015 ER Retirement Planning for the Last 5-10 Years of...

2015 ANSWER BOOK

Retirement Planning for the Last 5-10 Years of Employment

2 2015

FEDERAL SOUP ANSWER BOOK:RETIREMENT PLANNING FOR THE LAST 5-10 YEARS OF EMPLOYMENTBY EDWARD A. ZURNDORFER

ABOUT THE AUTHOREdward A. Zurndorfer is a retiree of the federal government and is currently the owner of EZ Accounting and Financial Services, an accounting and financial service firm in Silver Spring, MD. He is a Certified Financial Planner (CFP), a Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Registered Health Underwriter (RHU) and Registered Employee Benefits Consultant (REBC). He is also an IRS Enrolled Agent, licensed to represent taxpayers before the IRS. His firm specializes in the areas of individual taxes, tax preparation and consulting, employee benefits consulting in the areas of health and life insurance and retirement planning.

Mr. Zurndorfer writes for Federal Employees News Digest (FEND). He is the author of numerous other 1105 Media Inc. publications. He has written numerous articles in national and local financial journals, including the National Public Accountant, the Maryland Society of Accountants Journal, and the National Society of Enrolled Agents Journal.

He is also the moderator of 1105’s popular FederalSoup.com question-and-answer forum. He conducts retirement and benefits seminars throughout the country for federal employees, as well as seminars on the Thrift Savings Plan, long-term care insurance, and the government’s new flexible spending accounts program.

2015 © COPYRIGHT 1105 MEDIA, INC.

BUYOUTS AND EARLY OUTS

CHAPTER X: XXXXXXXX

The Federal Long Term Care Insurance Program is sponsored by the U.S. Office of Personnel Management, offered by John Hancock Life & Health Insurance Company, and administered by Long Term Care Partners, LLC.

FLTCIP6457

Make long term care insurance part of your retirement plan.Long term care is expensive, and it’s not covered by traditional types of insurance plans. With benefits designed specifically for the Federal family, the Federal Long Term Care Insurance Program (FLTCIP) offers a smart way to help protect savings and assets should you need long term care services someday.

Note: Certain medical conditions, or combinations of conditions, will prevent some people from being approved for coverage. You need to apply to find out if you qualify for coverage under the FLTCIP.

The Federal Long Term Care Insurance Program

1-800-LTC-FEDS (1-800-582-3337) TTY 1-800-843-3557 www.LTCFEDS.com/FederalSoup

http://tinyurl.com/ogdk7nz

4 2015

TABLE OF CONTENTSChecking Personnel Records and Selecting a Tentative Retirement Date

Reviewing Insurance Coverage

Reviewing Thrift Savings Plan Withdrawal Options

Reviewing Social Security Eligibility and Benefits

Reviewing and Understanding Medicare Eligibility and Choices

Considering Survivor Benefit Elections

Updating an Estate Plan

Saving Sufficient Liquid Assets for the Six Months Following Retirement

Considering Housing Options After Retirement

Considering Work Options After Retirement

5

9

18

22

24

25

28

29

31

34

PUBLISHED BY1105 Public Sector Media Group8609 Westwood Center Drive, Suite 500Vienna, VA 22182

COPYRIGHT NOTICE Copyright © 2015. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, transmitted in any form or by any means (electronic, electric, mechanical, photocopying, recording, or otherwise) without the prior permission of the copyright owner.

LICENSING INFORMATION To purchase a license authorizing you to distribute this publication, please e-mail [email protected].

We have attempted to compile information that is accurate and current as possible. Federal policies laws, regulations, statistics, and addresses continually change; therefore, no warranties are made as to the accuracy or completeness of the information in this publication.

CONTACT INFORMATIONCustomer Service: 1-800-989-3363Fax: [email protected]://www.FederalSoup.comPrinted in the United States of America

FEDERAL SOUP ANSWER BOOK: RETIREMENT PLANNING FOR THE LAST 5-10 YEARS OF EMPLOYMENT

CHECKING PERSONNEL RECORDS AND SELECTING A TENTATIVE RETIREMENT DATE

5 2015

Checking Personnel Records for Accuracy and Selecting a Tentative Retirement Date1. Q. What issues should employees within five to

10 years of retirement be focusing on?

