As you make preparations for retirement, it’s important that you have all your bases covered. An analysis of the fundamental building blocks of a retirement plan can help you avoid any unpleasant pitfalls during your golden years.
Determine A Required Income Threshold
Income planning starts with calculating net retirement income and estimating all post-retirement monthly expenses. Should your net income be sufficient to cover those costs, your first financial building block is intact. Conversely, a deficit may necessitate extended employment to mitigate the retirement income gap. For federal retirees, net retirement income is comprised of the Federal Employees Retirement System (FERS) annuity, Social Security benefits, and distributions from the Thrift Savings Plan (TSP). Effective income planning also involves assessing the impact of inflation on purchasing power throughout a retirement period spanning 20 to 30 years.
Plan For Your Healthcare
Another important aspect of planning is ensuring the continuation of Federal Employees Health Benefits (FEHB) in retirement. Given that the federal government subsidizes up to 75% of FEHB premiums, it is crucial to comprehend the eligibility criteria stipulated by the FEHB 5-Year Rule. At the age of 65, individuals must decide whether to enroll in Medicare, as Medicare Part A (inpatient services) is offered without a premium. The Office of Personnel Management (OPM) recommends both retirees and active employees enroll in Part A. Since Medicare Part B (outpatient services) requires a premium payment, it is essential to evaluate whether incorporating Part B into your FEHB coverage is advantageous for your retirement.
Consider Tax Implications
In addition to the taxes owed on distributions from your traditional Thrift Savings Plan (TSP), between 90% and 98% of your Federal Employees Retirement System (FERS) annuity is taxable. Furthermore, depending on your provisional income, up to 85% of your Social Security benefits may also be subject to taxation. Additionally, you must account for the taxes on Required Minimum Distributions (RMDs) from your traditional TSP. Considering the complexity of the continually evolving tax laws, it is advisable to consult a tax professional to develop an efficient tax strategy.
Leaving A Legacy
When calculating the value of your home, investment properties, collectibles, jewelry, and funds allocated across various accounts, the cumulative total of your assets may be unexpectedly substantial. Consequently, it is imperative to draft essential estate planning documents to safeguard your legacy, including:
- Last Will and Testament
- Living Trust
- Durable Power of Attorney
- Advance Health Care Directives
For further information, consider consulting an FRC® trained advisor who possesses comprehensive knowledge of your federal benefits.
