Are you a federal employee planning for retirement but feeling overwhelmed by your options? In this episode, Michael, Ben, Tommy, and John break down the Federal Employee Retirement System (FERS), explaining key retirement benefits and strategies to maximize your pension. From the differences between immediate retirements to the role of sick leave and survivor benefits, this episode covers what you need to know.
Listen in to learn about the value of accountability partners, survivor benefit options, and why your FERS pension might just make you a secret millionaire. You'll hear practical advice to help you retire confidently and comfortably.
Listen to the full episode here:
What you will learn:
- How you could be a secret millionaire. (3:20)
- The importance of having an accountability partner. (5:00)
- The calculation for FERS. (7:00)
- How to use sick leave toward retirement. (11:00)
- The three types of immediate unreduced retirement. (17:50)
- How the Survivor Benefit Plan impacts FERS. (20:15)
- The three options you have for survivor benefits. (26:15)
- Why your FERS pension is one of your largest assets. (30:05)
- What you need to know about health insurance and benefits. (36:00)
- Why it is never too late to start. (43:10)
Ideas worth sharing:
- “Don’t think you missed the gravy train if you missed the CSRS version of Federal retirement.” - Mason & Associates
- “If we use our annual and our sick leave correctly throughout our career, maybe we work for 35 years instead of 30. But that’s a much bigger impact than storing it, being miserable, hurting every day, and burning out. That could make a big difference in the length of your career.” - Mason & Associates
- “When you have survivor benefits, you behave differently. We know our spouse is taken care of, we know our children are taken care of. We make decisions because we have survivor benefits. We’re not in defense mode when we have these benefits.” - Mason & Associates
Resources from this episode:
- Mason & Associates: LinkedIn
- Tommy Blackburn: LinkedIn
- John Mason: LinkedIn
- Ben Raikes: Website
- CSRS
- FERS
- Benefits Administration Letter
- John Mason interview with WAVY-TV 10
- Medicare
Did you enjoy the Federal Employee Financial Planning Podcast? Never miss an episode by subscribing on Apple Podcasts, Amazon, Spotify, and YouTube Music.
Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
John Mason: Welcome to the Federal Employee Financial Planning Podcast. I'm John Mason, President and Certified Financial Planner at Mason & Associates. And on this episode, we have the entire crew, Mike Mason, Ben Raikes, Tommy Blackburn. And folks, if this is your first time tuning into our podcast, we're very credentialed, we're financial planners first, we do this second.
We have four certified financial planners, a CPA, an EA, a CLU, a CHFC, so very credentialed. And we've been specializing with federal employees for, I think, almost four decades now. So again, we do financial planning first, we do this content creation second. Thanks for tuning in. If you've been here for our entire journey, which is almost three years, thanks for subscribing.
Thanks for being back every two weeks as we release new episodes. So this episode today is navigating FERS, retirement options for federal employees. So we're going to talk very specifically about the federal employee retirement system. We're going to go through the differences of immediate retirements, whether it's reduced or unreduced. We're going to talk a little bit about deferred versus postponed. And we really just kind of want to get back to some of the basics because we've been drifting a bit. We've been talking about a lot of different things so we wanted to kind of get back to our roots here and do a federal benefits-specific show.
So guys, as we kick this off, hope everybody's having a great morning. it is Wednesday, right? I think Wednesday, September 18th, as we record this.
Ben Raikes: Yeah. I having a great morning, John. I'm laughing a little bit as you're saying, “Hey, we need to get back to the basics, starting this podcast.”
And we chatted for just a few minutes before we got started and you can really go down a rabbit hole thinking about all the different options that you have under a first retirement. But our goal here is to start at a 30,000-foot view and drill down a little bit, but make this really easy and digestible for you all, give you the basics and just give you some food for thought.
But having a great Wednesday morning, it's rainy here in Richmond, but I'm fortunate because I just had my yard aerated and seated. So I actually had good timing on that.
Tommy Blackburn: You didn't do it yourself?
Ben Raikes: I did not do it myself, Tommy, believe it or not.
Tommy Blackburn: You've come a long way.
Ben Raikes: I knew that was coming.
Michael Mason: I'm really excited to do this as well. We started specializing with federal employees back when CSRS was the most common, and now it's FERS. And we have a saying at Mason & Associates, I'm sure if you're a regular listener to the program, you're the secret millionaires out there. One of my favorite comments is don't think you missed the gravy train if you missed the CSRS version of a federal retirement.
So as we talk about this, we're going to talk about why we call you the secret millionaires as well. So it's exciting for me to get back to a podcast we probably did a year and a half ago, but it's great to refresh it.
