What You Need to Know About Retirement: Back to the Basics
A few years ago I got an email that simply stated, “Chris, I love your newsletters. I have a question. I’m retiring tomorrow, what do I need to know?”
Tomorrow?
Really?
If you could speak to my wife, you would probably learn quickly that my default response is often biting sarcasm, not kind graciousness. What I wanted to write back was “What do you need to know? You need to know how to build a time machine so you can go back and fix yourself.”
What I actually wrote was, “Give me a call and we’ll discuss it.” So, maybe I’m making progress in my personal development, after all.
Anyway, this individual’s email does bring up a good point. Outside of attending a retirement seminar, or reading a LOT of material, there are not too many places you can go to get a quick overview on a FERS retirement. Dan Jamison’s FERSGUIDE is the best thing out there for sure. But even that can be a lot to study if you are just starting out.
I aim to fill that gap in this paper. For those of you just starting to think about retirement, hopefully this is a very useful place to start. For those of you that are experts and are already at a place where you are helping coworkers in your offices, perhaps this is a resource you can share to get them oriented quickly. From there, they can dig deeper into the individual topics.
I’ve got some good news for those of you who don’t appreciate my math-intensive diatribes. This one is non-nerd friendly. It’s not meant to be a deep dive into retirement—quite the opposite. It will give you a good overview of what you’re going to get for all those years of punching the clock, and you can research each topic more if you’d like, at your own pace. There is some math, but it’s so simple even a federal agent can do it.
So let’s get started.
When you retire, you get a pension for life.
Assuming you retire on an immediate retirement (there are different retirements you can read about HERE), you will start to get a monthly pension check. This is called an “annuity” in FERS speak, so don’t let that confuse you. (I find most people understand pension better than annuity.)
Just to be clear, salary is what they pay you to come to work. Annuity is what they pay you not to come to work.
Regardless of what you call it, you get this monthly check for the rest of your life. It gets adjusted upward for inflation over time as well. So it will get larger as you get older. For example, for 2021, FERS retirees are getting a 1.3% COLA increase. (When you’re working, your salary increases through raises. When you retire, your pension increases through COLAs-Cost of Living Adjustments).
The monthly amount you get is calculated based on 2 things: a) How much you earned while you were working, and b) How much time you had on. More specifically, you average your 3 highest working years (for most people that’s their final 3 years, but it doesn’t have to be). That’s the “High-3” you often hear people talking about.
Then the number of years you worked, the number of years of military time you bought back, and the number of years of sick time you have left when you retire are all thrown together and a percentage is calculated. That percentage is multiplied by your High-3 number to get your pension amount.
Example: Maybe 30 years plus sick time and military time gets you around 36 years total (36%). And your High-3 amount was $100,000, then your annual pension amount would be about $36,000 a year, or $3,000 a month. (If you were law enforcement, you’d get a significantly higher pension than this for the same amount of time so there are some differences in the jobs).
If you retire before age 62, you will get a bonus monthly amount.
Under FERS, if you retire before age 62, you get a supplemental monthly check. You do not get this for life; you get it until age 62. It is never adjusted for inflation, unlike the pension amount. This is a confusing subject for many, and you can read more about it HERE. The bottom line is you get some extra money every month.
If you retire after age 62, you will also get a bonus monthly amount.
You don’t get the Supplement, but you do get something else. For Regular FERS, you get credit for each year you work at 1%. Work 30 years and you get 30%. However, if you work until 62 and then retire, instead of the government paying you the bonus Supplement, they’ll pay you a 10% bonus on your percentage. In other words, instead of 1% a year, you would receive 1.1% a year. Using our same example above, work 30 years but retire at 62 and you will not get 30% towards your High-3, you would get 33% (30 X 1.1).
So, no Supplement, but a higher pension amount. This will be paid to you for life, and will be eligible to be adjusted for inflation.
Hmmm, so what’s better? Retire early and get the Supplement, or work until 62 and get the extra 10% credit?
Up to you. Understand that law enforcement and other special category FERS don’t have the option to go to 62. They are mandatorily retired at 56 or 57 years of age. So for them, it may be beneficial to retire as soon as possible and maximize those payments. They’ll never see the 1.1% rate anyway.
For the rest of you that may not be eligible to retire until say, 60, well, maybe 2 years of Supplement payments are not as much as a lifetime of higher pension payments if you’ll just wait a couple of more years before you retire? Just do the math and see.
When you retire, you get all of your remaining annual leave in one check.
If you have annual leave hours when you retire (and most people intentionally do), you will receive one single, lump-sum check for the value of those annual leave days. Depending on how much time you’ve saved up and how much you earn, the check could be $20,000 or more.
When you retire, you do NOT get a check for unused sick leave hours.