A. Employees who are within five to 10 years of retirement should focus on the following issues: (1) building a full understanding of their retirement benefits; (2) targeting goals for retirement – in particular, what they will do once they retire, and whether they will have sufficient income to support their new lifestyle; (3) analyzing their choices for retirement, including survivor benefit elections for a spouse, a former spouse or another eligible individual; (4) deciding what to do with their Thrift Savings Plan (TSP) account; (5) deciding when to start receiving Social Security retirement benefits; and (6) deciding where they will live, and examining housing options after they retire from federal service.

2. Q. What should employees check in their personnel records during their last years of federal service?



6 2015

A. Employees should check their SF 50 (Notice of Personnel Action) for accuracy; in particular, Box 30 (“Retirement Plan”) to verify they are in the correct retirement plan. The table below summarizes the codes used in Box 30 for the various retirement plans. They also should check Box 31 (“Service Computation Date”) to verify that their start date in federal service is correct. They should make sure that their salaries shown on their SF 50 are correct. Usually the last three salaries will be averaged and used in the computation of the CSRS and FERS annuities.

3. Q. What are some other items that should be checked in employee personnel records?

A. Employees who have made deposits for temporary or seasonal (non-deduction) service and/or for military service should make

Retirement Plan Commonly Called SF 50 Box 30 CodeCivil Service Retirement System1 CSRS 1 or 6

Civil Service Retirement System and Social Security2 CSRS Offset C or E

Federal Employees Retirement System3 FERS K, L, M or N

Federal Employees Retirement System – Revised Annuity Employees4

FERS-RAE KR, LR, MR or NR

Federal Employees Retirement System–Further Revised Annuity Employees5

FERS-FRAE KF, LF, MF, NF

1 Permanent employees hired before 1/1/1984.

2 CSRS employees with at least five years of service as of 12/31/1986 who left federal service for at least one year after 1/1/1984, and who returned to federal service.

3 Permanent employees hired after 12/31/1983 and before 1/1/2013.

4 Permanent employees first hired after 12/31/2012, or rehired employees with less than five years prior federal service.

5 Permanent employees first hired after 12/31/2013, or rehired employees with less than five years prior federal service.



7 2015

sure they have received full credit for the years covering their deposit. A full deposit for temporary or military service is reflected in an employee’s service computation date (SCD) for retirement being adjusted backward in time to include the years covering the deposit. If they owe a redeposit for their CSRS or FERS contributions because they withdrew these contributions when they previously left federal service, they should seriously consider redepositing these withdrawn contributions together with interest charges to get credit for these years of service.

4. Q. What should employees within five to 10 years of retirement request from their retirement specialist in their human resources or personnel office?

A. Employees should find out their official service computation date (SCD) for retirement. The SCD for retirement is used as to determine an employee’s eligibility to retire and in the computation of their CSRS or FERS annuity. Employees should also request an annuity and benefits computation (CSRS or FERS) for one or two possible retirement dates in the near future. They should request a consultation with the specialist to review the annuity computation estimates, to review health, life and long-term care insurance benefits after retirement, and TSP withdrawal options after retirement.



8 2015

5. Q. What is some guidance with respect to choosing the best time of the month and the best time of the year to retire?

A. All employees should attempt to retire at the end of a pay period. For most employees, the end of a pay period is the second Saturday of a pay period. CSRS/CSRS Offset employees should retire either on the last day of the month or within the first three days of the following month. FERS employees should attempt to retire on the last day of a month. For all employees, retiring on these recommended days will result in their receiving their first CSRS or FERS annuity check within one month of their retirement date.

If an employee wants to get paid for as much unused annual leave hours as possible, then the best time of the year to retire is at the end of the leave year (late December or early January), before the start of the new leave year.

6. Q. Why is it important for retiring employees to get paid shortly after they retire for as many unused annual leave hours as possible?

A. When an employee retires, it may take OPM’s retirement office anywhere from three to 12 months to send the retiree their first full CSRS or FERS annuity check. For the first two, and perhaps as many 10 months following an employee’s retirement, the retired employee will receive


REVIEWING INSURANCE COVERAGE

9 2015

annuity checks – called “interim” checks – which are approximations of the actual annuity check. The approximation averages 50 percent to 90 percent of the true amount of the annuity check. In the meantime, the annuitant has bills to pay and the unused annual leave check – which will be paid to the annuitant within 10 to 45 days of the annuitant’s retirement date – can be used to help pay these bills during the time of these “interim” annuity checks.

Reviewing Insurance Coverage7. Q. What are some issues involving health

insurance that employees within five to 10 years of retirement need to consider?

