Latest / Federal Retirement Advisors | FedLegacy / Federal Employee Pay Stub: Which Deductions Stop in Retirement
Transcript
- William Smith: What's going on, everybody? Hope everybody's doing well. Hope everybody had a good day's worth of work. Or if you retire, I hope that you are enjoying retirement because you should. but if you're retired, this conversation might be a little different for you because what we're gonna be talking about today is we're gonna be talking about how to read your FERS paycheck and how that translate into translates and translates into retirement. Because one of the things that We oftentimes see, especially now that we're meeting with a lot of folks who are retired at the end of the year and they're nervous about what retirement will look like on the other side. And so they're like, well, I'm making this amount of money now. Well, how much will I lose in retirement when my new chip paycheck starts coming in? Will it be a big gap and things like that? And oftentimes the gap is a lot smaller than you think, especially if you're the type of person who has put a lot of money in their TSP, especially in the last couple of years, because you're putting so much in your TSP, that's a big deduction. And then you have your Social Security, you have taxes and all those things. And those things go away. And so what we're going to talk about tonight, more so than anything, is this. When it comes to your pay, it's one thing to know how much is hitting your account. But the next thing that you need to know is how much stays there. Very, very important. And that's how you do proper income planning. Again, you can know all your numbers of how much is going gonna hit their account. Okay, Mr. Smith, after the taxes and everything like that, I'm gonna have forty one hundred dollars a month. Okay. Well, when's the last time you did an expense plan? When's the last time you planned for travel? Because here's the thing. When you leave the government, there's certain things you're not gonna be paying for no more. I mean, not a lot for anymore. Gas, you know, especially if you're going to work four or five days a week now, like like a lot of you are. Parking, you won't be paying for that anymore. Dry cleaners, you won't be paying for that anymore. Lunches and things like that, you won't be paying for that anymore. But here's what you will be paying for Vacation. Most people shop a whole lot more. You eat more, you eat out more when you're retired, as you should, right? You should be enjoying retirement. But the expenses change. Gas pricing and all that type of stuff goes to flights. And it should. So I want I want to make sure we understand that. But one of the things we're going to talk about tonight as we as we're in our series of of the last 90 days working as a federal employee. We've been on theme with with those subjects. But the one topic that one of the topics that we often talk about the most on our calls. Is how to look at your current paycheck and then what is it gonna look like in retirement, right? And so what I want to do is I'm gonna share my screen. And we have a sample paste paste up here that I wanna I wanna show you. So and again, these are real numbers from a pay stub. We ch we changed the the name, obviously, you know, but but but this is a real one. And I want to show you the things that when you look at your pay stuff, the things that are not gonna be there anymore. So you can track that. So when we do our retirement readiness sessions, that's our first call. But on our second call, we do our strategy call. And on our strategy call, what we do is we look at the two tabs pre retirement and post retirement. And we always look at what your net pay is now and then what your net pay will be in retirement. And when we do the pre retirement slide, it automatically deducts these things that you're paying right now. So if you can see my screen. This is an example of a of a federal employee that's working. The gross pay, which we all know doesn't matter much unless it's just taxes. Unless, unless if you're following your taxes, that's when gross comes in because the IRS wants the gross. So we're looking at, we're looking at the gross pay. If you see here is $4,200, $42.31. But then you got income taxes coming out. That's going to change in retirement. It should reduce. You're going to have a lower tax bracket. Depends on how much you're taking out of ATSP. But that tax number is going to be less. The state income tax is going to be less. And then there are things that end. If you look at a federal employee pay stub, well, most of you all's pay stubs, especially if you're you know, if you have a my pay pay stub, it always says oa s d i. That's a big number on the deduction page. And every time we review on a pay stub with people, they're like, what's this OA S D I? That's social security. And that social security will go away, right? So those things end. Medicare tax goes away. Now, if you're below 62, that Medicare tax goes away. But once you get to 65, then you start paying Medicare. So that's a whole nother conversation. But the tax on it ends. The first retirement that you put the deduction, that goes away. And then your TSP contribution goes away. And like I like I'm in this case, this person is putting in 423 a pay period. But a lot of you all who are closer to retirement are probably doing a whole lot better. More than that 423. And so that deduction goes away. And so if you look at this, and then you have dental and you're fairly basic. And for example, in this