Terry Gerton I want to start by picking your brain on health insurance. Many federal retirees and near retirees are traveling more, and often they\u2019re traveling internationally. If you\u2019re covered under the Federal Employees Health Benefit Plan, how does that coverage work outside the US?<\/p>\n
Tammy Flanagan That\u2019s a good question, Terry, because each plan has its own set of requirements when you\u2019re traveling overseas. Some plans are fairly generous. In fact, Blue Cross Blue Shield has offices overseas where if you\u2019re in those areas where those offices are located, they\u2019ll pay the claim for you and take care of it just as if you were here in the U.S. But other plans will say, you know, go ahead, but be prepared to pay out of pocket. And then when you come home, file the claim and we will reimburse you. And in many cases, that also requires that you translate those bills into English and convert the currency into dollars. So you want to check your plan brochure or give your plan carrier a call before you travel overseas, just to find out what happens if I have an emergency, what happens If I fall or get sick, you know, what is gonna happen as far as paying the bills and getting care. And also importantly, is if you can\u2019t travel back home commercially like you got over there, you might need some repatriation benefits, and I\u2019ll tell you, none of our federal health plans offer those benefits, including Tricare does not offer it as well. So you want to have some good travel insurance that includes that repatriate benefit. Otherwise, you might be stuck there for six months while you recover.<\/p>\n
Terry Gerton Travel often goes hand in hand with retirement itself. So if someone has just retired from federal service and maybe delayed Medicare, can you walk us through the eight-month special enrollment period for Medicare Part B? And what happens if you miss it?<\/p>\n
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Tammy Flanagan Yeah, sure, because I think this is becoming a big issue based on the number of emails I\u2019ve received over the last year with all these massive number of employees who retired. And some of them are over age 65. So they weren\u2019t able or they didn\u2019t have to enroll in part B while they were still employed, even though they were eligible. Most of them would have enrolled in part A, which is the hospital insurance, but they delayed enrollment in part B because they still had current employment health coverage. Which means they\u2019re not gonna be charged a late enrollment penalty, as long as they enroll within the special enrollment period that lasts for eight months following their retirement month. So that gives them time to decide, do I want part B? Do I need to have part B, which health plan is gonna work best with it? So it does give you a little bit of time, but you do wanna consider it during that period, because then from that point forward, for every 12 months past your retirement date, you\u2019re gonna pay a 10% permanent late enrollment penalty on that standard premium. So if you wait two or three years to make that decision, that could increase your cost in today\u2019s dollars by more than $60 a month, just for waiting. So you do wanna look into that and consider the benefits of having Medicare versus just using your federal health insurance. We\u2019re lucky that we can\u2019t have that choice where we don\u2019t have to take Medicare, but you don\u2019t want to be short-sighted about making that decision.<\/p>\n
Terry Gerton Well then for retirees who might be juggling FEHB and Medicare and now living on retirement income, how can they think best about aligning those health coverage decisions with what they\u2019re doing financially?<\/p>\n
Tammy Flanagan Right, yeah, so a lot of our employees have three sources of income. In fact, most of them do, but it depends on whether they\u2019re ready to turn them all on or not. So generally what happens when you first retire, you\u2019re going to get your FERS retirement benefit, or in some cases, you\u2019re still getting a civil service retirement benefit if you\u2019re under the old system. But in addition to that, you might be qualified for social security, and you need to decide if you going to turn that on right away. If you\u2019re under your full retirement age for Social Security, you have to decide if I\u2019m going to go back to work or not somewhere because there is an earnings limit of how much you can make in the job or the career before you have to hand some of that Social Security benefit back. You don\u2019t lose that earnings limit till you reach your full-retirement age, which is generally close to age 67 for most of our listeners. Now your third source of income, this is the most flexible source, is your Thrift Savings Plan. And that\u2019s really come a long way since the Thrift Plan started back in 1987. In fact, I was looking at some recent statistics and I thought it was in billions, but it\u2019s actually in trillions. We have over $1 trillion in the TSP. I had to look up how many zeros that is, and that\u2019s 12 zeros after the one. So that\u2019s come quite a long away from nothing to this trillion dollars. But the average account balance is not close to a trillion, It\u2019s more like $220,000, $240,000 for the average federal worker in their TSP account. So you gotta keep saving and build that up so that you can create a source of income to add to your FERS benefit and your Social Security.<\/p>\n
Terry Gerton I\u2019m speaking with Tammy Flanagan. She\u2019s a principal with Retired Federal. Well, Tammy, let\u2019s look at the TSP a little bit more in detail because, as of January of this year, TSP participants can do Roth in-plan conversions. So for retirees or those close to retirement, what should people understand about moving pre-taxed TSP money into a Roth?<\/p>\n
