Episode Transcript
[00:00:00] Speaker A: Any examples used are for illustrative purposes only and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
Welcome to Reyna Retirement. Reyna Reyes has dedicated her career to helping people make smarter financial decisions. Reyna Retirement is all about breaking down complex financial concepts into language you can actually understand.
Now here's the co founder of American Federal Benefits Consultants, Raina Reyes.
[00:00:39] Speaker B: Raina, here to tell you what's going on today. And we can sum it up in a song from the movie Shrek. Cha cha cha changes and they are happening and they are coming around the bend. So what does that mean? Well first let's look at a baseline of what you currently have. Okay, let me show you here. You're a federal employee with a federal retirement system. And there's a couple of them. Many of y' all used to be in the civil service program. And that does not look like this. That's a single leg, kind of a mushroom style. One leg of retirement, you got a pension. And that's all she wrote. And then they evolved a little bit back in the 80s, 84, 89 time period where they added the FERS, that is Federal Employee Retirement System program.
And now it's a three legged stool, first leg pension. What's the second leg?
Social Security, third leg, tsp. And it was designed so all three legs equally work together for good for those who love receiving a pension. And the third leg, of course, tsp, they call that a defined contribution plan because you define the contribution, you can choose what you want to contribute. Although Rain is going to tell you don't ever go under 5% contribution into that because if you do go below, you are leaving money on the stool on the table. You're not getting the total amount that is designed to come to you. As long as you put in 5% to the TSP, they will match you 5%.
So let's go backwards. Social Security, that's a defined, that's, that's a defined benefit plan. So you don't get a choice, you just put money in there and then you're going to get a monthly benefit after retirement, after age 62 if you decide to turn it on. But today we want to talk about leg one pension. What is that? How do you contribute and how does it shake out? Well, this one's very detailed. I call it Gatorade. So you've all made Gatorade before, or maybe you made Kool Aid. Who cares? The ingredients of either of these types of drinks are water and then the already sweetened powder. So it may sound silly for a second, but if you look at this image, it might make more sense to you. So when you make Gatorade for the football team or the baseball team or the hockey team or whatever team, you put a bunch of water in it first. Well, as you see, the water is the government.
And the government is not into taxing themselves.
So their contribution to your pension has not yet been taxed.
And they say, okay, you want a pension forever? Well, you're going to put some skin in the game. So you contribute every pay period an amount of money that's auto deducted right out of your paycheck into the pension system. I call it Gatorade because it's already sweetened like the new version. It's not where you got to add sugar like when my, when I was growing up. And it's already been sweetened because it's already been taxed. You paid tax on the way in, which is great. It's sort of dollar cost, average taxes. And you put it in very slowly over a time period and then fast forward, you call me and you say, reina, I'm ready to retire. What do I do? I say, okay, let's do the stuff. Let's get you out of dodge. We they stir up the bucket. And then every month you get a red Solo cup because it's your contribution. And the government, most of it will absolutely be taxed. Some of it has already been taxed. Get your own Gatorade over the time period of 25 years. After 25 years, you get a letter says you're not drinking Gatorade anymore. Now you're only drinking water because you've received all of your own contributions.
So how does this really look in the real world? I want you to understand the concept of Gatorade so you understand what I mean when I say it. But in reality, if we go to the next slide here, you will see that it's not as easy as all that. So Fers system was created, you know, late 83, beginning 84. Anybody hired 19 after 1984 was automatically a FERS employee. And you contribute 0.8% into your pension.
So that is your Gatorade. The 0.8%, it's not even 1%. The math is easier at 1% because everybody can move a decimal. But the cha cha cha changes that are on the horizon are to Potentially increase this from a 0.8% to a 4.4% increase.
Obviously about, you know, let's talk to our math majors. 440% increase to what that is. Maybe my math is wrong. 300. I don't care. It's more. It's a lot. So, but fear not, because there are people who are already paying this amount if they were hired after 19.
Correction, 2013. But remember back in the day, civil service, they've been contributing 7%. 7%. But the reason for that is because all they receive is a pension and they do not contribute into Social Security.
So the way it works, you put money in and this is your Gatorade. So if you are a Customs and Border Protection employee, you've seen your leave and earnings statement look like this. You've contributed a total of $26,000 over this time period. If you're a postdoc employee, you've wondered, what in the heck is this number at the bottom right hand corner? Am I paste up? It is not your monthly pension, even though it says retirement. That is your total contribution to the pension. That is the total amount of Gatorade you've ever contributed into the system out of which you will receive monthly payments forever. But that amount's already been taxed. And you'll get it slowly over a time period. If you work for the Social Security Administration, your leave and earning statement looks more like this. And, and you'll see it over here on the left hand side. Cumulative retirement. If you work for the VA or Department of Defense in any way, box 19. Cumulative retirement. That's the total amount that you've ever contributed into your pension.
So interesting things, interesting things. So the changes that are potentially happening would increase that slowly over a time period in my understanding is a two part phase to increase it over the course of a year, but 1.6, 1.8%, something like that, and then increase it the remainder of the difference thereafter.
So understandably, you have questions, you have concerns. What in the world is this? Why in the world, all of those things you can reach out, make sense of what you're already doing and how that's going to translate into retirement. Because in retirement you're not contributing into the pension anymore. It's distribution time.
It's time to receive that for which you worked so long.
And you can reach out to me, my team, we can help you navigate all of this. I just wanted you to see what it means and why they're doing it. They're basically saying, hey listen, we need you to oversaturate your pension a little bit more. We need more Gatorade because of the budget, right? They're trying to budget for the government and then it's the whole age old saying of let's all tighten our belts and that's fine.
So we just need to make a plan for it. So reach out and we can talk Gatorade, we can talk cha cha cha changes, we can talk retirement, tsp, Social Security, Medicare, the whole bit. We'll see you then.
[00:08:09] Speaker A: Thanks for listening to Reyna Retirement With a strong commitment to ethical standards, Raina works hard to find the right solution for each individual or family who reaches out for advice. To contact rina directly, call 850-450-6500. That's 850-450-6500. Or to reach the team at American Federal Benefits Consultants, call 1-800-872-8857. That's 1-800-872- 8857. You can also go online to americanfederal.org not affiliated with the United States Government. Opinions expressed are subject to change without notice. These opinions are not intended as investment advice, nor do they predict future performance of any product. All information provided is believed to be from reliable sources. However, we make no representation or warranty as to the accuracy of any statement. The information is intended to be educational in nature and does not provide a guarantee or specific result. All copyrights and trademarks are the property of their respective owners. American Federal Benefits Consultants is an independent organization, not a government agency or affiliated with the Federal Government or any state government. The terms State CSRs, FERs, FELI, and FEHB are all registered trademarks of the U.S. office of Personnel Management. American Federal Benefits Consultants, agents, Consultants, or any independent contractors do not provide tax, legal or investment advice and do not engage in the solicitation or sale of securities. Consult with your tax advisor or attorney regarding specific situations.
