STWS Advisor Jennifer Meyer dives deep into items 5 through 7 from her “10 MORE Easy Ways to Ruin a Federal Retirement” Series.
Hello readers. Here is my next offering in my "10 MORE Easy Ways to Ruin a Federal Retirement” series. In this article, we will cover three topics that a lot of folks do not consider as part of a retirement plan: Medicare, survivorship annuities, and Health Savings Accounts. Let’s jump in.
5. Mess UP Medicare
Let’s face it. No one really wants to think of health insurance as a retirement planning piece. However, I believe that it is greatly overlooked. Being enrolled in FEHB and being able to carry it into retirement is a massive advantage for federal retirees. The quality of the FEHB offerings can obscure the role that Medicare may play in the quality of your retired life. So, this requires discussion and analysis sooner rather than later.
How is your health? Do you have a chronic condition that requires ongoing and costly medication? How frequently do you meet your out-of-pocket expenses? What is your family history? Did your parents, siblings or even aunts and uncles (by blood) develop conditions later in life?
Wow Jen, I’m not enjoying these questions and thoughts.
That’s fair. But I would much rather ask hard questions now if it leads to an easier time later in life.
Too many times folks let recency bias (how one is doing right now) sway their Medicare decision making. Think about it, if you’re 65 and you feel pretty good, you may choose to pass up on enrolling in Medicare part B. Then four years later, you are diagnosed with a condition that you discover runs in your family. So now to buttress your health insurance, you check into Medicare enrollment only to find that your premiums may be up to 40% higher.
Tackle this topic early. There are many options that you may not have considered as to how the parts might fit together down the road. For example, did you know that some FEHB plans now reimburse part of the premiums for Medicare? Did you also know that FEHB offers Medicare Advantage plans (and yes, that means that Uncle Sam pays up to 75% of the premium)?
A little time and thought invested now can reap quality of life dividends over the next decades of your life.
6. Slack on Survivorship
Ok, ok. This one won't impact YOUR retirement, but it can be a big deal for your surviving spouse. To provide a survivor’s annuity for your federal pension means that you will accept a reduction in your annuity to provide your survivor an ongoing percentage of your original annuity for life. While the formulas differ for CSRS and FERS annuitants and survivors, the principle is the same.
Providing income over two lives leverages the power of your federal annuity. So why am I even writing about it? There is something of a cottage industry within financial services that promotes the idea of replacing survivor benefits with financial products, primarily life insurance.
Now I am not advocating this approach. I am saying that you need to proceed with caution. My primary reason for this warning is that if a survivor annuity is not provided, your spouse would not be able to continue in FEHB after your passing. That a big miss.
But Jen, I can give a partial survivor annuity and then the FEHB problem is solved.
That is true. However, in my mind that does not make the decision a no-brainer. For one thing, reductions in CSRS or FERS annuities for the purpose of providing a survivor benefit are not taxed. This means that when a comparison of the “cost” to provide a comparable benefit using life insurance is done, frequently the full amount of the reduction is used. The problem with this approach is that the additional money in your annuity will be taxed. So, you won’t have as much to use for the insurance premium.
Make Sure You're Fully Prepared to Retire from the Federal Government with our No-Cost Webinar Series:
I reiterate, proceed with caution. If you want to go a bit deeper, check out our podcast on the topic: LISTEN HERE.
7. The Hidden Power of the HSA
Wait, what? Jen, you mean the thing for reimbursing deductibles and buying glasses?
Yes. But a Health Savings Account can be so much more than that. Consider this scenario, you have diligently maximized your contributions to TSP and yet every April 15th, you lament not having more deductions or reductions against taxable income. Enter the HSA.
First some basics. To have an HSA, you must first be enrolled in a high deductible health plan. As the name implies, you might have years where your out-of-pocket outlay is higher. To help offset this, you may set up and fund a Health Savings Account or HSA. This will permit you to make contributions on a pretax basis (remember April 15th). Additionally, the earnings will grow tax deferred BUT contributions and earnings may be withdrawn TAX FREE when used for eligible medical expenses.
Um Jen, we already know this. Kind of boring.
Ok, did you know this? You do not have to withdraw the funds for this year’s medical expenses? You can let the balances compound and grow for many years. Did you also know that you can establish the account in a way that allows you to invest all or part of the balance? Did you know that those invested funds can grow and STILL be withdrawn and used TAX FREE?
So, stay with me. Before you there is a savings vehicle that allows for deductible contributions (like traditional TSP), tax free growth, and withdrawals (like Roth TSP). Still bored?
Now, are there rules that need to be followed? Yes, and here’s a link to a great paper in the FEDZONE.
If you begin an HSA early, you might have years (while younger) that you don’t have a lot of medical expenses. And later in life (like in retirement), you might be spending more on health care. Then consider this. In 2023, a family can contribute up to $7750 to an HSA. If that amount is contributed every year, in 30 years - assuming 7% growth - the balance would exceed $700,000.
So, think about it. $700,000 available for medical expenses. From insulin to Long-Term Care premiums - and even premiums for Medicare Part B. Now does this sound like retirement planning and wealth building?
Please understand that I am not proposing this as a “wonder product” or a one-size-fits-all idea. The biggest thing I want to do with these articles is propose options that you may not have considered. The benefits available to you as a career fed are vast and many are complicated. That is why we invest so much time and resources to teach and write about them. But every now and then, there is a hidden gem option or strategy that is too good not to share.
In my next article, I will round out the last three ways (plus a bonus way) to ruin a federal retirement. Until then.
**Written by Jennifer Meyer, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Meyer and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. *****The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you're eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.***