John Mason: Well, guys, as I was preparing for the podcast today, I know we all prepare in different ways. And this morning I got up around five o'clock. I won't take too much time with this, audience. Don't worry. So I woke up around five o'clock. my son wasn't much behind me. And the whole goal of this morning was that I wanted to get a workout in before the podcast. And I was talking with Mike yesterday, who many of you know as my dad, and I was like, it is just so hard to make the right decision every day. Whether it's what you buy at the grocery store, what you put in your body, as far as food, whether or not you work out, whether or not you run. And it's like every single day, our bodies and our minds and everything is on defense mode. Every day. And it's just so hard to make those right decisions, but I know three of us on this podcast, the millennial generation all have Apple watches and I know Ben, he lost his in a river and he had to go out and buy one immediately because he knew he was going to work out the next day and he couldn't not close his rings or get credit for the workout.
Ben Raikes: It was awful.
John Mason: It’s awful. And you just start thinking about, it's really hard to make the right decision all the time. So we've created these hacks, whether it's an Apple watch or things of that nature that keep you motivated because it's hard to have that intrinsic motivation all the time.
And it occurred to me that's one of the reasons we have a job at Mason & Associates is you don't necessarily get an Apple Watch for your retirement. You don't get an Apple Watch for buying the right amount of life insurance. Like your Apple Watch isn't going to help you do these things. So you need an accountability partner.
Some things it can be a machine, other times it needs to be a human. And as I was reflecting on the value that we provide to our clients, it seems like that accountability partner, helping somebody always make the right decision is something that's very important on what we do every day.
Michael Mason: And Ben, that watch has been on your arm for so long, I'm sure as it was sinking to the bottom of the river, you were concerned that the watch was going to tell your brain that you were drowning. So you had to go get a new one to stay alive.
Ben Raikes: I'm surprised there wasn't an auto 911 dial to the middle of some lake in Maine.
John Mason: So let's dive right in. So navigating FERS retirement options for federal employees. So as I look over here at my notes, let's talk about first, how do you calculate a FERS pension.
So F-E-R-S, FERS, how do you calculate a FERS pension? We're going to go through some of the immediate. Retirement. So immediate unreduced. Let's go there first. And then for the audience, FERS, Federal Employee Retirement System was released in the mid-1980s. It is after CSRS, and the biggest difference between the CSRS system and the FERS system is that one group pays into Social Security, the other doesn't.
The other big difference is CSRS has a really big pension that's one component. FERS, Federal Employee Retirement System has two components. You have the Social Security Benefit and the Federal Pension. So whoever wants to take it, let's share with the audience the calculation for FERS and then also just kind of caveat, we're not talking about FERS Special in this episode.
Ben Raikes: Why don’t you go ahead, Tommy.
Tommy Blackburn: Okay. Thank you. So the calculation for an immediate FERS retirement is going to be your years and months of service. And the important distinction there is it's complete months. So years and months times your high-3, times 1% is going to be the normal calculation there. And I suppose while we're going to it, if you have over 20 years and age 62, you then get a 10% increase.
So, the factor goes from 1% to 1.1. That is an important distinction. And I guess I'll let somebody else kind of jump in here. Well, actually, as I'm going, I said the complete month's comment, I just want to sprinkle in there. As you retire, any sick leave that you have. Is also going to get added into those years of service.
So we're going to add up all of your days, weeks, months to get to it and complete months count for that calculation. So any days that we have left over, that is in a way to speak, kind of lost money. So many people tend to try to get it down precisely so that they retire with complete months, and so that's how the immediate calculation there works.
John Mason: I love it, Tommy so thank you. And you mentioned sick leave, which I think many people who joined in the mid-1980s or early 1990s came in where only 50% of your sick leave would count towards your federal retirement. So it used to be that sick leave was this really bad thing.
You didn't want to retire with it. It was, you're getting a 50% discount then it only adds onto your pension and it takes forever to get that back. I think nurses specifically, when I began in 2010, we're the only group of people whose sick leave actually fully counted towards their retirement. And sometime in 2012 to 2014, I believe, they changed that rule where 100% of your sick leave counts. So it's like 173 or 174 hours of sick leave equals one month. It is so common for us to see folks with six months, 12 months, or even more of sick leave. And so that's a neat thing that it's going to be able to stack onto your retirement.
