I CAN’T AFFORD TO RETIRE: A Letter to Federal Law Enforcement (Part 1)

Chris Barfield, CPA

Financial Investigator, U.S. Marshals

I hear this refrain all the time–“I can’t afford to retire!” Sometimes it’s phrased a little differently: “Where am I going to go and make this same amount of money?” Or, maybe it’s, “Once I get another year toward my High-3, then I can retire.”

I want to put some solid analysis to these statements because frankly, many of the people I talk to can, in fact, retire when first eligible, they just don’t fully understand the numbers. Hopefully I can shed some light on that in this paper, and give you a few things to think about. I realize that some of you can’t actually retire–there’s too much debt, or a divorce devastated you, or whatever. I get it. But that doesn’t mean this paper isn’t for you. If you’re planning on continuing to work after the government, you might want to retire and start that career sooner rather than later. In fact, if you already know you’ll need to work in retirement, I would argue it’s in your best interest to leave absolutely as soon as you’re eligible, and I’ll explain why by addressing three of the most common excuses.

Excuse #1: Where Can I Go and Make the Same Amount of Money?

My response: Just about anywhere!

Understand that you don’t need to replace your entire salary to be in the same financial position you are now (i.e., take home pay). Remember–you get a retirement check, right? In fact, in most of my analysis with government employees, I’ve found that if they get a job making 35% of what they’re making now, they are actually just as well off. I’ll walk through these numbers in a second, but what this means is that if you gross $130,000 a year in your government job, you’ll need to find a job grossing $45,500 a year in retirement. And I think we’ll all agree that’s pretty doable. For many people, they can make that part-time, which offers the best of both worlds–less work, more annual income.

(I realize some of you will retire as GS-15’s and some as GS-12’s, so I’m picking an ending salary in the middle. The numbers work regardless.)

The question then becomes “How much am I getting paid to continue to deal with 50-hour or more workweeks to meet LEAP/AUO requirements, the headaches of after-hour callouts, undesirable work assignment deadlines, travel on short notice, personal risk, missed birthdays, long commutes to the office, and so on?” The answer might just disappoint you…

Let’s assume an 1811 SCE is retiring after 24 years with a High-3 of $130,000. Let’s also assume they retire on their 50th birthday, which would be their earliest eligibility in this example:

FERS Annuity: $49,400 ($130,000 x 38%, 1.7% for the first 20 years, 1% for the next 4)

FERS Supplement: $14,400 (a realistic estimate)

Total: $63,800

Less Death Benefit: -$4,940 (full 50% death benefit)

Net Retirement: $58,860

Most people stop here. They see $58k and get a sick feeling in their stomach. They are used to seeing a gross of $130k and start freaking out, desperately trying to figure out how they will live taking a 55% pay cut!!! But hold on–they’re comparing apples and oranges.

You aren’t actually getting to spend every dime of your $130,000 you make now, right? Some of that money is already spoken for. A lot of it goes to Social Security, Medicare, TSP, and FERS Retirement. You will NOT be paying for those things out of your retirement check. I want to make sure everyone understands that. Your retirement check doesn’t have TSP taken out, or Social Security tax, or your 1.3% for your FERS retirement (or 4.9% for your poor recent hires–sorry!!)

To compare the retirement salary to the working salary, we have to add those things back in that are being taken out now so that a fair comparison can be made. So let’s get started:

Social Security: $8,060. Social Security taxes income at 6.2% $130,000 x 6.2%=$8,060.

Medicare: $1,885. Medicare taxes income at 1.45%

FERS Retirement: $1,690. This is at the lowest 1.3% rate. For those of you hired recently, you pay up to 4.9%.

TSP Contributions: $19,000. This is the maximum limit and what I find many of you are contributing during your final employment years.

Income Taxes: $1,500. Because you’ll be making less, you should be PAYING less. This is a conservative amount, estimating what you’ll save.

Now, let’s add all of this back together to our $58,860 salary and what do we have? $90,995. Or, put another way, 70% of what you were making prior to retirement. Meaning, even if you don’t get out of bed, you’ll be making the equivalent of 70% of what you were making before you retired. Whew! Feel better, now? I return to my original premise–Find a job making 35% of what you’re making now, and you’ll be the same as before. In fact, in this example, you’ll be 5 percentage points better than you where you were pre-retirement.