A. If employees currently enrolled in the Federal Employee Health Benefits (FEHB) program want to keep their FEHB coverage during their retirement, then they must participate in the FEHB program, either himself or herself or through a spouse who participates in the FEHB program during all of the last five years of federal employment. If an employee is not currently enrolled – either by himself or herself or through a spouse – in the FEHB program, or is not enrolled in Tricare (the health insurance program for members



10 2015

of the uniformed services), and would like to participate in the FEHB program throughout their retirement, then they must enroll during the next FEHB “open season” and continue to participate for at least the five years leading up to their retirement date.

8. Q. If a FERS-covered employee retires under the “Minimum Retirement Age (MRA) + 10” immediate or postponed retirement option and decides to postpone the receipt of their annuity, what are the options for health insurance during retirement?

A. Those FERS-covered employees who have been covered by FEHB under their own enrollment or as a family member under another FEHB enrollment for the five years immediately preceding their retirement date are eligible to keep FEHB coverage during their retirement years. This is true even if a FERS employee has reached minimum retirement age (MRA) with at least 10 years of federal service and retires, and elects to postpone the start of his or her FERS annuity, in which case the FEHB coverage will be suspended until the FERS annuity starts.

9. Q. What are options for employees who are not eligible for FEHB insurance coverage during retirement?



11 2015

A. Those employees who are not eligible for FEHB coverage during retirement may elect to continue the health insurance for up to 18 months after their date of retirement or separation through Temporary Continuation of Coverage (TCC). With TCC, the retired or separated employee will pay the full FEHB premium (both the employee’s and government’s portions). It is therefore in the employee’s best interest to enroll in the FEHB program within five to 10 years of their retirement date. Under the provisions of the Affordable Care Act of 2010 (ACA), employees can enroll in a health insurance plan offered on their state’s health care exchange.

10. Q. What are some considerations with respect to the Federal Employees Group Life Insurance (FEGLI) program coverage during retirement?

A. As retirement gets closer, for many employees the need for life insurance diminishes. For example, some employees have life insurance to pay off their mortgage when they die. But if these same employees are within five to 10 years or retirement and are in the process of paying off their mortgage, they can at least decrease the amount of their FEGLI coverage. Those employees who may have other reasons to have life insurance and who are in relatively good health should consider purchasing individual



12 2015

term life insurance from a private life insurance company.

11. Q. What are the requirements for an employee to continue FEGLI coverage into retirement?

A. In order to continue FEGLI coverage into retirement, an employee must: (1) retire on an immediate annuity (one that begins within 30 days after separation) or postponed annuity under the “MRA +10” provisions of FERS; (2) have been enrolled in FEGLI for the five years preceding the starting date of their annuity; (3) have not converted to an individual policy; and (4) have not waived coverage of “Basic” FEGLI life insurance.

12. Q. For employees who are eligible and who want to keep the full amount of FEGLI coverage for retirement, what is the amount of FEGLI coverage equal to?

A. Retirees can maintain the “Basic” and optional coverages (Options A, B, and C) that were in effect on the last day of their employment.

13. Q. Do retirees pay the same amount for FEGLI as employees pay?

A. If an employee decides to keep the full



13 2015

amount of FEGLI coverage in effect on the last day of their employment, then FEGLI becomes very expensive during retirement. The cost of FEGLI “basic” coverage for annuitants will increase starting in January 2016. For that reason alone, those employees who are in relatively good health and who need life insurance during retirement should consider purchasing an individual term life insurance policy from a private insurance company.

14. Q. 14. Are there any suggestions as to what type of life insurance should be purchased from a private insurance company?

A. Employees nearing retirement are encouraged to buy term and not cash value (permanent) life insurance. Cash value life insurance is more expensive and rarely does a federal employee have a need for it. With respect to term insurance, employees are encouraged to buy level term life insurance in which the policyowner pays the same premium throughout the length of the policy while the face amount of the policy stays the same. Level term life insurance comes in lengths of 10, 15, 20, 25 and 30 years.

15. Q. Are there types of term life insurance policies that should be avoided?



14 2015

A. Employees should avoid annual renewable term life insurance (in which premiums increase at least every other year), decreasing term life insurance (in which the face amount of the life insurance policy decreases every year), and return of premium life insurance (in which premiums are more expensive compared to level term life insurance policies).