Annual leaves are direct payout though. So when you separate with annual leave, that's going to be a cash compensation. Your sick leave is going to tack on to your retirement years. Now here's a really, a little nuance that we encountered last year. One of the nuances we encountered last year is Tommy, you specifically said at 20 years of service and age 62, you receive a 1.1% multiplier. So instead of one, you receive a 1.1. Why had a client last year or the year before, their years are running together now. I feel like I'm getting an old man. The years are running together, but he requested a retirement estimate from human resources and he was 63 or 64 years old.
He had 19 years and nine months of service, including his sick leave. And HR was advising him that it was go ahead and retire. And I said, Hey, hey, hey, this is not good. We're three months away from having the 1.1 kicker. Why would we go now?” And the HR department didn't think that his sick leave would get him to the 1.1% multiplier, but in fact, it does. So if you have 19 years, 19 and a half years of service and you're 62, six months of sick leave is going to get you to that 1.1. You have to go to opm.gov and download that benefits administration letter to see that, but that's one little nuance, and that increases retirement for the next 30 or 40 years. So at sick leave is important to understand how it works.
Michael Mason: Yeah. I would say the same thing with any military service that you buy. If you have four years of military and only 15 or 16 years of actual federal service, you're still going to meet that 20-year requirement. I wanted to, not necessarily correct, but to, I would say FERS is a three-level, three-legged stool, John, versus that two-legged.
Everyone, CSRS has a TSP, so does FERS, but FERS gets that 5% match to their TSP. So not only is it social security and the FERS annuity, but the match to TSP as well. And I guess one other comment I was going to make, and this comes from dad years ago when he retired CSRS, and he worked at National Institutes of Health, and if he couldn't get past Springfield, Virginia from Woodbridge, Virginia in the first hour of his commute, he would go home and it would be sick leave.
And even with a year of sick leave, think about this, a year of sick leave, we've done the math, at most it's 1.1% of your high-3. We use one because it's easy, so if your high-3 is 100 grand, that one year of sick leave is 1% or $1,000 more a year, it's gonna take a lot of time for that to mean what it would have meant had you used sick leave.
I'm not saying use it poorly, but it's pretty flexible, right? Maybe you burn your sick leave ‘cause your break-even point is going to be a long time down the road.
Tommy Blackburn: I believe I've heard the first flu nowadays. The first flu.
John Mason: The first flu. And we had a whole episode where we talked about sick and annual leave and how using your leave, not irresponsibly, but using it to relax and recharge, using it to take care of yourself, using it to be with your family, how that may actually extend your career.
Well past the 1% that you were trying to get because you stored up the sick leave, right? So if we use our annual leave and our sick leave correctly over a career, maybe we work for 35 years instead of 30. That's a much bigger impact than storing it, being miserable, hurting every day, burning out, right? So using that leave can make a big difference in the length of your career.
For example, for our audience, Mike, you're 63, I believe. 63 years old. And if you had to work as hard right now as you were working 10 or 15 years ago, there's no way you're working until age 70, but you're fortunate that Tommy, Ben, and myself are here to have taken on some of that responsibility, which now is going to extend your career five, seven, 10, however many years you're going to be here.
It's the same thing, right? We cannot run a thousand miles an hour forever and think that we're going to be able to have that same length of career.
Michael Mason: Still have to factor in that I've got to tolerate you boys every day too. So that's a difficult proposition. Let me add one more caveat to the sick leave.
Once you know what it means or doesn't mean, you know, a year is 1% of your high-3. And I've seen people do this after over 37 years. If you really know what it means and it's maybe it means a lot, maybe it's not a whole lot. I've seen people donate their sick leave to folks that are battling a dread disease.
And that donated sick leave helped, as one I'm remembering, get to where she could retire on active duty. And her retiring on active duty versus retirement, versus retiring and dying meant about 700,000 of option B life insurance that was able to pay out. She didn't have it long enough for it to pay out had she retired.
So, understanding you can be generous to your friends that you work with that may need that leave once you understand how powerful or non-powerful it really is.
Tommy Blackburn: It's a powerful story.
Ben Raikes: I think one last point on this, and I think we've hit it pretty hard, is–I don't want to take away the significance of 62 in 20 years being at 1.1% versus being at 1%. It's not an extra 0.1 that's added to your pension. It's an extra 10% on to your pension, cost of living adjusted for the rest of your life. So just to re-emphasize the point about Mike, you've got these people that are saving and saving and saving, trying to get that one additional year of sick leave that ends up being an extra 1%.
Well, if you just make sure you've got 20 years at age 62, that's an extra 10% to your pension. So again, John, to your point, if you're going to be at 19 years and 5 months, well what's another 7 months to get an extra 10%. Just thinking about those two things together and how much more that extra just 0.1 is actually worth.
