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Satisfied, but......
Old 05-24-2015, 12:39 PM   #1
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Satisfied, but......

Hi, I am a 51 SWF who am planning to retire at age 56. I earn ~$150k/yr. I will have a government pension of ~$4300/month ($52K/yr), retiree health insurance etc. I currently have ~$800K in my 401k and estimate it to be worth at least $900K at age 56. So I should have available ~$88k /yr to live on at age 56 if I assume a 4% withdrawal rate. I estimate my living expenses will be $48K/yr. Therefore I am satisfied with my current situation.

So what's the problem. I have been approached by people that I know, who would like for me to join them working in the private sector. I think this would make me happier in addition to being satisfied. But I would still like to FIRE at 56 unless the new job makes me really, really happy and fulfilled. I am trying to calculate what salary / benefits in the new job would make this at least a break even financial scenario.

By leaving the government now, I can defer my pension until age 56 but it would be reduced and I would lose retire health benefits. So what do I lose in benefits?

As a very rough first pass, I calculated what it would cost to purchase retire health care from age 56 to 65 as: 10 years * $800 / month *12 = $96,000.

My pension would go from the $52k/yr mentioned above to ~$42k/yr. So If I would assume a 30 yr life expectancy from age 56, based upon family history, this would cost me ~$300k/yr over my lifetime.

So between healthcare and the reduced pension, I would need to "makeup" $396k in the 4.5 years that I plan on working to make the new job financially equivalent. So a new salary of $150k + $396k /4 or $238k /yr would "makeup" this difference. My plan is if this new job can provide this salary (which it might) to sharpen my pencil and look at the higher tax implications in those 4 .5 years and the value of having the extra money earned in those 4.5 years invested.

Has anyone else faced a similar opportunity? Since this is a new and evolving situation I am looking for advice, items I'm not considering, and support in general.

Thanks!
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Old 05-24-2015, 12:49 PM   #2
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Do you know if you agency can offer an early out?
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Old 05-24-2015, 12:50 PM   #3
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You indicated you expect to have a $40k/yr surplus from income vs. expected expenses by age 56. Thus if this:

Quote:
Originally Posted by Par34 View Post
...me to join them working in the private sector. I think this would make me happier in addition to being satisfied.
is really true, the "cost" (almost an opportunity cost for pensions and health care) is inconsequential to me. As you indicated, it's possible if not likely that your compensation from the job will cover that cost anyway. In addition, you won't be drawing down your savings and may be adding to it, which only increases that financial security whenever you do fully retire.

So if you think there's a decent chance it'll make you happy to work in the private sector (rather than just satisfied), and the financial impact is really negligible (you're already set... and then some), there's no amount of math or tax implications that would hold me up from trying it out.
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Old 05-24-2015, 12:55 PM   #4
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If the job make you happy then go for it, but you are giving up 4.5 year of free time to do other things you may want to in FIRE. What I have found is I like not having to go to work, free time to do what I want, and getting to live life on my terms.
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Old 05-24-2015, 01:40 PM   #5
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No, I do not have an early out opportunity. At this point I will be working for the 4.5 years. Either where I am now with Uncle Sam or in the private sector. I don't have access to either my pension or my 401k until age 56 without a significant penalty and my other resources are not enough to cover my living expenses.


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Old 05-24-2015, 02:00 PM   #6
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I'd never give up my free retiree healthcare. At 55 that would be a long way to Medicare.
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Old 05-24-2015, 02:09 PM   #7
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If you are a FERS employee and you retire before the year in which you turn 55, you will be stuck with the 10% IRS tax penalty.

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Old 05-24-2015, 02:14 PM   #8
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I think I see some errors in your assumptions/calculations:

Quote:
Originally Posted by Par34 View Post
As a very rough first pass, I calculated what it would cost to purchase retire health care from age 56 to 65 as: 10 years * $800 / month *12 = $96,000.

My pension would go from the $52k/yr mentioned above to ~$42k/yr. So If I would assume a 30 yr life expectancy from age 56, based upon family history, this would cost me ~$300k/yr over my lifetime.

