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If you’re a FERS employee, you want to know the bottom line:

How much money will I receive in retirement?

To answer this question, we need to discuss three things.

We like to refer to these income sources as the 3-Legged Stool of retirement.

The three legs of the stool include:

1. FERS Retirement Pension (FERS)
2. Social Security
3. Thrift Savings Plan (TSP)

Together, these will make up the majority of your income sources in retirement. We’ll take a deeper dive into each one of the legs of the stool, but first, let’s discuss your retirement eligibility.

When can I retire as a FERS employee?

As a FERS employee, you must reach certain age requirements and also have enough creditable service to retire. For a full, immediate FERS retirement, see the table below for eligibility.

Source: opm.gov

You need reach your MRA (minimum retirement age) and have 30 years of service OR be age 60 with 20 years of service OR age 62 with 5 years of service. You can also retire under an MRA+10 years of service provision with a reduced pension, but we won’t go into detail on that here. If you’re wondering about your minimum retirement age — it depends on your birth year (see table below).

*Source: opm.gov

Leg 1: FERS Retirement Pension

Your FERS pension also known as your FERS annuity is a monthly check you’ll receive shortly after you retire from federal service. You’ve been paying into FERS every pay period during federal employment (you can see the deduction on the line item labeled “Retire 8” on your federal paystub). Typically, it’s 0.8% of basic pay. Although, how much you’ve paid into FERS doesn’t matter because the pension you’ll receive is not based on that amount.

How Much Will I Receive For My FERS Pension?

We can calculate your FERS pension using three things:

-High-3 Salary

-Years of Creditable Service

-Pension Multiplier

High-3 Salary: this is the highest average basic pay you earned during any 3 consecutive years of service. For most feds, this will be your last three years of service, but could be from an earlier period if you earned more in prior federal working years. One thing to note….basic pay includes shift rates and locality pay but it does not include overtime, bonuses, etc.

Years of Creditable Service: this include years of federal covered service, or service where your pay was subject to FERS retirement deductions. This is typically career or career conditional service. If you have unused sick leave, you may use this towards your FERS pension computation as well.

Pension Multiplier: if retiring under at age 61 or younger, your pension multiplier will be 1%. If you retire at age 62 and have at least 20 years of service, your pension multiplier will be 1.1%.

We can calculate your FERS pension by multiplying these three components together.

You can read more about this topic and the most common mistakes people make in our earlier blog post.

FERS Pension Example

Let’s put these numbers into practice.

For example, Michael, a postal employee, is age 65 with 20 years of service. He has a High-3 of $80,000.

How much will his FERS pension be?

$80,000 x 20 x 1.1% = $17,600 annually or $1,467 monthly.

Gross vs. Net FERS Pension

In the example above, we calculated Michael’s gross pension amount. But it’s important to remember the difference between gross and net. The net number is the number Michael will actually take home each month. We have to subtract items from the gross amount including taxes, survivor annuity costs, health insurance premiums, FEGLI + others depending on your situation. As you’re planning, be sure to take these into consideration and plan around your net amount.

Leg 2: Social Security

Most FERS employees been paying approximately 6.2% of basic pay into Social Security during federal employment. You become eligible to start receiving Social Security benefits starting at age 62.

How Much Will I Receive From Social Security?

Social Security benefit amounts largely depend on your working years and how much you earned during your employment history. Any other non-federal jobs you’ve and paid into Social Security will also be taken into consideration. We won’t go into all the details on how to calculate your social security benefit as your estimated benefit amounts are readily available on Social Security’s Website. Create an account and get estimated amounts for age 62, full retirement, and age 70. If you’re age 60 and over, you’ve probably been mailed an estimated statement by the Social Security office — they stopped mailing statements out to anyone under age 60 unless specifically requested.

Many people like to run a “break-even” analysis to determine the claiming strategy that makes the most sense, depending on how long they think they’ll live. You can do so with many calculators available for free online.

FERS Special Retirement Supplement (SRS) If Retiring Before 62

As you know by now, FERS employees are eligible to retire prior to age 62 (if you reach your MRA with 30 years service or age 60 with 20 years of service). When doing so, you are eligible for a FERS SRS. This supplement is an additional monthly check that you can receive up until age 62. Ultimately, the purpose of this check is to bridge the gap between when you retire on a full, immediate retirement and when you’re eligible for Social Security.

The actual calculation can be complicated, but for our purposes, we’ll use a high level formula to give you a good estimate.

Years of Creditable Service divided by 40 multiplied by Your Age 62 Social Security Benefit = FERS Special Retirement Supplement. Again, you will receive this amount up until the time you turn age 62 and become Social Security eligible.

Leg 3: Thrift Savings Plan (TSP)

The TSP is a tax-deferred savings and investment plan offered by the federal government. It’s similar to and provides many of the same advantages as private 401(k) plans. If you’ve been contributing to this plan you know your agency matches the first 3% of your salary contributions dollar for dollar and the next 2% is matched 50 cents per dollar contributed.

