along the way, filling in the blanks of what of what they thought they knew. Confirming the things they did know. I get asked questions a lot, and this is a very simple one, but can have a very complicated answer, and you may have the same thing. It's when should I take Social Security? And a lot of reasons why I'm getting asked this and why I'm putting this out there.
Speaker1:
And my answer is simple. Sounds easy, but it depends. And why does it depend? I'll get into that in a second. But why am I getting asked the question? Because people are hearing that Social Security is in trouble. People are hearing, you can look at the news, you can look online. That Social Security could be exhausted in less than ten years. We're hearing that Social Security might pay out less benefits in the future. We don't know exactly what's going to happen. I know we rely on the government to fix a lot of things, and hopefully this system is there for us when we do retire in the way that we think it's going to be. But understand that when you should take Social Security is dependent upon you, your situation and when you need the money. So this all goes into your plan if Fers Firs. As a Firs employee, it's a three part plan. Pension, social Security and TSB when you retire should revolve around maximizing your social security strategy, in my opinion. Right. If you're going to retire at 62 or later, I believe most veteran employees are looking to take Social Security right away and not delay. So if that's the case, if you're in that boat, you're planning on taking Social Security as soon as you retire. You have to factor it in now of when you should take Social Security.
Speaker1:
So the question would be when should I take Social security should coincide with when should I retire, right. That's part of the same question, because most federal employees I talked to are not retiring and then delaying Social Security. Another thing that people look at and, you know, myself included, you do not have an account at Social Security, meaning all your contributions are not just sitting there in a account, you know, labeled John Doe or, you know, Mr. or Mrs. Federal Employee, and you can take a lump sum from it, and that money is just invested and it's growing like your TSB That money's in there. Yes. Meaning it's designed to make a payout for you. You're going to be a beneficiary. You're filing a claim with Social Security and getting this this benefit from it. You don't have an account, though, that's sitting there with all the money that you've put in. That's that's earned interest and things like that. So people look at it. Well, I want to start collecting this and I'll let my TSP grow instead of the other way around. Instead of taking TSP and waiting on Social Security. There's a lot of different schools of thought of when you should take it. But generally what I see is that federal employees are taking Social Security right when they retire. So that goes back to the question of when should you retire? Because if you prepare properly and you do all the estimates, then Social Security is a part of that decision.
Speaker1:
And when you do retire, it is the right time to take Social Security. That's just a general thing that I see. But if you have specific questions about your situation, reach out to us. We can cover it in further detail. Now, piggybacking on Social Security. What if Social Security goes away or provides a lesser amount? I just mentioned that this is kind of a follow up question, but if you read the Social Security Trustees report from 2023, we talked about it on an episode here. I'm looking forward to the new one that comes out. They talk about the future of Social Security. So it is real. It is a real concern. It's in their report. But what can I do to prepare for that possibility of Social Security paying less or going away entirely? Now, this is a simple answer, but I'm going to combine it with a longer explanation. I say over prepare. Now what does that mean? What if we prepared for retirement as if Social Security was not going to be there? We just took it off the table, scratched it off. So now you've got two things. You've got your pension and you've got TSP. Let's eliminate Social Security for a second. Hypothetically, how would you prepare for retirement if that's the case? Run all the numbers. Let's go through it and see if it makes sense for you to still retire at a certain age.
Speaker1:
If you're like, well, I can't, I need I'm going to need that Social Security income again. It's gone. We eliminated it. So how can we fill in the gap there? We have to set aside additional money for retirement and over prepare for that. Well, let's say we prepare as if it's not going to be there. So that way we're not over preparing at this point in this scenario, we have to set aside additional money, whether it's in TSP or another account or some other place where you're putting retirement savings. Let that build over time, and hopefully that can fill the gap of what Social Security was supposed to pay you. And if you set it up properly from day one, it can be in a place where it would pay you a lifetime income, just like Social Security would, right? You can even set it up where when you take that income, it can provide benefit to your spouse, similar to what Social Security can provide. Then when you do retire, you know that you've prepared for Social Security to not be there at all. And if it is there in the full capacity, great, you've over prepared. You're going to have way too much money. But if for some reason Social Security does pay a lesser amount or it's there in a diminished capacity. Then you're glad. Very happy that you overprepared.