So between healthcare and the reduced pension, I would need to "makeup" $396k in the 4.5 years that I plan on working to make the new job financially equivalent. So a new salary of $150k + $396k /4 or $238k /yr would "makeup" this difference. My plan is if this new job can provide this salary (which it might) to sharpen my pencil and look at the higher tax implications in those 4 .5 years and the value of having the extra money earned in those 4.5 years invested.
Is your retiree healthcare a tax-free benefit? If so, you need to use AFTER-TAX dollars to buy the same healthcare if you leave. So it's not $96,000, but $96,000 divided by your marginal tax rate of whatever your pension/investment income and salary would be taxed at. With a salary of ~$250,000/year, there are many things you start to get hit with. So you'd likely need to earn more like $96,000 divided by something like .5 (1 minus total tax rate....and don't forget to include EVERYTHING in that tax rate, like Medicare tax, local taxes, various other taxes and loss of deductions that come into play when you earn that much, etc.)

However, I also noticed that you aren't discounting that $300,000 that you are losing by taking a reduced pension. You don't need $300,000 in today's dollars to makeup that $10,000 annual shortfall from now for the next 20-30 years. So that would offset the healthcare error a little bit.

Another thing to think about: how secure is this job?It would be very unfortunate if you forever lost out on retiree health and a higher pension only to find out you get laid off in 2 years, or you really don't like the position. Also, how would your other benefits like vacation and other perks compare?

And lastly - don't forget to look at all aspects of the possible new position. Everything from your boss to coworkers to the corporate culture to clients/customers you have to deal with, and a host of other factors that can turn a 'dream job' into anything but. Don't go into it thinking "Oh, I really like this person and they're great to interact with"...because you will be doing a lot more than just interacting with that one person.
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Old 05-24-2015, 02:18 PM   #9
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Fed health care is not free, but well subsidized. Feds pay about 28 percent of Health Insurance premiums, the government pays about 72 percent. This continues into retirement, until Medicare (when government insurance can continue as supplemental insurance to Part B, meds, etc., but the retiree continue to pay about 28 percent of the premium for life--still a good deal).

Par34: It sounds like you are in FERS (and a GS-15). Presuming you will have 30 years in (and are not a fed in law enforcement) at 56 (if that's your minimum retirement age), don't forget to add onto your pension the FERS Supplement (which mimics social security), which you would receive until 62. You may be getting more that 52k, when that is added in.

I'm a 56 year-old former fed who took an early out offer a few months before my 56 birthday. The FERS supplement started for me when I turned 56, and is additional to my pension (didn't have 30 years, but the early out allowed me to retire without the "under 62" penalty), about 14k a year.

Otherwise, my financial situation is similar to yours. I'm retired little over a year now and am fine, living off my FERS pension and supplement. So far, I've not had to touch my TSP or other savings/investments. My cost of living is about the same as yours, so if you do stay with Uncle Sam until 56, c'mon in then, the water is fine!
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Old 05-26-2015, 07:01 AM   #10
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If you are a FERS employee and you retire before the year in which you turn 55, you will be stuck with the 10% IRS tax penalty.

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Are you referring to a 10% IRS tax penalty from the FERS pension or from the 401K (TPS) savings? I am not aware of an additional 10% tax penalty on the FERS pension. I am aware of the reduced pension due to age.
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Old 05-26-2015, 07:23 AM   #11
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In your case, you need to retire from Federal service in the calendar year in which you turn 55 in order avoid a 10 percent IRS tax penalty on any TSP withdrawals (unless you do the 72t withdrawal). If you plan to retire at 56 from Federal service at 56, this issue is moot. If you leave now, at 51, to take a private sector job and defer your Federal retirement, you won't be able to touch your TSP until 59.5 without penalty (unless you do 72t withdrawals, pursuant to IRS rules for 72t withdrawals).
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Old 05-26-2015, 07:36 AM   #12
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How do Social Security benefits get affected by a move? You speak of retirement income but not Social Security. Some government jobs have great retirement but not eligible for Social Security. If that is true of you, how would five years of non government income affect future SS benefits? Additionally, I'd look at a 3% withdrawal rate instead of 4%. You do have a lot of excess......but, how about long term care? have you computed that into your costs? Good thinking on your part......good luck to you on your decision.
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Old 05-26-2015, 08:48 AM   #13
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How do Social Security benefits get affected by a move? You speak of retirement income but not Social Security. Some government jobs have great retirement but not eligible for Social Security. If that is true of you, how would five years of non government income affect future SS benefits? Additionally, I'd look at a 3% withdrawal rate instead of 4%. You do have a lot of excess......but, how about long term care? have you computed that into your costs? Good thinking on your part......good luck to you on your decision.
I do believe employees covered by FERS are eligible for Social Security.

