More Retirement Myth Busting

Last week we covered four financial planning myths that can confuse and frighten employees as they try to figure out how much income they will need in retirement. This week, I’ve chosen five more statements related to insurance, taxes and Social Security that are largely mythical, even if some contain a grain of truth. Let’s look at them. 

Myth No. 5: If you have coverage under the Federal Employees Health Benefits Program, there’s no need to enroll in Medicare when you turn 65.

There is some truth to this statement. In every federal health plan brochure, you will find the following statement: “If you do not apply for one or more Parts of Medicare, you can still be covered under the FEHB Program.” But the bigger question is: “What are the advantages of enrolling in Medicare?” They include:

• Medicare parts A and B, when combined with many FEHBP plans, provide close to 100 percent coverage for inpatient and outpatient medical care.
• Medicare caters to the elderly by providing excellent coverage for such needs as therapies, durable medical equipment and home health care.
• There are federal health plans that will provide a health fund or a Medicare reimbursement to help cover the cost of the additional premium for Medicare Part B. 
• If you sign up late for Part B, you might incur a late enrollment surcharge that is permanently added to your premium.

Myth #6: Your agency is responsible for making sure all of your service is included with your retirement benefit computation.

While it’s true that your human resources office bears responsibility for documenting and verifying your service history, your agency only knows about service that is documented in your official personnel records. You, on the other hand, know where you’ve worked during your entire career and only you can verify whether the history of your career that is documented in your official records is accurate.

It’s wise to verify that your career has been accurately documented in your electronic official personnel folder long before you retire. If there are inaccurate records or missing retirement contributions, it’s best to get them sorted out well before your retirement date. Remember, you have the final say before your retirement application is sent to the Office of Personnel Management for processing, because you have to sign the application. 

Myth #7: Only those people in good health should consider a high deductible health plan.

Healthy people can choose just about any health plan that they want, because they will mainly be using health insurance for preventative and emergency care. The reasons for choosing a HDHP have more to do with saving money on your tax bill than whether you are in good health or poor health. With a HDHP, you will have a health savings account into which you can make tax-free contributions that will earn tax-free interest and can be used to pay for qualified healthcare expenses tax-free.

Those who can afford to fully fund their HSA accounts should consider a HDHP. These plans generally have lower premiums and lower cost sharing once the deductible is met. And they have catastrophic limits on out of pocket expenses similar to other FEHBP plans.

Myth #8: Your taxes will be lower after you retire.

The sources of your retirement income from your federal pension, Social Security retirement and withdrawals from your retirement savings such as the Thrift Savings Plan and individual retirement accounts will determine your taxes in retirement. Some people don’t have to pay any income tax after they retire. But most federal retirees who enjoy a pension benefit and who have taken advantage of saving for retirement in the TSP will find that tax considerations are an important part of retirement planning. Remember:

• Up to 85% of your Social Security benefits may be taxable, depending on your income and filing status.
• Even if you’re receiving Social Security, you will have Social Security taxes withheld from your pay if you’re still earning income from work.
• Distributions from traditional TSP accounts, 401(k) accounts and traditional IRA accounts are taxable. Qualified distributions from Roth TSP accounts and other Roth IRA are tax-free. 
• How much tax you’ll pay on those distributions and your other sources of retirement income depends on the tax bracket into which you fall and whether the state where you live taxes retirement income.

Myth #9: You can’t count on Social Security for your retirement years.

It’s true that for higher income earners, Social Security retirement benefits provide less income replacement then for those with lower incomes. And Congress could theoretically change the program at any time. 

But as for Social Security going away completely, it’s more likely that Congress will make changes on the revenue side (in the form of tax increases) or lower benefits (by raising the full retirement age or changing the benefit formula) in order to continue Social Security for future generations.

While current poor economic conditions are likely to have an adverse impact on Social Security’s long-term solvency, it’s important to remember that the program has been around since 1935. 

Bonus myth: Members of Congress receive a pension equal to their full salary after a year of service.

Just like other federal workers, the overwhelming majority of members of Congress are covered by the Federal Employees’ Retirement System. Members can participate in the TSP and they pay Social Security taxes just like most Americans. After five years of civilian federal service, they earn a retirement benefit. But that benefit wouldn’t replace their full pay (or that of any federal employee) unless they worked almost 100 years to earn 100% of their high-three average salary.