Please explain the federal annuity

[Anonymous]

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Anonymous wrote:This is very helpful. Can one of the experts give me their thoughts on this scenario?

My DW is a GS 15 10, making $163,000 per year. She's been a federal employee (attorney) for 18.5 years.

She's thinking of switching to the private sector in a few years. She likes working and so plans to work until 65 or later.

Should she wait until after she has 20 years of federal employment to make the switch to the private sector, since she's only 1.5 years away?

And if she doesn't feel strongly about making the switch to the private sector, what about just staying in the current job, which she likes well enough? Thank you.

The salary tables do not indicate that GS 15-10 is paid 163k. Regardless of that, leaving before getting 20 years in would be monumentally stupid.

Why? What happens with 20 year’s service if you are leaving well before retirement age anyway? Isn’t it just a straight calculation based on number of years?

After 20 years, your pension under FERS is calculated as 1.1% for each year of service rather than 1.0%

Ok, so if I calculated correctly, that's a difference of $4,920 per year? (If the high-3 salary is $164,000, I calculate the pension after 19 years as a federal employee at $31,160 (versus the pension after 20 years as a federal employee as $36,080).) Do I have that right? If so, it's not a huge difference is one could get a better salary in the private sector (by leaving a the 19th year instead of the 20th year.) Or maybe she should stay if the health insurance benefits in retirement are so great? (Can someone explain what they are?)

To get the health insurance benefits she would have to be eligible for retirement (minimum retirement age) at the time she separates and currently be subscribing to the federal health insurance (and have done so for 5 years over the course of her employment). It all can be postponed until she actually execute the retiremeent.

My understanding is that the health insurance is quite valuable. You pay the same rates as employees. You also need to register for medicare and your FEHB benefits work in tandem with medicare. Some plans provide a lot of benefits such as complete elimination of co-pays and various credits because of how the systems work together. Its complicated and I plan to go to a seminar to understand.

I am almost 54 and my MRA age is 56. At this point, it would be very costly for me to leave before I hit MRA. I currently have 22 years in.

Forgive my ignorance as I am in my mid-40's, but once you qualify for Medicare at age 65, what type of health insurance do you need? At the risk of sounding like an idiot, does Medicare not cover most things that normal health insurance would cover?

Thanks for asking this. I've always wanted to know...

It is frankly impossible to get a straight answer.

Medicare Part A (hospital care) is free and is primary on hospital expenses
Medicare Part B costs (134-428/month depending on income) covers medical expenses, but there is a deductible and they don't pay all
Medicare Part C (Medicare Advantage) is, I think, basically like a health care company providing coordinating your coverage in addition to what Parts A and B provide. This may include prescription coverage.
Madicare Part D is a stand alone prescription coverage.

My guess is with the federal retirement FEHB you take Part A and B and then FEHB is secondary insurance but is similar to the Medicare Advantage in that it covers more and provides your prescription coverage. Several of the providers set themselves up to be appealing to retirees and they basically cover all copays. and give some credits for medical expenses My guess is when we retire DH and I will be in the second highest income category for payments so if today we would pay: $700 in medicare premiums and $430 in FEHB premiums (BCBS basic family). Non of that is pre-tax.

It is impossible to get a straight answer on this. I once spent hours looking for it. Best I could tell, you need to take Part A (which is mandatory and free), but if you're high income, Part B is expensive, and not worth it if you have a good FEHB plan. I think the Feds don't give a straight answer because they don't want to discourage retirees from getting Part B, even if it isn't really in their financial interest, because it lessens the expense on the FEHB plans.

One thing PArt B covers that (i believe) most FEHB plans do not is durable medical equipment (wheelchairs, walkers, etc.) and maybe hearing aids?

I think that's true. But after looking at the premiums, I didn't think there was any way that could be worth it.

[Anonymous]

Anonymous wrote:My dad is a retiring fed and after looking at various advice and calculations, he is using a FEHB plan in retirement, Medicare Part A (free) but not Part B. He went back and forth on having both FEHB and Part B, but ultimately decided it didn't make sense to have both. Note though that he has a healthy retirement income and lots of savings, and no serious chronic health conditions as of now. I think (but I'm not sure about this) that you can elect Part B later, but you pay much more the longer you wait to elect it. Still though, if you develop some condition or medical need for which Part B provides better coverage, my understanding is you can add it later even though it will be quite costly then.

This is true. I came to the same conclusion as your Dad.

[Anonymous]

If a fed person retires with high blood pressure and diabetes, how much benefit is part B vs not having part B.

[Anonymous]

Anonymous wrote:If a fed person retires with high blood pressure and diabetes, how much benefit is part B vs not having part B.

It dependsbon what treatment is, Part B is not prescription drug coverage and I am certain that FEHB prescription coverage is better than Part D.

[Anonymous]

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Anonymous wrote:I’m totally confused about determining what age you “retire” at. Say you worked for the government from age 31-35 (5 years total) then left for the private sector. To make the math easy, say your high 3 average was $100,000. If you file for benefits when you are 62, what benefits, if any, are you entitled to?