Your FERS pension and Social Security amounts are defined benefit amounts, meaning you’ll receive a set amount each month. Your TSP is a defined contribution plan, and the withdrawals and how much you’ll receive depend on 1) how much you’ve contributed 2) how well the underlying investments have performed 3) how much you want to withdraw each month.

We’ve went into more detail on the TSP in another blog post.

Schedule your FREE federal benefits review and retirement analysis here.

For more information, you can contact your friends at GPIS by calling 866-201-7829 or by sending an e-mail to info@gpis4u.org

-Sam Wiss, Retirement Income Certified Professional (RICP ®)

What’s the TSP?

The Thrift Savings Plan (TSP) is a tax-deferred retirement savings vehicle designed specifically for federal employees and uniformed service members. This defined contribution plan was first established by Congress in 1986 and behaves similarly to private sector 401(k) plans. The plan allows federal employees to save a portion of their salary each pay-period for retirement. It is one leg, of the 3-Legged stool of retirement for FERS employees (FERS Pension and Social Security being the other two).

How Do TSP Contributions Work?

TSP contributions are taken directly from your paycheck. If you recently started working, you were automatically enrolled at 5% salary contributions to the TSP. You can work with your agency’s payroll to start, change or stop TSP contributions at any time.

Federal employees who contribute to the TSP receive matching contributions from their respective agency. The current matching percentages include the first 3% of contributions matched dollar for dollar and the next 2% matched at 50 cents per dollar. Contributions above 5% are not matched.

For 2021, the maximum contribution amount is $19,500 annually, or $26,000 annually if over age 50.

TSP contributions can be made with Traditional or pre-tax dollars (meaning you’ll defer the taxes now and pay the tax when you withdraw the money) or Roth/post-tax dollars (meaning you’ll pay the taxes now and receive qualified distributions tax-free in retirement).

What Are The TSP Funds Available to Me?

We’ll give a high-level overview of each of the funds available for your investment, and you can find additional information directly on TSP’s website.

What are your TSP Options in Retirement?

You’ll have four options when you’re ready to retire.

1. Cash Out
2. Annuitize Your TSP with MetLife
3. Leave the Money in TSP
4. Rollover to an IRA

There are pros and cons to each of these, and we’ll discuss these further below…

1. Cash Out

Pros: You can cash out your TSP and take all the money into your bank account. The money becomes yours to spend and do whatever you’d like. You can pay off your house, car loan, etc.

Cons: However, when you cash out your TSP, it’ll most likely bump you into a higher tax bracket. This is especially true if you have a larger TSP balance. Beware of the huge tax bill (potentially 30-40%) coming your way if you decide to go this route.

2. Annuitize Your TSP with MetLife

Pros: By annuitizing your TSP, you’re basically trading your account balance to receive a regular monthly income. This is similar to your FERS pension or Social Security. The amount you’ll receive depends on your TSP account balance. Ultimately, you’re purchasing an income annuity from MetLife. What’s great about this method is you’ll receive an additional paycheck for life.

Cons: If you want a guaranteed monthly paycheck, there may be better options in the outside marketplace, with higher monthly income amounts. Also, with other external annuities, you don’t have to give up your entire TSP balance. You can still continue to earn interest and grow your account balance. And, if you need additional money or income in certain months, you can do this in the form of a withdrawal.

3. Leave the Money in TSP

Pros: You can leave the money in TSP when you retire; there’s nothing that forces you to withdraw the funds. It can continue to grow in value over time in any of the available TSP funds. TSP fund selections also have extremely low fees.

Cons: However, there are no guarantees inside of the TSP and many of the investment choices come with market risk and the potential for loss of principal. Also, TSP is a great accumulation account, but not the most optimal distribution account when you want to make withdrawals.

4. Rollover to an IRA

Pros: By rolling your TSP over to an IRA, you can maintain full control of your account value and all investment choices. Your account value can continue to grow with interest, inside of a tax-deferred wrapper. Also, if anything should anything happen to you, the full account value will be passed along to your beneficiaries. GPIS can help with the rollover process if you’d like to learn more.

Cons: Beware, though, as some IRA options where you move your money can have high fees (3-5%!). Aim for IRA plans that have minimal fees, or none at all.

Schedule your FREE federal benefits review and retirement analysis here.

For more information, you can contact your friends at GPIS by calling 866-201-7829 or by sending an e-mail to info@gpis4u.org

-Sam Wiss, Retirement Income Certified Professional (RICP ®)

Special Benefit If You Retire Before Age 62

If you’re a FERS employee and you retire on an immediate, unreduced annuity before you turn age 62, you might be eligible for the FERS Special Retirement Supplement (SRS).

It’s an additional monthly paycheck, similar to your FERS pension.

You’ll receive it starting when you retire until the month you turn age 62.