John Mason: And put some numbers to it, it's not uncommon for us to see a 40,000-dollar FERS pension today. And the difference between having the 1.1 and not is 40 versus 44,000. That's significant. So that's a higher survivor benefit. It's a higher pension. So Tommy walked through the calculation 1% times your high three times your years of service, caveat 1.1 if you hit those requirements. And your high three is your highest 36 months of consecutive earnings, which can be in the beginning of your career, the middle of your career, the end of your career. So wherever you get your highest 36 months of consecutive earnings, that will determine your high-3.
How can you look at this? Well, a lot of federal employees are really good at keeping pay stubs. Some of them have pay stubs dating back to 1987 on yellow paper now. And it's like, well, maybe an easier way is logging into ssa.gov and looking at your Medicare earnings for the last three years. That'll give you a good idea of what your high-3 was.
The retirement system GRB may give you an accurate estimate, but I always like to verify independently what that data, where it's coming from and SocialSecurity.gov is a good place. You could also get your last three years of W2s. That's a place where you could potentially verify your high-3.
So, last two years plus this year divided by 36 months or divided by three years is going to give you that calculation. Three forms, y'all, three forms of an immediate unreduced retirement. 30 years of service and minimum retirement age, 20 years and age 60 or five years and age 62. So those are the three types of immediate unreduced retirement.
Overwhelmingly, most people know about the 30 in MRA. That is the one that specifically if this was like your first or second job out of school or first or second job out of high school, this is the one you're shooting for. 30 years in MRA. If you're a second career or you did not start with the government until later, then you're probably looking at the 20 years and age 60 or the five years and age 62.
So military is often going to fall into that second and third category. Whereas a I guess, quote unquote, career federal employee is probably looking at the 30 years in MRA. So minimum retirement age is, let's call it 57. Audience, don't barbecue me there. There's a chart that says it used to be 56.
It was 55 for CSRS. So it was like 56 years old then it was 56 in a few months. And then everybody born after a certain point is 57. For simplicity, MRA is basically 57 for retirees of today. There may be a few people left, Tommy, who squeak in 56 and some change.
Tommy Blackburn: Yeah. I'm glad you hit on that MRA, an acronym that probably our federal employees are familiar with, but minimum retirement age.
And I have found surprisingly, I think there has been some confusion about MRA plus 30 with clients, so I've definitely encountered where it's like, “I have my 30 at age 60.” And it's like, well, that's more than you got to have to get to that immediate retirement, so important to just–so for the simple example would be if we're age 57 and have 30 years of service, we can do that immediate retirement and you hit the age 60 with 20 or 62 and five.
I do think we don't have to spend a lot of time on this, but as I thought about the calculation we went through in this immediate retirement, we've done episodes on it previously, we're big proponents of it, but probably throwing that SBP onto that calculation. And so by SBP, we mean the Survivor Benefit Plan.
And if one of you just want to quickly walk through what does that reduction look like and what does that do to the formula?
Michael Mason: Go ahead, Ben.
Ben Raikes: So, survivor benefits, the maximum that you can elect as a federal employee retiring under FERS is a 50% survivor benefit paid out normally to your spouse.
And for that survivor benefit of 50%, you pay 10% of your unreduced pension amount for that benefit. So if your benefit is $5,000 per month, you pay $500 per month for that benefit. And then at your death, your spouse would receive 50% of the unreduced amount. So it would be $2,500 a month continuing to your spouse.
John, Tommy, Mike, one of you all can take this as well. It's 10% on paper, but in reality, it's actually a little bit less than 10% when we think about it, right?
Michael Mason: Yeah, you're just not going to get it, right? So it's 500 bucks a month, 6,000 a year. You don't get the 6,000 so you don't pay tax on the 6, 000.
So you can't compare a 500 dollar a month life insurance premium to a 500 dollar a month survivor benefit for two reasons. The survivor benefit's pre tax. The life insurance policy is not going to be enough and it's static, where your survivor benefit continues to grow with cost of living. I'll add a caveat, John, ‘cause I pulled it up, born in 1965 to 1969. It's 56 and some months. Anybody born in 1970 and beyond, minimum retirement age is 57.
John Mason: Thank you, Mike. So for the audience, if you have questions on survivor benefits, we have multiple episodes on our YouTube channel and our podcasts that talk a lot about survivor benefits, but we have to take a moment to pause and talk about the emotional win of SPP.
I know we've done this on other episodes, but when you have survivor benefits, you behave differently. We know our spouse is taken care of. We know our children are taken care of. We make decisions because we have survivor benefits. For instance, we can take portfolio withdrawals, we can do bigger vacations, we're not worried about maybe a long term care event as much as we would have been had we not had survivor benefits, so.
