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[TSPStrategy] Will your future income rocket your Medicare premiums?

[TSPStrategy] Will your future income rocket your Medicare premiums?

https://www.govexec.com/pay-benefits/2024/03/will-your-future-income-rocket-your-medicare-premiums/394516/?oref=ge_paybenefits_nl&utm_source=Sailthru&utm_medium=email&utm_campaign=Pay%20and%20Benefits%20Watch:%20March%207%2C%202024&utm_term=newsletter_pay_and_benefits_watch

Will your future income rocket your Medicare premiums?

As a federal employee with FEHB, should you also take Medicare Part B at age 65? Here are a few things to consider before making the decision.

Medicare Part B can play a crucial role in providing essential healthcare coverage for individuals aged 65 and older. It covers outpatient care, preventive services, and durable medical equipment – like an FEHB plan. 

But unlike Medicare Part A, which is free at age 65 and covers major medical expenses like hospital visits, Part B carries a monthly premium. 

And here's the part that catches a lot of retirees off guard: The monthly premium for Medicare Part B is dependent on your income. 

At certain income levels, the government adds an "income-related monthly adjustment amount" to the base premium. And, while Part B premiums start out relatively affordable, they can become far more expensive for higher income earners. 

Who is Eligible?

Individuals can file for Medicare Part B up to three months before turning 65 and no later than three months after reaching age 65.  

Individuals who are 65 or older and still covered under an employer's healthcare plan (or a spouse's plan), are not required to enroll for Medicare Part B until they have retired. After retirement, you have eight months to enroll without penalty.  

The penalties for filing late can be quite harsh, as they are permanent increases to all future premiums. So, you'll want to be sure you've done your homework and know what's best for you ahead of time.

How do Premiums Work?

Medicare Part B premiums are based upon someone(s) Modified Adjusted Gross Income or their income before deductions. As you can see in the chart below, premiums can increase significantly at higher income levels: 

How Does the Future Income Affect My Decision?

One of the most important retirement planning considerations, and one that's often forgotten, is how future income, including pensions, Social Security, and required minimum distributions, can influence tax obligations and Medicare costs.

For private sector retirees, retirement income is typically limited to Social Security plus withdrawals from their retirement accounts. Because of that, it's relatively easy to stay within one of the first Medicare Part B premium brackets. 

Federal employees, on the other hand, typically have a nice pension which, when combined with Social Security and TSP withdrawals, can land them in the same tax bracket as when they were working. 

If a federal retiree's pension is high enough, they may decide to delay Social Security until they're 65 or 70. In that scenario, they may be in the first Medicare premium bracket at retirement but may face higher IRMAA and increased Medicare Part B premiums once Social Security benefits have begun.

Finally, the most overlooked (and often largest) income stream that can impact your future retirement income are RMDs, a required withdrawal from your retirement account that is mandatory for any tax-deferred (traditional) account.  

In short, Uncle Sam lets you defer paying taxes on these funds while you were working, and now, it's time to pay up. 

Accounts like your TSP, previous employer plans, and Traditional IRAs are all considered in this formula. It is a mandatory withdrawal that boasts a staggering 25% penalty if it is missed  (down from 50% prior to the Secure Act 2.0 passed in 2022).  

These distributions count as taxable income and contribute to your MAGI. They begin at age 73 (75 for those who are not age 73 by Dec. 31, 2033) and are approximately 4% of your traditional balance year one. As you age, your IRS Divisor, a nice way of saying life expectancy, decreases and the proportion of your account that needs to be withdrawn increases.  

Typically, you can assume your RMD will be larger than the prior year unless you have a negative year in your investments. Retirees who underestimate the impact of RMDs on their overall income may find themselves in a higher IRMAA tier, leading to increased Medicare premiums that could cost them thousands of dollars.

Have a Plan

So, what should you do if you think Social Security and RMDs could spike your retirement income?  

First, run your numbers to assess your risk. 

If you're at risk of higher premiums, the good news is that there are strategies to mitigate the risks mentioned above. This can be achieved by engaging in strategic tax planning to minimize overall taxable income. 