I’ll end the first part of this three-part series by pointing out a few things:

  1. This is without touching your TSP balance. Many people supplement their income with TSP withdrawals. After all, that’s what you saved it for. But, I’m using a conservative approach and not including those payments in my numbers.
  2. Many SCE’s are retiring with more than 24 years of service, especially when considering military time bought back. This will make your FERS annuity percentage even higher.
  3. If you are married to another FERS employee, you may not need (or want) to take the FERS Survivor Benefit since your spouse will qualify for FEHB and their own annuity. That adds another 10% back into your retirement check, or $4,940 in this example.

Real-World Example

A GS-13 recently contacted me as I was typing this and shared her actual numbers. She will earn $24,000 less in retirement than she is currently earning while working. Her concern was that she “loses” $24,000 a year, or $2,000 a month. And that is true. I’m not aware of any job that will pay you a full 100% to not show up. But the flip side of this is that she is only working for $24,000 a year, since she’d get everything but that if she retired. (Of course, continuing to work means some other benefits like TSP matching, etc., so there are other factors to consider, but my point is that the salary itself is not tremendously different.) Stay at home and you make everything you make now except for $24,000. Work 40 hours a week for 52 weeks and you earn an extra $24,000. That’s a lot of work for $24,000. In fact, if you do the math, you’ll see you’re working for $11.54 an hour. Just to put that in perspective: Minimum wage in Washington, DC is $12.50 an hour….

I CAN’T AFFORD TO RETIRE: Part 2 in the letter to federal law enforcement series

In the first part of this series, we covered Excuse #1–Where can I go and make this same amount of money? Now we will move on to a statement that is perhaps even more commonly heard around squadrooms, morning Starbucks runs, gyms, and in the rambling discussions during those long hours on surveillance…

Excuse #2: I just need a few more months (years) for my High-3.

While additional time certainly adds more money into your final retirement check, it is often not as much as people think. Understand that when contemplating retiring now or working farther into the future, you are simply deciding between an additional 1% per year, or nothing.  One percent. That’s it. On our fictional $130,000 job, that equates to $1,300 a year, or about $108 a month BEFORE taxes. Even if you are hitting the pay cap right now, that equates to only about $139 a month before taxes.  

Let’s assume for a second that you live 30 years after retirement (until age 80). Let’s also assume you worked that extra year for 1% at a High-3 of $130,000. That equates to $39,000 additional you’ll receive in retirement, spread out over 30 years.  (1% x $130,000 x 30 years). Again, this is before taxes. (I understand that I have not adjusted this number for COLA or raises and in many years, FERS retirees get small COLA adjustments, and FERS employees may get a raise, but it provides a good frame of reference).  

I want to restate that, just so it is clear:  If your High-3 is $130,000 and you work an extra year to pad your retirement, you will gross an additional $39,000 (roughly) over the rest of your life.  One could easily make the argument that a better solution would simply be to retire, work somewhere for less than a year, and get that entire $39,000 in the first year of retirement.  You get it immediately rather than waiting 30 years to collect it all, and you could invest it, letting it earn money for you.  

“But staying an extra year increases my supplement too, right?”

Yes it does. By roughly 1/40th. In our fictional example, that would be about $300 a year extra in supplement payments, or about $25 a month before taxes. Worth it? That’s for you to decide. But, while we’re on the subject, let’s take a deeper look into how this whole supplement thing works…

FERS Retirement Annuity Supplement, or simply, the RAS. Since OPM likes to give everything multiple names for no reason, you will also see it called the FERS Special Retirement Supplement (SRS), or sometimes, just the FERS Supplement. I hear employees often refer to it as the Social Security Supplement and sometimes the “bridge payment.” Regardless, it’s all the same thing.

Now, back to our math: One factor that should be considered along with the lifetime $39,000 is this:  for every year you work for the government after age 50 (in our fictional retiree example), that is one less year you will receive the supplement.  There is a time factor on that benefit. You can only receive it until age 62. The clock is ticking—this is not a benefit you’ll receive for the rest of your life; there is a finite time to collect on it.  Each year you aren’t receiving it, is an additional $14,400 (or so) that you are giving up by choosing to work for the government. Remember that prior to your MRA (which is 56 or 57 for most of you), you can earn an unlimited amount of money and still get the supplement.  But that stops at your MRA. After that, you’ll start to lose your supplement once you make over $17,640 (for 2019).