Tommy Blackburn: John, you mentioned earlier the thought about we're in constant defense mode and that's where my mind goes is having SPP means we're proactive, we're operating from a place that's not of fear, we're not in defense mode when we have SPP in place.
John Mason: 100%. So it's not just math. It's not just a math discussion.
It is a emotional discussion. And let's pretend for example, that you could buy, Tommy, a life insurance policy that could replace survivor benefits. We don't really think that's true. And unfortunately, we have clients pass away every year. We've had clients pass away recently and they could be in their fifties.
They could be in their eighties or anywhere in between. But let's say you could buy life insurance. Remember, just like you said, every day we're just bombarded with having to make hard decisions. So let's pretend every year an insurance company sends you a bill for six to $10,000 for this awesome life insurance policy.
And every year that hits your mailbox and you're like, “Awesome. Can't wait to pay that.” Well, what did we just talk about? We just talked about it's hard to make the right decision. How many times when that six to 10,000 dollar life insurance bill comes in are you going to make the right decision? Chances are you're going to make the wrong decision at some point.
You're going to drop the life insurance coverage and you're not going to have survivor benefits or life insurance because you're a human. And unfortunately, that's what we do is we're going to take the easy way out at some point, or we're going to get fed up just as the reason people are dropping long term care policies because they don't want to pay the premium increase.
There's a, it's just going to happen, and it's hard to make the right decision. And survivor benefits, luckily, we only have to make it once.
Tommy Blackburn: There's like decision fatigue, I think, but taking the long term care made me think about it where it's like, yeah, after so many years of premium raises, you're probably tired of evaluating this thing.
And it just gets to a point where it almost feels easier, not the right decision to throw in the towel. One thing that came to mind too that I just want to mention, when I first began specializing with federal employees here and learning from John and Mike and thinking about the survivor benefit, I remember it just, it was amazing to me that, this was John's words, there's no actuarial adjustment on that survivor benefit.
So many pension systems, it's, “Well, what's the age of your spouse?” And now we look at, “Well, what's the probability of how long they're going to live?” And there's a calculation as to how much this costs you. It doesn't matter how old your spouse is under the Federal Survivor Benefit Plan. It's 10% pre tax. So no actuarial adjustment based on your spouse there.
Michael Mason: That's the Hugh Hefner effect, right?
John Mason: Yes. And oh, by the way, it's got a pop up feature. So this is turning into an SBP episode.
Tommy Blackburn: I'm sorry guys, I was afraid we would go too deep into it. But you had to address this, right?
John Mason: You did it.
Tommy Blackburn: I did it.
John Mason: So pop up, meaning if your spouse that you're protecting predeceases you, you pop back up to the full amount. It's like it never happened. And you don't get refunded, but you don't have to keep paying. And then if you get remarried, guess what you can get again? You can start survivor benefits again.
So it's a really good thing. Ben, you touched on the 50%. There's technically three options with survivor benefits. You have the 0%, the 25% or the 50%. Many federal employee couples. Only have one federal employee in the house, not two. Now, granted there are some that are dual federal, but health insurance, if you don't have survivor benefits, you do not receive health insurance.
Okay. So for many people out there, 0% is not an option. It's just not, it's not an option because we're not going to want our surviving spouse to not have health insurance. So that means we're starting at a mandatory 25% or 5% cost. That's the floor. Then it's like, “Well, dude, you just want to pay a little bit more to have the full benefit.” And the answer is yes, that's probably what we want.
Tommy Blackburn: I love it. I'm glad because that was going through my mind too. It's like, we're really down to these two options and the difference between them is really only one option here.
Ben Raikes: If on that retirement paperwork, if you have to get a notarized spousal consent in order to not elect something, maybe that's time for you to sit back, pause, and say, “Am I making the best decision here?”
Michael Mason: Well, let me tell you, to wrap this up, and you can't have a first discussion without having a survivor benefit discussion, you just can't do it. Because the biggest benefit other than the actual retirement is the fact that you can share it with your spouse. And John, you know this. We've built Mason and associates being the contrarian beginning in the late 1980s when everyone wanted to sell life insurance to retiring federal employees versus the survivor benefit.
We were the ones that were helping you get survivor benefits, right? So even the dual federal employee households, the one thing you control is your first pension. You don't control your social security. One of those social security checks is going away. And how many times have we heard people that didn't know this get pissed off?
