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Michael Wood | How Retirement Cut Proposals Will Affect Federal Workers
Article by Michael Wood
MICHAEL WOOD –
There is much debate regarding the difference in working conditions between federal and private sector employees. On the one hand, private-sector employees think federal employees enjoy better benefits. Why is that so? Over the years, private sector employers have reduced their employee benefits. On the other hand, federal benefit packages are challenging to maintain. However, federal employees’ base salaries are lower than those of private sector employees. In turn, this creates the need for federal benefits to offset differences.
Recent White House proposals threatened to reduce federal employee benefits. This letter, from the director of the US Office of Personnel Management, details the proposed measures. These measures target federal employees enrolled in the Civil Service Retirement (CSRS)and FederalEmployees Retirement System (FERS). The goal of these measures is to reduce budget deficits. Already, pay freezes and compensation adjustments to affect federal employee benefits which are less than those of private sector employees are. Below are four possible measures that might be implemented.
Increases in Benefits Contributions
In the past, private companies offered retirement benefits that require no employee contributions. Even so, most employees prefer 401(k) retirement plans as it gives them greater control over their future. In contrast, public sector retirement plans require recurring contributions. Today, a majority of employees in FERS remit 0.8% of their salaries and3.1% or 4.4% if hired after 2012.
Under this proposal, FERS contributions will hike with one percentage point and a ceiling of 7.25% of base pay. This is equivalent to 14.5% of total pension similar to SocialSecurity’s 50/50 allocation of contributions between employees and employers. Paying an additional 6.45% of base pay necessitates pay cuts with no significant change in benefit payouts. Over the next ten years, this will slash deficits by $69 billion and more beyond this period.
Longer Pension Calculation Duration
Currently, FERS and CSRS benefits are computed using an average of the highest annual pay over a period of three years. Typically, this is derived late in an employee’s career when salaries are highest. The proposed law will increase this period to five years. An increase in the calculation period reduces the average as well as initial payouts lasting throughout retirement. Essentially, these proposals attempt to mimic how Social Security uses an employee’s 35-year history to compute pensions. All the same, private sector pensions follow rules similar to the public sector. Implementing this measure will save the Fed $6 billion over the next ten years.
Reductions in COLA Benefits
Similar to Social Security’s COLA benefits for retirees, federal pension benefits increase about inflation. Growing payouts in this way offset increases in the cost of living expenses.
The proposed new laws will reduce CSRS COLA benefits by 0.5% as well as wholly eliminate them from the FERS. This will translate to reductions of $50 billion in the next ten years and onwards.
No Supplemental Annuities
FERS supplemental annuities require that an employee quit service before age 62 and enroll in Social security. Supplemental annuities help determine what an employee’s corresponding Social Security benefits will be. However, proposed measures will eliminate these benefits saving the federal government $19 billion in the next decade.
Final Thoughts
Though the White House can only make suggestions, it cannot enact these measures. Given that, it’s obliged to provide direction regarding these proposals. As calls to reduce budget deficits increase, it is possible that Congress will deliberate on these and other proposals. However, federal employees will oppose these measures strongly, though if they are implemented they certainly will have to endure the cuts.
Michael Wood
Michael Wood is the principal and owner of Integrity Retirement Planning, LLC with offices located in Cambridge, Maryland. Michael began his career in Insurance and Financial Services with Bankers Life and Casualty in 1999 where he practiced insurance until 2002 at which time he started his own company.
OPINION | Is the Fed To Blame for Reduced Wages and Benefits?
In the recent past, proposed budgetary measures seek to reduce the benefits current and retired federal employees receive. Given that, it is worrying that federal employees aren’t doing anything to fight back this threat. What is the reason behind this nonchalance?
It could be that most feds aren’t aware of the impending threat. For this reason, many are oblivious of this risk to the retirement benefits and incomes. Others may know of these measures but could be ignorant and apathetic.
What are the Proposed Measures?
The White House’s 2019 budget proposal contains the proposed benefits cutting measures. Among the proposed in this budget are those that seek to reduce the following benefits:
Cost of Living Allowances (COLA)
Employees under FERS will no longer receive COLA annuities or pensions in the future. COLAs exist to offset inflation during a federal employee’s retirement. This measure is expected to affect a majority if the federal retirees. In this proposal are measures to reduce current and past CSRS COLA retirement benefits.
