Latest / Federal Retirement Advisors | FedLegacy / Survivor Benefits Every Federal Employee Needs to Understand
Transcript
- William Smith: if you're a federal employee, your spouse is not a federal employee, that if you pass and ⁓ don't select survivor benefit, that the FEHB, your federal health insurance benefit, does not pass on your Did you know that? That is a really, really significant detail that most people just look over. And so what we're going to talk about today is we're going to talk about those survivor benefit details because, know, just just just earlier this week was it? No, it was Friday. I was talking to a couple he's a federal employee. He's getting ready to leave GAO and were going through the we were going through his survivor benefits on his retirement paperwork and the survivor benefit part came up and he's like, well, ⁓ I know if I want to. He was being respectful, but he was just like, we get we get we we have a decent amount of money. I don't want to I don't know if I want to take the survivor benefit because I feel like you know, I'm probably going to outlive her. She's going to probably outlive me. And so he was like, and we got enough money. And so I was just like, but you're forgetting one thing, the federal employee health benefit. And that's a significant thing. And so what we're going to do today is we're going to talk about the survivor benefit. to talk about a scenario that we have with a real couple, like we've been doing in the last couple of weeks. And we're going to walk you through that scenario because oftentimes when you're checking, when you're checking boxes on your retirement paperwork, Oftentimes you just, some, people just don't understand exactly what's happening. So the survivor benefit piece, super important, because there's a lot of things that are involved in that. And so today we're gonna cover that. so when it comes to your survivor benefit, you have all the power. Literally you have all the power and you have to make certain decisions to make sure that your surviving spouse is able to benefit from what you have. And not only just your surviving spouse, oftentimes even your kids, right? But for this, we're talking about the survival spouse and how big of a difference it is. So one day, we're just not gonna be here, right? It could be a Tuesday morning, it could be a Wednesday morning, but. Thursday, Friday, but one day we're not going to be here. And the question is, what happens next for your family? What happens? Do you have a plan set up? Is it clear to your to your spouse what they're supposed to do next? What's that first phone call? When they make that firm first phone call, what's the expected outcome? You know, what are they beneficiaries on? What are they not? What do they have to pay taxes on? What do they do not? You know. Will they continue the health insurance? they're a federal employee, they not? How much will their social security payment be? It's a whole lot of things that happen on that next day that matter. Right now, my aunt-in-law is dealing with the death of her husband. He was a VA, he was a military, he was a former military veteran. And so she's dealing with the VA. Luckily she has me in her corner, so I'm helping her out. without me, I don't know what she would do. Right. And I'm sure it's like many, many, many folk, you know, you want to know what the game plan is, who you call, why you call them, when you call them, what you need, when you call them, all those types of things, because eventually that's going to happen. And so you want to make sure that you and your spouse are, are, are, making the correct decisions now and why you're making them. So there's the fault decision that people make all the time. A lot of times people are filling out paperwork at the end of the year. They're trying to rush and get it in. And so you want to make sure you do the right thing. So in this example, we have. Karen and Mark and Karen. Obviously we changed the name of the folks, but this is a real scenario that we dealt with recently. And so Mark is a federal employee. Karen is not a federal employee. Mark is retiring this year. Mark has a salary of 108. His pension is gonna be 350, I mean, 3,500. He's taking the first supplement, social security, all those things. Karen, like most people in the private sector, she's working. She doesn't have a pension though. She has her 401k, but she has no pension. Mark does have that pension, right? what Mark was not gonna do before talking to us, she would no longer get that pension, right? And so that's a big deal, but not only will she not get the pension, she wasn't gonna get the health insurance. And so we'll go through that in a second. Another thing, when it came to their investments, Mark had 420k. in his TSP between his Roth and his traditional TSP. Karen had 240,000 in her for one K that a joint savings of 57,000. Now in this case, we always talk about the financial house. They had 92 % of their money all the way invested in the market, fully aggressive, you know, no real protected buckets or anything like that. They were just operating at a full speed ahead because Mark was working, Karen was working. They weren't really thinking about the protection in the long term. Right. And so When they said that with us, they had five cracks. They had no survivor benefits selected, which is important for Karen. They had no foundation built. They had a tax bomb because 92 % of their money was in qualified accounts. They had no long-term care plan. And when we ran our numbers just based on their current scenario, and they were shocked by this, when they turned age 100, there was $10,000 left in their accounts. At age 95, there was about 30,000. And so when they looked at those accounts, when they looked at that scenario, obviously they don't know if they're going to live to 100, but they would like to think they may. And so if they do, that's the amount of money that would have been left over. And they didn't like that for obvious reasons. So the thing that we did was we went and we