Your federal retirement benefits represent potentially one of the most valuable assets you possess. Making the wrong decisions with the benefit options that you are eligible for can possibly delay retirement eligibility, deny health insurance to survivors, forfeit free life insurance, or even prohibit your spouse from a valuable stream of survivor pension income. It is time to start thinking like the Federal Millionaire that you are and Maximize those benefits!
1) Pensions – There are fewer and fewer companies that provide pensions for their employees. Have you ever thought about the value of your pension? Let’s make a few assumptions for illustrative purposes: you are a 62 year old retiree with a basic FERS pension annuity of $40,000. Let’s assume you have an average life expectancy of 85 years old. Let’s assume a simple Cost of Living increase (COLA) of 1.5% each year. Your pension would be worth approximately $1,000,000 under those assumptions. Live longer and its worth more. Have a spouse who outlives you? It could be worth a great deal more. Adding the value of your social security pension, you’re worth quite a bit more than you thought. It is time to start planning like the Federal Millionaire that you are!
2) Health Care (FEHB) – Have you thought about monetizing the value of the health benefits you’ve earned through your federal service? What are they worth? If you compare your FEHB costs while working to your private sector counterparts, you might find that private employers pay as much of the group coverage cost for their employees as the federal government does for you. However, at retirement, many private sector employees find that they are required to pay the entire cost of their benefit to continue their health insurance. Not so for the federal employee! Even in retirement, the federal government pays approximately 2/3rd of your health insurance premiums. If that wasn’t the case – how much money would you need to have saved to pay entire premium yourself? Many reports state that the average 65 year old couple will pay between $275,000 and $375,000 in healthcare costs over their lifetimes. Granted, this includes deductibles and prescriptions – but a healthy portion of that estimate includes Medicare Part B/D supplements and approximately 70% of your premiums are paid by the federal government as a result of your federal service! If we took that number and extrapolated the value of the benefit over the same 85 year old life expectancy and then adjusted its value based on the rising cost of health care, what do you think your value would be? Let’s take a look. If you are paying $400 per month for family coverage for you and your spouse, then we know that the government is paying about $800 per month. If we grow this benefit at a rate of 5% per year (slower than it is actually increasing), that means by age 85 the government portion will be about $28,000 per year in premiums. If you total all those premiums up for the next 23 years, you have nearly a $400,000 benefit! What a powerful benefit!
3) Life Insurance (FEGLI) – No doubt about it, it can get expensive over time. Especially in retirement. But did you realize that there is a way to keep some of it for FREE? So many federal employees don’t take the time to look at the cost of maintaining free coverage in retirement and throw away their ability to do so, in turn costing their beneficiaries thousands of dollars of expenses when they pass away. That’s right. We have witnessed federal employees who were told to cancel all their FEGLI because it was over priced and too expensive. In one case, the employee threw away about $40,000 tax free dollars in insurance money that was absolutely FREE. Think like the Federal Millionaire that you are and be sure you know which FEGLI insurance is right for your situation.
4) Survivor Benefits (SBP) – They can be very expensive but are sometimes the best thing we can do for our family! In many cases, the key to this amazing benefit is securing the federal health benefit eligibility for your spouse. Owning them in the most efficient way can add thousands to your family’s bottom line; throwing them away can devastate an otherwise “healthy” plan! Take a look at this following example: A federal employee elects to provide a full survivor pension for her spouse (awesome job–we highly recommend doing it, but just do it the correct way!). It will cost her $9,100 per year to leave this benefit for him. Again, let’s make her age 62 and expect her to live through age 85. How will that story play out? If she pays $9,100 per year for the 23 years she lives and her spouse should tragically pre-decease her, where does the $209,300 (23 x $9100) go that she spent on this benefit for him? NOT back to her or her family! What if she elected a smaller option for his Survivor Pension–let’s say 10 % of the survivors benefit to maintain healthcare eligibility. It would only be approximately 10% of the costs, and the remaining 90% could purchase a “private pension equivalent” that will make sure all of those resources will eventually make it back to the employee’s family. This will put nearly $188,000 back into the estate of the federal employee and still provide a lifetime of healthcare and pensions for all! This is certainly a thought process for the Federal Millionaire!