Many FERS employees have never even heard of this benefit, so let us break it down for you…

Eligibility For The FERS Supplement

The FERS Supplement is eligible for any FERS employee who retires on a full, immediate retirement, and meets any of the following qualifications:

               -Age 60 with 20 years of service

               -Minimum Retirement Age with 30 years of service

               -Minimum Retirement Age if retiring under VERA

You’ll notice we don’t mention anything about CSRS employees as there isn’t an equivalent in that system. There’s also no age 62 with 5 years of service qualification because the FERS Supplement stops paying the month you turn age 62.

A final note on eligibility: employees who retire under the MRA+10 provision, deferred retirees, and disability retirees are not eligible.

How Much Is The Supplement?

The actual calculation of the FERS Supplement is extremely complicated, so we’ll use a ballpark formula that will get us close to the actual amount. You can read more about the exact calculation here.

For planning purposes, we’ll use our estimate:

Years of Creditable Service divided by 40, times your Age 62 Social Security Benefit

You can find your Age 62 Social Security amount from page 2 of your estimated Social Security statement. If you don’t have one, they can be found on Social Security’s Website. You don’t have to start receiving Social Security benefits at 62 — this number is used only for calculation purposes.

FERS Supplement Reductions

If you’ll have earned income (salary, wages or income from self-employment) after Federal service, it’s possible your Supplement will be reduced. It depends on whether or not your earned income exceeds the “exempt” amount, which was $18,240 in 2020. This dollar amount is identical to the earnings test applied each year to Social Security recipients.

The Supplement will be reduced $1 for every $2 the recipients’ earned income exceeds the exempt amount ($18,240). It’s important to note that earned income does not include retirement income sources such as your FERS annuity, IRA withdrawals, TSP withdrawals, investment income, rental income, plus others.

 Example of FERS Supplement Reduction

Michael retired in March of 2019 at his MRA of 56 with 30 years of service. He is due to receive a FERS Supplement amount of $12,000 per year or $1,000 per month. However, Michael got bored in retirement and began working part-time in May of 2019. Between May 2019 and December 2019, Michael earned $35,000 in wages from his part-time job.

Because Michael’s wages ($35,000) exceeded the exempt amount ($18,240) his FERS Supplement will be reduced in 2020 by OPM. The reduction will be [$35,000 – 18,640] / 2 = $8,380 Reduction.

In 2020, after OPM has computed his reduction, Michael will begin receiving his reduced FERS Supplement amount of [$12,000 – $8,680] = $3,320 per year or $277 per month.

Want to find out whether or not you’re eligible for this benefit?

Curious how much yours might be?

Please contact your friends at GPIS by calling 866-201-7829 or by sending an e-mail to info@gpis4u.org

You can also browse our other posts at www.gpis4u.org.

 

 

As we move forward into 2021, there are a few numbers that stand out more than others. And these numbers might affect how you plan for retirement. Be sure to read below thoroughly to see how these numbers apply to your situation in 2021 and beyond.

300

Let’s start with the number 300 (and no we aren’t talking about the movie!)

During a typical year, federal employees are allowed to carryover a maximum of 240 hours of annual leave. Anything more than 240 hours is forfeited. There’s exceptions to this rule, but we won’t cover all of them here.

For 2021, the new temporary carryover amount has been raised to 300 hours. The reason for the change is the inability of many employees to use their leave time due to the COVID-19 pandemic.

A couple things to note: this excess leave must be used in 2021 as the leave carryover amount for 2022 will revert back to 240 hours. Also, the excess leave cannot be included in the lump sum payment should you retire in 2021.

You can read more about the memo here: Annual Leave Guidance

As the saying goes, use it or lose it in 2021…

1.3%

In 2021, federal retirees will receive a 1.3% cost of living adjustment to their retirement paychecks. This COLA was announced in October and went live with payments starting January 4^th. It’s down slightly from the 1.6% COLA FERS & CSRS employees received in 2020.

$148.50

The Medicare Part B Premium in 2021 is $148.50, which is a 2.7% increase from the 2020 amount of $144.60. If you’ve received notice of an IRMAA or (income related monthly adjustment amount) you can check out our blog post from November that details ways to appeal the adjustment.

1%

Civilian federal employees will receive a pay raise of 1% for the year 2021. This amount is across the board, and there are no locality pay adjustments this year. 3% is the raise for military members in 2021. The pay raise went live on January 1^st, 2021. OPM has published full pay tables here.

$19,500

If you’re under age 50, the limit for TSP contributions is $19,500, which is unchanged from 2020. Those age 50 and older are still eligible for catch-up contributions of $6,500 annually, for a total of $26,000 in eligible contributions. Full TSP fund returns for 2020 are available on tsp.gov.

If you have any questions around any of these topics, please contact your friends at GPIS by calling 866-201-7829 or by sending an e-mail to info@gpis4u.org.

Federal Employee Health Benefits in Retirement

As you’ve probably noticed, health insurance is expensive!

And it gets even more expensive as you age.

As a federal employee, your FEHB is arguably the best benefit you receive from the government (both during your working years and in retirement).

We get these questions all the time:

Can I keep my health benefits in retirement?