Tax planning strategies could include:

  • Spreading retirement account distributions over several years.  
  • Taking advantage of tax-efficient investment tactics.  
  • Being intentional with the timing of things like your retirement age/date as well as when to draw Social Security.  

Finally, potentially the most impactful strategy is Roth contributions and conversions. While this incurs taxes in the short term, it can reduce taxable income in the future and potentially lower future income and Medicare premiums.

I it's important to take steps NOW to prepare yourself for a decision on Medicare Part B.  

By proactively considering pension benefits, Social Security filing age/amount, and forecasting future RMDs in your financial planning, you can make informed decisions that not only optimize your healthcare coverage but also mitigate the impact on taxes and premiums. 

Taking a proactive approach to these considerations can contribute to a more financially secure and stress-free retirement.

David Setia is a chartered mutual fund counselor with Capital Financial Planners as well as federal benefits trainer for RETFED Seminars. If you don't feel confident in your Medicare, Social Security, and retirement plans, register for a complimentary checkup. For federal topics covered in even greater depth, see our recorded webinars.

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[TSPStrategy] Here’s how to find the information you need when planning for retirement

[TSPStrategy] Here’s how to find the information you need when planning for retirement

https://www.govexec.com/pay-benefits/2024/02/heres-how-find-information-you-need-when-planning-retirement/394533/?oref=ge_retirementplanning_nl&utm_source=Sailthru&utm_medium=email&utm_campaign=Retirement%20Planning:%20March%201%2C%202024&utm_term=newsletter_retirement_planning

Here's how to find the information you need when planning for retirement

When it comes to leaving federal employment to transition to retirement, there are important decisions that must be made, and it is vital to know the difference between fact, fiction and rumor.

Did you know that the answers to your retirement questions are readily available if you know where to look? That is a slight catch, isn't it? Knowing where to look and being sure that you didn't miss the fine print or an important detail that could change the meaning of what you might be trying to learn.  

When I began studying federal retirement benefits in the 1980s those answers were much more difficult to find. Relying on printed materials with only a table of contents instead of a search engine took time and you never really knew if you were looking at the latest revision of a publication or document. The good thing about those early days is that your "personnel office" was usually just a friendly phone call away, or if you were lucky, in the same building. 

Whether past or present, much of the retirement information that we have is learned from conversations that are passed around among employees who read something or heard something from a "reliable" source. 

The problem with that is it could be like the old game of "telephone," a popular children's game in which messages are whispered from person to person. As you might guess the final message generally would be very different from the original.  

When it comes to leaving federal employment to transition to retirement, there are important decisions that must be made, and it is vital to know the difference between fact, fiction and rumor. It is good practice to find and verify the source of the information you hear whether it is something you hear at a seminar or from a colleague. This way, there is less chance of misinterpreting the explanation. As Edgar Allen Poe once wrote, "Believe only half of what you see and nothing that you hear." 

Here are some resources and references to learn more about planning and preparing for retirement:

CSRS, FERS, FEHB, and FEGLI

The resources for finding answers to your federal retirement benefits questions should begin with the Office of Personnel Management. Over the years, the OPM website has been reinvented and expanded to help employees and retirees locate important benefits information. Here some of my favorite landing places:

  • Retirement Center is where you will find the "Retirement Quick Guide," a new tool that explains the retirement process and provides a general timeline. There is also a link to "Tax Help for Annuitants" and an area labeled "Retiring Soon?" 
  • Across the top of the homepage of www.opm.gov, you will find a tab labeled "Insurance." For Federal Employees Health Benefits, click on "Healthcare" and then "Plan Information," where you will find all the FEHB plans available in your area with links to plan websites and current plan brochures. This is where you will find a link that will take you to the Consumer's Checkbook Comparison tool to help you narrow down your health plan choices. Also located under the Healthcare tab, you will find "Reference Materials" to locate important Open Season information and the Federal Employees Health Benefits Handbook.  
  • Click the "Retirement" tab and then My Annuity and Benefits to find useful information for retirees and family members.  
  • For specific, but general information about CSRS and FERS retirement, click CSRS Information or FERS Information. For technical information, go to the Benefits Officers Center.
  • If you are looking for topical publications or forms for retirement and insurance, they can be found easily under the "Retirement" tab as well.
  • Looking for information on federal pay rates or leave policies, look no further than the "Pay & Leave" tab under "Policy" link at the top of the homepage. 
  • If you are looking for a snow day, then Operating Status is where you will find that information, generally focused on the Washington, D.C.-area workers.  If you're outside of the "Washington Capital Beltway," then you must follow the operating status announcements issued by your agency. Once you retire, every day will be a "snow day!"

Thrift Savings Plan

Most employees have been to www.tsp.gov, after all, that is where you can sign into your personal TSP account to check your balance, change your investment allocation and apply for a loan or withdrawal selection. But did you know:

  •  The TSP offers live online webinar training? You can register for the latest courses at TSP Online Learning.
  • Looking for a publication on the topic of contributions, funds and investments, loans, tax information, withdrawals or death benefits? Look no further than the "Forms" area for fact sheets, booklets, and well, forms! Be aware that the TSP uses very few actual forms these days as most actions are accomplished electronically when you log into your account.
  • You can find the latest plan news and information on the TSP website, which is kept up-to-date and current. Here you can find information about the new I Fund benchmark index that will take place in 2024 as well as the "Setting Every Community Up for Retirement Enhancement Act of 2022, which President Biden signed into law on Dec. 29, 2022.  
  • The Federal Retirement Thrift Investment Board is charged by law to administer the TSP in the interest of you, the TSP participants. Here you will find the latest minutes of the board meetings with interesting statistics about how much is being invested, borrowed and withdrawn from the TSP, in the attachments linked to every copy of the minutes.

Social Security

The reason for creating the Federal Employees Retirement System in the first place was the change in the law that took effect in the early 1980s that required new federal employeest pay into Social Security. The older CSRS was a "single" benefit retirement system that included a generous government pension, but employees were exempt from paying the FICA tax and the TSP did not exist. It is important to understand Social Security as it provides another stream of lifetime income during retirement.  

  • Be sure to set up an account at www.ssa.gov so that you can check your eligibility for benefits, get benefits estimates, and apply for Social Security or Medicare.  
  • There are calculators on the website to help you learn how much of your benefit you will receive whether you apply before or after your normal retirement age.  Other calculators allow you to compute rough estimates of your retirement benefit based on current earnings as well as the impact of the Windfall Elimination Provision for those of you who will receive pensions from work not covered by Social Security such as CSRS retirees. 
  • Did you know that you may apply for Medicare through the Social Security website or by calling Social Security?  

Medicare

Although you sign up for Medicare through SSA, to learn more about the program, you will find all you need to know about Medicare at www.medicare.gov.

  • Most FEHB plans will coordinate well with original Medicare (Parts A & B), and you won't need to sign up for Medicare Advantage Plans (Part C), Medicare drug plans (Part D), or Medigap policies (supplemental policies that provide extra coverage for original Medicare).  
  • If you are looking for Medicare providers (physicians, hospitals, nursing homes, and others), you can use the tool on the website to easily locate those in your area. 
  • If you are looking for the basics of original Medicare such as the sign-up periods and coverage information. 
  • Once enrolled, you can create and log into your Medicare account to check a claim, pay your premium, or review your coverage.  

Try out some of these resources today and become familiar with them so that you can easily search for the information that will answer your questions about your valuable federal retirement and insurance benefits. Take charge of your retirement so you can be sure you are getting all the benefits you have worked so hard to achieve!


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[TSPStrategy] Crafting your perfect retirement exit strategy

[TSPStrategy] Crafting your perfect retirement exit strategy

https://www.govexec.com/pay-benefits/2024/02/crafting-your-perfect-retirement-exit-strategy/394040/?oref=ge-related-article&utm_source=Sailthru&utm_medium=email&utm_campaign=Retirement%20Planning:%20March%201%2C%202024&utm_term=newsletter_retirement_planning

Crafting your perfect retirement exit strategy

These pre-retirement tasks can help ensure a smooth transition.