FEHB Health Insurance
Another proposed measure intends to reduce federal employees FEHB Health Insurance remittances. In essence, this is a well-hidden pay cut targeting federal employees.
Annuities
Also, the 2019 budget proposal will cut pensions and annuities are calculated to achieve desired cuts. Instead of using a high-3 annual average, this measure will use a high-5 annual average for calculations. In doing so, it will reduce the base used in calculating annuities and pensions. Employees who make a significant contribution to their retirement plans will be hard hit by this proposal.
Thrift Savings Plans (TSP)
Besides the above benefits, the 2019 budget proposals also target TSPs employer math and total value. What’s’ more, the G Fund’s interest rate is targeted for reduction.
Given that, the importance of paying attention to these proposed measures cannot be underrated. It is not possible to ignore these issues and hope to enjoy your benefits after retirement. The time for action is now! Electing to let this issue fade away is a recipe for disaster.
Hypothetical Case Study
Consider this hypothetical case of an employee with 34 years of federal service. Let’s assume that he learned of the impending measures to eliminate or reduce his benefits last year. Two of his major concerns include measures to eliminate the Special Retirement Supplement (SRS) and Cost of Living Allowance (COLA).
As a result, he conducts a Retirement Readiness Review(RRR) with the assistance of his financial advisor. Because of SRS cuts, he has to postpone his retirement by four years. Even worse, the proposed elimination of COLA benefits jeopardizes his retirement plan.
Presently, this employee is 54 years old and looks forward to retiring at 58 years of age. Given that, he planned to rely on the SRS supplemental income in his first four years of retirement. All the same, his RRR reveals he needs to make SRS withdrawals in the short term worth $69,000 for sustenance.
SRS Status
At age 62, estimates show that he requires an SSA income of $1,646. At 58 years of age, his SRS payments equal 87.5% of his SSA income at age 62, (35 years/40 year=87.5%). Initially, he had planned to use $1,440 ($1,646 * 87.5% =$1,440) each month for his retirement needs in the first four retirement years. However, he will have to delay his plans if/when the SRS is eradicated.
COLA Status
Though eradication of the SRS limits his short-term retirement objectives, the impact of the COLA proposal will be devastating. COLA adjustments exist to offset fluctuations in living expenses caused by inflation. By losing this benefit, federal employees will wake up to the impact of the proposed measures.
In this case, his Retirement Readiness Review helped him estimate the costs and income he needs to retire. Assuming that the SRS is still in place, his monthly income equates to $7,000 and a $6,000 monthly debt. Previously, he was comfortable with a $1,000 fixed salary per month before COLA’s eradication and its impact on his retirement financial status. Since 1913, the rate of inflation averaged 3.24%, though in some years it has exceeded this average. According to inflationdata.com, the average rate of inflation hit 4.86% in the 40s, 7.25% in the 70s, and 5.82% in the 80s. In these decades, life was hard for people with increasing living costs and no wage increments.
A key takeaway is that wages don’t matchup to inflation once you retire. The eradication of COLA means that any accumulated savings won’t be sufficient to offset the increase. Also, it is impossible to tell what future inflation rates will be. But using a moderate inflation rate can help reveal potential financial pitfalls.
What Will You Do?
- Federal employees need to mobilize against this proposed measures as well as speak with a unified voice.
- Lobbying political leaders and parties can help change policy viewpoints regarding proposed measures.
- Enroll as a NARFE member if you wish to protect your personal income as well as retirement benefits or other groups that represent federal employees.
The bottom line is either you get engaged or take what others think you deserve. When these measures are implemented and federal employees fail to take action, they will be solely responsible for their status.
How to change my TSP contribution
If you have not made a contribution election through your agency to start contributions or change the way your contributions work, there are a few steps:
- Ask your personnel or benefits office whether your agency or service handles enrollments
- Determine the amount you want to contribute and whether you want a Roth or Traditional TSP
- Return your completed TSP-1 or TSP-U-1 to your employer to get your payroll deductions set up. Your election should be effective no later than the first full pay period after your agency or service receives it.