16. Q. What is the best way for employees to go about purchasing life insurance?

A. The recommended way for employees to purchase life insurance is through a licensed and experienced life insurance broker. Insurance brokers can be found on the Internet, in the Yellow Pages, or through recommendations from friends, neighbors or fellow employees. To check on a prospective insurance broker’s reputation and credentials, employees should check with their state insurance commission.

17. Q. What is long-term care and when should employees within five to 10 years of retirement consider applying for long-term care insurance?

A. Long-term care (LTC) encompasses a wide range of health and personal care – from simple assisted living arrangements to intensive nursing care. Since most individuals do not have a need for LTC on average until they reach their



15 2015

late 70s and 80s, buying LTC insurance is not recommended when an individual is younger than 50. Since most employees within five to 10 years of retirement are on average in their mid to late 50s or early 60s, theses employees should consider purchasing LTC insurance before they retire from federal service.

18. Q. What are the options for employees within five to 10 years of retirement for purchasing LTC insurance?

A. All federal employees, together with their spouses and other eligible family members, are eligible to apply for LTC insurance under the Federal Long Term Care Insurance Program (FLTCIP). Applications may be submitted at any time. Information about the program may be obtained at www.ltcfeds.com and applications may also be downloaded from this site. Employees and retirees pay the full cost of the FLTCIP insurance with no government contributions. Employees may also look into purchasing LTC insurance from a private insurance company. The FLTCIP recently increased premium rates for new applicants but did not change premium rates for existing FLTCIP policyholders.

19. Q. Is there anything special about the FLTCIP that would make it better LTC insurance than



16 2015

the individual LTC insurance policies that can be bought from a private insurance company?

A. The FLTCIP is run by LTC Partners, LLC, currently John Hancock Life and Health Insurance Co.. The FLTCIP is a group-sponsored LTC insurance program regulated by the federal government with no variation in the program by states. Given the current “turmoil” going on among the remaining private insurance companies offering LTC insurance, the FLTCIP represents a great opportunity for employees and family members to obtain LTC insurance at reasonable premium rates.

20. Q. Do employees have to apply for the FLTCIP before they retire?

A. Employees are not required to apply for the FLTCIP before they retire. They can apply for the FLTCIP after they retire. But since premiums are based on “entry age,” the premiums will be less expensive (at least initially) for employees who apply for it when they are younger and not retired. Another consideration is that if LTC Partners (which administer the FLTCIP) have an “open season,” employees and their spouses who want to apply for the insurance will be allowed to fill out a “short” application form rather than a standard application form. Annuitants who apply are not permitted to fill out a short application form, even during an open season. Also, other



17 2015

than spouses, eligible family members such as parents and parents-in-law may not apply for the FLTCIP once an employee has retired from federal service.

21. Q. What are some reasons for purchasing LTC insurance rather than “self-insuring”?

A. Among the reasons that employees within five to 10 years of retirement should purchase LTC insurance are: (1) the premiums will be less expensive, at least initially, compared to buying it later; (2) they do not have an extra $200,000 to $300,000 to invest for their future LTC needs; (3) they do not want to rely solely on family caregivers for their LTC; (4) they can afford the premiums; (5) they are not interested in depleting their assets and savings to qualify for Medicaid; (6) they are interested in having more control over the type of care they will receive and where they will receive it; and (7) they are able to reduce the amount of their life insurance and can use the extra premiums saved to pay for LTC insurance.


REVIEWING THRIFT SAVINGS PLAN WITHDRAWAL OPTIONS

18 2015

Reviewing Thrift Savings Plan Withdrawal Options22. Q. Is there anything that employees within

five to 10 years of retirement should be doing with respect to their Thrift Savings Plan (TSP) accounts?

A. Employees within five to 10 years of their retirement should be contributing the maximum possible to their TSP accounts, both regular contributions and if they are age 50 or older, “catch-up” contributions. FERS employees at a minimum should be contributing at least 5 percent of their gross pay each pay date in order to receive the maximum agency matching of 4 percent. Unless these employees plan to withdraw all of their TSP funds shortly after they retire, they should avoid putting too much of their TSP money in the bond funds (G and F Funds). This is to allow future growth of their TSP account, both at the end of their federal employment and well into their retirement years.