If you have sick leave hours when you retire, you do not get an actual check for those. However, unlike many years ago when they just vanished into thin air, you do get some type of credit for them. The balance remaining at retirement is converted into years, months, and days, and are added to your work time. They use this chart for the conversion.
Maybe you worked 30 years, and you have 1 year of sick leave built up. You wouldn’t get 30%, you’d get 31%. (30% for the working years, and 1% for the sick leave). They would add that unused sick time to give you more working time, and hence a higher percentage of your High-3.
This has the effect of you getting more money for the sick time, but over the remainder of your life, not all at once like the annual leave payout. Read more about this HERE.
Your spouse is eligible to continuing getting a portion of your pension when you kick the bucket.
Called the survivor benefit, you can have a deduction taken out of your pension amount each month, and then if you pass away before your spouse, they will continue to receive a portion of your annuity.
How much?
A 5% deduction in your monthly check means they will receive 25% of your annuity amount for the rest of their life. A 10% deduction in your monthly check means they will receive 50% of your monthly amount for the rest of their life. And obviously a 0% reduction means they get nothing. Your pension dies with you. Here’s how this would look in an example:
Jack retires and gets $3,000 a month in his FERS annuity. Jack elects a 10% reduction monthly so that if he kicks the bucket before his wife Diane, she will continue to get a check. By electing a 10% reduction, Jack now gets $2,700 a month ($3,000 - $300). When Jack dies, Diane now gets half of Jack’s monthly annuity check, or $1,500 ($3,000 x 50%).
Were Jack to take a 5% reduction, his monthly check would be $2,850. But then Diane would only get 25% of $3,000, ($750) once he shuffled off this mortal coil.
So, 5 will get you 25, 10 will get you 50.
Both the 5% and 10% reductions will allow the surviving spouse to continue with FEHB (our government healthcare). 0% reduction means not only does the annuity die with you, so does health insurance coverage, unless the spouse was a federal employee and qualifies on their own merit.
So, think twice or three times before selecting that 0%. Your spouse will probably REALLY want health insurance.
If your spouse passes away before you, they stop taking the survivor benefit out. You don’t get any of it back, but you don’t have to keep paying into it if there is no survivor.
Read more on this topic HERE.
When you retire, you get healthcare for life.
Assuming you meet certain rules, namely you had FEHB coverage for the last 5 years your worked, and you were covered when you left, you can carry your FEHB into retirement for you and your family. This is an incredible benefit that is underrated by most. The cost for a retiree is the same as the cost for an employee. That is frankly, a really good deal.
Open Seasons work the same for retirees as employees, so you can change your plan each Open Season just like you could when you were an employee. I get that question alot.
When you retire, you can take your other insurance with you, too.
You can keep FEGLI, Dental, Vision, Long Term Care, etc. FEGLI will require you to make some decisions when you fill out your retirement paperwork, so you should fully understand how the pricing works. Read more about it HERE. Spoiler alert: It’s super expensive!
When you retire, you can start using your Thrift Savings Plan (TSP) money.
There are a few caveats to this, and I’ll try not to get too far in the weeds. For most of you that retire, you will have satisfied the age requirement of retiring at 50 (for SCE) or 55 (for Regular FERS), meaning you can make withdrawals without paying the early 10% penalty that people in the real world younger than 59 1/2 have to pay.
If you have a Roth TSP, the age is still 59 1/2.
So, what can you do with your TSP money?
Lots of things. You can take a lump sum amount of say $20k, to take that long-awaited cruise. You can decide you’d rather take $2,000 a month from your TSP than get a job working for $2,000 a month so you can set up those payments. You can transfer some (or all) of your TSP into a private Individual Retirement Account (IRA), and go crazy trading stocks all day. You can use it to pay off your mortgage, give a bunch of money to your kids, or you could literally do nothing with the money, and let it sit there and grow. The options are pretty wide open. (You could even make a generous donation to the “Barfield Financial Motorcycle and Recreation Fund”—you know…for the children.)
There are some limits to how often you can withdraw money, and everything from your Traditional TSP will be taxed as ordinary income, so you’ll have to think about how that will affect your withdrawal. You would not want to take out $500,000 at one time, for example, and put yourself into the highest tax bracket, and pay a huge tax bill.
Do you need an investment advisor? No. You don’t NEED one. You may benefit from some planning, particularly in the area of taxes and estate planning if you want to pass money to your kids. But is it necessary to turn all of your TSP money over to an advisor to manage? Not only is it not necessary, I would argue against you doing that. But, hey, it’s your money.
Will I receive pressure from advisors I talk to about moving my money to them? Highly likely.