pay stuff, a person is bringing in, this person is bringing in 4,200 every two weeks, probably about 8,500 every, every two weeks. I mean, yeah, 8,400 every every two weeks in, I mean, total, you know, almost per month. I mean, just keeping the basic math. I'm not gonna do the math at 20 times 26, but Two pay periods, $8,400 a month is the gross, right? And also sometimes that's what we look at. But then when you look at the net, you're at about $2,500 every two weeks. So about $5,000 a month is what that person's bringing in. And so when you're looking at your retirement, but okay, okay, one other thing. But when you retire, what's coming out of your pay stub? You're gonna have the health insurance, that's gonna stay. Your taxes are reduced. Most more than likely you're not you're gonna waive your Fegley cost, so that's gonna be free. You you're not paying Social Security anymore. Your state income taxes is reduced, and there's no other deductions. So what we often find, especially depending on how long you're in the government, oftentimes it's a very, it's very close. And then you're also getting the Social Security payment coming in. So you had your Social Security plus your first pension amount, you're oftentimes very close to what you were making on a net level when you were working. Again, it just depends on how many years you work in the government, if your pinch is high. If you haven't been in the government long, it's gonna be a it's definitely gonna be a gap for you. But that's okay because you also have your TSP. The reason why we're talking about this today is because oftentimes people delay retirement because they're afraid of retirement, because they're afraid of what's on the other side because they never ran their numbers. Once we sit down and we take out the Social Security payment, we take out the Medicare payment, we take out the first The first the first amount they make you deduct. We take out what you're putting towards your TSP. We we reduce your Fegley. Some people have Fegley five times their salary and they pay $300 a pay period for it. We take out the Fegley five times your salary. You start to see a clear vision of what retirement will look like. And you start to realize, man, it's not that much, it's not that big of a difference, right? We're talking maybe $1,000 in the worst case scenario where, you know, five, six hundred dollars, you're like, Okay, my lifestyle doesn't shift much, especially when you add in Social Security and everything like that. So what I want you all to do, if you have not done it, pull out your LES and look at the things like Social Security, look at what you're paying for Medicare, look at what you're paying for the first pension contribution, look at what you're paying for your TSP contribution. Look at those things and any allotments that you a lot of folks have, a lot of y'all have allotments coming up. Look at what you got that that's not going to continue with you. In retirement, look at those things. Look at those things. It makes a huge, huge, huge difference. And gives you and and and the reason why it makes a difference is because it gives you peace of mind. Let me ask y'all this question. Anybody who's who's really looked at their pay stub and deducted out those things that we talked about, the social security, Medicare, first contribution, TSP. Who's really looked at their that's on this call? Who's really looked at their pay stub, saw those things, and it's like, this makes a big difference? Has anybody on this call ever looked at those things before and just and like took a took a bit of a relaxed, like, wow. Especially that the one thing that cut catches a lot of people is that OSDI. Because it's such a big number, most people don't understand it. And so they're just like, what in the world is this? Has anybody looked at their pay stuff and done that before and really took the deductions down? I'm not gonna move on until somebody says yes or no. I need some, I need some crowd, crowd involvement. I'm not gonna sit here and talk. But It's important. It's important to look at that, at those things because it would just give you that peace of mind. And then what you do is once you have once you have that, then it allows you to really look at okay, if my income isn't that much of a difference, how much do I need to take from your TSP? And so when we look at that, we oftentimes look at like this in Gloria situation. You know, she's sp she's spending about fifty five hundred dollars in in in in her expenses for the month. And this is a worst case scenario, right? So she's she's bringing in fifty five hundred dollars. Her net pay, sixteen forty-seven from her first pension after taxes, her social security after taxes on that, nineteen hundred. Then there's a gap of nineteen hundred dollars. This is where your TSP comes in, and your TSP can the f can fill that gap. The cool thing about you all as federal employees is this. And the difference between you and the private sector is you all have a pension that's not fixed. The private sector doesn't have a pension at all, but you all have a pension that's not fixed. And your pension has a cola increase that goes up every year based on inflation. Unlike when you're retired, I mean when you're working and the president has to have has to decide when, I mean, if you get a raise or not. cost of living raise every year or not. That's not the same when you're retired. When you're retired, it's based on the inflation report that comes out in October, coming up in a couple of month couple of