23. Q. What can separated or retired federal employees do with their TSP accounts?

A. Bpon separation or retirement from federal service, a TSP participant may: (1) do



19 2015

nothing with their TSP account and let the funds continue to accrue earnings (although TSP participants are subject to a minimum mandatory required minimum distribution starting at age 70.5 and every year thereafter); (2) withdraw a portion or all of the funds in their account; or (3) make inter-fund transfers. A TSP participant who has departed from federal service or retired may not: (1) contribute to their account, although they can transfer other retirement savings into their TSP account from eligible employer plans, and to the new Roth TSP from Roth 401(k), Roth 403(b) and Roth 457(b) plans (Form TSP-60 [Request for a Transfer into the TSP] is used to request a transfer into a TSP account); and (2) borrow from their TSP account (no more TSP loans). Note that retired employees can make penalty-free (no 10 percent early withdrawal penalty) TSP withdrawals if they retire from federal service any time during the year or after they become age 55. Also, effective Jan. 1, 2016, those employees who are classified as “special provision” employees—this includes law enforcement officers, firefighters and air traffic controllers—can make penalty-free TSP withdrawals if they retire from federal service any time during the year they become age 50.

24. Q. What are the TSP withdrawal options?

A. A TSP participant may: (1) make a one-time-only partial withdrawal of $1,000 or more;



20 2015

(2) make a full withdrawal – either a single payment, a series of monthly payments, or a life annuity; or (3) transfer some or all of the payments to an Individual Retirement Account (IRA) or to another eligible retirement plan (e.g., a 401(k) plan).

25. Q. What are the advantages of transferring TSP funds to an IRA?

A. The advantages of transferring one’s TSP account to an IRA are: (1) taxes will continue to be deferred on the amount transferred from the traditional tax-deferred TSP to a traditional IRA until the IRA funds are withdrawn; (2) there are limitless investment choices to choose for an IRA versus the 10 funds in the TSP; (3) there are multiple partial withdrawals allowed for a traditional IRA.

The disadvantages of transferring TSP funds to a traditional IRA are: (1) an IRA owner could pay high management fees and other charges when investing privately in an IRA; for this reason alone, a TSP account owner within a few years of retirement should be wary of financial planners and stockbrokers who promise to grow TSP accounts with little cost; and (2) early withdrawal tax penalties may apply to IRA amounts withdrawn before the IRA owner is age 59.5. The TSP exempts withdrawals from an early withdrawal tax



21 2015

penalty if the TSP participant separates from federal service in the year they reach age 55 or later.

26. Q. What are the advantages and disadvantages of a TSP life annuity?

A. The advantages of a TSP life annuity are: (1) a life annuity provides a steady supplemental income for the TSP participant (the annuitant) and for the joint annuitant (if applicable); (2) the amount of the annuity will not be affected by the performances of the stock market or the bond market; and (3) no management of the account is necessary.

The disadvantages of a TSP life annuity are: (1) once elected, this option cannot be canceled or changed; it is for life; (2) it will take many years of receiving annuity payments to recover the original investment in the TSP participant’s account; (3) there is no access to the original investment; and (4) if the TSP participant who opts for a life annuity dies before receiving the amount used to purchase the annuity, then the remainder belongs to the annuity provider (Metropolitan Life Insurance Co.) and is not paid to a beneficiary.


REVIEWING SOCIAL SECURITY ELIGIBILITY AND BENEFITS

22 2015

Reviewing Social Security Eligibility and Benefits27. Q. Are there any actions employees within

5 to 10 years of retirement should take with respect to their future Social Security retirement benefits?

A. Employees are encouraged to go online to www.socialsecurity.gov/myaccount and create an account in order to view and print out their Social Security statement. The statement is a record of earnings on which an individual paid Social Security taxes together with the estimated benefits that will be paid to the individual and to the individual’s family in the event of disability, retirement or death.

28. Q. What type of questions should employees ask themselves when they view their Social Security statements?

A. Among the important questions employees should ask themselves when viewing their statements are: (1) Is my earnings history correct? For any year in which the reported Social Security wages is incorrect, action should be taken to correct it. (2) Do I have enough credits to qualify for benefits? (3) If I am covered by CSRS and have previous military


REVIEWING SOCIAL SECURITY ELIGIBILITY AND BENEFITS

23 2015

service, will I be affected by the “catch 62” provision? (4) Will early retirement significantly affect the amount of my retirement benefits?

