Met with financial planner yesterday (retirement)

zone_8grandmaAugust 29, 2007

I met with our CFP yesterday to discuss DH's pending retirement. He asked for all the usual documents (pension estimate, SS Pebe statement, 401K allocation, and my own figures for our expenses, income). I'm really glad that he got me started three years ago to carefully tracking our spending - I was able to give him very accurate information.

He ran it all through the Monte Carlo simulator and the results were pretty comfortable - yes, DH can retire as planned (he plans to retire next Feb)

I'm also glad we took his advice and moved before rather than after retiring.

We talked about the market, the need for a long term view, the fact that before DH can roll over his 401K, he will need to liquidate it - he can't roll over the mutual funds.

It's pretty scary to think about the primary breadwinner retiring; and I'm glad we've been working with this guy (and taking his advice). He commented on the fact that DH is able to retire at a relatively young age (59) and attributed it to realistic expectations, having a pension, AND contributing the max to his 401K all these years.

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I'm happy for you! you must be on top of the world right now! YAY!

The whole thing is all about PLANNING! we started later than we should have; but we own our home, save and invest regularly, and we're used to "livin' lean". Also, we work in fields that we genuinely enjoy and we can continue to work in a much more reduced capacity after "retirement". Skill and experience count for a lot.

Clearly, "luck" factors into it, too... ;)

    Bookmark   August 29, 2007 at 5:47PM
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How do you track your spending? Do you use some kind of spreadsheet? It would be so useful to know exactly how much we're spending and on what.

And btw, congratulations!

    Bookmark   August 29, 2007 at 5:52PM
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Thank you both.
chelone - actually, I'm a little concerned about DH being underfoot! I have my routines and my computer time and I know it will take some adjustment for the two of us to be together so much....

I use Quicken It's taken me several years (since we started going to the CFP) to really get into the habit of entering the data, but I have DH trained. When he purchases something, he sets the receipt on my keyboard and I enter it when I'm updating. When I run errands, etc, I save my receipts and set them on the keyboard to enter. I can download transactions from my bank (and often do) but I want more detail. For example, if I download a transaction at the grocery store, the bank only shows the total. My receipt shows how much was actualy spent on food, how much on wine, how much on household items (paper towels, etc).

Getting set up and getting started takes a little time and commitment, but once you have the system in place, it doesn't take long.

Now, I can pull up a report and tell DH exactly how much we spent last month on gas, etc. It is a real eye opener and has made me much more concious of where the $$ go.

Id addition to using Quicken, I have an Excel spreadsheet for the budget. Using Quicken, I can see how much we've spent in each category, per month, YTD total and that tells me if my budget is realistic.

We're fortunate to have pensions, but they have no cost of living adjustment, so inflation is our major concern. That is the reason we are moderately aggressive in our portfolio. To have it all in CD's would be secure, but that's worthless if inflation goes up more than what the Cd's would pay.

The CFP cautioned us about drawing on our port the first few years for "fun" stuff (trips & toys). Our net income will drop about $700/mo initially, so we plan to draw that much for three years (until DH reaches 62 and can draw SS).

I'm thinking about working part time starting next month for some things I want and I'm encouraging DH to consider looking for part time work (both to keep him busy and to give him his own discrectionary spending money)

It's both exciting and scary...a new chapter...

    Bookmark   August 29, 2007 at 6:16PM
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Well done, zone8 Grandma.
Would that more folks were as smart.

Many advise seniors to put a substantial amount of their assets into investments that are fairly stable, e.g. bonds.

But bonds, CDs, GICs. etc., carrying the guarantee that the number of dollars involved won't shrink (if held to maturity), there's that other guarantee that the issuers never mention ...

... the number of the dollars can't grow, either, apart from the rent on the money.

In which case, there are two rats that eat your cheese.

Most folks in Canada earning over $10,000. annually have that required partner in their money-management business, the Canada Revenue Agency.

They want to talk to us annually about all of our income, and for most of us, they want part of it. Though some folks here with $25,000. - 30,000. annual income in 2005, and over 60% increase in 2006 to single "taxpayer" earning up to $46,345., were able to arrange things to pay no tax whatever. Which of necessity included no income from employment, pension ... or interest.