Potential Government Shutdown Looms in Fall
With the start of the next fiscal just four months away, conflict in Congress makes it likely that a continuing resolution may be procured before October 1 to keep the federal government functional. What’s more, failure to reach an accord in Congress may lead to a formal shutdown of the government just six weeks to the midterm elections.
But how will this happen? Below is a breakdown of the possible ways this might unfold.
- In recent months, Republicans have made it clear that they won’t allow the passage of a budget resolution in Congress despite federal law requiring
- Subsequently, this makes it impossible to allocate funds for the coming year unless a budget resolution is adopted first before May 1st.
- Although the House had numerous opportunities to debate the appropriations bill for the fiscal year beginning October 1, 2018, the House didn’t take any action regarding2019 appropriations.
- According to gov, the House Appropriations Committee has only approved5 of the 12 2019 Appropriation bills with its subcommittee approving only two others.
- The present condition means that there currently isn’t any tentative approval of the 2019 appropriations
- What’s more, data on Congress.gov indicates that theSenate AppropriationsCommittee and its subcommittees have approved none of the allocations despite having the capacity to act independently of the House.
- Plus, there isn’t sufficient time for Congress to act. Besides, the fiscal year 2019 begins about four months time. Session 42 of the House is set to commence within 95 working days and theSenate has only 61 sitting days.
- But what can change this situation? Only if the WhiteHouse, Senate, and the House jointly can a possible government shutdown is averted.
- With the House FreedomCaucus flexing its political muscles, Democrats not willing to lose any political ground before the midterm elections, and a president willing to prove his mettle after okaying the 2018 appropriations bills reluctantly, gaining consensus in a fractured Congress will prove challenging.
- Also, achieving an agreement between Democrats and Republicans that pleases the president looks impossible. Keep it in mind that the president needs billions of dollars for his border wall.
- However, the House Speaker andSenate MajorityLeader are doing everything possible to prevent any potential government shutdown before fall. Accordingly, they are relentlessly working to have as many appropriations bills passed.
- Nonetheless, it remains to be seen whether this will be possible with so little time left before the beginning of the fiscal year 2019.
- What’s more, the House Speaker and Senate Majority Leader are keen to avoid short-lived continuing resolutions. Why is that so? It is becauseCRs will keep Democrat and Republican lawmakers in Washington instead of on the campaign
- Consequently, October 1 is a most important deadline marking the beginning of a political showdown regarding a CR and signaling the possibility of a potential government shutdown.
Michael Wood | Optional FEGLI Premiums Rising After Age 50
MICHAEL WOOD – FEGLI provides coverage to federal employees and is employer-sponsored. Interestingly, it is the largest insurance program of its kind in the USA.
The program was created in 1954 and covers federal employees, their families and retires. Currently, the Office of Personnel Management administers the program with MetLife Insurance Group underwriting its processes.
FEGLI offers four types of coverage options. The first option is Basic coverage, which the federal government subsidizes. In this arrangement, employees foot two-thirds of their premiums and the government pays the rest. Even so, employees foot 100% of premiums in the optionsFEGLI cover. But all FEGLI coverage is a Term Life Insurance that does not earn any interest or cash value.
Basic Coverage
With FEGLI Basic coverage employees receive automatic coverage unless one opts out. Typically, basic coverage has three death benefits that insure employees for a sum equal to their annual basic salary to the nearest $1,000 plus an extra $2,000.
Example: let’s assume Jane Doe comes to Michael Wood’s office and she makes $37,400 in a year. Based on the above rule, Jane’s death benefit would be $40,000.
Besides that, Basic FEGLI coverage adds additional funds equal to Jane’s annual basic pay. But upon attaining35 years, this figure reduces by 10% until age 45 when it ceases to apply. Below is a table showing how this works every year beginning at 35 years of age.
| Age at Death | Basic Insurance | Extra Benefit | Total Basic |
| Under 35 | $40,000 | $40,000 | $80,000 |
| 35 | $40,000 | $40,000 | $80,000 |
| 36 | $40,000 | $36,000 | $76,000 |
| 37 | $40,000 | $28,000 | $72,000 |
| 39 | $40,000 | $32,000 | $68,000 |
| 38 | $40,000 | $28,000 | $64,000 |
| 39 | $40,000 | $24,000 | $64,000 |
| 40 | $40,000 | $20,000 | $60,000 |
| 41 | $40,000 | $16,000 | $56,000 |
| 42 | $40,000 | $12,000 | $52,000 |
| 43 | $40,000 | $8,000 | $48,000 |
| 44 | $40,000 | $4,000 | $44,000 |
| 45 and over | $40,000 | $0 | $40,000 |
Keep it in mind that the additional coverage figure reduces annually until it no longer applies.