Speaker1:
Now, look, I certainly don't want you to live in the poorhouse today just to prepare for tomorrow. Meaning you don't want to be, you know, eating on scraps and, you know, saltine crackers, peanut butter and jelly sandwiches. I mentioned this before, but not that there's anything wrong with that, but I just don't want you to be forced to live on it just to prepare for your future. But anything additional that you can set aside. Not a bad idea to over prepare. And again, if in the end, Social Security is there at its full capacity and you have this additional money that you set aside for retirement, not such a bad thing to have too much money in retirement. We've talked about this before, but this has been a concern. I've had a lot of federal employees asking me about the future of Social Security, and unfortunately, I don't work for the agency. I'm not in the in the meetings to know what the future looks like for real. I hope that they fix it and it's there again in the full capacity that it's supposed to be. But they're telling you in their reports that it may not be. So. It is important to not take this time lightly, and any additional money you can set aside for your future to provide more income for you in retirement may not be a bad thing. I'm. I'm not a guy that leaves things a chance.
Speaker1:
I love to prepare. I like taking matters into my own hands when possible, when necessary, and to doing something about it. Because you can affect change on your situation. You're not relying on a different system or a different government or rules to change. That can happen with or without your say you take control of this. So awesome. Okay. Next question. What do we got? What are your feelings? Meaning my feelings. I get asked this when I do benefits reviews. What are your feelings on Roth accounts versus traditional accounts? Now what you mean by this or what people mean by this when they ask me this question or ask us this question is when do I want to pay taxes? What I like to pay taxes? Or do you want to pay taxes now or later? Because most people will know, or most people realize that a Roth account is an account that will pay out a tax free benefit when you start withdrawing money. So within your TSP, you know you have both a Roth account and a traditional account. We've talked about this on this show. If you are not familiar, I highly suggest you go watch our episodes where we've discussed TSP. But when it comes to Roth versus traditional accounts, it really does depend on when you want to pay taxes now or later. I'll give you an idea. So in a traditional account, and this is where the government matching money goes, this is your default option.
Speaker1:
Your money is going into the traditional account. So if you defer money and put it into TSP, understand that you do not pay tax on that today. If it's in the traditional account you get a tax deduction for that today. So your taxable income is reduced by the amount that you contribute to TSP. That money goes in plus the matching money. It's all in the traditional bucket. It earns interest. It grows. When you withdraw money out in the future, you pay tax on every single dollar. Your contributions, the government contributions and the interest that you earned. But you got a tax deduction on your contributions along the way. The second option is if you do the Roth version of the Roth bucket, you pay tax on those dollars today, the money goes in, it earns interest. It grows. You've already prepaid the tax on the money that you put in. It grows with interest over time, no matter how big or small it gets, all the money you withdraw in the future comes out tax free. Would you rather put money or pay taxes now or later? Another way to put it when we talk about Roth, would you rather pay tax on the seeds or the harvest? In the first example, using traditional you're not paying tax on the seeds, the money that's going in as it grows, you're paying tax on the harvest down the road.
Speaker1:
But in the Roth side, you're paying tax on the initial contributions, the seeds. And no matter how big it grows, you're going to be have money tax free in the future. For me personally, I'm going to switch gears. So that's just a general overview. And it really depends again on when you want to pay tax now or later. For me personally, I'm going to switch to a personal opinion. This is not a blanket recommendation. This is not me telling you what you need to do. I personally enjoy having more tax free dollars in the future. I most of my personal stuff now. I'm not a government employee. I'm not going to get your pension. Um, and I'm not participating in your TSP, but in my personal retirement savings, I am looking at more tax free dollars. Why? Because you look at that question. What do you want to pay tax now or later? Now we know what the tax brackets are. Now we can prepay Uncle Sam. Now we can prepay our tax liability. And who knows where taxes are going to go in the future. I'm not subject to any changes in a negative way. Right. If taxes go down all right I'm still not paying tax on all the earnings that I had. If taxes go up then great I prepay tax at a lower tax rate, and even all my earnings now are going to be tax free. So personally I like tax free accounts.