weeks, actually. It's based on that. And then you know, okay, here's what my raise is. If inflation is up, you know your cost of living increase is gonna increase as a retired federal employee. And so what we've seen happen Is as income goes up, and one thing that we try to talk people into and we look at when we look at your expense sheet to make sure you're on point, we look at those expenses. And there's common expenses that can go down over time strategically. Like something something something simple as a card note. It's like, okay, well, does it make sense for us to continue to pay this card note or should we pay this car off? Right? Something that if you are a federal employee and you got, if you got over 400,000 in your TSP, you should probably be paying your car off. That's like the good number. Right. If you can pay that car off, you're no longer paying interest to the bank. That reduces your expenses. Right. And if you buy a car in the future, as your as your four hundred thousand dollars or more continues to raise, the next car you buy, you just pay it cash. You gotta take cash out of your TSP anyway to reduce to reduce RMDs as they get ready to come. So why not just take it out, spend the money, use it on the car, no interest on that car, reduces your monthly expenses. Which reduces how much you need to take over out of a TSP. You're not paying interest on interest anymore. That T that money can stay in your TSP. the interest money can stay in your TSP and grow instead. Right. So just get rid of the get rid of the card note. You can negotiate better when you're paying cash, things like that. That's a common conversation that I have with a lot of folk. And so when you have these gaps when you initially retire, your goal should be to start reducing it over time. Cars one. Another one, obviously the house, you know, some folks you're close to paying off a house. You got, you know, a lot of folks we meet are you know have a house, but they're like fifteen years from paying it off. Retirement typically lasts around thirty, thirty-five years. The closer you can get to paying that off, not saying you need to take cash out and pay it off. I'm just saying pay it down in a you know, just pay it down over time. You can double up the payments, reduce it down, but you can do things like that, that reduces that nineteen That $1,900 gap. A lot of times people would have a lot of expenses in retirement, oftentimes have credit card debt. Obviously, paying that down can make a difference. One thing I'm seeing more now than ever, which I I I did not see 10 years ago, was a lot of a lot of people retiring have student loan debt. You know, I remember when I was in college, my parents couldn't get a loan out to help pay for my college. Like I don't even think that was possible. I don't know. It might have been. My parents didn't qualify for it, at least. And so now I'm seeing, but but it wasn't one but ten years ago I wasn't seeing a lot of this, but I'm seeing a ton of it now where where parents who are retiring are stuck with their kids' student loans. Like that's like very common now. And so now we're seeing this. It's actually pretty sad because what we're seeing is these kids aren't getting jobs, and then their parents are starting to retire, and they're stuck with a student l student loan that their kids can't afford to pay back. And They're headed into retirement. So that's something that we're seeing more of, but that's something that you can look to pay down when you have a decent sized TSP. And that also reduces that gap. So credit card, student loans, car note are the ones that are the one and mortgage, but mortgages is is a is a big difference because that that that bills a lot higher. But those are some of the things that you can look to pay down. And this here's one thing I want to say too. Don't be afraid to use your TSP. I realize like, lot of people when they retire because they're so used to they're so used to s growing their TSP and not touching it because you can't until you're 59 and a half or retire that when it's time it's like it's like some it's like how can you it's like somebody just giving you freedom and you just don't want to leave because you're like, man, I no, you could go. This is yours. You can have it. And people are like, well no, I shouldn't touch it. Like no, you you you worked 30 years. Sacrifice, put 10%. You took risk in the C fund SNI fund. You did all this stuff to use it right now. Like it's time. Go use it. And people are like, I don't know. I just I just don't know. And so what I'm saying is, and especially if you're that type of person who you saved aggressively, like Deidre, I you here. You're you're a great saver, right? When you when you retire, Deidre, that's what the money's for. And with the with big balances. That money compounds, right? If you got, if you have 700,000 in your TSP and you're getting a 10% return on that in a year, that's $70,000 in just interest right there. That's significant. $700 to $70, $770, just by getting 7% interest. And that's pretty, that's pretty conservative. And so imagine you have $50,000 in student loans. And you're like, man, that's a lot of money. But the year before you just got 7% in 10% 10% interest on 700,000. That's 70,000. You pay the student loan off with just the interest that you get. And we see that more and more and more when people retire, but people just are not used to engaging with money that way and taking out lump sums of cash that way because it's just not something that people do, right? No. And