Plus ... if you put your investable money into investments where the amount invested can't grow, don't forget that there's another rat loose among those dollars.

The inflation rat chews a corner off of each of them, each year that you have them invested where their number can't increase.

So ...

... after you take some of the interest to pay the tax (in Canada, at the highest rate) ...

... you have to take some of the rest of it to put with the principal in order to maintain its purchasing power - equal to the rate of inflation.

In recent years we've heard of inflation running at 2% or so ... but I think that many of us have been finding that the costs of stuff that we buy is increasing faster than that.

As for you, the owner of the money ...

... you get what's left.

Which in recent years has been ... not much

And, don't forget ... the rats eat first!

I'm crowding 80 years of age, and I have over half of my assets (upwards of 80%, actually) in equity-based investments.

Yes, their value goes up and down, and sideways for periods, but quality stocks have usually trended upward, give them a few years.

And I don't plan to be in a situation where I need to liquidate any of the equities in anything under a 10-year time frame.

The dividends that most of them pay annually come at a low tax rate.

And when I liquidate them, I get half of the growth with no tax to pay on that.

Finally, I want to leave a legacy for my kids.

It seems to me that we in the western world who have lived high on the hog for about three generations are about to suffer from a severe reduction in our lifestyle.

I hope that you and hubby have a great retirement, zone8 Grandma.

ole joyful

    Bookmark   August 30, 2007 at 12:45AM
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Congratulations! That is wonderful and I wish you and your DH the most fun you've ever had in your lives! It's an exciting new time for you two, and a whole new world waiting for you....

    Bookmark   August 30, 2007 at 1:36AM
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I've just started looking for a CFA - you sound happy with yours and it may be in another post somwhere but can you reiterate what type he is and how you found him? I hope to be in your position in 10 years (probably unlikely) and can't wait. Very happy for you!

    Bookmark   August 30, 2007 at 5:32AM
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thanks, joyful, jkom and mary.

We found our guy about four years ago. We had started talking about DH retiring but didn't have a clue as to how to really go about planning for it in an orderly way. I had seen friends and family retire, take a lump sum, and lose most of it in the market. I had lost quite a bit in tech stocks in the early 2000's and was feeling burned by the market, but still felt that we needed to invest. DH had assorted IRA accounts all over the place started at various points in his life - he doesn't like dealing with finances even though he's adamant about not having CC debt.

I told him I felt we needed profession help (LOL) and he agreed. I asked around for referrals and we interviewed about three. The guy we settled on was referred to me by a former co-worker whose good sense I respected, he had the credentials and experience, and (just as important), we "clicked". We felt comfortable talking to him and we are able to communicate honestly with him. A planner can't help unless the client is honest and works with him/her.

Doug (our CFP) gave us some excellent advice when we first started. He advised DH to increase his 401k contributions to 20% (it was 16%). He advised us to deal with our housing situation before rather than after retiring (we were living in a not-elder friendly house). We sold our old house and built a new one. He advised me to track our finances and to do regular "net worth" statements, preferably at the same time each year. He gave me some income-expense forms to help me get started. (I think of myself as the CFO of the family).

He also suggested that six months to a year before retiring, we should actually live on what our expected retirement income would be.

For our part, we've tried to follow his advice. It's definitely a team thing. A CFP can't do anything for someone unless they are willing to take the advice offered.

I'm really glad I discovered this board. And thank you all again.

    Bookmark   August 30, 2007 at 9:51AM
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I hope your DH is like mine, fun to be around and makes his own lunch! Enjoy your well-earned, well-planned-for retirement.

I'm curious about the 401K advice. I know you have to be careful with things such as 1031's (sell one property and invest in another without paying tax). You can't "take possession" of any funds lest they be taxed to you. How do you liquidate within a 401K without "taking possession"?

    Bookmark   August 30, 2007 at 10:50AM
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When he retires, DH will roll over the 401K to a small IRA that is already with the CFP. That's what I did. The check is made out to the institution (indicating that it's for John Doe's IRA) indicating that it's a rollover - to ensure no tax liability. When I called the office, they asked if it was a rollover and I said "yes", so they knew how to make the check out.