You need 40 credits (~10 years work) to be eligible for SS benefits. Someone who has only worked 5 years on an SS job will not be eligible for SS pension. If you work at least 10 years but less than 30 years in an SS job, you're eligible for SS pension but it will be reduced based on the retirement pension you receive from your government job because of the Windfall Elimination Provision.
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Old 05-26-2015, 08:55 AM   #14
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I would be extremely worried about job security (especially for high earners) in the private sector. If the economy goes south, job security is even more of a concern for private sector employment. Not so with a government job.

I would stick with the sure thing, given that it is only a few more years.
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Old 05-26-2015, 09:55 AM   #15
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I think the biggest error in your calculation is not considering taxes on the increased income. For now, let's say that your $396k need to come out whole is right. In order to save $396k, you need to earn much more than that because of taxes. That additional income would likely be taxed at 28-33%, so let's call it 30%. In order to "save" $396k you need to earn $565k ($396k/(1-30%)).

So rather than $238k/year that would be $291k/year. The extra $141k a year of income would be subject to $42k of taxes, leaving $99k a year to be saved to make you whole.

If your income is also subject to local income taxes then it will be even more.

A friend of mine moved jobs in his early 50s, fell in love with his new job and new organization and is still happily working as a result.

It looks like you'll be in great shape to retire at 56 either way, so unless you care to leave a financial legacy, it boils down to a personal, lifestyle decision to me.
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Old 05-26-2015, 10:21 AM   #16
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I faced a similar choice 15 years ago, stay in a State job or jump ship. I had two significant differences, I was 45 and married to a spouse with State job. I was able to jump and still keep the CalPERS medical as spouse, and make double the income for the last 15 yrs.

I think those two factors work against you, you are single and you have limited years to make a significant impact. Stick with your current job and plan to retire at 56, you can always do some consulting work after that. I worked in IT and the preference now is for 10-99 subcontractors, they dont want W-2 employees in their 50s.


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Old 05-26-2015, 08:58 PM   #17
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If the job make you happy then go for it, but you are giving up 4.5 year of free time to do other things you may want to in FIRE. What I have found is I like not having to go to work, free time to do what I want, and getting to live life on my terms.
+1. Giving up those 4.5 precious years would be an absolute deal-killer for me, but everyone is different.
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Old 05-27-2015, 09:07 AM   #18
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I'd never give up my free retiree healthcare. At 55 that would be a long way to Medicare.
+1
I left the federal govt at 52. Even though we can afford to handle outside insurance premiums, it's one of those decisions that I wish I had waited a few more years. Even though it's not exactly 'free', the fed health insurance is such a great value compared to what is out there on the open market. One doesn't know where insurance premiums are going to go in the future - except up.
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Old 05-27-2015, 09:57 AM   #19
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I would stick it out until 56.
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Old 05-27-2015, 01:52 PM   #20
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HESPERUS, the way my contract is written is that it is tied to the highest cost premium. In Medicare it will be an average of the three highest. They have not offered a deal as sweet as this in 15 years and it's even worse now. Basically you are out of luck unless you started work at 20 and work until you are 65, then you may have enough to cover Medicare.

I could not have retired at 54 without it. Beside my monthly pension, I think the medical is the best retirement benefit.
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