29. Q. What is the “catch 62” provision and whom does it affect?

A. The “catch 22” provision affects CSRS employees who entered federal service before Oct. 1, 1982, and had prior military service. If these employees have fewer than 40 credits of Social Security at the later of age 62 or their retirement date, then a deposit for military service is not necessary. But if these employees currently have 40 or more credits of Social Security, or will have at the later of age 62 or their retirement date, then a full deposit for their military service must be made before they retire. If these employees do not make this deposit, then their years of military service will not be used in the computation of their CSRS annuities. Affected employees should contact their personnel offices immediately for more information.


REVIEWING AND UNDERSTANDING MEDICARE ELIGIBILITY AND CHOICES

24 2015

Reviewing and Understanding Medicare Eligibility and Choices30. Q. What is Medicare and are federal employees

entitled to it?

A. Medicare is a health insurance program for individuals who are age 65 and older, who are disabled and under age 65, or who have end-stage renal disease (permanent kidney failure treated with dialysis or a transplant). There are four parts to the Medicare program: (1) Medicare Part A – hospital insurance; (2) Medicare Part B – medical insurance; (3) Medicare Part C – Medicare Advantage program; and (4) Medicare Part D – prescription drug program. All federal employees hired since 1983 and most employees hired before 1983 are eligible to enroll in Medicare. Most enroll in Medicare Parts A and B after they retire from federal service and when they reach age 65.

31. Q. Is there anything that employees within five to 10 years of retirement need to understand about their future Medicare enrollment?


CONSIDERING SURVIVOR BENEFIT ELECTIONS

25 2015

A. Employees who are within five to 10 years retirement should understand the following things about their future Medicare coverage. (1) Which parts of Medicare they should enroll in when they become eligible and when they should enroll, namely (a) if they will retire from federal service before age 65, they should enroll in Medicare Part A (no cost) and Medicare B (carries a monthly premium that depends on the individual’s gross income); or (b) if they are still working for the federal government and enrolled in the FEHB program, they should enroll in Part A only. These employees should enroll in Medicare B within 8 months of their retirement date to avoid the late enrollment penalty. (2) How Medicare Parts A and B coordinate with their FEHB program insurance. Information about this is available at www.opm.gov/healthcare-insurance/healthcare/medicare.

Considering Survivor Benefit Elections32. Q. What are the survivor benefits payable upon

the death of an employee or a retiree and what should employees who are close to retirement consider with respect to these benefits?

A. Survivor benefits are payable upon the death of the retiree or an employee with at least 10 years of federal service. Survivor benefit elections made at retirement include: (1) spousal



26 2015

(current and former) survivor benefits; and (2) insurable interest benefits. Married employees normally choose a survivor benefit for their spouse. However, if they were previously married to someone else while in federal service, a court order may require the employee/retiree to give full survivor benefits to a former spouse.

33. Q. What are the options for current employees at the time of retirement to give survivor benefits to a current spouse?

A. Married employees within five to 10 years of retirement should be aware of their options for giving surviving benefits to current spouses. An employee may elect a maximum, a partial, or no survivor benefit for their current spouse. The spouse must provide written and notarized consent for a survivor annuity benefit if other than a full survivor annuity benefit is elected. The maximum or partial election ensures continued health benefits for a spouse who is covered under a self and family health plan and is not eligible for FEHB insurance based on his or her own participation in the FEHB program.

34. Q. What are the options for providing survivor benefits to a former spouse?

A. An employee may elect to provide a former



27 2015

spouse with survivor benefits. If the employee has remarried, then the current spouse must consent to this election. Also, a court order might be required to provide survivor benefits to a former spouse. A former spouse’s benefits terminate upon his or her death or if he or she remarries before age 55. This is true unless the former spouse’s marriage to the employee lasted 30 years or more, or the terms for the benefits were established in a court order.

35. Q. Can an employee elect a reduced retirement annuity to provide an “insurable interest” survivor annuity to someone who has an insurable interest in the employee?

A. “Insurable interest” is an insurance term that applies to an individual who would benefit from the employee or retiree continuing to live. The requirements for this election are: (1) the employee is responsible for arranging and paying the costs of a current medical examination showing that the employee is in good health; (2) the employee cannot retire on disability; and (3) for married employees, a current spouse must give written consent. If the insurable interest survivor is not a close relative, then the employee must provide proof that the insurable interest depends on the employee for support by submitting an affidavit from one or more persons attesting to the fact this this is a legitimate relationship and that the insurable


UPDATING AN ESTATE PLAN

28 2015

interest survivor is dependent on the employee for support.

Updating an Estate Plan36. Q. What are some of the things that employees

close to retirement need to be aware of with respect to updating their estate plan?