Another type of coverage under the Basic FEGLI coverage is Accidental Death and Dismemberment. ADD coverage pays an amount equal to the FEGLi’s basic coverage if an individual’s death arises from a covered accident. An equivalent amount is paid where an individual loses two of the following an accident:
- A foot
- A hand
- Or an eye
If lose of one of the above occurs, Basic coverage pays a $20,000 benefit.
FEGLI Optional Covers
FEGLI offers Optional Coverage that an employee pays for 100%. These options include:
Option A
This option lets employees purchase extra coverage worth $10,000. Althoughbenefitsremainconstantover time, employees graduate to higher premium brackets every five years. Below is a table detailing how premiums increase every five years upon attainingthe age of 35 years.
| Age Group | Costs of Option A Coverage Over Time |
| Under 35 | $0.20 |
| 35 to 39 | $0.30 |
| 40 to 44 | $0.40 |
| 45 to 49 | $0.70 |
| 50 to 54 | $1.10 |
| 55 to 59 | $2.00 |
| 60 to 64 | $6.00 |
| 65 to 64 | $6.00 |
| 70 to 74 | $6.00 |
| 75 to 79 | $6.00 |
| 80 and above | $6.00 |
NB: Coverage premiums increases are charged biweekly not monthly whenever an employee attains the age of 50 years. Term life issuance premiums are higher than those found in the private insurance marketplace.
FEGLI Option B
This optionalcoverage plan lets employees acquire coverageworth five times the valueof basic coverage. Similar to Basic coverage, this is term life insurancethat accumulatesno cash valueand earnsno interest. Plus, employees pay 100% of all coverage premiums. Option B coverageremainsconstantthroughout its duration but premiumcosts increase every five years after anemployee attainsthe 35 years. The example below demonstrates option B coveragethat is fivetimesthe value of basic coverage.
| Age Group | The premium for Option B Coverage |
| Under 35 | $3.80 |
| 35 to 39 | %5.70 |
| 40 to 44 | $7.60 |
| 45 to 49 | $13.30 |
| 50 to 54 | $20.90 |
| 55 to 59 | $38.00 |
| 60 to 64 | $83.60 |
| 65 to 69 | $102.60 |
| 70 to 74 | $182.40 |
| 75 to 79 | $342.00 |
| 810 and above | $501.60 |
NB: Option B coverage rates increase rapidly after attaining 50 years. At 50 years of age, employees pay $20.90 per payment period equivalent to $45.28 per month. At age 55, employeespay $38.00 per payment period equivalent to $82.33 per month. At this rate, premiums are bound to become unmanageableby the age of 65 years as well as premiums building no cash value during this time.
Option C
FEGLI Option C coverage lets employees acquire term life coverage for their families (spouses and any children). Accordingly, it covers spouses for $5,000 and children for $2,500. Besides that, emplo0yees can opt to obtain coverage that is five times the value of the initial lump sum for both spouses and children. However, all selected multiples must be of equal value.
OptionC covers unmarriedchildren from birthuntil the age of 21 years. Also, any disabledor handicapped childrenare allowed to remain under this coverage after the age of 22. Just like Options A and B amountof coverageremainsconstant though premiumsbeginto increaseuponattaining35 years. Below is a ratestablefor Option C coverage.
| Age Group | Costs per Payment Period |
| Under 35 | $1.10 |
| 35 to 39 | $1.35 |
| 40 to 44 | $2.05 |
| 45 to 49 | $2.95 |
| 50 to 54 | $4.60 |
| 55 to 59 | $7.40 |
| 60 to 64 | $13.50 |
| 65 to 69 | $15.70 |
| 70 to 74 | $19.15 |
| 75 to 79 | $26.30 |
| 80 and above | $36.00 |
NB: Option C rates increase at a fat rate from 60 years onwards. Even so, Option C children coverage may no longer apply at this age.