5% of 100k (which have been eroded by 27 years of inflation so probably won't cover 5% of your living expences)

NP - So then wouldn't it be better to pull out the contributions when you leave the gov't at 35 and then invest them so they have some growth? At 100k over 5 yrs contributing 4.4%, you would have put in 22k, which would be a sizeable chunk to put into an IRA. In contrast the payouts from the annuity would be $5000/yr or about ~$400/month. Is the value of the annuity the fact that that $400/month would be in perpetuity? (Just figuring out how to compare these things against each other.)

Very good question and astute analysis. Employees classified as FERS-FRAE and FERS-RAE should have their pension contributions refunded in this scenario and invest them into an IRA. Meanwhile, regular FERS employees should not have their pension contributions refunded and defer the pension until 62 no matter how far that is away because they paid a pittance for it (0.8% of salary).

It's an interesting question. Let's make some reasonable assumptions based on the above hypo -- someone who worked for fed. govt. for 5 years from 31-35 under FERS-FRAE, with a high-3 of $100k, and then leaves federal government and works until age 62 before retiring.

Scenario #1 -- they leave the money in the FERS system. At age 62, they can start collecting a lifetime annuity of $5k/year. Adjusting for 27 years of inflation, that's worth about $2.5k per year in today's dollars.

Scenario #2 -- they take out their contributions and invest in an IRA. The contributions would be $22k. If they invest that for 27 years, adjusting the return for inflation, a reasonable estimate is they will have between $50k and $100k in the IRA in today's dollarswhen they turn 62. That is enough to buy a lifetime annuity of $3k-$6k (again, in today's dollars).

So, I agree scenario #2 (taking out the FERS-FRAE contributions and investing them is likely the better option.

Of course, it also carries some risk -- if the real (inflation adjusted) return on the IRA is less than about 2.5%, they would have been better off keeping the money in the pension. A long term REAL return of 2.5% is way lower than the historical average, but it's definitely a significant possibility. You can't just assume that scenario #2 will always come out ahead. There is some risk. (That said, personally, I'll gladly take a bet that the stock market will beat 2.5% over the course of a 27 year period.)

Tying this into the other discussion on this thread - the opportunity to buy into FEHB at age 62 may actually be the much bigger value in this. Yes, you may be sitting on those funds and passing up growth potential. However, the differential between private insurance and FEHB today is several thousand dollars a year - and may continue to increase. So it's another factor to consider.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

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Anonymous wrote:I’m totally confused about determining what age you “retire” at. Say you worked for the government from age 31-35 (5 years total) then left for the private sector. To make the math easy, say your high 3 average was $100,000. If you file for benefits when you are 62, what benefits, if any, are you entitled to?

5% of 100k (which have been eroded by 27 years of inflation so probably won't cover 5% of your living expences)

NP - So then wouldn't it be better to pull out the contributions when you leave the gov't at 35 and then invest them so they have some growth? At 100k over 5 yrs contributing 4.4%, you would have put in 22k, which would be a sizeable chunk to put into an IRA. In contrast the payouts from the annuity would be $5000/yr or about ~$400/month. Is the value of the annuity the fact that that $400/month would be in perpetuity? (Just figuring out how to compare these things against each other.)

Very good question and astute analysis. Employees classified as FERS-FRAE and FERS-RAE should have their pension contributions refunded in this scenario and invest them into an IRA. Meanwhile, regular FERS employees should not have their pension contributions refunded and defer the pension until 62 no matter how far that is away because they paid a pittance for it (0.8% of salary).

It's an interesting question. Let's make some reasonable assumptions based on the above hypo -- someone who worked for fed. govt. for 5 years from 31-35 under FERS-FRAE, with a high-3 of $100k, and then leaves federal government and works until age 62 before retiring.

Scenario #1 -- they leave the money in the FERS system. At age 62, they can start collecting a lifetime annuity of $5k/year. Adjusting for 27 years of inflation, that's worth about $2.5k per year in today's dollars.

Scenario #2 -- they take out their contributions and invest in an IRA. The contributions would be $22k. If they invest that for 27 years, adjusting the return for inflation, a reasonable estimate is they will have between $50k and $100k in the IRA in today's dollarswhen they turn 62. That is enough to buy a lifetime annuity of $3k-$6k (again, in today's dollars).

So, I agree scenario #2 (taking out the FERS-FRAE contributions and investing them is likely the better option.

Of course, it also carries some risk -- if the real (inflation adjusted) return on the IRA is less than about 2.5%, they would have been better off keeping the money in the pension. A long term REAL return of 2.5% is way lower than the historical average, but it's definitely a significant possibility. You can't just assume that scenario #2 will always come out ahead. There is some risk. (That said, personally, I'll gladly take a bet that the stock market will beat 2.5% over the course of a 27 year period.)

Tying this into the other discussion on this thread - the opportunity to buy into FEHB at age 62 may actually be the much bigger value in this. Yes, you may be sitting on those funds and passing up growth potential. However, the differential between private insurance and FEHB today is several thousand dollars a year - and may continue to increase. So it's another factor to consider.

That's a different hypo. We were talking about someone who left fed service in their 30s, whether to keep the money in FERS or withdraw it. Such a person cannot buy into FEHB. To do so, you have to hit retirement age with the feds (and have been in FEHB for 5+ years). But, I agree, it's a great benefit.