I just re-read your question - right now within his 401K, DH has a choice of funds: "interest only", US Stocks, International Stock fund, and a couple of others. He's currently 25% in Interest Only and 75% in the other stocks. Before he can roll over the account, he has to move everything to the Interest Only account. At that point, everything is still in the 401K, then he can do the rollover as described above.

I've spoiled DH - I pack his lunch each morning. For years he made his own lunch, but when I retired, I started doing it.

joyful, you are so right - inflation is enemy #1. That is something we will be watching closely.

The CFP gave me a chart - it showed the relationship between the number of years of retirement, the asset allocation, the rate of withdrawal and gives the odds of running out of money. One interesting thing is if one is 100% bonds only, is retired 30 years, and withdraws at a rate of 5% (or more), they have a 100% chance of running out of funds before they die. If anyone is interested, I'll scan and upload the chart.

    Bookmark   August 30, 2007 at 12:05PM
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Congratulations, Zone 8 grandma!! You did everything right and now it looks like smooth sailing. I am happy for you.

And a little jealous. I've done everything just like you have. Quicken for years, full tilt savings, careful spending, etc. Even scaling back my work and spoiling DH in my spare time. And our Monte Carlo simulation also says DH can stop working.

But he has chosen to keep working full time for now.


    Bookmark   August 30, 2007 at 3:27PM
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Oh, one question for you though. In your plan do you count on Social Security payments as they are in those annual earnings statements, or did you lower the estimated payments? And do you think you will draw early at 62 or wait?

I keep going round and round on those two things in our plan.

    Bookmark   August 30, 2007 at 6:47PM
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Giving away my age, I started taking SS as soon as I turned 62 (I'm a few years older than DH)

DH also plans to start as soon as he turns 62. We went round and round, the CFP did not recommend one or the other; rather he pointed out the obvious ramifications of taking it early rather than later. Some friends of ours who are actuaries said that taking it as soon as possible is a no-brainer. They had the math to support their opinion, but it was beyond me.

My intuition is that changes will have to be made to the SS system. Probably lowering benefits and raising the earnings limit. My intuition also is that people already on SS would be grandfathered. It would be political suicide to lower benefits for those already on SS.

The pensions, SS and a small income from a rental house comprise about 65% of what we think we will need. Because DH has been having 20% of his paycheck go to his 401K, we've already been living on less than 80% of his earnings (less, actually, due to taxes). I figure we will have to draw from our port for three years (then DH turns 62). At that point, unless inflation has risen significantly, I don't think we will need to draw for a number of years. Our goal is to leave the IRAs and investment accounts alone as long as possible so they will grow and be there when health costs and inflation become significant concerns.

As I've read elsewhere on this board, we plan to keep a liquid sum, (enough to cover six months' expenses) so that if a draw is needed at a time when the market is down, we won't have to sell anything.

    Bookmark   August 31, 2007 at 9:48AM
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celticmoon -- DH waited until 65+ to draw SS. I started in January of the year I turned 65 (early 2006). I agree with the idea of taking it while it's still there! DH is in perfect health; me, not so perfect. That was also a factor in our opting to take his pension without survivor benefits. Even if I do follow my PGF (lived to 100), instead of my MGF (I'd be dead already), we shouldn't become burdens on our kids.

Unlike old joyful, we do not plan to leave a "pile" to our kids. We're taking income now and helping them now. We're budgeting for long lives too. So...joyful's plans of postponing all taxable income until "the end" don't work for us.

    Bookmark   August 31, 2007 at 11:07AM
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z8g, thanks so much for sharing your thoughts and decision process. Your crystal ball is pretty much like mine. But we are a bit younger, so Social Security means testing is a bigger potential issue for us. I could draw as early as 7 years from now - but a lot could change even by then!

I think my drawing early or not will hinge on DH's retirement path. Also on TSP annuity rates. One piece of our puzzle is to convert a chunk of DH's TSP into an annuity income stream, but given that the rate gets fixed for life (and has been swinging between 4.5 and 5.75 just in recent time), I want to pull that trigger when rates are optimal.