Comparing Between FEGLI Life Insurance Options and Private Market InsuranceOptions
The chart below illustrates the rates applicable to individuals making $96,100 annually with five multiples of Option B and Option C coverage
| AGE | Total Death Benefit | Bi-Weeklypremiums | Monthly premiums | Annual premiums |
| 50 to 54 | $594,000 | $73.30 | $160.12 | $1,921.40 |
| 55 to 59 | $594,000 | $121.25 | $262.71 | $3,152.50 |
| 60 to 64 | $594,000 | $247.75 | $536.79 | $6,441.50 |
| 65 to 69 | $594,000 | $486.45 | $1,053.98 | $12,647.70 |
| 70 to 74 | $594,000 | $920.15 | $1,993.66 | $23,923.90 |
| 80 and above | $594,000 | $1,337.25 | $2,897.38 | $34,768.50 |
According to this rates chart spread outover30 years, the total costs payable by the employer amount to $314,005. Interestingly, no matter how committed employees are to their life insurance policies not many can afford to pay the above figure. Fortunately, affordable alternatives exist in the private insurance market.
Private FEGLI Option A Alternatives
Acquiring similar coverage at age 50 in the private sector, one gets to pay cheaper premiums. What’s more, the table below depicts the considerable savings of obtaining private sector insurance.
| Age Bracket | Total Death Benefit | Bi-Weekly Premiums | Monthly Premiums | Annual Premiums |
| 50 to 54 | $594,000 | $193.59 | $2238.04 | |
| 55 to 59 | $594,000 | $193.59 | $2238.04 | |
| 60 to 64 | $594,000 | $193.59 | $2238.04 | |
| 65 to 69 | $594,000 | $193.59 | $2238.04 | |
| 70 to 74 | $594,000 | $193.59 | $2238.04 | |
| 80 and above | $594,000 | $193.59 | $2238.04 |
Apparently, private provider chargehigher rates that FEGLI’s group rates. This isbecauseFEGLI typically levies higher premiums on healthapplicants to offset shortfalls in less healthyapplicants. Nonetheless, in the private sector,this is not the case. The private marketplace pays a totalof $67,141 for a death benefit of %594,000 equivalentto asavingsof $246,864.
Michael Wood is the principal and owner of Integrity Retirement Planning, LLC with offices located in Cambridge, Maryland. Michael began his career in Insurance and Financial Services with Bankers Life and Casualty in 1999 where he practiced insurance until 2002 at which time he started his own company.
Michael Wood has been a licensed professional for almost 20 years, and he has focused exclusively on those consumers who are close to or already retired. He has a unique skill set and can help consumers carefully plan for federal retirement, long-term care, retirement income, Medicare, and Estate Planning. People who are getting close to retirement, or who have already retired, often find that the integration of the different components of their unique situation can be challenging to understand and plan for without help.
More Articles by Michael Wood: Is your Pension Safe?
Rick Spruill: How to Determine if FEGLI is Right for You
Rick Spruill Talks About Optimally Leveraging your FEGLI Coverage Options
RICK SPRUILL – Use the following three factors to help determine whether FEGLI is a sustainable coverage option for you. The first factor addresses your ability to satisfy underwritersrequirementsforindividualFEGLI protection. Doing so entails meeting criteria established by your lifestyle, social habits, age, and health. A second factor that determines whether you are eligible for FEGLI protection is the duration of protection. Keep it in mind shortly, a large percentage of federal employees in their 50s and 60s will have their FEGLI coverage revoked. Finally, your life protection needs also determine your qualification status.
Presently, the Federal Employee GroupLife Insurance provides the most extensive coverage policies in the world. Accordingly, coverage plan offers you plans that require no medical underwriting with competitively priced death benefits. Besides that, death benefits begin immediately upon enrollment. However, the flipside is that FEGLI premiums increase over time for all insurees. These changes are attributed to policy design innovations within this industry over the past couple of years.
But What If I Am Terminally Ill with Cancer, Suffer a Stroke or Heart Attack?
If this happens to you, expect to pay higher premiums. Subsequently, your ability to pay bills will adversely be affected. However, if you are eligible for living benefits, access to accelerated tax-free payments of your death benefits is available. But to do so, you need to make an application based on your needs.
