If you feel unsure about retirement, you’re asking the right question

Terry Gerton A topic that is on a lot of folks’ minds these days is retirement. Folks who retired last year or at the end of the fiscal year, at the beginning of the fiscal year at the and of the calendar year, there’s a lot going on and a lot of times people are concerned about when to pick the right retirement date. So as you start people thinking about retirement, what are some of the things that come up in that discussion.

Thiago Glieger Yeah, there’s a lot of different components to retirement planning, Terry, and you know, I think the first thing that we encourage people to remember is to just make sure that they are fully eligible to retire with benefits, right? When it comes to federal service, there are a lot different rules. So we have things like your age and service requirements for the pension. Are you collecting an immediate pension? Is it going to be a deferred pension? Are you going to postpone the benefits so that it’s not a reduced pension later on? And there’s also health insurance. It’s one of the greatest benefits we have through FEHB and federal service. And so you wanna make sure that you have continuation of FEHB into retirement before you actually leave and that you qualify, you checked all the boxes. Now, for the most part, most federal retirees are gonna have that health insurance in place. But here’s where I see it come into play sometimes where the spouse might have private sector health insurance coverage. And sometimes the coverage might be a little bit better than what’s through FEHB. So then maybe they’re taking care of their family through that, and then when they go to retire, they didn’t realize, hey, we have to be on the FEHB plan for at least five years for us to carry that into retirement. So that’s something to keep in mind as well. And then there’s other benefits, like the annuity supplement. If you’re not familiar with that term, it’s the special retirement supplement, as we call it. So it’s the Social Security light. And I have seen people, Terry, where if they had stuck around for six months longer, they could have qualified for the annuity supplement. And in some cases that would have been tens of thousands of extra dollars right at the beginning of retirement.

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Terry Gerton When someone is thinking about retirement, one of the things that comes up is actually choosing a retirement date. There are websites, I’ve seen them about the best day to retire, but there’s more to it than just a date on the calendar, right?

Thiago Glieger That’s right. There’s really two categories that I like people to be thinking about. There’s the financial component, which is what most people tend to focus on. And then there’s also the psychological component. So when it comes to the money, the first thing is you have to understand, are you going to have enough income between your pension or maybe social security, the annuity supplement, and the money that you’ve saved to be able to keep living your lifestyle and doing the things that you want to do, taking care of yourselves? Do you have a large enough nest egg, as we call it, which is where we’ve squirreled away all of the money in the TSP and other accounts so that we can continue to live our life ever so increasing because of inflation, and then also addressing taxes, which is a big part of retirement planning too. And then actually thinking about taxes too. You know, this is, when it comes to the money, taxes tends to be among the largest expenses that retirees are gonna face. And if we think about things like home renovations or college expense for our kids, Those are big expenses and we do a lot of planning around it, but seldom do we think about taxes in the same kind of way. And so if it’s going to be so big, we need to pay a little closer attention. Same thing when it comes to healthcare and other insurance, that’s all the money stuff. But then the psychological element, this is the one people tend to not really think too much about. They just think, you know what, I’m retiring because I don’t want to work anymore. And I will tell you from not personal experience, but our clients, that the not working is cool for about three or four months, and then that’s it. So we like to see people retiring to something rather than just from their current situation. So what is the purpose for waking up every day? Who are you doing things with? What are you enjoying in terms of hobbies? Are you volunteering? Are you traveling, right? And so those are things that are really important because the satisfaction is just important as being financially safe.

Terry Gerton That is so true, and I’ve seen it with many of my friends as well. What are you going to do when you don’t have to do anything? That’s right. Thiago, one of the other things that is important, and I think it relates to that psychological readiness, is people who actually start evaluating that and say, maybe I’m not ready to retire. I’ll just do one more year. And you call that a trap. Tell me why.