“What do you mean my wife's 2,000 a month social security checks’ going away. I was counting on that. I only get my three and my FERS?” Well, that's the case. And guess what? If Uncle Sam offered you a 10% reduction on her 2,000 of Social Security, without the proper help, you probably would have said, “No, I don't want to pay it.” But now you're ticked off because you're not getting it. So, you control one check. You don't control Social Security, you control one check, that's your FERS annuity.
John Mason: So, audience, please, there's an interview, we'll do our best. We always say we're gonna link things, and linking things is really challenging to remember what you said you're gonna do.
So, we're gonna try and link it, but go to our website, go to our YouTube channel, youtube.com/@fedemployeefinancialplanning. Look at the interview I did with WAVY-TV 10 that talked about the military survivor benefit open season. And we use poker chips to illustrate this. So it's important for federal, it's even more important for military.
So go check out that interview. We'll do our best to try and link to all of these resources. But Mike, you tease the audience earlier with secret millionaire and here's what's happened over the, over my career. In 2010, the folks we met with had X dollars in 2024. The folks have Y dollars and Y is higher than X.
The people retiring today started in 1987 to 1990 have enjoyed decades of a bull market in their TSP. And we used to say in 2010, your largest asset is your pension and that's maybe not true anymore because we're seeing many, many large seven-figure TSPs, 1 million, 2 million dollar TSPs. And there are instances where TSP is now a larger asset than your FERS pension.
But let's put that aside and at least all agree on this podcast and our audience that your FERS pension is one of your largest assets if not the largest asset. We do not leave our house uninsured, we do not leave our cars uninsured, and at your death, you would not want your TSP to go up in flames. If we do not take survivor benefits on FERS, you are leaving one of your largest assets uninsured.
Sure, I know there's the haters out there that are gonna say, “Well, what if we die at the same time,” and all these things and it's like, well, hopefully, you both live until your 90s and you won and you don't really care that you wasted money on SBP premiums. There's plenty of other scenarios where you wish you would have had it.
And we live this every day, helping hundreds if not thousands of federal employees retire and make the right decision. So. We've talked about immediate retirements recently, at least I personally have some clients who are exploring opportunities outside of the federal government. Either they're burned out from some of the red tape, they have some opportunities to explore other options, and they do not qualify for an immediate unreduced retirement.
So they don't hit those three criteria. Maybe they have 10 years and minimum retirement age. Maybe they have five years and they don't require or they don't qualify for an immediate retirement in any form. Let's talk through some of those options. And so, audience, there's two terms here. You have a deferred retirement.
A deferred retirement is when you have five years or more of service and you do not qualify to start your pension immediately when you leave the government. So what this means is when you leave, you don't retire, you quit. Okay? You quit. You don't retire. You quit. Then at 62, if you have five years, you can start your pension, or the other requirements 20 years and age 60.
But if you don't qualify for an immediate retirement of any form, you just quit. The other option is I can retire with a reduced retirement. And then for there, I have two decisions. Don't I, Tommy? I have two decisions if I qualify for an immediate reduced. I can either start the reduced retirement now, or I can postpone it until 62 where I will not have that reduction. So however you guys want to handle it, we can go down some rabbit holes here, but hopefully, I did a good job kind of outlining the options if you don't meet those immediate unreduced requirements.
Tommy Blackburn 1: You did. And I think, maybe on that last tree of decisions there, like, okay, so I could have started my pension and what we just want to say there.
So that decision point is, “Hey, I had 10 years of service and I was at my minimum retirement age,” which we said for the purposes of this conversation, let's just call it age 57. So I had at least 10 years of service and was age 57. I can now draw, I can either start my pension is going to be reduced essentially at 5% per year that we're taking it early, before age 62, or I can say I don't want to take the penalty or for whatever reason I've decided I don't want to start that pension right now. And that's when it's postponed. And so now I'm kicking it. I can turn it on whenever I want between now and age 62 and if I wait that full amount of time, then I get my unreduced pension.
I don't get that early penalty on it. Also, if we do that postponement, so we're waiting, we're delaying the penalty for I suppose a variety of reasons. We don't have health insurance during that period that we don't have the pension. So, that's another part of that decision and I think what we would say is that there's always an exception.
There's probably, there's always going to be some case out there where maybe it makes sense to do this postponement, but at a high level, as we've run the numbers, we're coming up with about a 20-year break even if you wait versus taking that penalty. And when you layer in on not having health insurance, it seems like at a high level, it's probably not going to make sense most of the time to not take that MRA in 10 versus postponing it until a later date.