Can my spouse and family stay on the benefits?

What happens to my benefits if I pass away?

Let’s put an end to the discussion and highlight how you can keep these benefits in your retirement years, while ensuring your spouse and family is also covered.

FEHB Eligibility In Retirement

Obviously, you’re eligible for FEHB during your career, but what about eligibility when you retire?

As an employee, you can continue your FEHB in retirement if you meet two conditions:

-You’ve been covered under FEHB for at least five years immediately preceding retirement (or if less than five years, for all service since you’ve been eligible to enroll)

-You retire with an immediate pension

During the time you’ve been covered under FEHB, you can switch carriers, change plans or modify coverage types — as long as you remain under FEHB coverage for five years, you’re good to go for retirement eligibility.

FEHB Premium Costs

During retirement, the government will continue to pay around 72% of the overall premium amount. You’ll pay approximately 28% of the premium cost out of pocket. Postal employees, who receive lower union-negotiated premiums during their working years, might see a slight increase in retirement when these go away. FEHB premiums during working years are also paid using pre-tax dollars. In retirement, post-tax dollars are used, effectively making the premium more expensive.

Spouse Eligibility for FEHB

Yes, your spouse can continue coverage under FEHB with you in retirement.

However, there are two conditions your spouse must meet in order to continue FEHB should you predecease them.

               -Your spouse is eligible to receive a Survivor Benefit

               -Your spouse is enrolled in FEHB prior to your death

You’ll have the option to choose a spousal survivor benefit during the retirement packet completion process, which GPIS does free of charge!

FEHB For Family Members

As a retiree, your eligible family members are allowed on your plan. You can add them during open season each year (November and December).

Any qualifying life events would also give you the option to add a family member. These would include: marriage, divorce, death of a spouse or the birth/adoption of a child.

Canceling FEHB Coverage

You always have the option to cancel any existing FEHB coverage. But, proceed with extreme caution. As we mentioned earlier, this is one of your best benefits as a federal employee. Once you cancel coverage, the decision is final. You’ll no longer be eligible to re-enroll in the program.

If you have any questions about any of these topics, please contact your friends at GPIS by calling 866-201-7829 or by sending an e-mail to info@gpis4u.org.

As we move forward into 2021, there are a few numbers that stand out more than others. And these numbers might affect how you plan for retirement. Be sure to read below thoroughly to see how these numbers apply to your situation in 2021 and beyond.

300

Let’s start with the number 300 (and no we aren’t talking about the movie!)

During a typical year, federal employees are allowed to carryover a maximum of 240 hours of annual leave. Anything more than 240 hours is forfeited. There’s exceptions to this rule, but we won’t cover all of them here.

For 2021, the new temporary carryover amount has been raised to 300 hours. The reason for the change is the inability of many employees to use their leave time due to the COVID-19 pandemic.

A couple things to note: this excess leave must be used in 2021 as the leave carryover amount for 2022 will revert back to 240 hours. Also, the excess leave cannot be included in the lump sum payment should you retire in 2021.

You can read more about the memo here: Annual Leave Guidance

As the saying goes, use it or lose it in 2021…

1.3%

In 2021, federal retirees will receive a 1.3% cost of living adjustment to their retirement paychecks. This COLA was announced in October and went live with payments starting January 4^th. It’s down slightly from the 1.6% COLA FERS & CSRS employees received in 2020.

$148.50

The Medicare Part B Premium in 2021 is $148.50, which is a 2.7% increase from the 2020 amount of $144.60. If you’ve received notice of an IRMAA or (income related monthly adjustment amount) you can check out our blog post from November that details ways to appeal the adjustment.

1%

Civilian federal employees will receive a pay raise of 1% for the year 2021. This amount is across the board, and there are no locality pay adjustments this year. 3% is the raise for military members in 2021. The pay raise went live on January 1^st, 2021. OPM has published full pay tables here.

$19,500

If you’re under age 50, the limit for TSP contributions is $19,500, which is unchanged from 2020. Those age 50 and older are still eligible for catch-up contributions of $6,500 annually, for a total of $26,000 in eligible contributions. Full TSP fund returns for 2020 are available on tsp.gov.

If you have any questions around any of these topics, please contact your friends at GPIS by calling 866-201-7829 or by sending an e-mail to info@gpis4u.org.

As we move forward into 2021, there are a few numbers that stand out more than others. And these numbers might affect how you plan for retirement. Be sure to read below thoroughly to see how these numbers apply to your situation in 2021 and beyond.

300

Let’s start with the number 300 (and no we aren’t talking about the movie!)

During a typical year, federal employees are allowed to carryover a maximum of 240 hours of annual leave. Anything more than 240 hours is forfeited. There’s exceptions to this rule, but we won’t cover all of them here.

For 2021, the new temporary carryover amount has been raised to 300 hours. The reason for the change is the inability of many employees to use their leave time due to the COVID-19 pandemic.

A couple things to note: this excess leave must be used in 2021 as the leave carryover amount for 2022 will revert back to 240 hours. Also, the excess leave cannot be included in the lump sum payment should you retire in 2021.