5) Military Service – Have you served in the military? Are you a reservist with a lot of active duty? Attend one of the military academies? Have you looked at a true cost benefits analysis to determine the value of buying your active duty so that your time served can be applied to your federal retirement? Even at the end of your federal civilian service, it might make sense to buy your time and add significant value to your retirement. But so often, those who qualify to buy back benefits see a large buyback number and feel overwhelmed. Don’t be! Have a real cost benefit discussion with someone who is able and qualified to explain the value of that extra service time in your annuity calculation. Since the cost for figuring out whether or not you should buy it back is free, get the data and make an informed decision. An example: We have witnessed enhancements of nearly $9,000 per year in a combined salary increase when this benefit is exercised properly for a qualified retiree, and it only costs the individual just under $17,000 to buy it back. He was all paid back in less than two years, and every paycheck after that reminded him of the power of capturing and being compensated for his military service!
6) Thrift Savings Plan (TSP) – Decisions, decisions! TSP can be one of your most powerful accumulation vehicles. After all, you get up to a 5% match on your contributions. But what about costly distribution errors? So many federal employees find themselves accidently putting their TSP funds into a more restrictive position just when they need the funds the most. You need someone who is qualified to understand and navigate the positives and the negatives of the TSP distribution rules. Use that Millionaire mindset and determine your best course of action with your TSP. A costly error in distribution could leave hundreds of thousands of dollars out of your estate and your family’s hands. The number one failure that we see federal employees take with their TSP is a pre-mature IRA rollover. They do this in haste before understanding the impact of that decision. IRA rollovers are a great thing–just know what you are doing before you execute!
7) Retirement Planning – You spent 3 months planning your last one week vacation with the kids and grandkids. As Federal Millionaires, you owe it to yourself to put together a solid retirement plan that integrates all your federal benefits into one comprehensive plan. The poorest execution of a good plan will always outperform the perfect execution of no plan at all! As a Federal Millionaire, your comprehensive plan is a must!
The point is you have incredibly powerful benefits, and even if you consider yourself a modest retiree, your federal service benefits put you in the top tier of financially successful retirees. It is crucial that you work with a planner who not only understands your federal benefits, but who also has the ability to provide counsel to you. Understanding benefits without the ability to see the financial big picture, or, conversely, not understanding the true value of these federal benefits is like trying to see the whole picture while wearing blinders. You owe it to yourself and your family to make sure you find a professional who can demonstrate that he sees both sides of the picture. One final thought–if what you thought were true turned out not to be, when would you want to know? Do not hesitate and get started now living like the Federal Millionaire you are!
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About the Author: Gary Fouts
Mr. Gary Fouts is currently the National Director of Retirement Benefits Training and a Senior Partner for Retirement Systems Solutions. He is responsible for all matters relating to both the development of RSS regional specialists across the nation and the creation of comprehensive and up-to-date training materials for federal, state and local employees or agencies. He specializes in federal, state and local benefits training and coordinates agency-sponsored and public seminars on how to structure retirement benefits. Prior to his current position, Mr. Gary Fouts served in the U.S. Navy, retiring after 22 years of faithful service as a US Navy Intelligence Officer. During that time he was directly responsible for supporting the warfare communities with valuable and timely intelligence. A trademark of his career in this capacity was the ability to inform his war fighting customers of what they needed to know to conduct their mission. He always distinguished between the facts that surrounded a situation and the emotion of the moment. This is a skill that translates directly into his line of work today as a benefits counselor. As our governments continue their never-ending expansion and contraction, now more than ever, it is crucial that all employees have an opportunity to receive clear, objective advice relative to their retirement benefits. Gary Fouts graduated in 1991 from Purdue University (Go Boilermakers!!!). He holds a Bachelors degree in Computer Information Systems and a Masters degree in Quality Systems Management. Mr. Fouts is a very active member of his local church and serves on the board of various charities. He is a devoted husband and father of five children and is married to Dr. Sara Lee Fouts.