put them through our financial house framework, which is what we talk about all the time, which is making sure you have a foundation. making sure you have that money that you need. In this case, we wanted to make sure that the money that Karen needed in case Mark would surpass that money is set aside in growing in a way that if something would have happened on a Tuesday morning that she has an account that she can go to to make sure she has that peace of mind. Next thing we talked about, we always talk about the walls, that's tax planning and inflation planning. When it comes to survivor benefits, the reason why tax planning is super important and it's a step that most people always miss is when your spouse passes, you're no longer filing married, filing jointly. You're now forced to file single. And when you're filing single, those tax brackets look a lot different. So it's easier to get into the higher tax brackets when you're filing single. And so you wanna make sure that if you have all that money sitting in qualified accounts and you're drawn off of it for income to close that gap in income that you're not getting, then all of a sudden now you're paying higher taxes. And that's something that most people miss. And so when it comes to the walls, that's one of the things that we, we, we, we helped them address. The next piece is the roof. Mark's getting ready to retire in August. Mark had started to reduce his exposure to the C-fund and was thinking about moving a lot of his money to the G-fund. So we helped him come up with a strategy to make sure that he's putting more money. at risk, but with the system, right? And so those are the things we did when we went, when we walked them through it. So before we met, you know, they had about 7.9 % of their money in, in, in, in, protected accounts. After we met, we put, we met them at about a 28 % of their money we put into protected accounts, right? And what that did is that helped Karen gain peace of mind because we knew, okay, we now you have 140, 50,000. sitting in a space that you know, okay, if something happens, this is the money that's going to you, right? And so, and we're gonna grow that money starting today at a decent amount pace with not as much risk so that if something happens to Mark, here's where you grow, here's where you go. And so one of the things that we also, again, about with them, talked about in the beginning of the call. is making sure that survivor benefit was checked. And so there's a choice. You can make the 25 % survivor benefit choice, or you can make the 50 % survivor benefit choice. We elected the 50 % choice after talking to them because at the end of the day, Karen has no pension. And so because Karen has no pension, we wanna make sure that she still continues to get marks, get marks 50 % pension. And the good thing about the 50 % pension is, is not 50 % of... where you are when you elected is 50 % of where you are after all those costs of living increases over the years at that point. So that's a big thing because that also offsets inflation because the thing about it is your bills are definitely going to be impacted by inflation. Now, hopefully you have a strategy where you're paying down your mortgage and things like that. So the older you get, you're not having that expense, but your expenses are going to be rising the longer you work. I mean, the longer you live and God willing you live a long time. And so One of things we did, we made sure we checked that box. But the next thing we did, the other part that we talked about that they weren't aware of and not many federal employers are aware is if Mark passes and he doesn't do the survivor benefit, Karen can't continue to get the subsidized health insurance benefit. And so we've seen couples where the spouse didn't have a survivor benefit. And when they passed, the surviving spouse had to go out. and get private health insurance, which can be quite costly at the old age, at that older age, because you're having to pay for the full thing. There's no subsidies. The government does subsidize a decent size of the federal health, FEHB. And so you want to make sure that your spouse has that because you're getting hit with a double whammy. At one point, you're no longer getting the income that you were going to get. And now you have to go out and find health insurance. That's very stressful. And if all you have is a TSP, now you're having to draw bigger chunks off the TSP. And so now you're pushing yourself into higher tax brackets. It just goes on and on. So you just want to make sure you have that survivor benefit. Unless you had, and again, there's cases, right? Where both of you all might be federal employees or one of you all might be retired military. And it just doesn't matter because you're fixed income. can offset any, you don't need your spouse's income. Now those scenarios exist. But if that isn't your case, where your spouse isn't a federal employee, they're in the private sector, it makes a lot of sense to check the box for the survivor benefit. And so another thing we did with them, we made sure that when it came to their investments, getting away from everything being super conservative to diversify a bit. So their average portfolio, before we met with them was around 5%. We increased it just a slight bit up to 6.5 % because they were huge risk takers, which is understandable. But that made a huge difference though, because we kept a lot of money still as we projected out, still in the C-Fund, but we balanced it out, right? And so that difference of the survivor benefit being turned on and the financial house properly set up made a big difference when it came to their retirement, right? we have screen here. We call it the we call it our life screen. ⁓ And what this does is it lets us it lets us analyze you will be ⁓ if something would happen to your spouse. Right. So it also helps when it comes ⁓ when people ask us like you know, you know, do we need, do I need life insurance? What should I do? This screen helps, helps make that decision. So