Early Retirement From Federal Service - Jill on Money with Jill Schlesinger

Summary

Podcast Summary: Early Retirement From Federal Service

Jill on Money with Jill Schlesinger
Host: Jill Schlesinger, CFP®
Episode Release Date: February 28, 2025

Introduction

In the February 28th episode of Jill on Money with Jill Schlesinger, host Jill Schlesinger delves into the complexities and considerations surrounding early retirement from federal service. The episode addresses listener questions, explores fundamental financial principles, and offers actionable advice tailored to federal employees contemplating early retirement.

Key Topics Discussed

1. The 4% Withdrawal Rule

Listener Question:
Jerry inquires about the applicability of the 4% rule to his retirement strategy, especially since his pension covers basic needs.

Jill's Insight:
Jill explains that the 4% rule is a withdrawal rate indicating the percentage of your retirement portfolio you can safely withdraw annually without depleting your funds prematurely. She states:

"The 4% rule is actually what's referred to as a withdrawal rate, meaning the amount of money that you can pull from your total investment and retirement accounts without depleting those funds before the end of your life."
[04:30]

She further notes that if a pension sufficiently covers basic needs, retirees might have the flexibility to adjust their withdrawal rates upward, though she questions the necessity:

"Why would you take more money out if your pension's covering all your needs?"
[05:10]

Conclusion:
For individuals like Jerry, understanding the balance between pension income and withdrawal rates is crucial. Jill suggests a personalized approach, emphasizing the importance of consulting a financial advisor to tailor strategies to individual circumstances.

2. Gift Tax Implications for Joint Vehicle Ownership

Listener Question:
Mike asks whether purchasing a vehicle jointly with his daughter falls under the 2025 gift tax rules.

Jill's Response:
Jill clarifies the conditions under which such a transaction would be considered a gift:

"If the amount you're paying for that car, half yours, half hers, if her half amounts to more than $19,000, which is the gift tax allowance for 2025. That would actually constitute a gift."
[07:15]

She advises:

"If you're married, you and your spouse could be gifting $19,000 each, so that would be $38,000. It depends on your situation."
[07:45]

Conclusion:
Jill emphasizes the importance of understanding IRS gift tax thresholds and recommends consulting with a tax professional to navigate specific situations effectively.

3. Understanding CD Investments and Early Termination

Listener Question:
Danielle shares her experience with a brokered CD and seeks clarity on her unexpected payout.

Jill's Explanation:
Jill differentiates between traditional and brokered CDs:

"It sounds like you have a brokered CD, which offers more flexibility but comes with the risk of early termination fees."
[09:00]

She elaborates on the mechanics:

"With a brokered CD, the bank can call the CD, and it often costs a few bucks to get out of it. While you might receive a higher interest rate, there's downside risk."
[09:30]

Conclusion:
For future investments, Jill recommends opting for traditional CDs if minimizing risk is a priority, as they typically do not allow early termination by the issuer.

4. Funding Preschool Expenses Through Investment Dividends

Listener Question:
Sharon, a single parent, considers using dividends from her investments to pay for preschool.

Jill's Advice:
Jill encourages maintaining a robust savings strategy:

"Don't get off your whole savings track. Using dividends can help temporarily, but selling part of your index fund might be a cleaner approach."
[10:45]

Conclusion:
Balancing immediate expenses with long-term savings goals is essential. Jill suggests evaluating both options to determine the most sustainable method for managing preschool costs without jeopardizing future financial security.

5. Case Study: Early Retirement for a Federal Worker

Listener Profile:
An anonymous federal employee with 30 years of service, no dependents, and several health issues is considering voluntary early retirement. Key financial details include:

Pension: $2,800/month immediately
Health Insurance: Covered
Supplement: $1,765/month from age 57 to 62
Social Security: $2,315/month at 62; $3,340/month at 67; $173/month at 74
Savings: $1.2 million in a Thrift Savings Plan (TSP)
Other Assets: $8,000 Roth IRA, $135,000 remaining mortgage, $80,000 in high-yield savings
Expenses: Estimated at $6,000/month, including vacations
Intentions: Potential volunteering