I agree that it all comes down to: 1)knowing what you spend (backwards tracking with Quicken); and 2)understanding your future income (educating yourself and crunching numbers); and 3)living within that future income frame (=reality check). All are crucial to a solid plan. You have all the bases covered. It is still scary I'm sure, but your plan is as solid and as realistic as possible.

Agree also that saving is critical. Looking back, I see that to make an early retirement possible, we've been living roughly a rule of thirds here for some time: 1/3 to taxes, 1/3 saved, 1/3 spent. Driving older cars, living in an ordinary (now paid for!) home, paying cash and overall living well below our means made that possible. We would be in very different circumstances if we spent money the way we could.

Course, if DH keeps working, I could loosen up those purse strings a bit. Could it be time for an HD TV and digital cable? Maybe trade in my 97 Toyota? Hmmmm. Might need another thread to get my head around that transition, LOL.

    Bookmark   August 31, 2007 at 11:11AM
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You certainly seem to be on-track. Obviously we all have different situations and goals, but I think for all of us, being financially independent until the end is paramount.

I have a disabled granddaughter, so hope to leave something for her. Also, want to be able to help grandsons with college. But I think the main gift I can give my sons is to do everything within my power to avoid becoming a burden.

We have wills, health care directives, etc in place (in a notebook with some other instructions and lists of accounts with contact info) where my son knows to look in case.

A few years ago, my ex-husband (sons' father) died. He left a mess: no will, no documentation, and he lived in another state. He had two sons (mine) by his first marriage, and another son by his second marriage. He had a small life insurance policy which paid only the third son. My younger son had to become the executor (by default, the other sons just were not equipped to deal with the hassle). One piece of property has been sold and the other is still on the market. It's been an enormous headache for my son and he was dealing with his own grief as well.

I promised him that I would not leave a mess for him when I die.

This really isn't related to retirement, but DH pointed out to me that he knows nothing of how/when I pay the bills, so I made out a list for him and put it into the notebook (in case I get hit by a car)

    Bookmark   August 31, 2007 at 11:40AM
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I just got caught up on this thread. I'll have to have DH read this -- a lot of good information here! Thanks!

We are currently living on probably less than half of our gross income. I really need to sit down and figure it out exactly, but we are putting the max into 410Ks and Roth IRAs plus saving a minimum set amount plus any extra into after-tax savings. I don't think we really have enough investment cash available to make a CFP worthwhile at this point.

Our situation is such that we don't have anyone we will need to leave money to or support after we're gone. Sometimes I wonder if we should be spending MORE money now, while we can enjoy it. But we're not lacking for anything, certainly.

    Bookmark   September 8, 2007 at 1:17PM
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zone 8 grandma - So how did that work the with the Smith Barney CFP? Did you have funds there before and so its part of a service? Or did you choose this guy and pay by the hour?

    Bookmark   September 9, 2007 at 8:41AM
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No we didn't have an account there. We met him and talked.
I asked how he was paid and he said he receives 1% of the total port value.

Several months went by as we discussed and talked to other planners. When we decided to go with him, I rolled over my 401K to an IRA at SB. Hubby had several assorted IRAs (started over a number of years and neglected) as well as assorted investment accounts and individuals. He opened an IRA with SB and rolled over his other IRAs to it. Then he opened a taxable account for a modest inheritance he received.

So the answer is, we chose the guy, we rolled over our accounts to SB and we pay him a percentage. It's been four years now and we are happy with the arrangement.

    Bookmark   September 10, 2007 at 11:24AM
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My DH works for the Federal government. He's eligible to retire at 55 (next year) with 70% of his high-3 salary. His pension will be reduced due to electing spousal benefits for me. We will be going to a retirement seminar at some point to see if what we are doing is the right thing. We have 2 houses, a mortgage that will be paid off next year, no debt to speak of. I have a 401K and IRA that should total about $500,000 when I turn 55 (3 more years). I want to collect my Social Security at age 62 (about $1,500 per month). I've done Excel spreadsheets for the retirement budget (seems ok on paper). I'll feel better when we talk to a professional.