Speaker1:
That's a that's a decision for you to make. But the question comes back to when do you want to pay tax now or later. Last question for today. And I get this. This was somebody that comes from a question of person that I talked to actually before they got hired. This was an ideal scenario. Loved it. This was a federal employee. We talked we did a benefits review for them and a retirement analysis even before they got hired. You know, about a month before they got hired. How were we able to do this? Well, they knew what their salary was going to be. They knew all the selections that they made when it came to the benefits, you know, Fegli, etc. TSP all of the things. And we're able to run an analysis on the front end. And this is the best case scenario for you all. The earlier you can learn this the better. But the question that this federal employee asked me was, I just want to make sure that I'm doing the right things, that I made the right choices, that choices that I'm going to be on the right track because I want to retire as soon as I possibly can, and starting from the beginning and maximizing all that time. As I said, you're preparing for retirement from day one. This person has the ability to take control of that and, uh, correctly prepare or even over prepare for retirement.
Speaker1:
Right? Over prepare for all life's contingencies and other things, making sure it's it's set, but then not only from the front end, how do you ensure you're on the right track going forward? I recommend even for this person who got all the information before they even took their first day as a federal employee and had their first day get a checkup every year or two, every year or two, in the same way you go to the doctor. I use this analogy. You get a physical every year, you get your blood work drawn, you get your tests done, whatever it is on an annual basis. Do that with your retirement and your benefit situation. Dynamics may have changed within the family. Financial situation may situation may have changed, needs have changed. Health might have changed, outlook might have changed, time frames, salary. All these things may have changed. And we can plug in the new variables, rerun the numbers, give you the new outlook and you can see if you're still on the right track. Great. And if you veered off the path a little bit, we can redirect you and get you back on. If you're on the straight and narrow and you're on the road to retiring based on your timeline and when you want to retire. Great. You got confirmation, but you don't want to assume, hey, I did this one time ten years ago and they told me I was good, so I haven't gone back.
Speaker1:
That's like getting a clean bill of health from your doctor and going back, you know, ten years later and be like, I did it ten years ago. I'm fine. They told me I was good to go. Just keep doing what you're doing. Things can change. And there might be some things seen and unseen that are detrimental to your your situation. So I say, and I recommend get a checkup done every year or every two years at Least and make sure that you're heading in the right direction. This will give you peace of mind. This will give you that confidence. You'll know that you don't have any of these misconceptions that we're talking about, and you can know with confidence that you're going to retire how you want, when you want, doing the things that you want to do, having the lifestyle you want to have when you do retire. Question for you all. Now, these are questions you've been asking me. Have a question for you all. What did we miss? Right? There are questions you have and I love hearing from you, either via email or on the phone or text or things like that, and just saying, hey, what about this? Or how about an episode showing this? Like, do you have questions that you have not yet seen answered on our show? With the over 100 episodes that we have, you have not seen this question.
Speaker1:
You have not seen this addressed. You have not come across an answer for this. I want to make sure I'm giving you the information that you need. So if you need something, let us provide it. Because if you need it, chances are there are other federal employees of the 2 million plus that are employed by the government that can also use it. So I'd love to hear from you, your feedback and everything. It'd be incredible to have a flood of questions come in so that we can talk about that on a future episode. I really appreciate your time. Thank you for taking it out of your busy schedule. Thank you for being a listener of the show. A follower of the show. Tell others, how do we get this information? How do we spread the word? You have to tell your colleagues if you enjoy it, if you listen to it in the car, when you're on the treadmill, when you're trying to go to sleep at night, jokingly, if you've enjoyed the content, share it with your colleagues. Share it with those that you work with because this is who it's for. Not just for you. It is for you, but not just for you. I want you to share with others who also need to listen to this and to hear this information. Again, my name is Val Majewski with American Benefits Exchange. Really appreciate you taking the time. And look forward to seeing you on a future episode.
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