Can I continue to contribute to my TSP in retirement? No
Can I transfer other IRA’s or 401k’s to my TSP in retirement? Yes, if they meet the TSP’s requirement to accept them.
When you retire, the timeline should look something like this.
This is a generalization, granted, so don’t cover me up in hate mail! Some people will have issues that cause their individual timeline to be much longer, but this is a good representation from retirees I have actually worked with, and data I personally compiled. Your experience may vary.
Day 0 Retire. Let’s use December 31st for sake of this example
Depending on when the pay period ended, you should receive your last paycheck approximately 1-2 weeks after retirement (By January 15th)
Approximately 2-4 weeks after retirement, you should receive your lump sum annual leave check (by February)
Approximately 1-2 months after retirement, you should start to get your interim check from OPM (say March 1st in this example). The interim check is about 60%-70% of what your final check should be. (OPM intentionally shorts you while they do your final calculations.) You should expect to get this smaller check for about 1-3 months.
If all goes according to plan and there is no serious issue, 3-4 months after retirement, you should begin receiving your full, adjudicated check, along with any back pay that OPM shorted you from the time you retired. Retiring on December 31st would hopefully result in you getting your full monthly checks by April or May.
There is NO set guarantee for this, and there are a number of factors that can influence the timeline. Retiring during the high season (end of the year) may delay it. But the biggest cause for delay is something not right in your file. Maybe you switched to multiple agencies, and that resulted in dates erroneously calculated, or missing paperwork, etc. Maybe you are missing your military buyback receipt. Maybe there was a divorce in which the spouse was awarded a portion of the retirement, but that paperwork was not done properly or not submitted at all. These sorts of things are all potential delayers of your check. But the good news is they are all easily reviewable while you are still working. So spend some time in your eOPF and make sure everything is correct!
Over-Generalized Timeline
(*Your timeline may be longer. This is not an opportunity to sue me.)
When you retire, life will be different.
Duh, that’s pretty obvious, Chris. I know it is, but I talk to a lot of people each year who were not quite prepared for just HOW different life was post retirement. Do the same thing for 30 years in a row and then one day you wake up and you don’t do that thing any more—that can take a little bit of adjustment.
Everyone eventually adjusts, and everyone is always glad they retired. Most regret not doing it sooner, but understand that there can be for some people, an adjustment phase. Those that seem to do best with this are those that are retiring TO something, not just FROM something. Either they are retiring to another job, or to spend more time with family, or to build a new house, etc. Just removing the 40-50 hour work week without anything to replace it can be a bit of a shock. If your entire life is your job, I would suggest you develop some other interests, projects, and missions, or you may feel lost for quite awhile.
If you’re just retiring so you can sit on the couch all day, waiting for the 4:30 dinner special and then bed after Wheel of Fortune, might I suggest you rethink your plan?
How much money do I need to make in retirement to equal my current salary?
This is a very good question. After doing this for a number of years, I have discovered a certain shortcut that can help you ballpark this answer. In general, I have found that if an individual can obtain a job earning approximately 35% of their pre-retirement income, they should be bringing home about the same amount of money in retirement as when they were working.
For example, say you were making $100,000 gross while working for the government. If you can get a job bringing in approximately $35,000 in retirement, your net pay should be roughly the same. If you are making $165,000 before retirement, $58,000 should get you roughly the same net pay—Get a job paying $70,000, and you should have a net raise.
This is just a rough estimate. For some it may be 30% and for others it may be 40%. But if you are looking for a very quick way to determine what the gap is you need to fill, 35% is a good starting place.
I talk more about this in what is by far the most popular paper I’ve ever written, available HERE.
What are some of the forms I may need for the retirement packet?
SF 3107. Application for FERS Retirement. This is the big one.
SF 3102. FERS Beneficiary
SF 2818. FEGLI Continuation into Retirement
SF 2823. FEGLI Beneficiary
IRS Form W-4P. Withholding for Annuities
You may need some, or all of these forms. Or you may need additional forms. Your HR department will guide you through the process. By the way, all of these forms are available on my website, along with other free resources, HERE.
Everything mentioned above is about after retirement—What should you be doing if you are still working, but contemplating retiring soon?
Here are my Top 10 tips.
Get an estimate. Ask your agency to get you an official estimate that shows your annuity, supplement, healthcare cost, etc. You should become very familiar with this document. Review it closely and make sure everything is correct on it. A lot of the data on it will come from your personnel information, so an error on the estimate can signify an error in your file, and you need to take care of that right away. If you want to pay for an estimate and someone to walk you through what it all means, contact me, or one of the others mentioned in #2:
Get educated on the different retirement benefits talked about here. Maybe even compare staying versus going. You can do this yourself for free. You can pay people to do this for you. I charge a fee to create an estimate for you and to explain it line by line. Others offer similar services: Tammy Flanagan, Brad Bobb, Kelly Monroe, and Joe Moy are a few that I know about. Hiring someone is not necessary. Again, you can learn all of this on your own at OPM, TSP, etc. But some people prefer the peace of mind and the ability to ask questions one on one with someone who does this sort of thing regularly.