On the other hand, the optional FEGLI offers nothing. So if you don’t have access to enough emergency funds or sick leave, you can apply for a hardship withdrawal. Even so, this can potentially wipe out of your reserves. Besides that, taxes will eat a significant chunk of your retirement assets as well as incur a 10% early withdrawal penalty.
With medical innovations increasing the average lifespans of most Americans, most federal employees are concerned about living longer than expected.
Although that is true, all types of insurance policies are geared towards ensuring that you maintain a comfortablelifestyle for your family. But families need to identify the kindof protection they require on an individual basis. Doing so can help these families prioritize their insurance needs and budgets.
Nonetheless, if insurance were free, then it would be possible to protect families against any conceivable harm. For this reason, most of us would opt to have full protection against multiple disasters. If we can potentially foretell the future, individuals would select optimal protection. In retrospect, it is not possible to do that, which means that we often cannot foretell what kind of protection is necessary. Consequently, selecting the best protection mandates that we identify the best coverage options at pocket-friendly prices.
Accordingly, this is a risky consideration when shopping for a comprehensive coverage option. For instance, polls of federal employees reveal that not many of them have significant savings to afford a cancer policy. Although one might have cancer coverage and then dies from a heart attack, than any cancer and LTC coverage they have is a waste of resources. Nonetheless, having a policy with multiple covers is the ideal situation. According to Rick Spruill, a perfect policy should cover all possible outcomes minus the additional costs, risks, or complications of acquiring use or lose it coverage.
So, who requires FEGLI coverage?
Initially, FEGLI coverage is suitable for federal employees under 45 years of age, why is that so? It is because at this age there is no Basic Extra Benefit as well as diminishing 5-year cost increases. This means that you have access to affordable alternatives and increased flexibility of LivingBenefits. Also, FEGLI is ideal for those with preexisting health conditions or risky lifestyles(read sea divers or tobacco smokers) that cannot be converged under a conventional insurance policy.
Although FEGLI coverage for all federal employees, its premiums are equal for both chain-smoking fast food aficionados and physically active vegans. What’s more, premiums are expected to rise by 2066% for both groups between the ages of 35 and 65. Here is a calculator to help you compute FEGLI premiums if you are 65 and above.
So, What Will You Do?
You need to ponder over these questions before settling for FEGLI as your desired coverage option. Alternatively, you could shop around for an affordable option that has Living Benefits.However, to do so evaluate the following questions:
- Ask yourself why you need coverage: is it to protect my family’s present lifestyle after my demise or is it to defend its present and future lifestyle?
- How eligible am I for underwriting?
- Will waiting before getting FEGLI coverage affect your eligibility for individual coverage?
- How long do I need to have FEGLI coverage to ensure that my family is fully covered after I am gone?
- How much retirement savings do I have for offsettingLivingBenefits?
Caveat! Do not wait too long before evaluating FEGLI policies as premiums are bound to rise in the future. Thus, you need to collect and evaluate available options to help you make the most suitable decision for your family and you. Once you decide to stay, leave, or drop coverage, you need to consult with a federally-certified financial advisor in making your decision.
So, What Will You Do?
Rick Spruill is a Financial, Retirement, Military and Civil Service Retirement TSP Fegli and VGLI Life insurance Conversion Expert, Wealth Transfer, Nursing home, Estate, Consulting and Planning Experts and a Business Tax reduction expert…
Other articles by Rick Spruill: Everything to Know About Denied FEGLI Claims
Linda Jensen | How to Pay Less Taxes on Your Federal Retirement Income
LINDA JENSEN- Paying tax on the federal retirement income is a necessity, but there are many ways to ensure that you pay less tax than you have been probably paying till now. If you want to learn how to pay less tax on your federal retirement income, then you must keep reading on. Here we are explaining how you can pay fewer taxes on your social security and TSP income.
The Extension on Filing Federal Retirement Income Taxes
It is a fact that most people file their federal retirement income taxes in April. However many people still prefer filing extensions and have until 16th October to file this year. Another fact is that people who have been paying income taxes may get a nasty surprise when they see the bottom line on the federal income tax return as withholding can be considerably different for retirement income as compared to employment income.