Tammy Flanagan Yeah, it sounds pretty enticing to do that because you\u2019re taking money that you\u2019ll have to pay taxes on later on when you start to withdraw the money, but you can convert that now to money that you won\u2019t have to pay taxes on later, but you gotta pay taxes on it now when you make the conversion. So the way it works when you\u2019re doing that within the TSP account is let\u2019s say you decide I\u2019m gonna convert $100,000 of my TSP from traditional pre-tax TSP to the after-tax Roth account. Well, that\u2019s fine. You can move that entire $100,000 into the Roth version where it\u2019s gonna grow tax-free from that point forward. However, the $100,00 now becomes taxable income. So when it\u2019s time to pay your 2026 taxes, you\u2019re gonna have an extra $100,000 W-2 or I should say 1099 that\u2019s gonna come that you have to pay tax on that with other money, not the money that you transferred because that\u2019s all wrapped up in your Roth now. Then the other problem with the Roth TSP is that, right now, tax rates are what they are, but when the time comes to withdraw the money, will they be different? Will you be in a lower tax bracket or a higher tax bracket? Will the rules change requiring some people to pay tax on their Roth distributions? That\u2019s been proposed in the past. So when you\u2019re making that decision, you\u2019re still taking a bit of a chance, not sure what the future holds. So you\u2019ve got to be careful about the tax planning and also what you might expect in the future down the road.<\/p>\n
Terry Gerton There\u2019s a lot of individual considerations there. And one of the things that\u2019s really interesting, speaking of how different people think about their TSP, is how people are actually using the plan. Are they taking it as regular allotments or annuities? Or are they doing something else with it?<\/p>\n
Tammy Flanagan Well, Terry, there are a lot of numbers coming out recently about what people are doing with their TSP accounts after they leave. And that used to be, and it probably still is to some extent, that some people aren\u2019t doing anything with it and just letting it continue to grow or maybe adding to their savings by going into another job. But for those who are taking money out, and last year was a pretty big year for that, with all the deferred resignations and delays in retirement processing. So it was difficult for some people to get by without a paycheck or without a retirement check for those couple of months. So last year we had 700,000 people take out either age-based or hardship transactions. And half of those were age-base, where as employees, they were thinking ahead and getting money out of the TSP, perhaps putting it into an IRA. And for the hardship ones, these are employees that have a financial hardship where they\u2019re having trouble paying their monthly bills. And so they\u2019re taking that money out of their TSP account and paying tax on it because that\u2019s not a loan. That\u2019s a transfer out of the thrift. Now, the loan program is also very popular. We have half a million TSP loans outstanding and those total value of those loans are $5 billion. So we do have a lot of folks who are not only contributing to their thrift, but they\u2019re also paying back those loans. But the good news there is you pay back yourself. And you pay back money at the G fund rate. So it\u2019s a pretty good, decent rate of return on that loan program. Now, as far as withdrawals and ongoing payments, you have a lot of folks who are taking out monthly payments from The Thrift, where they either decide I need $1,000 a month or whatever that amount is. So there\u2019s a lot ongoing monthly payments, but not so many coming out in the form of the TSP annuity option. You know, a lot folks have not felt that that was a good option for them yet. In fact, I saw there\u2019s only about 1,200 annuity payments going out every month. So such a very tiny number compared to how many TSP participants we have. But as far as the folks taking monthly withdrawal options, that\u2019s a huge number. That\u2019s about 900,000 folks doing that as a supplement most likely to their FERS benefit and their social security.<\/p>\n
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Terry Gerton As you describe that, it\u2019s clear that the TSP system allows for a lot of flexibility and a lot individual design. What conclusions do you draw as you look at all of that variation there about how people really want their retirement distributions to work for them.<\/p>\n
Tammy Flanagan Yeah, well, I think the whole goal of the TSP was to create that third source of income because you can\u2019t really live quite nicely on your FERS benefit by itself. That\u2019s going to pay your health insurance and your other benefits, and what\u2019s left isn\u2019t all that much to live on. So between that and your Social Security, you\u2019re going to need that third stream of income. So be sure that you consider that in your retirement planning because if you retire age 57, pretty young age to retire, you have to plan for the next three or four decades of life and you wanna make sure that that amount of money that you\u2019ve saved is gonna last you that long. So don\u2019t be too quick to pull too much out too fast. So sometimes it might require a little part-time job or something to supplement your other income while you\u2019re waiting till the time is right to make those TSP withdrawals, but it can create a pretty nice source of income. And for some folks, it\u2019s a third of their retirement income. In some cases, it\u2019s a third coming from FERS, a third of their income coming from Social Security, and another third of it coming from TSP. So they can be equal shares in some cases.<\/p>\n
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