    Bookmark   September 26, 2007 at 10:58AM
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wow, cheerful1, that's a wonderful position to be in. The only uncertainty you would have is health benefits, and I would imagine your DH's pension includes them - most seem to. Best of luck to you going forward!

    Bookmark   September 26, 2007 at 11:20AM
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Here's a real quick rule of thumb. It's not terribly accurate, but it should at least give you an idea of whether you're in the vicinity of what you need.

Take your mortgage payments and any other expenses that remain constant rather than increasing with inflation. Multiply the yearly total by 12.5 and subtract that number from your total savings (including 401k and IRA).

Take what's left and figure 4% of that number.

Now add half of your pension and any other payments that remain fixed, rather than increasing with inflation.

Finally, add any additional payments, such as Social Security, that increase with inflation.

That's approximately how much money you can afford to spend, not including your fixed expenses.

For example, suppose you have an ongoing mortgage payment of $2,000 per month, a pension of $60,000 per year, $500,000 in savings, and $1,500 per month in Social Security. Then you would do the following:

$2,000/month is $24,000/year; multiply that by 12.5 and you have $300,000. Subtracting that from your savings gives $200,000 left over.

4% of $200,000 is $8,000 per year. To that, we add $18,000 for Social Security and half of the $60,000 pension, for a total of $56,000. That's approximatly what you can afford to spend, not including the mortgage.

This rule of thumb assumes that your savings can be invested for a long-term return of 8% per year, and that inflation is 4% per year. So if you have a fixed payment, such as a pension, and you spend half of it, you can invest the other half and get back enough to keep up with inflation, on average.

Similarly, if you have a fixed payment such as a mortgage, multiplying it by 12.5 gives you an idea of how much money you must have invested in order for the returns to keep up with that payment.

This rule of thumb is very rough, and I am sure that your financial planner will go over the application in much greater detail. However, I have found it to be a useful starting point for back-of-envelope estimations.

    Bookmark   September 26, 2007 at 11:32AM
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Alphacat, what about income taxes?

Do they come out of the "what you can afford to spend" or are they already out?

    Bookmark   September 26, 2007 at 11:45PM
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jcom51 - thanks! We will have my husband's government health benefits (he has to pay for it). We have been very fortunate to have been blessed with good jobs. We don't take a lot of vacations (the 2nd home in PA is our weekend/vacation place). We have no children. We have been saving for retirement since we were in our 30s. We constantly talk about finances (that's one thing we have no problem discussing). The only thing that could kill us are the ever-rising real estate taxes and heating costs.

    Bookmark   September 27, 2007 at 9:06AM
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That's why I said it's a rough rule. It will tell you if you're in the right vicinity. It's not accurate enough to tell you whether taxes are included.

Consider: In the hypothetical situation I described, we're talking about being able to spend about $56,000. I'm guessing that income taxes in such a situation will be well under $10,000, and probably more like $6,000.

Now -- the difference between $50,000 and $56,000 can be more than accounted for by totally random, unpredictable events, such as whether the markets do better or worse than expected over the next few years. So at this level of inaccuracy, you're fooling yourself if you try to reckon that closely.

What the rule of thumb does do is to argue that in a situation such as this one, you will probably be in trouble if you expect to be able to spend $100,000 per year, and if you can hold your expenses to $40,000 per year, you can be pretty confident of being able to withstand even a pretty severe market downturn.

More accuracy than that requires more detailed estimates of the sort that financial planners get paid to do :-)

    Bookmark   September 27, 2007 at 9:07AM
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Huh. At 15% fed tax rate (25% if AGI is over 64K) and 6.5% state tax rate here, that's a pretty big variable to leave vague in the 'formula'.

56K after taxes is way different than 56K before taxes. About 8k different. Ha! Exact same amount as that 4% draw from the 200k nest egg in the example. Not sure I like that your formula "is not accurate enough" to say whether I can spend that draw or have to fork it all over to the taxman.

I'm guessing the formula yields a pretax figure. So taxes would have to come off the top. What else is new though, right?

    Bookmark   September 28, 2007 at 4:31PM
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You are missing two things: (1) Your 15% tax rate does not apply to your entire income; (2) Other decisions you make, such as your particular choice of asset allocation, will have larger long-term effects than the amount of your money that goes in taxes.