A. By the time an employee is within five to 10 years of retirement, they should have an estate plan in place. But this plan should be reviewed and updated as necessary. For example, employees should make sure their beneficiary designations are current, including beneficiary designations for their life insurance policies, TSP account, IRAs and bank accounts.

37. Q. What are the most important parts to a proper estate plan?

A. The most important parts to a proper estate plan for employees close to retirement are: (1) beneficiaries for accounts in which beneficiaries can be named (and making sure these beneficiary designations are current); (2) a will or trust for assets in which beneficiaries cannot be named; (3) a living will and an advanced health care directive (health care power of attorney); (4) a durable power of


SAVING SUFFICIENT LIQUID ASSETS FOR THE SIX MONTHS FOLLOWING RETIREMENT

29 2015

attorney for financial asset management;; and (5) if necessary, guardians for minor children or disabled adult relatives;. (6) setting up trusts to minimize the possibility of having to pay state estate or inheritance taxes if their states impose such taxes.

38. Q. Where should employees go to get their will or trust, advance health care directive, durable power of attorney and living will written?

A. Employees are highly encouraged to go to an estate attorney in their resident state to get their estate documents written. Once employees retire and perhaps move to another state, they should get their estate documents reviewed by an estate attorney in their new state of residence.

Saving Sufficient Liquid Assets for the Six Months Following Retirement39. Q. When employees retire from federal service,

what should they anticipate during the first three to six months of retirement with respect to the amount of their CS1tS or FE1tS annuities?


SAVING SUFFICIENT LIQUID ASSETS FOR THE SIX MONTHS FOLLOWING RETIREMENT

30 2015

A. Upon retiring from federal service an employee will receive his or her first annuity check. But the first three to eight annuity checks are called “interim” checks, in that employees will receive 50 percent to 90 percent of the actual amount. For that reason, employees should have another source of income in order to pay their bills during this interim period.

40. Q. Is a retiring employee’s lump-sum payment for unused annual leave a good way of paying a recently retired employee’s bills during the interim period?

A. Yes, a retiring employee’s lump-sum payment for unused annual leave can provide recently retired employees with an excellent source of liquid funds during the interim period. The lump-sum payment for unused annual leave is paid by an employee’s payroll office and is usually directly deposited into a retiring employee’s bank account within 10 to 45 days of the employee’s retirement date.

41. Q. What should an employee know with respect to how their lump-sum payment for unused annual leave is taxed?

A. The lump-sum payment for unused annual leave is subject to federal and state income taxes and Social Security (FICA) and Medicare Part


CONSIDERING HOUSING OPTIONS AFTER RETIREMENT

31 2015

A (hospital insurance) payroll taxes. Employees who retire at the end of the year and receive their lump-sum payment in the following year (January or February) when their income will be less may want to adjust their federal and state withholding in order for fewer income taxes to be withheld. This adjustment should be done at least three to four weeks before an employee retires.

Considering Housing Options After Retirement42. Q. Should employees within five to 10 years of

retirement think about housing options for their retirement years?

A. Most definitely. Perhaps one of the most personal questions facing soon-to-be retirees is the question of housing during their retirement years. Those employees approaching their retirement have to seriously consider the following questions: (1) Do they want to “age in place”? (2) Do they want to retire to another state or another country? (3) Will they need to tap into their home equity now in order to build their retirement home? (4) How will their housing needs evolve over all the years they are retired?



32 2015

43. Q. What are some of the housing options for future retirees?

A. Among the most popular housing options for today’s retirees: (1) downsizing and staying in the same community, for example, by selling one’s detached house and using the proceeds to buy a small condominium in the same community, perhaps by renting an apartment rather than purchasing another residence; (2) tapping into the current home’s equity through a home equity loan to pay for the purchase of a smaller home; (3) moving out of the country; (4) becoming a long-term renter; (5) moving in with other family members; and (6) becoming part of a continuing care retirement community.

44. Q. Are there any income tax issues that employees approaching retirement should be aware of concerning their housing options?