There's always going to be exceptions and, variety of specific patterns that could change that answer. But hopefully, some helpful information, if you find yourself in that situation and also hopefully just illustrates as this whole episode does. We know, we're very familiar with these systems and thinking through the options and already knowing, beginning to build the cases in our head versus having to start from scratch. And we know where the nuances, if we don't know the answer, we know how to find it, which I thought that was so great, John, when you threw out that benefit administration letter, that we know when we get these random things of where to go find the answer even if we don't know it.
Michael Mason: Putting some numbers, it's always good to put some numbers to it. So you used 10 years in MRA 57, so you're retiring 5 years before you're fully unreduced. So 100,000 dollar high-3 if you got your full 10% be 10,000 a year, but you're going to take a 5% reduction for those 5 years.
5 times 5 is 25. So now your real option is do I wait 5 years to get $10,000 a year or do I take $7,500 a year right now? And that's that break-even analysis that you're talking about. what $7,500 right now and with some of the greatest health insurance Obviously, you have the option, if you're leaving, to go find corporate employment, like one of our clients did. Great corporate employment. And you're going to get health insurance, but maybe not as good as your first health insurance. So just some numbers to the end.
John Mason: Thank you for saying that. Thank you for saying the health insurance, Mike, because it's federal employees are, I mean, we know we got some really, really intelligent, highly compensated federal employees who have opportunities to go in their private sector and make big money.
And it starts when you get later in your career. It's like, okay, when do I take that opportunity? And just like Ben was saying earlier, we want to work that extra year to make the 1.1% to get to age 62. Like that's a no-brainer. We want to try and get that, especially if we're close. Well, what's a big mistake you could make if you're 57 years old with nine years of service and X, Y, Z corporations beaten down your door and you leave?
Well, now you have 57 and 9 years of service. You don't qualify for the MRA plus 10. And you never get to re-enroll in Federal Employee Health Benefits ever again. Federal Employee Health Benefits is one of your biggest benefits as a federal employee. It's one of your largest assets. It's health insurance for the rest of your life.
It's your Medicare supplement. It's your Medicare drug plan and everything. And you may be getting courted or you may be thinking about, “I'm fed up with this. I don't want to do this anymore.” Well, Ben, what a big mistake if we don't, if we're only a year away from being able to get that MRA plus 10 and at least have the option to start the health insurance at 62.
Ben Raikes: Absolutely. I think you said it well, John. So, what happens is the time that you're postponing your benefit, if you could have retired at MRA in 10, so let's say it's from 57 to 62, you do not have Federal Employees Health Benefits. Maybe you have it somewhere else, as Mike said, maybe you've got another job that's offering it to you, but you'll be able to reapply at the age of 62.
And John's scenario, let's say I only have nine years, so I wasn't eligible for any retirements, you never get to turn that switch back on. That's gone potentially for the rest of your life. And maybe you, so maybe you've got 57 and nine years, you go take a job somewhere else, you only work there three years.
Okay, so now I'm age 60. I'm retired from the other non-federal job that I took, and now I have five years until I can turn on Medicare Part A and B, whereas if I just waited one more year to work for the federal government, I would have been able to keep FEHB at least until I got back into the program.
So there's a ton of mistakes that you can make, as you said John, particularly when you get late into your career and you're getting those other offers. You really need to work with a professional and say, “Hey, what am I leaving on the table?” We know what the salary is. We potentially know what the pension that we're leaving on the table. But what about health insurance? What about FEGLI? What about long-term care? All these other things that are gonna potentially cease to exist.
John Mason: The Apple Watch just came out. OS 11. It's like has this new training load thing where it tells you if you're working out too hard and you should maybe scale back and it gives you all these things.
Well, again, there's no device that's going to tell you, “Hey bro, you should probably work six more months,” or “You need to do this because you're about to leave a lot on the table.” There's no device that's going to tell you that. And that's, again, the benefit of having an accountability partner.
Mike, we're almost 40 minutes into this episode, and I think you have some stories from your military days that are directly related to what we're talking about with these federal employees looking to make a career change maybe too early. And how did the saying go? “You need to leave the military because I'm going to go make the big bucks in the private sector.”
Michael Mason: So we've worked together too long cause you knew exactly where my mind was going. You opened it up with you have to put a valuation, a dollar valuation on the benefit of your FERS health insurance, your government health insurance. Same thing for military. I left after six years, with the same thought process, you know, go, and fortunately, we did make some big bucks opening Mason & Associates.
But if somebody said to the 10-year guy that's going to walk away and he could have worked another 10 or she could have worked another 10 in the military and produced a 40,000 dollar pension for the rest of their lives. What if the advisor said to that person, “If you work another 10 years, we're gonna give you a million dollars.” That person would probably work the other 10 years, but they walk away from it.