If you have ended up paying more taxes then you need to read on to know how to save taxes the next year. If you are among those people who are yet to retire, you will be glad that you read this article as you will not be paying a large amount of taxes due in the first year of retirement.
The Difference
When you are working in a federal job, you simply file a W-4, and all the vital taxes are withheld from your paycheck. You just set it and forget it. Things change when you retire.
Annuity and Taxes
Most people fill out a W-4P with retirement papers, and the taxes are withheld from the monthly payments. This withholding is usually based on the last W-4 filed when a person was still and employee. It is highly likely that the W-4 covers all the taxes that are due from CSRS or FERS annuity.
Social Security and Taxes
When you consider the social security withholding, things start to get difficult. It is very likely that 85 percent of your social security will be subject to a federal income tax at your rate for the ordinary income. However, some retirees will find that a lesser portion is considered to be taxable. Hence, the higher your income is, the higher would be the percentage of your social security benefit that is eligible for a federal income tax.
It is a fact that social security will not withhold anything from the payments for taxes until you request for the same. The main thing here is to avoid a tax surprise by paying the income tax on the social security as you go. You should ask the social security to withhold taxes from your monthly payments when you apply. In case you are applying for social security income online, you should do it by using the remarks section of the form. Alternatively, you can file a form W-4V after applying for social security.
Another useful advice to save extra tax on your federal retirement income is that you should make quarterly tax payments. These payments are due on January 15, April 15, June 15 or September 15. If you are a bit forgetful or you tend to accidentally spend the money you have set aside for tax purposes, then you should ask the social security to withhold 25 percent of your payment for paying up the federal retirement income taxes.
TSP and Taxes
If you need to know about how your federal retirement income in TSP will be taxed, you should check a booklet that is available on the website of TSP and offers a detailed table that describes the withholding on each kind of withdrawal. As per the TSP statistics, the most common withdrawal is known as substantially equal monthly payments in which withdrawal is withheld as if you were filing jointly, married and claiming three exemptions. It is usually there if the payments are likely to continue for a time span of 10 years.
A CPA expert calculated that you need to be withdrawing more than USD 1,700 per month before TSP starts the withholding process. So, you should increase the amount of withholding by completing withholding portion of TSP withdrawal form.
In case you have begun the distributions already, and you want to have more money withheld then you should file a W-4P. You should also change the withholding on form TSP-73 during the open season as this form is available on TSP website during open season. Like social security, you can also make quarterly estimated tax payments in TSP.
Conclusion:
It is a fact that most people do not like to pay taxes and they like it even less when the taxes are levied on federal retirement income but all of us need to pay them. Many people have no idea how taxes are withheld from retirement sources of revenue like social security and TSP. So the best idea could be to make changes now and avoid a penalty in the future. Talk to a financial expert such as Linda Jensen and learn more about your options.
Linda Jensen is the principal and owner of Asset Care & Preservation Services with offices in Olympia, WA. Linda began her career with Prudential Preferred in 1994 where she was an agency leader. She earned the credentials of a financial planner and has been in practice as an investment and insurance professional since that time. Linda Jensen started her own company in 1997.
The Blended Retirement System
The Blended Retirement System
More than 1.5 million individuals are qualified to decide their future military retirement benefit. The new law which has been in effect since 1st of January, 2018 has given them this chance. Department of Defense offers obligatory training for those qualified individuals with specific kind of educational programs, ensuring everyone understands whether they are eligible to choose the Blended Retirement System. Similar to the Thrift Savings Plan or TSP introduced by the TSP government, the Department of Defense created this retirement plan for the service members. While a significant reason behind launching this new retirement system is to conserve the money of the government, this new retirement plan provides numerous benefits to the veterans. To get the maximum benefits, military officers need to assemble their reserve funds for retirement. They can either open an independent venture or turn into a temporary administration worker with a confirmation as a veteran-claimed small business.
Benefits of TSP
Eligibility for the Blended Retirement System:
TSP government will enroll FERS members if they were hired after 1984. In case of Blended System, the recently hired service members have enrolled automatically. Also, current service members who have been on the job for about 12 years and also those individuals with a paid status of less than 4320 retirement points. Likewise, any service who were enrolled by the service administration or consented to a service arrangement will have the option for the Blended Retirement System. This service is not provided by the TSP government.