For example, suppose you retire this year, and next year the particular assets in which you are invested happen to do unusually well (or unusally poorly). One particularly good or bad year might change the amount of money you can spend in the future by 20% or more, either up or down.

As another example, this rule of thumb is based on the assumption that you can invest your money in a way that will earn 4% more than inflation over the long term. If you actually wind up earning 5% over inflation, that seemingly trivial change in your return increases by 25% the amount that you can spend each year.

I just don't see any way of being precise about the future. It's hard enough being precise about the past.

    Bookmark   September 29, 2007 at 12:46AM
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Alphacat, you are quite right about taxes and the inability of being precise about the future.

A funny story from when I worked for an independent CFP: one of my boss' clients called up in March because they owed taxes and she was desperate for some tax write-offs. He took at a look at their accounts and called her back, saying, "Well, there's good news and bad news. The bad news is, you have no tax write-offs because every account you have MADE money last year. The good news is your funds are being managed in a tax-advantaged way so you're keeping 75 cents out of every dollar (they have a multi-million dollar portfolio and are very wealthy people). So that's not so bad after all, is it?"

    Bookmark   September 29, 2007 at 8:00PM
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Sorry for not being clearer with my question, Alphacat. I have an OK comprehension of taxes and investments and variable returns, and I know the future is a huge unknown variable.

I was just intrigued by your formula (I'm a bit of a numbers junkie) and not understanding what that end number was supposed to represent. You refer to it as "what you can afford to spend" and as "what you can spend". I was just wondering whether some of that "spending" would be my taxes. And as best I can dissect the formula, the answer is yes.

(I do my budgeting with after tax dollars, so that is what came to my mind when I read "spend". Better for me to think of the formula as generating a number that is the broader "income")

I get it now. Thanks.

    Bookmark   September 29, 2007 at 11:53PM
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Cheerful, you don't need to use alphacat's formula because it is based on having a fixed pension that is worth less in real dollars each year due to inflation. However, unlike private sector pensions, your husband's CSRS annuity is increased annually at the same time and at the same rate as Social Security.

It is wonderful that he will be able to retire at 55 with a 70% annuity. That means he has 37 years of federal service (including any military time). BTW, as you may know, some of his annuity will be tax-free each year because it represents a return of the CSRS deductions that he contributed during the course of his career.

One other note, his health insurance remains the same as when he was an active employee. The government continues to pay 72% of the premium each month. And because the federal health benefits program is a "cradle to grave" entitlement, you most likely will not need to enroll in Medicare Part B at 65.

    Bookmark   October 6, 2007 at 9:49AM
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Can someone help me with this? My husband's electing the Spousal Annuity for me, which reduces the monthly amount he would receive. He also wants life insurance for me, which will be a big chunk out of the annuity as well.

If given a choice, would you rather take the spousal annuity and no life insurance, or vice versa, or both?

We want to have as much money every month as possible, but he's insistent that I have something to fall back on when he's gone.

    Bookmark   August 18, 2008 at 2:01PM
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Cheerful, you haven't given us enough information to answer that question, especially since we have no idea how much your husband's annuity is and how much life insurance you're talking about and how much the premiums will be. However, I can answer part of the question for you.

Your husband will have the option to choose a partial annuity for you or a "full" annuity. The full annuity will reduce his annuity by approximately 10% and will provide you with an annuity for life upon his death of 55% of his annuity. At the very least, he should definitely provide you with the minimum annuity because that will allow you to stay enrolled in the FEHBP. If he elects no spousal annuity, then upon his death you would lose your health benefits coverage under FEHB.

One other thing to keep in mind: His annuity will be indexed for inflation and so will your 55% spousal annuity. As an example, next year's COLA will be above 6%; even if we assume that the average increase will only be 4% a year, that means that his annuity will double every 18 years (rule of 72). So if his starting pension is $80k, then in 18 years when he is 73, it will be 160k. If he were to die then, you would begin to receive a pension of $88k/year, that would also continue to be increased annually. You would have to buy an awful lot of life insurance to replace that amount of income.

I hope that that helps to explain the issue.