Think about this for a second: you are giving up $14,000 a year today so that you can increase your retirement check by $1,300 a year in the future?  

Now, let’s look at some of the extremes:

  1.     Working a few more months.  I have met people wanting to work literally just 2 more months to get their retirement up to a certain amount.  2 months?! So, 2/12ths of 1%? That adds $18 a month before taxes to your retirement check. If you live another 30 years, that’s a total of $6,500 over your lifetime.  To put it another way, it is less than 50% of 1 year of the FERS supplement. Working a few months for a better retirement check is simply illogical.  

…the other extreme….

  1.   Going until mandatory, then filing an extension, then filing another one, then getting forcibly removed from the office, kicking and screaming, leaving fingernail marks in the carpet. Let’s assume you can work until you’re 58.  That adds 8% to your retirement check (ages 50-58).  That’s pretty much the max you can do as an SCE, and that includes an extension.  I’ve known a few people that received 2 extensions, but it is rare.

Also, typically if you’ve been granted an extension, you’re probably at least a GS-13, more likely a GS-14 or higher.  And since we’re discussing extremes, let’s bump up the High-3 to $160,000. So, you get an extra $12,800 a year, or roughly $1,067 a month before taxes.  Assuming you live another 22 years (until 80 like first example), you’ll make an additional $281,600 in retirement over that time. (Gross, i.e., before taxes).  Sounds like a lot. But let’s think about how much money you’ve left on the table in the form of the FERS Supplement you didn’t receive. $14,400 times 8 years is $115,200, or about 40% of what you made by working.  

(Most of you will not be receiving a High-3 of $160,000.  The majority of federal LEOs are GS-13’s, so this best case scenario I put forth won’t even apply to you, unless you live in some of the higher locality pay areas. But it may be realistic for some 14’s and up. Everyone’s numbers are different–do your own math.) 

Granted, your Supplement amount from age 58 to 62 will be higher since you have more creditable years, assuming you don’t work.  (Assuming you do work, you probably won’t see ANY of the Supplement). Your Social Security at age 62 will undoubtedly also be higher.  However, the same would hold true if you retired, and went to work in the private sector….

The question is simply this:  Would you have been better off working in the private sector for 8 years, collecting all the retirement money AND the private sector money?    

Everyone is different, but in most cases, I would argue the answer is yes.  It is very dependent on your marketability and experience, however, and that leads me into my last point, which will appear in the third, and final part of this series. Click HERE for Part 3.

I CAN’T AFFORD TO RETIRE: Part 3 in the letter to federal law enforcement series

This is the 3rd and final part of this series. If you haven’t read parts 1 and 2, go back and check them out. Today, we’ll deal with those who are later in their careers and might be facing some looming college bills, large mortgage payments, or perhaps recovering from some challenging financial situations. Those that feel like they really can’t afford to retire due to financial pressures.

Excuse #3.  I need to go until mandatory and then I will still have to work! I’m broke!

I realize that there are some people that find themselves here.  Life happens. And sometimes it happens hard. There are divorces, family members with special medical needs, crushing debt, poor investment decisions, etc.  It is impossible to go back and relive certain decisions, so we press on, dealing with the consequences. What this means for a hypothetical 48 year old SCE is that he or she may not actually be able to retire completely at 50.  

But—and this is key– I want to make sure everyone understands the distinction between retiring from the government, and retiring completely.  

If working into your 60’s is inevitable for you, that doesn’t eliminate the option of leaving the federal government at 50.  I speak to retirees who left in their mid to late 50’s and their refrain is a common one: I’m not as marketable now as I was when I was 50.  Trying to make some inroads into the private sector at 57 is simply not as easy as it is at 49 or 50. It’s just a fact. There are some professions that may be a little more forgiving in age—teaching might be one.  Perhaps consulting of some sort. But for security-related jobs, retirees report back to me that the earlier you can leave the better. Getting hired at 50 is not as difficult as getting hired at 57.

I have some thoughts on planning your marketability and have written a paper on it, but for now, suffice it to say, looking into the private sector at 50 may turn out to be much more lucrative than working for the government until 57, and then trying to find a private sector position.  I know of several retirees that have left within the last 12 months who all make salaries well into the 6 figures. (And the first digit isn’t a 1!) They were all right at 50 or just over. They feel confident they would not have gotten jobs that command those salaries had they waited to try to get them at 57 or later. 