And why do I put a million dollars on it? Well, we need for every $40,000 of pension income, if we're gonna replace it, we need a million dollars in a 401k. And that's not enough for a lady or a man that's retiring from the military at 45 years old. That's a 50 year retirement.
You probably need more than a million. The 4% rule probably doesn't work, but as we talk about health insurance, let's talk about the military health insurance as well. It cost Bobby and I $24,000 a year for our health insurance. Military health insurance is free. If we just look and say $1,000 a month for health insurance, 12,000 a year, that's another 300,000 equivalent benefit.
So now you walked away from 1.3 million when all you had to do was blink your eyes and do 10 more years.
Tommy Blackburn: I wanted to add excellent insurance versus what you're paying is we would not, it's definitely not in the same ballpark.
John Mason: We would definitely not call it a Cadillac plan.
Tommy Blackburn: No.
John Mason: It's like pay $24,000 a year and if you go to the doctor, pay another five or 10 or whatever our out-of-pocket is. It's a catastrophic private sector.
Michael Mason: Let me just throw this, and I have to, because we talked about the secret millionaire. So Ben and I will probably meet with a prospective new client in the next two weeks who's 62 years old, private sector, saved 1.5 million in his 401k, just inherited a couple million dollars from his spouse's mother, and probably has $40,000 of Social Security if he turns it on at 67. But he's gonna work five more years. If he were a federal employee, he could be out today because on top of 40,000 of Social Security, 20,000 that his spouse is gonna draw on his record.
But he would work, he would retire today because he'd have another 40,000 dollar pension, which this private sector guy can't make up. He's got to save another million. But more importantly, you've already all said it, he's working to 67 so they can get to age 65 minimum and have some health insurance. It's a game.
That's why you're the secret millionaires, not just in your 40,000 pension or your first pension, but in all the other benefits you get to carry.
John Mason: So I'm going to circle this back a little bit y'all, as we close out to Apple Watch and health stuff and financial planning and all these things.
And it's like, it's never too late to start. It doesn't matter if you're 25, 35, 65, it's never too late to start eating right, to start exercising, to start taking care of yourself. It's never too late to reach out to a financial planning team, to ask for help. Maybe you could have started earlier. Maybe you could have done things better, faster, stronger, but that doesn't mean it's too late to make good decisions. We work with clients typically at or near retirement, in or near retirement with a million dollars or more in investable assets. If that sounds like you and you're looking to begin a relationship, we would love to speak with you. MasonLLC.net or 757 223 9898. It's never too late.
It's never too late to get that accountability partner. It's never too late to start making good decisions for yourself, for your family, for your retirement, for your health. We'll do our best to link to all of the resources that we've talked about in this episode. And I just hope that we've done a good job today, guys, kind of going through FERS, helping people navigate the federal employee retirement system and understand some of the decisions that they're coming up to.
Michael Mason: It materialized just like we hoped it would. We beat it all up before, and we just know with all the experience that we're gonna get out the high points and I think we did a good job today.
Ben Raikes: Well, we're closing out at a win/go lightning round.
John Mason: I think let's close it down with one final thought, and that's there's this concept of if you were like an athlete in high school or college and then you become a parent, you're a mom, you're a dad, and somebody invites you to an ultimate frisbee game in your mid-thirties, like, what's going to happen is you're going to like tear an ACL or you're going to rupture an achilles because you're going to remember that you were this like awesome athlete 20 years ago and you're going to think you still have that capability today and it's just going to snap.
It's just going to rupture. With your financial plan, you may not have this like rupture event. But there's going to be a point in time where you are conflicted. There's going to be a point in time where your back's against the wall and you're going to need help. You cannot wait to call somebody like us when that happens because we have a process.
We have an onboarding process. We don't take on new clients in October, November, December because we're taking care of existing clients. If you're up against a decision that you have to make in a week, and it takes us a month to get through the initial planning process, well, I'm sorry, we're not going to be able to help.
So I think I just wanted to close with that thought that we know you're going to have your back against the wall at some point. Make sure you have your accountability partner, make sure you have a plan in place and you have an advocate who's going to help you through those tough decisions. Folks, this is the Federal Employee Financial Planning Podcast.
Thank you, Mike, Ben, Tommy, for joining me on another episode. Thank you, audience. Thank you, clients. We know you're out there listening. We appreciate all the support. We're Mason & Associates. We're financial planners first, we do this second. And we hope that today, we do what we always try to do, which is support, empower, educate, and motivate you to make changes in your financial plan.
The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.
We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.