    Bookmark   August 19, 2008 at 9:45AM
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It will also depend on how much they are charging you for life insurance. Most of these plans charge much higher premiums for what is essentially level term life insurance, than you would pay through a good low-cost provider such as Transamerica or West Coast Life. You could easily get a quote off one of the insurance broker websites to compare apples to apples - you don't have to go through with actually signing up for the life insurance, just enter your stats so they can offer a preliminary quote.

You need to consider whether you actually need life insurance or not - most retired people don't unless it's for estate planning purposes. If your lifestyle is dependent upon two income streams, however, it might make sense to obtain a modest policy of $200K-750K. If your health allows a Preferred or Standard rating, the cost would be reasonable, depending upon age.

    Bookmark   August 19, 2008 at 12:42PM
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We estimate that his monthly annuity (without Spousal) will be $8,200. The monthly life insurance premium would be $322 on a $450,000 policy.

bethesdamadman - how did you find out that COLA will be 6% next year? We figured it would be around 4%, but I like your number better.

My husband definitely wants the Spousal annuity for me.

    Bookmark   August 19, 2008 at 1:05PM
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"how did you find out that COLA will be 6% next year? We figured it would be around 4%, but I like your number better."

I used to be the the Retirement Officer and the Benefits Officer for a branch of the federal government, and I still keep up with current events in the benefits & retirement area.

The COLA is based on the change in the consumer price index from October of one year to September of the next. So far this fiscal year, the CPI has increased exactly 6.2%, with two more months still to go. If you don't want to follow the CPI, you can track the progress of the COLA on NARFE's website (National Association of Active & Retired Federal Employees). I'll provide a link at the end of this message.

Keep in mind, however, that your husband won't be receiving that amount if he hasn't retired yet. For example, if he retires October 1 of this year, his COLA would be prorated and he would receive 1/4 of the increase in January 2009 for the three months that he would be retired in 2008. If he retires at the end of the year, say Dec. 31 or Jan 1, then he won't receive any COLA his first year. He will, however, receive a full COLA in January 2010.

I hope that all makes sense. If not, feel free to ask any other questions.

Here is a link that might be useful: NARFE COLA Update

    Bookmark   August 19, 2008 at 1:27PM
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cheerful: The monthly life insurance premium would be $322 on a $450,000 policy.

One other thing I wanted to add to my previous message, was that if your husband's life insurance is with the federal government (FEGLI), then the premiums will continue to increase as he gets older, and the amount of the insurance will decrease.

Using the $322 figure and assuming that he is insured under FEGLI, this indicates to me that his basic insurance amount is $151,000 and he chose the 50% reduction at age 65, which would cost $140/month. The other $300,000, for Option B based on a multiple of his salary, would cost .607 per thousand, which would be $182, for a total of $322/month.

However, Option B premiums increase with age every five years. So although it is only $182 month between ages 55-59, it more than doubles at age 60 to $390/month. At age 65 it will increase again unless your husband chooses the "full reduction" option at retirement, in which case the insurance will reduce 2% per month for 50 months until there is no insurance coverage left.

So you see, you and your husband have several things to consider before signing retirement papers.

BTW, let me reiterate again that my above discussion is moot if your husband's insurance is not under FEGLI.

    Bookmark   August 19, 2008 at 1:56PM
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The part that's throwing us off in the calculations is that reference to the reduction percentages. We're not sure what those mean, so we may be checking off the wrong box in figuring this out.

He is insured under FEGLI.

    Bookmark   August 19, 2008 at 2:00PM
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I'll be happy to help you with this. First of all, there are two different reduction calculations: one for the basic insurance and one for the option B insurance. It sounds like your question pertains to the basic insurance.

As I stated in an earlier post, it appeared that your husband had calculated the basic insurance premium based on a 50% reduction at age 65. What this means is that starting with the 2nd month following his 65th birthday, the amount of his basic insurance will decrease 1% per month for 50 months until the amount of the insurance is only 50% of what it was when he retired. So, if he started with $150,000 of basic life insurance, it would end up being $75,000 when he is 69. The amount that he pays will change from .925 per thousand to .325 per thousand at age 65 and will continue for as long as he lives.

