Have you ever read the articles that offer ‘fun’ facts about retirement, saving money, and other financial topics? We have, and they barely scratch the surface. Although it’s not an excellent job, we’re going to uncover some of the less fun facts today.
Social Security retirement benefits often come with federal income tax bills.
Firstly, you will only avoid tax when your combined income falls below $25,000 as an individual or $32,000 as a couple. As soon as you’re over this amount, your benefit could be taxed 50% or even 85%. In case you didn’t know, you don’t need to add all Social Security to your ‘combined income’ calculation, only half (and non-taxable interest).
We have better news because not all states will tax Social Security benefits. Also, when first applying, you might request withholding of federal taxes for benefit payments. For those receiving benefits, use Form W-4V (this form is also for those who want to stop or change withholding).
Survivor elections are permanent.
You may choose less than the maximum survivor benefit under the Federal Employees Retirement Systems and Civil Service Retirement System plans in retirement. However, you’ll need consent from your partner, if married, at the point of retirement. It’s possible to reduce or cancel the survivor benefit, but this needs to be done within 30 days of the first monthly payment. In the first 18 months of the annuity, you can only add a survivor benefit or increase the existing one (in a single life annuity).
Under FERS, there’s a fairly hefty penalty when changing from no survivor benefit to either a full survivor benefit or a partial one; 24.5% or 12.25%, respectively. Let’s say your partner waived a survivor benefit at retirement, then a benefit of $50,000 per year would lead to a $12,250 penalty if introduced later. As mentioned, this is only available for the first 18 months of the annuity too. Under CSRS, there’s also a penalty. Once the initial 18 months have passed, whatever survivor options you have set up will be considered permanent (until divorce or death).
Before filing an application for retirement, we always advise carefully considering the value and cost of this single benefit. If you die first, how will your spouse maintain their living standards? Even if your spouse is older and has a medical condition, you still need to consider the risk of dying first. If you and your partner will be reliant on your retirement income, it might be wise to elect a survivor benefit. Although your retirement will drop in value, you will also pay less in tax. If your spouse dies first, you can restore the unreduced annuity.
Retirement estimates aren’t always accurate.
When this happens, it’s natural to look for somebody to blame. In reality, it just tends to happen sometimes. For some inaccuracies it will be due to owed state income tax on a FERS or CSRS benefit. They can never be 100% accurate with estimates because they don’t consider Social Security retirement, part-time or full-time work, a spouse’s income, or withdrawals from a TSP or another retirement plan.
If you want to calculate better estimates for federal tax withholding, we recommend the brilliant IRS estimator tool. What’s more, you can adjust tax withholding on the Office of Personnel Management website.
Another problem with the estimate is that it can’t consider a service credit issue. For example, this includes changes in work schedules, service that isn’t creditable, unpaid redeposits or deposits, undocumented service, or retirement coverage adjustments.
In our experience, we’ve seen estimates also missing former spouse entitlements, a FERS supplement, or survivor benefit election. Even with offset estimates from the CSRS, they can fail to explain the offset when qualifying for Social Security or retiring.
Don’t get us wrong; it’s useful to use retirement estimates from agencies. However, seek clarification if you’re confused by your estimate or believe something to be wrong. The last thing you want is to retire and then find you have less money than expected.
There’s a Social Security hit for those born before 1960.
According to some statistics, the number of people born before 1960 is four million; this means turning 60 and becoming eligible for Social Security in around two years. Before the first year of eligibility, Social Security will go back two years for an average wage level. Thanks to the Social Security Trustees Report, we know that the average wage index was around $53,850 in 2019. In 2020, this was originally expected to increase to $55,650. Now, the COVID-19 pandemic and high unemployment will push this figure right down.
Compared to those born in 1959, the class of 1960 could get benefits as much as 6% lower. Although we could see a fix from Congress, this will still come at a cost.
Coverage can change after retirement.
Finally, some people entering retirement will want to keep their life insurance benefit coverage. However, there’s a cost that comes with continuing coverage after the age of 65. With this in mind, you need to think about whether or not you want and need life insurance after retiring.
With Option A and Basic FEGLI, there’s an opportunity to extend coverage after age 65 and retirement. Yet, coverage is 2% less per month until it reaches one-quarter of its original value. We recommend using the OPM calculator to work out the estimated cost of continued coverage.
Though not exactly fun, these facts about federal retirement are important. Make sure you consider them when planning for your retirement!
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Email: [email protected]
Phone: 3604642979
Bio:
After entering the financial services industry in 1994, it was a desire to guide people towards their financial independence that drove Aaron to start Steele Capital Management in 2013. Armed with an extensive background in financial planning and commercial banking coupled with a sincere passion for helping people, Aaron has the expertise and affinity for serving the unique needs of those in transition. Clients benefit from his objective financial solutions and education aligned solely with
helping them pursue the most comfortable financial life possible.
Born in Olympia, Washington, Aaron spent much of his childhood in Denver, Colorado. An area outside of Phoenix, Arizona, known as the East Valley, occupies a special place in Aaron’s heart. It is where he graduated from Arizona State University with a Bachelor of Science degree in Business Administration, started a family, and advanced his professional career.
Having now returned to his hometown of Olympia, and with the days of coaching his sons football and baseball teams behind him, he now has time to pursue his civic passions. Aaron is proud to serve on the Board of Regents Leadership for Thurston County as the Secretary and Treasurer for the Morningside area. His past affiliations include the West Olympia Rotary and has served on various committees for organizations throughout his community.
Aaron and his beautiful wife, Holly, a Registered Nurse, consider their greatest accomplishment having raised Thomas and Tate, their two intelligent and motivated sons. Their oldest son Tate is following in his father’s entrepreneurial footsteps and currently attends the Carson College of Business at Washington State University. Their beloved youngest son, Thomas, is a student at Olympia High School.
Focused on helping veterans and their families navigate the maze of long-term care solutions, Aaron specializes in customized strategies to avoid the financial crisis that care related expenses can create. Experience has shown him that many seniors are not prepared for the economic transition that takes place as they reach an advanced age.
With support from the American Academy of Benefit Planners – an organization with expertise and resources on the intricacies of government benefits – he helps clients close the gap between the cost of care and their income while protecting their assets from depletion.
Aaron can help you and your family to create, preserve and protect your legacy.
That’s making a difference.
Disclosure:
Disclosure:
Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice filed, or is excluded from notice filing requirements. BWM does not accept or take responsibility for acting on time-sensitive instructions sent by email or other electronic means. Content shared or published through this medium is only intended for an audience in the States the Advisor is licensed in. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copy of this transmission is strictly prohibited. If you receive this communication in error, please immediately notify the sender. The information included should not be considered investment advice. There are risks involved with investing which may include market fluctuation and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making an investment decision.
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