The Biggest Problem with Benefits Estimates

Most federal employees who are planning their retirement get a Benefits Estimate at some point in the process. Often, people may get several before they retire.

Getting a Benefits Estimate from your HR can be a helpful place to start planning your retirement.

But there is a big problem with Benefits Estimates that you should know before you plan your retirement. And this is going to sound too simple… but bear with me… because it really can cause serious problems for your retirement planning.

So What Is the Biggest Problem with Benefits Estimates…?

People forget that it is only an estimate. Sounds silly, right?

It’s obvious even in the name that it’s only an estimate… but many people really do take the *estimate* they receive from their HR to be official. But it’s not.

Why is This a Problem? And Why Does It Matter?

Here are three ways this problem can affect you…

#1) Creditable Service Shown May Not Be What You Get

In a previous article, At the Brink of An Irreversible Mistake I shared the story of Robert. Robert swore up and down that he had 30 years of creditable service; and all the Benefits Estimates he ever received from his HR looked that way too. And to boot – he even had his ‘30-Year’ pin.

But in the weeks before his planned retirement, he found out that he didn’t actually have as much creditable service as he expected.

And it didn’t matter that every Benefits Estimate he had received showed that all of his time counted. And it didn’t matter that he had his 30-year pin. All that matters is what is on your SF-50s.

Many Benefits Estimates may be created using your SCD (Service Computation Date), but this is not the same date used to compute your actual retirement benefits. Your RSCD (Retirement Service Computation Date) is the official date used. And they might be different.

What’s the catch? For most federal employees, their RSCD isn’t officially calculated until after they retire!

Many Federal Employees started their career with a few months where they were not paying into the retirement system. That means the SCD you see on your LES may not be the same as your RSCD for retirement.

So what should you do?

Take the time to do your own review of your SF-50s. You want to make sure you have a copy of all of your SF-50s. Check each one to verify whether or not your time on each form counts toward your retirement so you know how much creditable service you have for retirement.

Most FERS retirement calculators will have you start with your SCD – but this should only be a temporary placeholder.

Benefits Estimates are a helpful place to start, but they are not official. Nothing can substitute for getting a Certified Summary of Federal Service or thoroughly reviewing your SF-50s.

If you’ve never heard about this, you’ll want to read my page on how to review your SF-50s.

#2) Most Estimates Don’t Show Enough Taxes Being Withheld

9 out of 10 Benefits Estimates I see do not show enough taxes being withheld. Why is this a problem?

Uncle Sam and Aunt IRS always get their pound of flesh. The question is whether you’ll pay for it as you go, or get a nasty surprise at tax time.

Let’s say your Estimate shows you would receive a net pension of $1,500 – but it didn’t show enough taxes being withheld. If you’ve made plans for your retirement based on expecting a net pension of $1,500… what happens when you only receive $1,200 a month?

Taxes will be one of your largest expenses in retirement. It’s important to understand how they will affect you and how much you’ll owe.

Don’t rely on the amount of taxes shown on your Benefits Estimate. 1 out of 10 that I see show enough taxes being withheld – but the vast majority do not.

#3) Military Time May Look Like You Bought It Back – Even If You Haven’t

Many Federal Employees have military time that they might be eligible to count towards their pension if they buy it back.

However sometimes Benefits Estimates will calculate your pension as if you had already bought back your military time – even if you haven’t.

This in itself is not a problem. The problem comes when people misunderstand that a ‘what-if’ scenario is being shown.

Some Benefits Estimates have helpful explanations of the scenario (usually handwritten in by a good HR specialist) – some do not. If you have Military Time, make sure you understand how it’s being shown in your Benefits Estimates. And always make sure you keep a copy of your DD-214 and ideally the cleared check you paid for it with or the letter from OPM showing that you paid for your military time in full to count towards your federal retirement.

The Solution?

There is simply no substitute for you to have a thorough understanding of your retirement benefits.

© 2016 Micah Shilanski, CFP®. All rights reserved. This article may not be reproduced without express written consent from Micah Shilanski, CFP®.

About the Author

Micah Shilanski is a Certified Financial Planner™ professional who specializes in helping federal employees get the most out of their retirement benefits. Micah helps his clients with tax planning, retirement planning, federal retirement planning, estate planning, and investment advice.

Plan Your Federal Retirement is a dba of Shilanski & Associates, Inc., an Alaska Registered Investment Advisor, with securities offered through Summit Brokerage Services, Inc., Member FINRA/SIPC.

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