You can read more about the memo here: Annual Leave Guidance

As the saying goes, use it or lose it in 2021…

1.3%

In 2021, federal retirees will receive a 1.3% cost of living adjustment to their retirement paychecks. This COLA was announced in October and went live with payments starting January 4^th. It’s down slightly from the 1.6% COLA FERS & CSRS employees received in 2020.

$148.50

The Medicare Part B Premium in 2021 is $148.50, which is a 2.7% increase from the 2020 amount of $144.60. If you’ve received notice of an IRMAA or (income related monthly adjustment amount) you can check out our blog post from November that details ways to appeal the adjustment.

1%

Civilian federal employees will receive a pay raise of 1% for the year 2021. This amount is across the board, and there are no locality pay adjustments this year. 3% is the raise for military members in 2021. The pay raise went live on January 1^st, 2021. OPM has published full pay tables here.

$19,500

If you’re under age 50, the limit for TSP contributions is $19,500, which is unchanged from 2020. Those age 50 and older are still eligible for catch-up contributions of $6,500 annually, for a total of $26,000 in eligible contributions. Full TSP fund returns for 2020 are available on tsp.gov.

If you have any questions around any of these topics, please contact your friends at GPIS by calling 866-201-7829 or by sending an e-mail to info@gpis4u.org.

As we move forward into 2021, there are a few numbers that stand out more than others. And these numbers might affect how you plan for retirement. Be sure to read below thoroughly to see how these numbers apply to your situation in 2021 and beyond.

300

Let’s start with the number 300 (and no we aren’t talking about the movie!)

During a typical year, federal employees are allowed to carryover a maximum of 240 hours of annual leave. Anything more than 240 hours is forfeited. There’s exceptions to this rule, but we won’t cover all of them here.

For 2021, the new temporary carryover amount has been raised to 300 hours. The reason for the change is the inability of many employees to use their leave time due to the COVID-19 pandemic.

A couple things to note: this excess leave must be used in 2021 as the leave carryover amount for 2022 will revert back to 240 hours. Also, the excess leave cannot be included in the lump sum payment should you retire in 2021.

You can read more about the memo here: Annual Leave Guidance

As the saying goes, use it or lose it in 2021…

1.3%

In 2021, federal retirees will receive a 1.3% cost of living adjustment to their retirement paychecks. This COLA was announced in October and went live with payments starting January 4^th. It’s down slightly from the 1.6% COLA FERS & CSRS employees received in 2020.

$148.50

The Medicare Part B Premium in 2021 is $148.50, which is a 2.7% increase from the 2020 amount of $144.60. If you’ve received notice of an IRMAA or (income related monthly adjustment amount) you can check out our blog post from November that details ways to appeal the adjustment.

1%

Civilian federal employees will receive a pay raise of 1% for the year 2021. This amount is across the board, and there are no locality pay adjustments this year. 3% is the raise for military members in 2021. The pay raise went live on January 1^st, 2021. OPM has published full pay tables here.

$19,500

If you’re under age 50, the limit for TSP contributions is $19,500, which is unchanged from 2020. Those age 50 and older are still eligible for catch-up contributions of $6,500 annually, for a total of $26,000 in eligible contributions. Full TSP fund returns for 2020 are available on tsp.gov.

If you have any questions around any of these topics, please contact your friends at GPIS by calling 866-201-7829 or by sending an e-mail to info@gpis4u.org.

If you’re close to retirement, the idea of not having a house payment can be very appealing.

You might even have enough money in your TSP to simply cut a check and pay off your current mortgage.

But is this a good idea?

Should you use your retirement savings to “retire” your house payment?

The short answer: it depends.

To better understand the numbers, let’s take a look at an example…

You’re in your last year of your working career. And let’s assume you have a $300,000 Traditional TSP balance, and you owe $150,000 on your house.

On the surface, it looks pretty simple.

You can easily take $150,000 out of your TSP and pay off the house.

But there’s something you need to consider….

The IRS & the tax consequences!

*We always recommend speaking with a tax advisor about your specific situation, and the information below is for educational purposes only.*

If you “cash out” $150,000 of your TSP, you’ll be paying taxes on $150,000 + any other earned income for that particular year.

As you can imagine, this will most likely bump you up into a higher tax bracket.

In a normal year: If we assume you earned $75,000 in wages, you would be in the 22% marginal tax bracket and owe approximately $15,413 in federal + FICA taxes without any additional TSP withdrawals.

If we combined the $150,000 TSP withdrawal and $75,000 in wages, you would owe taxes on $225,000 of income, bumping you up into the 35% marginal tax bracket.

This would equate to $61,401 in federal + FICA taxes owed!

All else equal, your tax bill would increase by $45,988 or 398%!

Not to mention, TSP is required to withhold 20% as a tax estimate.

This means if you wanted to pay off $150,000 of mortgage debt, you’d need to withdraw even more of your TSP to cover it.