Jill’s Analysis:
Given the listener's health risks and family history, Jill concurs with the advisors’ recommendation to take Social Security at 62:

"Taking Social Security at age 62 really does seem like the most viable option for you."
[09:47]

She reviews the financial standing:

"With a $2,800 pension and a $1.2 million TSP, you have a substantial portfolio to support your retirement."
[10:20]

Additional Insights by Jill:

Documentation: Ensure all retirement benefits and entitlements are documented in writing.
Portfolio Management: Maintaining a balanced portfolio (50/50) is prudent given health uncertainties.
Expense Management: Keeping monthly expenses controlled is critical to sustaining retirement funds.

Conclusion:
Jill advises that, given the listener's specific circumstances, proceeding with voluntary early retirement is feasible. She underscores the importance of thorough documentation and maintaining a diversified investment portfolio to ensure financial stability.

Final Thoughts

Jill Schlesinger adeptly navigates the challenges of early retirement for federal employees, offering nuanced advice that balances risk management with the pursuit of financial independence. Her thoughtful responses to listener questions highlight the importance of personalized financial planning, especially when dealing with unique circumstances such as health risks and specific retirement benefits.

For federal workers contemplating early retirement or anyone seeking tailored financial guidance, this episode provides valuable insights and practical strategies to make informed decisions.

Notable Quotes with Timestamps:

[04:30] "The 4% rule is actually what's referred to as a withdrawal rate, meaning the amount of money that you can pull from your total investment and retirement accounts without depleting those funds before the end of your life."
[05:10] "Why would you take more money out if your pension's covering all your needs?"
[07:15] "If the amount you're paying for that car, half yours, half hers, if her half amounts to more than $19,000, which is the gift tax allowance for 2025. That would actually constitute a gift."
[09:00] "It sounds like you have a brokered CD, which offers more flexibility but comes with the risk of early termination fees."
[09:47] "Okay, I agree with that."
[10:45] "Don't get off your whole savings track. Using dividends can help temporarily, but selling part of your index fund might be a cleaner approach."
[10:20] "With a $2,800 pension and a $1.2 million TSP, you have a substantial portfolio to support your retirement."

For more detailed discussions and personalized financial advice, visit jillonmoney.com and explore additional resources or contact the show directly with your financial questions.

Transcript

Jill Schlesinger (0:00)

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Mark Tulare (1:58)

