Find your retirement sweet spot(s)

If you have a simple exit strategy that gets you the best deal in retirement, there’s a good chance it’s wrong. Or at least not very easy. That’s especially true if you work for Uncle Sam. As most insiders know, government can be complicated. And frustrating. But also very rewarding. If you get it right and use your best exit options.

Whatever your plan and goal, there are many instances where people don’t get the best deal for themselves. That’s because they don’t know all the rules or questions about their pension and when to get the best deal. There are a number of “best dates” to retire. Mostly for tax reasons or to get a part of the new raise. Days like December 31 or January 3 depending on your retirement plan. But beyond that, there are definitely the best times to retire based on the answers to what – to us laypeople – seems easy. But not. With a long shot.

Example: A reader/listener recently sent us a “simple” question about retirement. Like most “simple” questions, it turned out to be complex. So we passed it on to Tammy Flanagan. She is a retiree who makes a living advising clients on retirement and other work-related issues. Tammy will be my guest on today’s Your Turn radio show at 10 am EDT. And we talk about general retirement issues. In the meantime, here’s an example of why many people should seek help planning their retirement. The question is apparently “simple”. The correct answer, anything but! The defense civilian writes:

I am a federal employee with the DoD and currently have 30 years of service but am 52 years old. I have invested in TSP since 1992 at maximum allowance. I think my retirement age is 57 – five years. Are there any advantages to taking early retirement? I am married and have two sons who are currently 13 and 11 years old. So if I can retire, they will go to college or prepare for it.

Easy right? Turns out not so much. Here is Tammy’s professional answer:

There are three main options this employee should consider in planning their retirement.

  1. It is important to her to do estimates for all three parts of FERS (FERS basic pension, FERS supplement or social security pension, different TSP distribution options).
  2. Note that all three benefit streams are subject to federal income tax and, depending on the state, also state income tax.
  3. She will continue to pay monthly premiums for her insurance in retirement, using after-tax dollars.
  4. If she is married, a survivor’s election must be considered, resulting in a 10% reduction in her basic FERS pension.
  5. It’s also important to plan for long-term care so future care needs don’t derail their financial plan.
  6. When planning TSP withdrawals, be careful about forecasting future returns as the market will fluctuate over time and may not deliver returns seen in the last few years of a bull market.
  7. Years of lower returns can be devastating and stressful if their FERS pension and Social Security pension benefits aren’t enough to withstand those returns swings.

Here are the three options along with some considerations to keep in mind with each one:

  • Quit before your MRA and apply to your MRA for deferred retirement.
    • Her future performance is based on three times her average salary at the time of her retirement from federal service.
    • She will not receive a cost-of-living adjustment to her FERS pension until age 62. Benefit remains the same for 10 years if she leaves federal service at age 52. Think about what your salary was 10 years ago. How different was it from today? If high inflation persists, it will severely erode your purchasing power for your FERS benefit and cause you to use up your retirement savings too quickly.
    • It will be difficult to stop working and not receive an income in the next five years. Life expectancy payments from the TSP based on $500,000 from age 52 with a future rate of return of 3% would provide an initial monthly payment of less than $1,300/month. Use the TSP Payments and Annuities Calculator to run different scenarios (remember that these payments are subject to state and possibly state income tax, depending on which state you live in).
    • Payments that are not life expectancy payments or an annuity result in a 10% prepayment penalty tax.
  • Keep working until age 57 (MRA)
    • This is her first right to an “immediate” full retirement.
    • The FERS Pension Supplement is paid to provide another immediate source of income in addition to the FERS Basic Pension benefit.
    • The FERS supplement has no cost-of-living adjustment and the basic FERS benefit is paid at a rate up to the age of 62, when the cost-of-living adjustment begins.
    • TSP withdrawals do not incur a 10% early withdrawal penalty, allowing for more flexibility in the type of withdrawal option chosen.
    • Depending on your TSP balance, this may be the first realistic opportunity to retire with enough income to replace your net income while working.
  • Continue working until age 62
    • Eligible for the pension calculation factor of 1.1% for the FERS base benefit, which is a 10% increase, apart from having more service and a more generous High-3 average salary as a result of continuing to work.
    • Eligible for a Social Security pension, which is more tax-friendly than the FERS supplement.
    • FERS and Social Security Pension receive annual cost-of-living adjustments.
    • There is a better chance of getting TSP payouts sufficient for a life expectancy of over 30 years to account for future market volatility and years of higher inflation.
age seniority option for retirement Benefit Calculation (Using $80,000 High-3 Average Salary)
52 30 No entitlement to immediate retirement; Termination with deferred retirement at age 57 30 x 1% x $80,000 = $24,000; Social Security payable at age 62*; Can accept TSP withdrawals at age 59½ with no penalty or life expectancy payments at any age.
57 35 First Eligibility for Immediate Retirement 35 x 1% x $80,000 = $28,000; FERS Supplement = 35/40 of SSA benefit at age 62*; eligible to withdraw payments from TSP without a 10% early withdrawal tax penalty.
62 40 Entitles to immediate retirement and higher calculation factor 40 x 1.1% x $80,000 = $35,200; entitlement to social security*; eligible to withdraw payments from TSP without a 10% early withdrawal tax penalty.

* estimates SSA performance at ages 62-70.

Your retirement age and when you will stop working

Your retirement age is the age at which you start receiving your Social Security pension benefits. For many people, this is not the same age that they stop working.

The age at which you stop working can affect the amount of your Social Security retirement benefits. We calculate your retirement pension based on your highest 35 years of earnings and the age at which you receive pensions.

If you stop working before you start receiving benefits

If you stop working before you start receiving benefits and you have less than 35 years of income, your benefit amount will be affected. When calculating the old-age pension you are entitled to, we use a zero for each year of no income. Unemployed years reduce the amount of the old-age pension.

Even if you have 35 income years when you stopped working, some of those years may be low-income years. When you claim pension benefits, those years will be averaged in your calculation, resulting in a lower benefit. However, if you continue to work, your low-earning years will be replaced by your high-earning years. Higher income increases your benefit amount.

If you stop working between the age of 62 and your full retirement age

You can stop working before you reach full retirement age and receive reduced benefits. The earliest age at which you can start receiving pension benefits is 62 years of age. If you claim benefits when you reach full retirement age, you will receive the full pension benefit.

If you stop working after reaching full retirement age

If you decide to work past your full retirement age, you have two options:

  • You can work regardless of your earnings and receive full pension benefits.
  • You can delay receiving retirement benefits and purchase credits that increase your retirement benefit.

Imagine if that was a complicated question? gulp!

Almost useless factoid

By David Thornton

Darth Vader’s breathing sound is trademarked.

Source: Gizmodo

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