Federal Employee Retirement FAQ: Expert Answers from Mike Stevens

Originally aired on KAOX, KID, KNRS, and KSL

💰 Social Security Questions

Q: "What exactly is spousal Social Security benefit?"

A: Even if your spouse never worked (or worked very little), they're eligible for Social Security benefits based on your work record.

Key Details:

• Spousal benefit = up to 50% of your primary insurance amount
• Available whether your spouse worked or not
• If your spouse has their own Social Security, they get the higher of the two amounts
• Must be claimed strategically for maximum benefit

Real Example: Recent client discovered his wife was eligible for an additional $491/month in spousal benefits — nearly $6,000 per year they were leaving unclaimed.

Action Step: If you're married, get a Social Security optimization analysis before claiming benefits.

Q: "Will Social Security really run out of money?"

A: The program won't disappear completely, but significant changes are coming to address funding shortfalls.

Expected Changes:

• Full retirement age increases — likely 70-73 for younger workers
• Benefit reductions — 20-25% cuts possible without legislative action
• Increased taxation — more benefits becoming taxable
• Higher wage caps — Social Security taxes on higher earners

Planning Strategy: Don't plan based on fear, but do factor potential reductions into your overall retirement strategy. Build other income sources to reduce Social Security dependence.

Q: "How many ways can married couples file for Social Security?"

A: There are approximately 567 legitimate filing strategies for married couples.

Why This Matters:

• Social Security Administration won't optimize for you
• One wrong decision can cost tens of thousands over your lifetime
• Coordination with spouse's benefits crucial
• Timing affects survivor benefits

Bottom Line: Professional optimization analysis is essential for married federal employees.

🏛️ Federal Employee Specific Questions

Q: "Should my son set up a Roth IRA for his first job?"

A: Absolutely! This is one of the greatest financial gifts you can give.

Why Roth IRAs Are Perfect for Young Workers:

• Taxes are historically low right now
• Young people typically in lower tax brackets
• Decades for tax-free compounding
• No required minimum distributions
• Tax-free inheritance for their beneficiaries

Action for Parents: Help your children understand the power of early investing and tax-free growth.

Q: "What's the difference between FERS and CSRS?"

A: Two different federal retirement systems with distinct benefits:

FERS (Federal Employee Retirement System):

• Three-pillar approach: pension + TSP + Social Security
• Lower pension percentage but includes TSP matching
• Full Social Security eligibility
• More portable between jobs

CSRS (Civil Service Retirement System):

• Higher pension percentage
• No TSP matching (but can contribute)
• Limited Social Security benefits
• Less portable

For Current Employees: All new federal employees are in FERS. Focus on maximizing all three pillars.

Q: "How much should I contribute to my TSP?"

A: Minimum: Enough to get full government match (typically 5%) Goal: Work toward annual contribution limits

2024 Contribution Limits:

• Regular contributions: $23,000
• Catch-up (age 50+): Additional $7,500
• Total possible: $30,500

Strategy by Age:

• 20s-30s: At least get the match, increase 1% annually
• 40s: 10-15% if possible
• 50+: Maximize with catch-up contributions

Q: "Can I keep my federal health insurance when I retire?"

A: Yes, but there are specific requirements:

FEHB Continuation Requirements:

• Retire under FERS or CSRS
• Continuously enrolled for 5 years immediately before retirement
• Continue paying premiums in retirement

Why It Matters: Federal health insurance is often superior to Medicare supplements and provides continuity of care.

💡 Investment & Planning Questions

Q: "Should I downsize my home in retirement?"

A: This is a complex decision that requires looking at your complete financial picture, not just housing in isolation.

Factors to Consider:

• Capital gains taxes on home sale
• Current housing market conditions
• Interest rates for new mortgage
• Total retirement income needs
• Liquidity requirements

Real Example: Recent client discovered that downsizing would tie up most of their liquid assets in the new home, leaving them "house rich but cash poor."

Recommendation: Analyze this decision as part of your complete retirement income plan, not in isolation.

Q: "I inherited money. How can I avoid a big tax bill?"

A: The answer depends entirely on what type of inheritance you received.

Different Inheritance Types:

• Cash/Bank accounts: Generally no immediate tax implications
• Inherited traditional IRAs: Subject to new 10-year withdrawal rules
• Inherited Roth IRAs: Still subject to 10-year rule but tax-free growth
• Non-retirement investments: May qualify for stepped-up basis

New Secure Act Rules:

• Non-spouse beneficiaries must withdraw inherited IRA within 10 years
• No more "stretch" IRA for most people
• 25% penalty + taxes if rules not followed

Action Step: Work with both a financial advisor and CPA to optimize inheritance tax strategy.

Q: "Is life insurance a good way to leave an inheritance?"

A: It can be, but it needs to make financial sense for your overall situation.

Life Insurance Advantages:

• Tax-free death benefit to beneficiaries
• Provides liquidity for estate taxes
• Income replacement for surviving spouse
• Can equalize inheritance among children

Important Considerations:

• Don't become "life insurance poor" in retirement
• Ensure you can afford premiums comfortably
• Consider your spouse's income needs first
• Discuss inheritance goals with spouse (couples often disagree!)