Welcome to the Jill on Money show. It's Friday, February 28th and we are here answering your financial questions about anything going on in your financial life. To reach us just go to our website jillonmoney.com and click the Contact Us button. It's always in the upper right hand corner. I also want to mention that tomorrow we will resume our weekend broadcasts but not in this feedback. We have another podcast. It is called Money Watch and we have decided to drop the episodes of the Money Watch podcast on Saturdays and Sundays. So twice a week, every Saturday and Sunday. And in this podcast we are really going back to your basics. This is a no nonsense place where we are helping people control their financial lives. I think sometimes this show we start to hear from people who are really along their financial journey. In the Money Watch podcast, just think about this, that we are breaking down all of those topics that you really were too embarrassed to ask about and maybe you just want to go back to basics. So that is what we're doing. Over at the Money Watch podcast, you can subscribe to Money Watch wherever you get your podcast, you can go to the website jillonmoney.com and again, new episodes of the Money Watch podcast will be dropping every Saturday and Sunday because as Ainsley, who is our ever true fantastic podcast research queen over at Paramount Global Global, she said we're dropping them on the weekend because your finances shouldn't wait until Monday. Nice line, Ainsley. I'm going to steal it for us. Okay, Right now let's get to our program. Let's do some emails. This is from Jerry, who asks. I often hear about the 4% rule, but my pension covers our basic needs. I don't really ever hear a percentage rule in these cases. I would assume that it would be much higher. Okay. This 4% rule is actually what's referred to as a withdrawal rate, meaning the amount of money that you can pull from your total investment and retirement accounts without depleting those funds before the end of your life. Now, 4% was a pretty tried and true rule. It's tough. I mean, that can often be a high number if we are in a big huge market sell off. But even if it's anywhere between 3 and 4%, it's called a safe withdrawal rate. Now, if your pension covers all of your basic needs and it has a cost of living adjustment, sure, you can take more money out of the account if you want, it doesn't matter. But, but I guess the other part is why would ya, why would you take more money out if your pension's covering all your needs? So, Jerry, I'd love to know more about what's going on for you and then maybe we can help you think about the best withdrawal rate for you in your life. This is from Mike, who says if I were to purchase a vehicle for my daughter and have both her name and my name on the title, would that fall within the 2025 gift rules because of both names on the title? Hmm, I'm not sure about this. I guess that in strictest definition, if the amount of money that you're paying for that car, half yours, half hers, if her half amounts to more than $19,000, which is the gift tax allowance for 2025. That would actually constitute a gift. Now by the way, Mike, if you're married, you and your spouse could be gifting $19,000 each. So that would be 38,000. It depends on your situation, whether or not you're married and the cost of the car. So get back in touch with us. This is from Danielle who writes, last year when interest rates are higher, we put aside some money into a three year CD that had a 5.2% interest rate. However, recently we were notified that the lender, a bank, was terming the CD early. We originally put $6,000 into the CD but noticed that the payout was 59.87. What happened? I thought CDs were a safe way to invest and while they didn't have the potential to grow as quickly as a stock, they wouldn't have the potential to depreciate either. We didn't lose this time around, but want to make sure we have a clear understanding for future CD investments. Okay Danielle, I think there's some confusion as to what kind of CD you owned. It sounds like you have a brokered or had a brokered cd. And the difference is that with a brokered CD you can have a lot more flexibility. Usually that brokered cd, it doesn't compound interest. Sometimes you get an interest in a regular period and maybe you get all of your interest at maturity. But the thing is, when the bank can call that brokered cd, the issue is that you are paying a small fee to get out of it. So usually what often happens with a brokered CD is that you get a higher rate of interest. But there is that downside risk. The institution can call the CD and it costs you a few bucks to get out in terms of your principal, so hopefully the amount of interest you receive made up for it. But in the future, if you want to be ultra ultra safe, you go for a traditional cd, not a brokered cd. I hope that helps. Okay, this next note is from Sharon, who says I listen to your podcast every day, sometimes as much for the soothing sounds of Jill's jokes as the information itself. Hey, thanks Sharon. Anyway, Sharon says I'm preparing to pay for a preschool, wondering if a fair strategy would be to fund it by taking out the dividends from my investments instead of reinvesting those dividends. It wouldn't cover the cost completely, but it would certainly help maintain my lifestyle and my current savings. Otherwise, daycare is $375 a week and my dividend income would provide about $250 a month. Some additional information. I'm 42, a single parent. I've got $25,000 in a brokerage account, mostly in a total stock market index fund. I make $107,000 and I direct 16% towards my Roth IRA. My income after taxes is about $4,400 a month, and I save 20 or 25% of that for things like unexpected expenses, vacation. And also I'm saving for a down payment, which is very important to me. This is the primary reason why I am looking for alternate ways to pay for daycare. Well, listen, you're young. I don't want you to get off your whole savings track. And so if for the time being, that dividend income certainly helps, sure. But the alternative would be to just sell some part of that total index fund and sock that away to help pay for daycare. And maybe that's a cleaner way of doing it. It would be for me. I think that that would be my preference at least. Okay, this is from Anonymous, and here's the deal. It's a federal worker, 30 years of service, no kids, no dependents. Our anonymous federal worker has now been given the possibility of a voluntary early retirement. And so here's what it would mean. Our listener would retire with an immediate unreduced pension amount of $2,800 a month and health insurance coverage. Anonymous would also be able to take advantage of a monthly supplement from age 57 to 62, which would be great. That would give you extra money before your Social Security kicks in. And that extra supplement is 1765amonth. If I were to take Social Security At 62, my estimated payment would be 2,315amonth. At 67, it would rise to 3,340. And at age 74,173. The caveat? I don't have longevity on my side. My dad passed away at age 60. Sibling was diagnosed with cancer last year. I have several health conditions that are problematic. I've discussed my situation with financial advisors who. Who all recommend I take Social Security at age 62 due to my health risks.