Thiago Glieger Yes, the the one more year trap. I’ve had clients who have been retiring in just one more year for about four years and it’s very easy to slip into this one more year because sometimes there is a good reason. Okay? So sometimes we are looking at maybe an additional benefit such as if you’re 61 years old and you’re you have at least 20 years in federal service hey maybe working those eight, nine, 10, 12 months to get yourself to 62 gets you 10% extra in your pension. That might be financially worth it. But other times, I think sometimes it’s people that are maybe just afraid of actually making this change and they’re calling that fear prudence, right? And this is something that can just be around, we don’t know what we’re gonna do yet, we’re not sure if the money is gonna be enough, we wanna grow our TSP more, we want a bigger pension or really just the idea that change is very hard for people. And so there are some risks in doing that. Right? You could get to a place where you really become unhappy, so you’re starting to burn out. And then there’s also the situation where we don’t really know what our health is going to look like. We could be very healthy until we’re not, right? And so I think that we have to think about our priorities in terms of what is our money for? Is it about getting more money or is it about taking care of ourselves? And at some point enough is enough.

Terry Gerton Certified financial planner Thiago Glieger is at RMG Advisors. Thiago, let’s keep on this financial thread here. Obviously, when a person retires, their income from their job stops. But what are the other sort of financial changes that occur when retirement begins?

Thiago Glieger Yeah, when your income goes away, it can be a little scary. But the good thing is that a lot of federal retirees are going to get what I call the retirement bonus, which is your annual leave lump sum payout, right? And so if you’ve accumulated a lot, when you will leave, you are able to get that as a lump sum payment, which has kind of nice because in some cases it could be again, tens of thousands of dollars. And when you leave service, you don’t start getting the pension immediately. There’s something called the interim pension, the interim amount that comes between you leave, when you leave and when the pension is actually finalized, which can take a few months. You can find those timelines on OPM’s website. And that lump sum helps you to have a little bit of extra cash in the bank. So that’s the first thing. Now the health insurance is often something that confuses people where they believe that they’re simply going to lose health insurance until their pension starts. And that’s not true. OPM is going to take care of that as long as you qualify to carry FEHB in retirement. So you don’t have to worry about that. They are adjudicating for that in your pension, making sure those premiums are being paid. But the biggest change of all, Terry, I think is this idea that now you are responsible for creating your income. Yeah, you’re gonna get a pension. In some cases, you’ll get a little bit of an annuity supplement, but then what? You have this big pile of money that now, you have to figure out how do we start taking the money out? How do we invest in such a way that it can create that income. Today, 10 years from now, as inflation comes in, how do we deal with taxes? And so all of these pieces that we’ve been contributing toward, now we’re taking care of ourselves and we have to make sure we’re aware.

Terry Gerton And so as you start to think about the complexity of all of those different pieces of income streams and taxes and insurance payments, how early should federal employees begin preparing for their retirement exit?

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Thiago Glieger I really like for people to start planning this at least six to 12 months ahead. But truthfully, I think a couple of years is really that magic spot because it gives you enough of a runway to start thinking about what’s going to need to be in place. If your income is going to go away and you’re just going to have a pension, but it’s not going to start for three or six months, depending on the backlog in OPM, you’re going to need to start accruing some cash. And saving a little bit of extra cash so you can bridge yourself after you retire that can take months, right? We’ve got expenses that we’re dealing with every month. So two years gives you a good time to start thinking about that. Another thing is that you can start to pay down some of those debt. If you’ve been carrying any student debt, you can accelerate that, if you’re dealing with college for your kids, if you are maybe you’re close to paying off a mortgage, you might consider accelerating those because when your income goes away those expenses can possibly go away as well right, so I think also the process of going through financial modeling and really working through a plan takes time, right? How long do we go through the process of coming up with a kitchen renovation and what we really wanna do, right? We wanna make sure we’re dedicating months and months and months and month, if not at least a couple of years to the process.

Terry Gerton When you think about some of the things you’ve just mentioned, there’s also Social Security and practice, maybe living on that retirement income for a while.

Thiago Glieger That’s a really good idea. And I’m really glad you brought that up, Terry, because it starts to put into place that muscle memory of, hey, we need to be more conscious of how we’re spending right now. When people retire, they’re often making the most money they’ve ever made, up until that point, right? And so sometimes, maybe they find themselves not budgeting as carefully like they should, or they always have enough income to be able to pay off the car each month, and so we want to start to live, as you say, practice living in the amount of spending that is going to be responsible in retirement.

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