Difference between CSRS and FERS
Retirement benefits of Blended Retirement System:
- Whether you have contributed to your Thrift Savings Plan or not, you will still receive a 1 percent of the base pay in the TSP account.
- The Department of Defense co-ordinates your TSP commitments by increasing at 5 percent of your base pay.
- You will receive a continuation pay which is not provided by the TSP government. It is a one-time payment if you are in the service for 12 years, and in return for your duty to serve an extra four years in service. In March 2018, the current individuals of the service received 2.5 times their month to month essential pay as of the day they started the service of their twelfth year of service.
- The Reserve and the Guard service member will receive half of their current salary.
- Those who will be retiring soon can obtain either half or quarter of their future retirement pay by means of lump sum amount at their retirement. Retirement paychecks would come back to their full sum after they reach the age 67.
How does TSP work?
Action elements:
Just like the Monthly Annuity calculator provided by the TSP government, the Department of Defense provides the BRS calculator where one can assess the retirement benefits. Before the service members make a final decision, they take an obligatory training session which is available in the learning management system of the service. Joint Knowledge Online and also via Military OneSource. The air service members, sailors, and soldiers can choose the Blended Retirement System through MyPay. Along with that, the Marines can choose the retirement system via Marine Online.
When it comes to Retirement plans, this is one of the best financial systems for the retired service members with unbelievable benefits for their future endeavors. The Department of Defense has created a personal savings system for the service members.
Michael Wood | 2017 TSP Modernization Act Comes with Surprising Benefits
MICHAEL WOOD – The TSP can be one of the best ways for you to save money and get the maximum out of your retirement plans because it allows you to get the highest possible returns by investing as early as possible.
Last November’s TSP Modernization Act of 2017 gives more flexibility to federal employees regarding investing and withdrawing money from their savings. Before the Modernization Act, employees could only withdraw money in two lump sums, once at 59 1/2 and secondly at the end of their service, when they would have to take the whole amount at once. After the Modernization Act, the rules changed so that an employee can make a post-separation withdrawal as early as at 30 days interval. In case of service age based withdrawals, that can be made up to 4 times a year.
The law also provides participants with much greater flexibility when it comes to changing the frequency and amount of monthly installment payments. Before the Act, a federal employee could only receive payments on a monthly basis from their account. An open season between October and December was the only time to make any possible changes to the number of payments. Now, a participant can choose to receive payments on a monthly, quarterly or annual basis. They can now change the amount and frequency of the payments whenever they want with having the power to stop or restart installment payments.
These changes in laws ensure better flexibility and control over your TSP, providing you can get the absolute most out of your plans. Also, these flexibilities offer that you get to use the savings whenever you need and also save based on how much you can spare. With these conveniences in place, designing your TSP and making sure you choose the right plans for yourself makes absolute sense.
With other reports suggesting that there is a chance, federal employees’ retirement plans can be cut to as much as $143.5 billion, which will directly affect current and future retirees. Along with that, there is a proposed pay freeze that can potentially happen next year after the hiring freeze for a while. Trump Administration is looking to make a complete overhaul in the public service sector, but all the details have not been outlined thoroughly. There are discussions on how to make the process of hiring younger workers far more accessible than what it is currently.
These proposed cuts can end up taking a significant toll on your retirement savings as there will be much fewer government subsidies on each sector of retirement plans. This means even for the same investments you’re likely to get a considerably lower return can end up hurting your long-term plans. The proposed pay freeze can harm your expected incomes over the year, and if you are hoping for some increment and thus planning to pay your installments, your plans might get disrupted with the pay freeze in action.
While planning your TSP, it’s better to make sure how much you can put away in installments along with how frequently you can do it. Also, you need to work out exactly how much saving you’d want at the end of your service and plan accordingly. TSP provides you with the best opportunity to secure the best possible future for you and your family. With these laws in place, you will get to reap the benefits even more.
Michael Wood is the principal and owner of Integrity Retirement Planning, LLC with offices located in Cambridge, Maryland. Michael began his career in Insurance and Financial Services with Bankers Life and Casualty in 1999 where he practiced insurance until 2002 at which time he started his own company. If you have questions, contact Michael Wood with questions about how you could save on your TSP.