so I just want to encourage you. You work your whole life, the money is yours. Make sure you're. Paying down stuff if your expenses are stressing you out. Make sure you take those trips that you always wanted to take. Like, do it. Because at the end of the day, the money is yours. It's meant to be either it's going to have two one of two jobs. It's meant for you to spend it, or spend some of it, not saying all of it, or grow it, right? And leave it to somebody else. But it's okay to spend that money while you're living. Is your money you so I'm just reiterating this because again, I see folks all the time and and and they retire and like, well, what am I supposed to do now? I'm like, Go enjoy it. Like Deidra, enjoy your retirement. I'm gonna be on you all the time about that. Like, I don't see you just still hanging around in the DMV. Like, go explore, right? So and so because that's what you work so hard to do. And and so one of the things I've been telling my team this week and I've realized What we do in these conversations. Oftentimes people come into our meetings and they're like, they're fearful. They come in, they're fearful. They don't know if they'd be able to retire. They don't know if they have enough money. And then we take them through our retirement readiness session. And then they go, it goes from fear to excitement, you know, a little bit of excitement. They're like, wow, I didn't realize. That the first pension worked this way. I didn't realize I was getting so much for Social Security. I didn't realize my TSP was going to grow like this. So then it goes to this excitement from fear to excitement. And then it then what I encourage, and I encourage all this for all of you all, is to get curious, then, right? And I drive you to curiosity because what I want you to do is I want you to be able to think about okay, well, how can I live my life in a way where I can enjoy what I've done? Do I build a new business? Do I become a real estate investor for my family? Do I take on a new hobby that causes me to travel around? Do I start a foundation where I support, you know, at-risk kids or w whatever, right? Whatever the family thing that you have going on in your family, right? Or whatever, whatever. Do I sponsor young kids and have them and have them go all the way up through through private school, through because they were in the inner city. Whatever it is, right? Find something to do that would give you purpose and meaning, you know, and and that makes a big difference. And so how does it all relate to the paycheck? It relates to the paycheck because the thing that holds most people back is they just don't understand their numbers. And so because they don't understand their numbers and what's what what it's gonna look like on the other side of retirement, they oftentimes continue to work when they really don't have to. And so if you're on this call, You're afraid and you're just like, man, I don't know. I don't know. Obviously, book a meeting with us and we will walk you through exactly if that's the case, if that ghost is real or not. But I can tell you this. Calculate your first pension. And if you don't know how to calculate your first pension, here's how you do it. Is your hot three. Now, if you don't know your hot three, that's fine. Just use your current salary. You might you might be over up about, you know, a couple hundred dollars, right? Or just take Take $10,000 off your current salary, right? Either do your current salary or take $10,000 off your current salary and you should be in the range. Right. You take your high three average, you take that number. Let's say you, let's say you make 110. You take, you do 100,000, you times it by the amount of years you, you, you work or will have worked when you retire. And then if you're under 62 and don't have 20 years of service, you times that times 1%. If you're at 62 and have 20 years of service, you times it times 1.1%. At that point, you get a 10% raise per month. That's what that equals out to. Run that number. You're going to get a number. That's going to be your annual salary. You divide that by 12. That is going to be your monthly salary. Okay. Once you have that monthly salary amount, you can then look at what you pay in taxes, what you pay health insurance coverage. You'll get the net. And then you can look at your paycheck and say, okay, look at these things. The things that are gonna end is Social Security, that OSDI is not gonna come out anymore. Your Medicare tax, your first pension contribution, your TSP contribution, any allotments that you have, all that fegly, that all that stuff is gonna go away. And then you can look at the numbers. And and then go to SSA.gov and get your social security or if you have it, go get your social security report and look at those and add that first pension and That social security, and then look at that net amount that you're getting right now. And then think to yourself, is this gap big enough for me to continue to work another five years or two years or another year? But the amount of money I have in my TSP, that will give you the freedom that you need to be like, you know what? I'm good. Especially if it's like $400. You can easily take that out of your TSP. I mean, easily. A thousand like easily. You know, and so you just wanna know exactly where you are by knowing your numbers because a lot of times people work so much longer because they never take the time to just look at what they're getting paid, what's coming out, and then what's gonna come out in retirement.