Most of the work that I've done over the past 39 years has been assisting federal employees separate from federal employment and move into their life after retirement. 

As you might expect, there are some employees who have a smooth transition and others hit a few roadblocks that slow down the process.  

When it comes to financial readiness, there are some individuals who are overly concerned that they won't be able to afford to retire, yet they will deposit more money in their bank accounts every month than they brought home in their net salary.  

Then there are others who are very confident that they can afford to retire even though their net pay in retirement will be thousands of dollars less than their net salary.  

So that you can avoid the dreaded phrase, "I'm living on a fixed income, and I can't _______ (fill in the blank with "go out to eat," "go on a vacation," "remodel our kitchen," etc.), here are some tips that may help you prepare and be sure that you are ready for this important life event!   

Follow These Steps

Your retirement from federal service typically begins with applying for your FERS Basic Retirement Benefit. This will provide you with a lifetime stream of income and continuation of your federal insurance benefits if you meet certain qualifications. We're talking about the paperwork, folks! Luckily, there isn't a lot of it, but the forms you must deal with can be very important and require careful review so that you can make wise choices for some critical decisions.   

The forms you may need along with supplemental information: 

Supplemental information, if applicable to your situation:  

  • Marriage certificate  
  • W-4 P Federal Tax Withholding  
  • Notarized consent of current spouse for partial or no survivor election (not needed for full election), if applicable  
  • Records of FEHB coverage under Tricare or spouse's FEHB coverage if applicable  
  • Court orders such as a divorce decree or property settlement if they give a survivor annuity or a portion of your retirement benefits based on your federal employment.   
  • Military Documents such as DD 214; documentation of retired pay and award letter 
  • RI 79-9 Application to cancel or suspend your FEHB coverage may be needed if you are covered by military health insurance and want to suspend your FEHB coverage.  
  • RI 92-19 Application for Deferred or Postponed Retirement that can be used in lieu of the SF 3107 if you will not be applying for your FERS retirement at the time of your separation from federal employment.  

Here are some tips provided by the Office of Personnel Management in their Retirement Quick Guide

  • Sign all forms. Missing signatures are one of the most common reasons for processing delays. 
  • Download your personnel records if your agency uses eOPF and you want your own copies. You will lose access to eOPF once you retire. 
  • Complete payments for any open service credit accounts for FERS and CSRS eligible deposit or service redeposit. Honorable post-1956 Military Service deposits must be paid in full before you retire. 
  • Check Supplemental Documents. Include all documentation required for your retirement application such as marriage certificate, military service records, court orders, etc. 
  • Once you have retired, be sure to sign up for OPM's Retirement Services Online (Set up this online service after receiving your CSA (Civil Service Active) number from OPM).  

Remember that there is no guarantee that your transition will be slow or fast regardless of how prepared you think you are since there are so many variables that can get in the way to slow down the process. Everyone should have enough cash on hand to cover living expenses for up to six months following your separation from federal service. This "emergency fund" may include your lump sum payment for annual leave that you will receive from your payroll provider.   

If any of the following apply to you, be prepared for your retirement to take longer than average to finalize: 

  • Court orders such as a divorce decree or property settlement. These require an additional step and are sent to the Court Order Benefits Branch for review. 
  • Retirement under the provisions for Law Enforcement Officer, Firefighter, Air Traffic Controller, Capitol Police, Supreme Court Police, or Nuclear Materials Courier. These cases require specialized computations. 
  • Past or active workers' compensation claims. 
  • Experience as a part-time or intermittent federal employee. 
  • Federal service at multiple federal agencies. 
  • Missing documents and forms, or incomplete or incorrect information in your retirement application. 
  • Moving without updating your address with OPM. 