Have a plan for the shortfall. Once you have an estimate, you’ll know what you’ll be making in retirement from your government benefits. They will replace a good portion of your income, but not all. If you need to make up the difference, have a game plan with where that money will come from. Maybe it’s a part time job, maybe it’s a monthly withdrawal from TSP, or maybe it’s filing for Social Security if you are eligible. Or maybe a combination of the 3. Just start to build your plan. If it’s a job you’ll be needing, start networking and resume building before you leave.
Get familiar with the paperwork ahead of time. I’ve had people bring me the forms to fill out on the day they retired. That is less than optimal. SF 3107 is the big one. Look over that a couple of months in advance and start thinking about how you will make some of those elections on there. Some will require a conversation with the spouse.
Ensure all beneficiary forms are up to date. I could tell you some pretty funny stories about beneficiaries. And unfortunately some pretty sad ones. Make sure they are up to date. If you are unsure, fill out a new one.
Verify and copy your eOPF. It is my understanding that all FERS employees now have electronic personnel folders. After you retire, you will be taken out of that system and lose access to the contents. Please, please, PLEASE, verify that everything is correct in it before you retire. Particularly look at your SF-50’s, dates of service, pay, receipt for military time, Service Computation Dates, etc. If you see any errors, or potential errors, address it immediately! Don’t go into retirement just thinking, “Oh, I’ll work it out then.” It may not work out like you wanted it to.
Agencies can, and sometimes do, lose personnel records. Sometimes OPM makes a mistake. If you find yourself having to correct OPM in retirement, you want to be able to immediately put your hands on the necessary documents yourself. You don’t want to be in a position of contacting old agencies to try to get them to pull the paperwork for you so that you can fight OPM.
File timely. Check with your agency, but it is my experience that most agencies would like your retirement papers submitted 30-60 days before your last day. There is no requirement for this. If you are eligible to retire, you can decide over the weekend that you’re not coming in again. Ever. I’ve seen that more than once. I knew someone who enjoyed his vacation over Christmas so much, he literally mailed his badge and credentials back into the office and never went back. I know of another individual who just simply did not show up for work one Monday. When the managers eventually got concerned enough to call them, they employee said, “Oh, I’m retiring today and not coming in.” Of course office chaos ensued. While you can participate in this type of behavior, it might result in a delayed check and some really hard feelings, so it is not on my list of recommendations. Best to check with your HR and see what they prefer.
Contemplate hiring a professional for some of the financial planning in retirement. I am thinking mostly in the area of tax and estate planning. Or maybe an advisor that does financial plans. As I mentioned above, I’m not a fan of you turning your money over to an investment advisor. But you may benefit from a financial planner that can advise you on tax planning moves, or create a full financial plan for you in retirement. Undoubtedly, you will at some point have a question about whether or not to pull from Traditional TSP, or your Roth, or when to file for Social Security benefits. Things like that are what a professional is useful for.
Pay off the TSP loan. Remember any outstanding (unpaid TSP loans) are considered income if they are not paid off when you retire. That can create a big tax burden. If you have $25,000 in unpaid TSP loans and are in the 22% tax bracket, the federal tax alone on that will be $5,500. Plan accordingly.
Keep reading. At minimum, I would recommend getting Dan Jamison’s FERSGUIDE in hard copy. Let that be your retirement notebook. Write questions and other notes in it. Read Tammy Flanagan’s weekly GovExec column. Read the free newsletters on my site. Ask questions, but be careful who you ask questions of. The “expert” 3 cubicles over may not be the guy you want to trust with your financial future.
BONUS: Pay down debt as much as possible. There is really only one number that determines whether or not you can retire, and how comfortable you will be: Your expenses. What do you owe and what do you have to pay each month? The lower you can get that number, the better off you will be in retirement. I see a lot of people focus on the income side of the equation. Focus on the debt side, and the income side takes care of itself.
Summary
Hopefully this helps. I know everyone is in a different place in life. Some of you love your career; some of you feel like you’ve been doing it so long, you’re somehow in the third half of it. Regardless of where you fall, a little bit of retirement planning is beneficial to everyone.
To recap—When you retire, you get:
Pension/Annuity
Temporary Supplement or permanent 10% bonus
Healthcare
Life, and other insurance if you want it
An optional spousal survivor benefit
Access to that massive, 7-figure TSP you’ve been sacrificing to build your entire career