A. Employees who have lived in their principal residence for at least two out of the past five years and who sell their principal residence at a gain may exclude up to $250,000 of capital gain income from federal and state income taxes, or $500,000 of capital gain income from federal and state income taxes if they are married and filing jointly. While there are some exceptions to the “two out of the five year rule,” employees who will be retiring within the next five to 10 years and who intend to sell their



33 2015

principal residence at the time of retirement should make sure they have lived in the principal residence for at least two out of the last five years preceding its sale in order to use the capital gain exclusion. Employees who own rental properties which have increased in value may avoid paying capital gain taxes on the rental property sale by “exchanging” one sale property for another property. This is known as a “1031 exchange.” Retirees who rent rather than own will have no mortgage interest and property tax deductions, perhaps resulting in a higher tax liability.

45. Q. Should employees within five to 10 years of retirement pay off their mortgage?

A. Those employees who are in the final years of their mortgage (last 10 years of a 30-year mortgage; last 5 years of a 15-year mortgage) and who have sufficient liquid assets to be able to pay off their mortgage should do so. The reason is that it is generally a good idea for retirees to have as little debt as possible, including a mortgage. If an employee wants to decrease their mortgage payment so that their monthly mortgage payment is more affordable – especially during retirement when income typically decreases – then perhaps refinancing an existing mortgage to a new mortgage with a lower mortgage interest would be in the best interest of the employee. Ideally, this


CONSIDERING WORK OPTIONS AFTER RETIREMENT

34 2015

refinancing will occur before the employee retires, in order to make it more likely the employee will qualify for the new mortgage.

Considering Work Options after Retirement46. Q. What should employees within five to 10

years of retirement be considering for what they plan to do after retirement?

A. Most employees look forward to the day they retire. But many employees fail to consider what they will be doing on daily basis after they retire. Financial professionals, psychologists, geriatric specialists, and social workers agree that the worst thing a retiree can do is to “do nothing.” Whether it is going back to school, volunteering, or going back to work, it is important for employees approaching retirement to give serious consideration as to what they want to do after they retire.

47. Q. Are there any restrictions for federal employees regarding getting a new job and working during retirement while receiving federal annuities?

A. Depending on the nature of the work and the agency, federal annuitants may work and



35 2015

receive their annuities with no limitations. But in certain agencies a retiree may not be able to contract with the same agency from which he or she retired. Employees are advised to contact their agency ethics attorney or counselor regarding post-employment rules and regulations for possible conflict of interest violations.

48. Q. Is it possible for an employee who retires from an agency to be rehired as a “rehired annuitant”?

A. There are federal agencies that may rehire certain retired employees due to the high demand of their skills. But it is not a “given” that an agency will hire back annuitants. Employees should check with their agency. Also, Congress has approved and OPM has established the rules for “phased retirement” in which employees can retire “partially” and work at the same time. OPM has not, however, issued the final rules regarding phased retirement as of this writing.Unfortunately many agencies have not offered phased retirement to eligible retiring employees.

49. Q. Is converting to part-time employment (less than 80 hours per pay period) a suggested way of “adjusting” into retirement?



36 2015

A. Most employees are aware of the fact that their income will decrease once they retire. To “adjust” into that financial state of their lives, converting to part-time employment—with its decrease in income before retirement—would be a good way to financially adjust.

Working part-time is also a good way for an employee to “ease” into the non-working stage of his or her future situation. See answer to question 46.

50. Q. Is there anything else that employees who work after they retire from federal service should know?

A. Employees who retire from federal service before their full retirement age (FRA) of age 65 to 67 and who elect to start receiving Social Security retirement benefits before FRA should be aware of the Social Security “earnings test.” If they earn too much, they could lose some or all of their Social Security benefits. The same earnings test applies to FERS annuitants who retire before 62 and are receiving the FERS annuity supplement. If they earn too much (wages, salary or self-employment income), they could lose some, or all, of their FERS annuity supplement.



37 2015

We hope that the 50 questions and answers presented in the Federal Soup Answer Book: Retirement Planning for the Last 5-10 Years of Employment will assist those employees who are eligible to retire from federal service within the next five to 10 years. Indeed, soon-to-be retirees and future retirees face problems that most of their parents and grandparents never encountered. These problems include “longevity risk,” that is, outliving one’s pension income, inadequate and increasingly more expensive health care and long-term care expenses, and unaffordable housing. But federal retirees are more fortunate than many other retirees. Because most of their employee benefits continue throughout retirement, and because they enjoy a guaranteed pension for life in the form of a CSRS or FERS annuity, most federal retirees hopefully will manage to avoid most of these problems.

015 ER Retirement Planning for the Last 5-10 Years of...

Documents

Transcript of 015 ER Retirement Planning for the Last 5-10 Years of...