Here are some other financial moves you may want to consider.

Right now, we’re seeing historically low interest rates for mortgages.

Have you looked into refinancing?

It’s possible to lock in a 15-year mortgage rate below 3% right now (depending on different factors).

 

A few things to know:

               –What’s your current mortgage interest rate?

               -How much equity is in your home?

               -What’s your credit score?

               -What would your new refinance rate be?

               -What would the cost of refinancing be?

               -How long do you plan on staying in your home?

 

All these will help determine whether it makes sense to refinance.

You can also consider paying the debt off over time rather than in one single lump sum.

By planning your payments and withdrawals accordingly, you can avoid bumping up into a higher tax bracket than necessary.

This will help ensure your money lasts you longer in retirement.

 

 

DISCLAIMER: GPIS does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

If you’re close to retirement, the idea of not having a house payment can be very appealing.

You might even have enough money in your TSP to simply cut a check and pay off your current mortgage.

But is this a good idea?

Should you use your retirement savings to “retire” your house payment?

The short answer: it depends.

To better understand the numbers, let’s take a look at an example…

You’re in your last year of your working career. And let’s assume you have a $300,000 Traditional TSP balance, and you owe $150,000 on your house.

On the surface, it looks pretty simple.

You can easily take $150,000 out of your TSP and pay off the house.

But there’s something you need to consider….

The IRS & the tax consequences!

*We always recommend speaking with a tax advisor about your specific situation, and the information below is for educational purposes only.*

If you “cash out” $150,000 of your TSP, you’ll be paying taxes on $150,000 + any other earned income for that particular year.

As you can imagine, this will most likely bump you up into a higher tax bracket.

In a normal year: If we assume you earned $75,000 in wages, you would be in the 22% marginal tax bracket and owe approximately $15,413 in federal + FICA taxes without any additional TSP withdrawals.

If we combined the $150,000 TSP withdrawal and $75,000 in wages, you would owe taxes on $225,000 of income, bumping you up into the 35% marginal tax bracket.

This would equate to $61,401 in federal + FICA taxes owed!

All else equal, your tax bill would increase by $45,988 or 398%!

Not to mention, TSP is required to withhold 20% as a tax estimate.

This means if you wanted to pay off $150,000 of mortgage debt, you’d need to withdraw even more of your TSP to cover it.

Here are some other financial moves you may want to consider.

Right now, we’re seeing historically low interest rates for mortgages.

Have you looked into refinancing?

It’s possible to lock in a 15-year mortgage rate below 3% right now (depending on different factors).

 

A few things to know:

               –What’s your current mortgage interest rate?

               -How much equity is in your home?

               -What’s your credit score?

               -What would your new refinance rate be?

               -What would the cost of refinancing be?

               -How long do you plan on staying in your home?

 

All these will help determine whether it makes sense to refinance.

You can also consider paying the debt off over time rather than in one single lump sum.

By planning your payments and withdrawals accordingly, you can avoid bumping up into a higher tax bracket than necessary.

This will help ensure your money lasts you longer in retirement.

 

 

DISCLAIMER: GPIS does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

To say 2020 has been a wild ride would be an understatement. We’ve had a global pandemic, volatile markets, a presidential election and a new normal across much of America. All of these things impact your personal finances. Before we reach year-end, let’s take a look at some things you might want to consider. Keeping track of these things will help maintain your short-term and long-term financial health.

Goals

Review any and all goals you might’ve set for 2020 and update your progress. If you haven’t set any goals, now would be a good time to map them out for 2021. We suggest breaking your goals down into short-term goals and long-term goals. We also suggest making an action plan to achieve those goals. And it always helps to break down the longer goals into smaller, actionable goals.

When goal-setting, make sure you include the total amount needed, the timeframe to achieve the goal, and the monthly contribution amount. You can make the monthly contribution a part of your monthly budget. 

 Credit Report

If you haven’t done so in awhile, make sure to check your credit report. There are plenty of free apps (Credit Karma) that allow you to keep tabs on any changes to your credit score. You’ll want to make sure there are no discrepancies, you haven’t been a victim of identify theft, and there aren’t any big decreases in your overall score. Using the free apps like Credit karma DOES NOT affect your credit. Only “hard-pulls” will negatively affect your credit. An example would be a bank pulling your credit to decide whether to loan you a mortgage or auto loan.

 Emergency Fund

One of the biggest things you can do to alleviate money worries is create an emergency fund. With an available emergency fund, you don’t have to turn to credit card debt or borrow money from friends and family at the first sign of trouble. Typically, you’ll want to keep 3 to 6 months worth of expenses in the fund. You’ll want to keep this money in a safe, secure account that you can easily liquidate. Something like an FDIC insured checking or savings account would serve this purpose well.