Remember back to part 1–for most of you, anything you get above 35% or so of your current gross would be a raise. Let’s go back to our fictional $130,000 SCE. He needs to make roughly $45k to bring home the same amount he’s bringing home now. If he gets a job making $100k, he just got himself a $55,000 raise. This is what leads me to say:

if you absolutely need to work, you, perhaps more than anyone else, need to leave as soon as possible so you can earn more money.

People will often say, “But I lose my supplement if I earn too much after hitting my MRA.” True. But remember two things. One, if you’re continuing to work for the government, you’re not getting your supplement anyway. Two, if you lose your $15k supplement annually then your theoretical raise goes down from $55k to $40k in our example above. But, hey–it’s still a $40k raise! No grade or step increase is going to get you that!

You offer a lot as a retired federal LEO.  Don’t sell yourself short. There are jobs out there.  They rarely just come to you, however. They often require networking (hello, LinkedIn) and maybe a few years of planning and targeting. But they are out there.  Remember, you already have a cushion of a retirement check. And you have health insurance, which is a huge plus when applying for a position. Tell them you don’t want to be on their health insurance—they’ll be thrilled to hear that.  Use it to negotiate a higher salary, more days off, or simply use it as a leg up against your competition.   

CONCLUSION

I don’t want people to misunderstand the purpose of this series.  I’m not intentionally trying to get everyone to leave the federal government.  For many of you, this job may be what fulfills you, and you still get out of bed after 20 years just itching to go to work. As much as I am a numbers guy, this much is true:

Life is not just a math problem.  

If you have found your true calling, by all means continue to work it. The government desperately needs passionate, hard-working people.  If you’ve got the drive to fight the bureaucracy and make things better after 20 years, then you’re a rare person indeed and the government is fortunate to have you.  

However, I’m not naïve enough to think there are not a whole lot of you out there who have arrived at the stage where you simply do this job for the money and nothing else.  You’d like to retire, but you just don’t see how. This series is directed toward you guys. Talk to me or a financial planner, and at least see what your options are.  

Lastly, I want to say this. The focus on this paper was demonstrating that sticking around just to improve your retirement check is not really as smart as many people think.  That doesn’t mean there are not other reasons to stay.  Building up your TSP may be a valid reason contributing to your staying. The government will match 5% and that is a significant amount.  However, many decent jobs in the private sector also have matching as well. Perhaps you only need to pay the house off in another year, and then retire for good and never work again. That’s probably a decent reason to stay—you only have a year left and you make a good salary.  

But if you are sticking around to earn more annuity money, or if you’ll have to work after the government anyway, please take a good hard look at leaving when you’re first eligible.  There are plenty of good reasons to do so, not the least of which is less stress. As Dan Jamison writes (you DO get the FERSGUIDE, don’t you?!), “Don’t discount the effect that retirement will have on your health. Most folks report that they are in better health, both mentally and physically, in retirement.  They also report better marriages and relationships with their kids” (2018 SCE GS13 v.2017.12.3, p 98).

I want all of you to have comfortable and fulfilling retirements.  If you’ve done 20+ years in the government, you’ve earned it. If you think I can help in any way, don’t hesitate to contact me.  We can run through your specific numbers or find answers to other financial questions you may have.

And seriously, if you are not familiar with the FERSGUIDE, please go to check it out. I know I mention it a lot. And it’s not for financial reasons–I don’t receive one dime from it in any way. I just promote it because it’s the single best source out there that I’ve found for planning your government retirement, especially for SCE’s. It’s the only site I’ve allowed all of my newsletters to be archived. Why? Because the author is one of us!  Dan Jamison is a retired FBI Special Agent (and CPA, by the way), so he fully understands the FERS SCE rules, and has given solid information to thousands over the years. And, he too retired when first eligible.

About the author: Chris Barfield has been with the US Marshals for 21 years, and dreams of eligibility… He has a BS and MS in Accounting and holds an active CPA license. He is currently assigned full-time to the US Attorney’s Office as a forensic accountant. He writes a completely free monthly(ish) newsletter for FERS employees, specializing in federal LEO’s. He can be contacted at barfieldfinancial@gmail.com

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