Planning Tip: At minimum, your home will likely provide inheritance. Add life insurance strategically, not automatically.

📊 Tax Planning Questions

Q: "Will I really pay less taxes in retirement?"

A: This is a common misconception. Many retirees pay similar or higher taxes.

Why Retirement Taxes Can Be Higher:

• No more 401(k)/TSP contributions reducing taxable income
• Required minimum distributions from retirement accounts
• Social Security benefits becoming taxable
• Loss of mortgage interest deductions
• Potential increases in tax brackets

Strategy: Plan for similar income needs in retirement, which often means similar tax levels.

Q: "Should I do Roth or traditional TSP contributions?"

A: Consider multiple factors:

Choose Roth When:

• Currently in lower tax bracket
• Young with decades until retirement
• Expect higher tax rates in future
• Want tax-free growth and distributions

Choose Traditional When:

• Currently in high tax bracket
• Need current year tax deduction
• Expect lower retirement income
• Have access to other tax-free sources

Best Strategy: Many federal employees benefit from a mix of both for tax diversification.

🏥 Healthcare & Long-Term Care Questions

Q: "Will Medicare cover my long-term care needs?"

A: No, Medicare has very limited long-term care coverage.

Medicare Limitations:

• Only covers "skilled" care, not custodial care
• Limited to 100 days in skilled nursing facilities
• Must meet strict qualification requirements
• No coverage for assisted living or home care

Planning Options:

• Long-term care insurance
• Hybrid life insurance/LTC policies
• Self-insurance with dedicated savings
• Family care arrangements

Statistics to Consider: 70% of people will need some form of long-term care during their lifetime.

Q: "What happens to FEGLI in retirement?"

A: Federal life insurance becomes much more expensive after age 65.

FEGLI Cost Increases:

• Option A (Basic): Reduces to 50% at retirement, 25% at age 65
• Option B (Additional): Premiums can increase 10-15 times after age 65
• Option C (Family): Also becomes more expensive

Strategy: Review life insurance needs before retirement and consider alternative coverage for post-65 needs.

🔄 Withdrawal Strategy Questions

Q: "What's wrong with the 4% withdrawal rule?"

A: The 4% rule is outdated due to:

Changed Factors:

• Inflation: Erodes purchasing power over 30+ year retirements
• Longevity: People living longer need money to last longer
• Market volatility: Sequence of returns risk in early retirement
• Healthcare costs: Rising faster than general inflation

Modern Approach: Dynamic withdrawal strategies that adjust based on market performance and personal circumstances.

Q: "How do I coordinate FERS pension with TSP withdrawals?"

A: Strategic coordination can optimize your tax situation:

Withdrawal Sequencing:

1. FERS pension: Automatic monthly income (taxable)
2. Social Security: Optimize timing for maximum benefit
3. TSP withdrawals: Fill the income gap strategically
4. Other investments: Coordinate for tax efficiency

Tax Considerations:

• Spread taxable income across multiple sources
• Use Roth accounts in high-tax years
• Harvest tax losses when appropriate
• Consider geographic tax implications

🎯 Professional Guidance Questions

Q: "How do I find the right financial advisor?"

A: Look for specific qualifications and approach:

Essential Qualities:

• Federal employee expertise — understands FERS, TSP, federal benefits
• Education focus — explains the "why" behind recommendations
• Comprehensive planning — coordinates all aspects of retirement
• Spouse inclusion — ensures both partners understand the plan

Red Flags:

• Pressure to make immediate decisions
• Can't explain recommendations clearly
• Focuses only on investments, ignores other aspects
• Different advisor each time you call

Questions to Ask:

• How many federal employees do you work with?
• Can you explain your fee structure?
• What's your planning process?
• How do you coordinate with my CPA?

Q: "Do I really need professional help if I'm smart with money?"

A: Even financially savvy people benefit from professional coordination.

Why Smart People Use Advisors:

• Complexity: Federal benefits interact in complex ways
• Time: Optimization requires significant research and analysis
• Emotions: Third party provides objective perspective
• Spouse protection: Ensures plan survives if something happens to you

Real Story: Smart client managed everything himself but realized his wife would be lost if something happened to him. Professional planning provides continuity and peace of mind.

📞 Get Your Questions Answered

Have questions not covered here? Capital Wealth Advisors specializes in federal employee retirement planning.

Contact Information:

• Phone: 801-210-5500
• Text: "VISIT" to 801-210-5500
• Website: capitalwealth.com

Free initial consultation for federal employees. Get personalized answers to your specific retirement questions.

📚 Additional Resources

Government Resources:

• OPM Retirement Info: opm.gov/retirement-services
• TSP Website: tsp.gov
• Social Security Admin: ssa.gov

Planning Tools:

• Social Security benefit calculator
• TSP allocation tools
• FERS pension estimator
• Retirement income projectors

Educational Content:

• Retire Right Radio (weekends on KAOX, KID, KNRS, KSL)
• Capital Wealth blog
• Federal employee webinars

These answers are based on general principles and may not apply to your specific situation. Consult with a qualified financial advisor specializing in federal employee benefits for personalized guidance.