Financial Inventory

It’s always good to know what you have, and what you owe. To do this, you can figure out your assets and your liabilities – this will also calculate your present net worth.  Make a list of your assets (these are items you currently own or possess). It would include things like cash, checking accounts, savings accounts, retirement accounts, vehicle blue book value, residence value, etc. Next, take inventory of your liabilities, which would include anything you owe or any debts you have. Liabilities include credit card balances, mortgages, auto loans, student loans, etc. If you have loans with balances above 5%, consider consolidating these into a personal loan to take advantage of historically low interest rates.

 Review Your Mortgage

Mortgage rates have teetered at all-time lows for much of 2020. Re-evaluate your existing mortgage and interest rate percentage to determine if it makes sense to refinance.  Some things to consider when deciding to refinance…

               -How long do you plan on living in the current home

               -What is your current mortgage rate vs a new mortgage rate

               -How long would it take to recoup any closing costs

If you can lower your interest rate by at least 1%, it most likely makes sense to refinance. Depending on the amount of equity you have in the home, you might also be able to rid your payment of PMI (private mortgage insurance).

Retirement/RMDs

Review your portfolio and make any necessary changes based on where you are in your career. If you want your investments or assets to remain safer, consider making those changes and rebalancing your portfolio. You should also decide whether or not you want to take an RMD or withdrawal between now and April 15^th. Due to COVID, all RMD requirements from Qualified plans were waived for 2020. Also, take a look at your goals for retirement and income, and make sure you’re putting a plan together to hit those goals.

If you have any questions around any of these topics, please contact your friends at GPIS by calling 866-201-7829 or by sending an e-mail to info@gpis4u.org.

8 Ways To Appeal 2021 Medicare Part B IRMAA Amount

The 2021 monthly premium amounts for Medicare Part B enrollees was recently announced by The Center for Medicare and Medicaid Services.

Many federal employees are currently enrolled in Medicare Part B or will become eligible at age 65.

As a reminder, Medicare Part B covers both medically necessary services and preventive services.

This includes doctors’ services and tests, outpatient care, home health services, ambulance services, mental health, among others.

Premiums payable for Medicare Part B coverage in 2021 are based on 2019 MAGI (Modified Adjusted Gross Income). 

The standard premium amount for 2021 is $148.50.

However, if an individual or married couple exceeds certain income limits, the payable amount increases for Part B coverage.

Paying above the standard rate of $148.50 for coverage is referred to as an IRMAA (Income Related Monthly Adjustment Amount).

The table below shows 2019 income amounts and the respective amounts payable in 2021 (source: Medicare.gov)

As you can see, the higher an individual or married couple’s MAGI, the higher the Medicare Part B premium.

If you find yourself paying above the standard Part B monthly premium of $148.50, you will receive a notice of IRMAA from the Social Security Administration in late November or early December.

In receiving this IRMAA notice, you have the right to file an appeal.

The appeal allows for a reconsideration of IRMAA surcharges due to certain life-changing events.

These life-changing events typically cause a significant decrease in an enrollees’ total income between 2019 and 2021.

Life-Changing Events Include:

1. Marriage
2. Divorce/Annulment
3. Death of Your Spouse
4. Work Stoppage
5. Work Reduction
6. Loss of Income-Producing Property
7. Loss of Pension Income
8. Employer Settlement Payment

If any of these circumstances apply to you, the form for appeal can be found here.

An example would include:

John Smith has been working for the post office his entire life, and recently turned age 65. He retired near the end of 2020 from federal service. John received an IRMAA letter in late November for his 2021 Medicare Part B premiums, due to his full-time federal employee salary in 2019. However, since John retired, his income will decrease significantly in 2021 compared to 2019 when he was working full-time. John should file an appeal and complete Form SSA-44. His appeal will fall under the “work-stoppage” classification for a life-changing event.

If you have any questions around Medicare Part B or your coverages, please contact your friends at GPIS by calling 866-201-7829 or by sending an e-mail to info@gpis4u.org.

Your FERS pension is an extremely important piece of the 3-legged stool in your federal retirement. The other two legs of the stool include your TSP and Social Security benefits.

We work with federal employees every day.

Many feds get confused on how their FERS pension amount is calculated.

Let’s dive in and go through the basics.

First, we’ll calculate your “gross” FERS pension amount. It’s based on the 3 things.

• Your High-3 Salary
• Years of Creditable Service
• Factor

Pretty straightforward, right?

Now let’s dig a little deeper into each of the components.

High-3 Salary

Your High-3 salary is the three highest earning, consecutive years of federal service you’ve had. This includes basic pay only (your salary), and does NOT include any overtime or bonuses.

Years of Creditable Service

Next, you’ll need to figure out your years of creditable service. As a rule, creditable service is the time during which your pay is subject to FERS retirement deductions. OPM looks at your SF-50s to calculate your creditable service. Also, one thing to note, many people falsely believe their creditable service starts with their service computation date (SCD), but OPM actually uses your retirement service computation date (RSCD).

If you have active, honorable military service, you can typically ‘buy back’ this time, and it will count towards your federal retirement. Cost-wise, it almost always makes sense to do this when possible.

Your unused Sick Leave (not Annual Leave) will also contribute to years of creditable service.