Tips for a Financially Secure Retirement 

Compare your net income while working with your estimated net income you will have in retirement. Here are some steps to compute these amounts: 

a. Convert your biweekly net income to a monthly amount by multiplying your net income by 26 pay periods and dividing the total by 12 months and compare with the total of your net sources of retirement income from Social Security, TSP, and the FERS Basic Retirement Benefit. 

b. Obtain an estimate of your Social Security retirement benefit (if you are old enough to qualify). Create a MySocialSecurity account to receive an estimate of your future benefits.  

c. Estimate income that you will receive from your Thrift Savings Plan in the form of: 

  • Installment payments (monthly, quarterly, or annually) 
  • Life Annuity (through the TSP annuity provider) 
  • Partial distributions as needed. 
  • Transfer to an IRA (allowing additional options for distribution) 

Consider the amount of federal and state income tax you may be required to pay based on the amount of your pre-tax withdrawals. Before you request a withdrawal or distribution, make sure you understand your options, the effects on your TSP account, tax rules, and other details. These TSP booklets offer comprehensive information: Distributions and Tax Rules about TSP Payments. You may use financial planning tools that are available from the Securities and Exchange Commission.

d. Request estimates of your retirement income from the FERS Basic Retirement Benefit: 

Your HR office can provide an annuity estimate for your FERS basic benefit and the FERS Special Retirement Supplement if you are eligible for this additional benefit.   

Consider reductions to your annuity amount for survivor elections, former spouse entitlement, age reduction for the MRA + 10 retirement option, as well as any changes in your work schedule (i.e. part-time, intermittent, or excessive leave without pay more than six months in any calendar year). 

Compute and estimate monthly withholdings for taxes and insurance that will be deducted from your monthly gross annuity. 

2. If your net income in retirement is projected to be significantly less than you have in net income while employed, consider your options: 

  • Can you realistically live on less income in retirement than you have while you are employed?  Start by projecting your anticipated expenses such as healthcare costs, living expenses, travel, and other expense plans or commitments.  
  • Pay down any debt you may have prior to retirement, especially high-interest consumer debt.   
  • Create a budget that supports the retirement lifestyle you want to live. Review and make any necessary adjustments to your budget as life circumstances and goals change. 
  • Increase your TSP allotment to allow for larger distributions in retirement.  This will also serve a dual purpose of reducing your net income while working to help you experience living on less income before it becomes a reality. 
  • Project your retirement to a later date.  Delaying for a year or two can substantially increase your financial security by increasing your FERS benefit, your retirement savings, and the value of your Social Security benefit.   
  • Explore post-retirement work opportunities to allow delayed distributions from the TSP and to avoid reduced Social Security retirement benefits that would be payable if you apply when you are younger than your full retirement age

You may need professional assistance to be sure that you are prepared for retirement.  This may include working with the following professionals: 

  • Retirement specialist who works in human resources at your agency who can provide retirement counseling including preparing retirement estimates for your retirement date; information that may help you make decisions regarding 
  • your best date to retire, continuation of insurance benefits, and survivor elections; and they can ensure that your service history is properly documented and creditable for retirement eligibility and computation.  
  • Certified Public Accountant who can help you consider the tax implications of financial decisions and assist with other tax-related issues, such as preparing annual tax returns. Some CPAs are also certified by the AICPA as personal financial specialists (PFSs), which means they have met AICPA's education requirements for providing financial planning services, including assessing your overall financial situation, developing a budget, setting goals for saving and investing, and developing a plan for monitoring your progress and reaching your goals. 
  • Estate Planning attorney to be sure your assets will be passed on to your heirs according to your wishes and in the most tax efficient way. 
  • Financial adviser:  Another professional you may wish to consult is an investment professional.  Use BrokerCheck to help you make informed choices about brokers and brokerage firms-and provides easy access to investment adviser information. Working with an adviser can help you evaluate your retirement decisions, especially the decision as to whether you are financially ready to retire!   

Learn more about working with financial professionals at the Financial Industry Regulatory Authority which is a government-authorized not-for-profit organization. 


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