then this survivor, when the survivor benefit call, you know, that's one of the things we talk about. When people are asking about survivor benefit or not, we go to this, we go to this screen to help illustrate the point on why it's important. So we go here. You can see here, we have the pension, mean, Mark. You know, you Karen's not retiring into 2033 to 365, but Mark is retiring this year. So Mark will receive his pension. Mark will receive his first supplement. And you see two first supplements here because Mark's first supplement. Well, Mark's first supplement were in a 62 and he's not going to get any inflation on this, but starting at 62, starting at 62, his, he'll begin to get his first supplement. He will begin to get his pension, but he will also get the cost of living increase on it. You also don't get the cost of living increase on the first supplement. So for the first two years, there's no cost of living increase, but then it begins to go once you turn 62. So that's why you see the two. And so right here, you see, we didn't put up a survivor benefit here. And so, cause this is how they had it currently set up. Then we have their assets here. This is everything Karen had. Karen had. had an old 401k and then the old IRA that she had, 55,000, they had joint savings, everything. And so, you know, and so when we went to the Life Page and we analyzed this Life Page with them, what, and we analyzed it on Mark's life, because that was the most important in this scenario because he was the breadwinner. They're in Virginia, so it, you know, takes those things into account, like what the funeral costs are in Virginia and things like that. Mark decided he was gonna keep his fegley. He's going to keep his faggly basic and let it decrease. So the decreased amount was going to be 28,000. So we looked at everything. And we should, and we looked at the survivor benefit as you can see here, and this is a mark passing the age 80 because he didn't have the survivor benefit. His pension drops down to zero in that column because Karen has no pension. So there's no other pension income. Now what does happen is Karen does pick up his social security income. So her highest, he had this higher social security income as you can see here. So she got that. Funeral was paid for. Whoa. the difference is that that that was a difference in what the funeral was and what his life insurance was was a positive 6000 because you see here the death benefit was 28,000 with the tea with the Feigley average funeral costs in Virginia with inflation 21,000. I don't think that's a little low, but there you go. And so as you see here now, you see this drag on her income, the expenses. And so by time she is 89, the money has completely run out. And so when I showed, when I showed Mark that he was like, ⁓ and this does not even include the increased health insurance costs. If we were to include the increased health insurance costs, it would even be sooner than that. But this is what, this is what not having the proper survivor benefit, how that can impact you. Right. And so what we did was we created, we created the financial house scenario and everything, everything remains the same. You know, And then we divvied up the money a bit based on how we like this call it the financial house. We put an IRA aside for them. One hundred fifty thousand protected. Made sure that grew. We put the TSP more in a growth mode, but isolated that so that that's there just for growth. And we just let Karen stuff continue to do what it did. But we really helped restructure Mark stuff. And, you know, all the expenses stay the same. But then we go to the life to have. You he still has this faggly. $28,000 because he took the, like he said, he took the 75 % reduction and. And as you can see here, right now, she still receives his social security. and now is at 56, right? Now he took a little bit less of a pension early on because he took the survivor benefit, but now there's still money for Karen. One, because we put the 150,000 aside and that's been growing. Also because we allowed the TSP to still stay in what we call the roof. We allowed that C Fund to still do what it does over time. And just those tweaks, seem small. but they're large in the grand scheme of things because oftentimes what happens is when people are retiring, when you're in retirement, you know, there's no more income coming in. You panic, you make decisions, but those decisions have really big impacts. And how I can relate to this, I was talking to some guys today, I run a men's group on Wednesdays and we were talking about what people did follow in 2008. There's so many people that once 2008 hit the market drop, they got afraid their money never grew again, cause they just played the G fund forever. Then there's folk that when 2008 hit, they invested properly and now they're TSP millionaires making the same salary, you know, but they just made different decisions. And so small decisions create big change. And that's the reason why we do these webinars consistently, because we want to make sure that you are making the correct decisions when it comes to your retirement. And so small tweaks today, survivor benefit, why it's important to have and how you structure it. Because it's not just a survivor benefit. is making sure you structure it the right way so that your family has overall peace of mind when you pass, because we all pass one day. So yeah, if you just go to fedlegacycall.com, we'll make sure we get you booked on a call. And how we do it is we have ⁓ four calls. The first call is just us getting to know you. We give you our retirement readiness The second call, we take you and build out a retirement analyzer, like what you saw today And then from there, we help you accomplish those goals by creating those different scenarios so that you can see, like at the beginning, we created a simple scenario for Karen and Mark based on what they were doing. Okay, we'll be back here again next week. We're here every Wednesday and look out for our emails and talk to you all soon.