Factor

Your factor is going to be either 1% or 1.1%. For most FERS employees, the factor is 1%. However, if you are age 62 or older, and have at least 20 years of service, your factor will be 1.1%. Many federal employees believe their factor is 1.1% because they’ve reached age 62 — this is incorrect. You need to be age 62 with at least 20 years of service.

To recap, to calculate your FERS pension, you’ll take your High-3 Salary x Years of Creditable Service x Your Factor. Remember, this is the gross amount, it will not be the actual amount you’ll take home. Many federal employees don’t take into consideration these reductions and are surprised when they get their first check. Let’s take a look at some of the most common reductions.

Common Reductions to FERS Pension

There are 7 possible reductions to your FERS pension. Remember to take these into consideration when planning your monthly income. The three we’ll discuss include Taxes, Survivor Benefits and FEHB (health insurance).

Taxes: Most of your FERS pension will be taxed at ordinary income tax rates. Typically, this is in the ballpark of 12-20%, however each individual’s tax situation is unique, and state taxes differ. With taxes, we recommend planning on the high-side and assume more rather than less.

Survivor Benefits: If you elect to leave a survivor annuity, your FERS pension amount will be reduced. However, If you predecease your spouse, they will receive a benefit amount monthly, for the duration of their own life. If you elect the “Max” survivor benefit, you FERS pension will be reduced 10% and your spouse will receive half of your pension if you pass away. If you elect the “Minimum” survivor benefit, your FERS pension will be reduced by 5% and your spouse will receive 25% of your original FERS pension.

FEHB: This reduction applies if you elect to continue healthcare coverage. These coverages and amounts will also vary by state. Plan for anywhere from $300-$500 per month for coverage. Most federal employees carry this coverage into retirement and for good reason – it’s one of the best healthcare plans in the marketplace. One important thing to note, you must elect at least the Minimum Survivor Benefit if you predecease your spouse and they want to continue the federal health insurance coverage.

If you have any questions about how to calculate your FERS pension amount, please reach out to your friends here at GPIS and we would be happy to help.

Tax Season is Approaching: Here Are Some Common Deductions

There are two certainties in life; death and taxes.

We all can probably remember the first job we had, and the first time we got a paycheck.

We tore it open, only to find there was a huge chunk of money missing!

Don’t think you aren’t getting anything for that money: you get the clean water running out of your tap, the police patrolling your neighborhood, and the garbage that gets picked up curbside every week.

As we near tax time, one of the more common concerns you might have is how to reduce your tax bill or what deductions qualify.

Let’s a take a look at some of the most common deductions you have.

Save more towards retirement

Your TSP contributions are pre-tax dollars (unless you’re using the Roth version).

Each dollar you contribute to your TSP reduces your taxable income.

Let’s look at an example…

2020 Salary: $60,000

2020 TSP Contribution: $10,000

2020 Taxable Income: $50,000

By contributing $10,000 to your TSP, you actually reduce your taxable income by that amount.

You don’t pay the tax now — you’ll pay taxes when you withdraw the money in retirement.

The more you contribute to your TSP, the more you reduce your taxable income.

In 2020, the current TSP max contribution is $19,500 or $26,000 if you’re over age 50.

This is also true for any Traditional IRAs you have outside of TSP. IRA contributions reduce your taxable income up to $6,000 per year or $7,000 if over age 50. These are a great avenue if you to save more for retirement, while also reducing your taxable income.

Use flexible spending plans (FSAFEDS)

Using a flexible spending account lowers your taxable income if you use the funds for eligible medical, dental or vision care expenses.

This money isn’t subject to payroll taxes.

One thing to note, you must incur eligible expenses by the end of the year in order for the money to stay off your tax bill. You can make a claim for expenses incurred in the 2020 benefit period until April 30, 2021.

You can also carry over $550 of unused funds into 2021 as long as you are re-enrolled in the program.

The 2021 contribution limit is $2,750 — you can sign up on FSAFEDS during Open Season to enroll.

Save for college

You can contribute to a 529 plan which is designed to help pay for higher education expenses.

529 plans are typically established by parents or grandparents on behalf of a child or grandchild.

These types of plans are tax-deferred and exempt from federal and state income tax, as long as the money is used for qualified educational expenses.

The contributions reduce your taxable income, the plans grow tax deferred, and the withdrawals are tax free if they qualify.

These are great plans if you want to help a loved one out with the rising cost of higher education, while giving yourself a tax break.

Donate to your favorite charity

Charitable contributions you make are deductible.

And they don’t necessarily have to be in cash.

If you donate old clothes, food, or items to Goodwill, this will lower you taxable income.

It’s recommended to always get receipts and keep them handy when making these deductions come tax-time.

Contributions help your community, while also giving you a tax break. It’s the definition of win-win!

Now while this list is in no way all the deductions or itemizations you could have, it gives you a good start…

As a reminder: this article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

If you have questions about any of these benefits, or the process for Open Enrollment, our specialists at GPIS are always here to help.