He could also choose the "no reduction" option, in which case the basic insurance would never be reduced and the full $150,000 would be payable upon his death. However, instead of paying .925 per $1000, his premium would start off at more than double that amount. He would be paying $2.155 per $1000.

Finally, he also could choose the 75% reduction which of course is the cheapest. He would start off paying only .325 per $1000, but at age 65 the amount of basic life insurance would begin reducing at the rate of 2% per month until only 25% was left. So, if he started with 150,000 worth of basic insurance, he would be left with only 37,500 by age 68. However, he would stop paying premiums at age 65 and the 37,500 worth of insurance would be free for the rest of his life.

Similar choices must be made with regard to the optional insurance, but I believe that those choices don't have to be made until he is 65. Let me know if you want me to go into detail about the optional insurance (which represents about $300,000 of his coverage).

I hope that this explanation has helped somewhat.

    Bookmark   August 19, 2008 at 3:04PM
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I always bow to bethesdamadman regarding FEGLI! On the insurance issue, speaking as someone who recently bought level term, I can say that unless you and your DH are in bad health - which is certainly possible - those are exorbitant rates for a reducing term insurance.

I'm overweight but with normal BP, no bad medical history save for a couple of broken bones in a car accident, take 20mg lovostatin. I got $500K of 20-yr level term insurance for $60/mo at age 54 from a well-regarded carrier. If I were to buy a policy on my 55-yr old DH, who suffered a haemorrhagic stroke at age 50 but whose BP, cholesterol and weight are now under medication and within low normal ranges, I would expect to pay no more than $100/mo for $500K of 20-yr level term.

I would strongly suggest that unless there are some serious health issues - recent (within 3-5 yrs) episodes of cancer, cardiac, or stroke - if you wish to obtain insurance, do it from an outside carrier.

    Bookmark   August 20, 2008 at 11:52AM
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jkom: I always bow to bethesdamadman regarding FEGLI! On the insurance issue, speaking as someone who recently bought level term, I can say that unless you and your DH are in bad health - which is certainly possible - those are exorbitant rates for a reducing term insurance."

Yep, I agree.

Not with the statement that I am any kind of expert on FEGLI, lol, but with the statement that FEGLI's premiums are exorbitant. The comparative rates between private policies and FEGLI are even worse for younger federal employees. Back when I was in HR, I would try to dissaude new employees from purchasing FEGLI by telling them that they should compare rates in the private sector. Most federal employees who are aware of how overpriced FEGLI is ended up purchasing their insurance from WAEPA.

I always found it interesting that the federal health benefits program is one of the best in the country, ESPECIALLY for retirees since they pay the same premiums and receive the same coverage as active employees, but that FELGI is so horrible.

    Bookmark   August 20, 2008 at 1:27PM
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"even if we assume that the average increase will only be 4% a year, that means that his annuity will double every 18 years (rule of 72). So if his starting pension is $80k, then in 18 years when he is 73, it will be 160k".

I was skeptical of this, until I did the math. I multiplied $80K by 104%, took that number and multiplied again by 104%, did that for a total of 18 times, and came up with $155,832.02!

So that would mean if the COLA averaged 6% a year, it would take 12 years to double. Amazing!

We're still discussing the FEGLI. It doesn't seem worth it.

    Bookmark   August 21, 2008 at 7:50AM
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cheerful: "I was skeptical of this, until I did the math. I multiplied $80K by 104%, took that number and multiplied again by 104%, did that for a total of 18 times, and came up with $155,832.02!"

LOL, no I'm afraid that you should have just stuck with the "Rule of 72."

You only multiplied 80,000 by 1.04 17 times. Try it again and you'll see. That works out to 155,832. If you multiply it the 18th time you'll end up with 162,065 and your initial figure would have doubled.

The Rule of 72 works with any number. As you noted, if you assume a 6% growth rate, the principal will double in 12 years. If you bump that up to 8%, it will double in only 9 years. That's why ROI is so important.

    Bookmark   August 21, 2008 at 9:40AM
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My calculator tape was off 1 calculation; it is $162,065, which still amazes me.

Is this what the bank calls compound interest?

    Bookmark   August 21, 2008 at 10:24AM
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