How do you budget for someplace you have never been? Federal employees have never been retired. A retirement is a place they have never been. The personal budgets they are familiar with while working will therefore be different during retirement.
Many in the financial planning community have long embraced the “80% rule” as a general guideline to assist those not yet in retirement to estimate how much of their current income or expenses will be needed during their retirement years. Many advisers in today’s financial planning community have discounted the traditional 80% rule. This is because it does not hold up when today’s retirees spending patterns are being mapped out.
Initial retirement years can be a time of spending levels as much or even more as those of the final working years. This is especially true for those retiring young. Later retirement years are less likely to have as many travel and recreation expenses. Finally, the last few years of retirement will bear witness to increases in additional medical and long-term care expenses.
No matter what percentage of income or expenses may be suitable for planning federal employees must anticipate four unique factors unique for their retirement. These four considerations are important to understand beyond the dollar amounts involved because of their context in a holistic financial planning process. The Federal Employee Health Benefits (FEHB) plans, the Federal Employee Group Life Insurance (FEGLI) Program, the Federal Retirement System (FERS) Survivor Benefit, and. Medicare Part B premiums pose distinctive implications regarding taxes, increased costs, reductions to the FERS annuity, and even penalties for late implementation.
The government will continue to subsidize 70% to 72% of the costs of total premium costs for FEHB premium for federal annuitants as is the case for federal employees. Federal employees’ pre-tax FEHB premiums are excluded from federal income, Social Security, Medicare, and state and local taxes.
The dollar costs of the premiums remain the same for federal annuitants as for federal employees. But there is a difference between being an employee and an annuitant regarding taxes and the premiums.
The good news is retirees do not have to pay Social Security or Medicare taxes on their pension since it is not considered wage income. The bad news is federal annuitants use after-tax dollars to pay for the premiums. This means there is no longer a reduction in taxable income associated with the FEHB premiums.
Retirees will see a significant uptick in their FEGLI premiums. This is because FEGLI is designed foremost for employees. All the FEGLI choices are assessed as term insurance products and the premiums change after retirement. Basic Life premiums, for example, will no longer be 16 cents per $1,000 of coverage.
Regardless of age at the time of retirement one will also be required at the time of retirement to elect how one wishes to continue Basic Coverage at age 65. Be prepared for substantial increases as one becomes older for Options A, B, and C. Please refer to the OPM website for a side-by-side comparison of FEGLI premiums for employees and retirees.
FERS Survivor Benefit
If you elect a full survivor annuity for your spouse when you retire, your annuity will be reduced by 10% to provide 50% of the annuity to the spouse upon your death. A 5% reduction of the annuity for 25% of coverage to the spouse is also a possible choice. You can also elect no survivor benefit.
Both the 10% and 5% elections allow a spouse to continue FEHB coverage in the event of your death. A spouse must sign a notarized consent form for any choice other than the 10% election.
Both the FERS annuity and the survivor benefit keep pace with inflation through the cost-of-living-adjustment (COLA). Note if the annual increase is 3% or higher the FERS retirees’ annuity is 1% less than the full COLA increase. In 2022, the FERS pension and the survivor benefit increased by 4.9 because the COLA was 5.9%.
You and your spouse will probably explore Medicare at age 65. The minimum monthly premium for each is $170.10 in 2022. Medicare premiums can be more expensive as your income-related monthly adjusted amount (IRMAA) increases. Medicare assesses your IRMAA from your income tax returns two years prior.
A penalty of 10% per year after the first being eligible for Medicare will be imposed upon future premium years for not taking Medicare Part B premiums. The penalty starts after 3 months of age 65 if retired from FERS. If a federal employee continues working beyond age 65 then the penalty deadline time starts 8 months after retirement.
Medicare premiums can be deducted from each of your Social Security pensions. If you are retired and elect to postpone taking Social Security at 65 but wish to have Medicare coverage, you will have to write quarterly checks for the Medicare premiums or have Medicare deduct the premium from your FERS annuity.
Federal employees must invest time to comprehend the roles of FEHB and Medicare in retirement. The Office of Personnel Management has several resources to provide you with an insight into the relationship between FEHB plans and Medicare. Here is a good start: Coordination of Medicare and FEHB Benefits.
The National Active and Retired Federal Employees Association (NARFE) also offers a resource for analysis of FEHB plans working with Medicare, including Medicare Advantage Plans.