Make sure you understand exactly how your retirement income works, writes Dallen Haws.

Make sure you understand exactly how your retirement income works, writes Dallen Haws. Mint Images/Getty Images

These 4 things must be paid before you get your federal pension monies

COMMENTARY | One financial planner says it's best to head into retirement with your eyes open.

Most feds are pleasantly surprised when they calculate their (gross) FERS pension for the first time. But most are then shocked at all the things that will need to come out of their pension before they receive any of it. After all, understanding how much income you’ll actually be able to spend is key to a great retirement. 

But this isn’t the first time there is a big difference between your gross pay and your net pay. Think about your current pay. While your annual salary may be $130,000 on paper, do you actually receive $130,000 in your bank account? Absolutely not. You first have to pay for social security, medicare, FEHB, TSP savings, etc.

The same is true for your pension.

What Comes Out

Here are the things that could be deducted from your pension: 

  • Survivor Benefit (if you elect it)
  • FEHB premiums
  • Other insurance premiums (like vision/dental/FEGLI/long term care)
  • Taxes

Survivor Benefits

If you are single then you don’t have to worry about survivor benefits.

But if you are married then survivor benefits are a way to ensure a piece of your pension sticks around for your spouse if you die first. 

Here are your options:

  • Full Survivor Benefits - This option will cost you 10% of your pension while you are both alive but if you die first then your spouse will be left with 50% of your gross pension. 
  • Partial Survivor Benefits - This option will cost you only 5% of your pension but your spouse would only get 25% if you died first.
  • No Survivor Benefits - Survivor benefits aren’t required and you can opt out if your spouse gives their consent. 

But if you don’t elect a survivor benefit then your spouse wouldn’t be able to stay on your FEHB (health insurance) once you die. Also, if you elected a survivor benefit and your spouse was to die first then the 5% or 10% deduction to your pension would go away. 

FEHB Premiums

Retirees have access to the same FEHB premium prices that active employees do, andt you can change your FEHB plan every year in open season even once you are retired. 

The difference however is that retirees don’t get to pay their premiums with pre-tax dollars as active federal employees do. So after taxes, FEHB will cost a bit more in retirement compared to while you were working. 

Other Insurance Premiums

It’s up to you on what other insurance you take with you into retirement but you will need to pay the premiums for whatever you take.

The most common insurance that people get rid of at retirement is FEGLI as the cost can go sky high at certain ages. Here is a guide on getting the most out of your FEGLI. 

Taxes

The vast majority of your FERS pension is taxable income on the federal level. Your pension may also be taxed on the state level depending on what state you live in. 

Here are some of the states that won’t tax your federal retirement income. 

Final Thoughts

The key to a great retirement is going in with your eyes wide open. 

If you understand exactly how your retirement income works then you will be much more likely to get the most out of it.

Dallen Haws is a financial planner and host of the Haws Federal Advisors “Plan Your Federal Benefits” YouTube channel and Haws Federal Advisors podcast

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