FEDSAVVY AUTHOR CAROL SCHMIDLIN, PRESIDENT OF FRANKLIN PLANNING, REVEALS HOW TO GET THE BEST RETIREMENT FROM THE MOST COMPLEX EMPLOYEE BENEFITS SYSTEM AROUND – THE FEDERAL GOVERNMENT
Carol Schmidlin is one of the few retirement planners willing to take on the labyrinth of Federal Benefits. It’s a niche market that requires extensive training and constant updating as benefit regulations shift, and demands even more expertise from planners to incorporate them into a holistic retirement strategy. Yet, as the author of the book FedSavvy: Tools and Tips to Maximize Your Federal Benefits, Schmidlin has made it her mission to guide federal employees through the complex terrain of their options, provisions, and tactics to enable them to maximize the benefits that they have earned.
“Federal Benefits are complex and confusing. There’s no basic ‘here it is’” says Schmidlin, who has made them her study for much of her career, along with the intricacies of regular retirement planning, including tax laws, investment management, and asset protection. As president of Franklin Planning in Sewell New Jersey, she knew her firm was located in a bedroom community for government workers, less than 30 minutes away from downtown Philadelphia, and had the opportunity to work with retiring federal employees. She also knew that if she was going to work with them, “I’d need to know these benefits backwards and forwards.” The complications are many; for example, “They have a great health insurance program, but unless they provide a survivor’s pension for their spouse, their spouse wouldn’t be able to receive that benefit if they died. You could find yourself ineligible for continued health insurance benefits if you’re the surviving spouse. As a financial planner, you could do irrevocable harm if you didn’t know that,” she says.
Unfortunately for federal employees, most financial planners don’t understand federal benefits, which can cause significant losses that cannot be fixed later. Schmidlin explains that an employee’s entire retirement system might be different depending on when he or she was hired, or whether they worked part-time. In fact, she says “There are so many exceptions that OPM [Office of Personnel Management] still does retirement benefits by hand, exactly like they did in 1920 when pensions first came out, because it’s so complex.”
Holistic planning, Schmidlin says, is the key – not just for federal retirees, but for all retirees. She incorporates investment management, tax planning, estate planning, federal benefits and income planning into a complete plan that fully integrates every aspect. “You have to take a holistic approach so you don’t miss anything. Every piece affects the other pieces of the financial planning pie. Federal benefits are just once slice of the pie,” she says.
While her clients’ retirement portfolios aren’t always complicated, understanding the potential complexities is vital to helping them make the best possible decisions. Schmidlin conducts workshops at both her office and at federal agencies to explain how to effectively use federal benefits and coordinate them into the ultimate retirement plan. She and her husband Brett Schmidlin don’t just serve the federal community though, they also invite retirees, federal or otherwise, to come in for full day retirement classes, or for one-hour “Brown Bag Lunch and Learn” classes, teaching their holistic planning strategies. But, her most popular workshop is “Fed Savvy: Tools and Tips to Maximize Your Federal Benefits.” She says her students often tell her she’s the first financial advisor they’ve met who understands federal benefits.
One significant decision for any retiree is when to take Social Security. “With married couples, there’s over 85 solid different choices on how and when to take Social Security,” says Schmidlin, who doesn’t give her clients a blanket answer. She looks into multiple factors to analyze how clients can get the most income. For federal employees, she takes into account their Thrift Savings Plan (TSP), which has restrictions on how retirees can withdraw income of which few are aware. “TSP has very low fees, it’s great when you’re accumulating, and it’s good if you can live within the income limits of that plan later,” she says. To most of her clients though, she recommends delaying Social Security as long as possible: “In today’s volatile markets, maximizing what you can get from Social Security is an important component to factor in to your retirement plan.”
Federal benefits complicate things even more. Federal employees have two different retirement systems: CSRS and FERS – as well as a brand new one: RAE (for employees hired January 1st, 2013 or after. “The older CSRS retirement system provides a generous pension, along with the ability to make contributions into the Thrift Savings Plan,” says Schmidlin, and while CSRS employees don’t pay into Social Security, they do have the Voluntary Contribution Program (VCP) which Schmidlin says “most people don’t even know about.” Federal employees in this program are allowed to put up to 10 percent of their lifetime earnings in the Voluntary Contribution Program, which they can roll into a Roth IRA when they retire. She says one of her clients recently converted her voluntary contribution funds to a Roth IRA worth $300,000.
There’s one striking new piece of information on federal benefits that everyone should know about – yet few understand. It’s a law that took effect in May of 2012 that creates a Roth T.S.P. option for federal employees. Schmidlin explains, “The Roth T.S.P. is phenomenal. It doesn’t matter how much they make, they’re eligible to contribute to the Roth T.S.P.” unlike the regular Roth IRA which has an income cap. She says she doesn’t see many retirees taking advantage of the Roth T.S.P., and recommends that everyone should look at it to determine if it makes sense for their situation. She says retirees “don’t understand how the Roth T.S.P. rules work going in and coming out. It’s very confusing. It’s been a big topic of my workshops and webinars. It’s such a lost opportunity for them to build a nice, tax free retirement account.” And with taxes expected to do nothing but rise, ensuring tax free money could be the best deal out there.
Schmidlin likes to say that Uncle Sam owns part of all retirement funds in 401Ks, pensions, and Social Security, and with tax laws in flux, no one knows if Uncle Sam will take 20 percent or 50 percent in the future. “By contributing into a Roth T.S.P. account, you pay the tax today in a known tax rate environment and pay just on your contributions. When you take it out, if you follow the rules, you don’t pay taxes – it can be a large tax free harvest,” she says. While the Roth T.S.P. sounds just like a Roth IRA, the Roth IRA limits contributions to $5,500 a year, and that’s only if retirees don’t overshoot the income restrictions. This new law makes it possible for federal employees to contribute $17,500 per year if they’re under 50 years old, and $23,000 if they’re over 50, with no income restrictions.
The key to unlocking the potential of federal benefits like these is to get familiar with them early, before retirement. Schmidlin helps her clients put everything into place in order to maximize their pensions, and more importantly, find out how those benefits affect every other part of their retirement plans.
Schmidlin recommends, “Whenever possible, do forward tax planning,” which she adds is difficult to do currently since the estate planning taxes are changing. Even then, she has a plan – multiple, in fact: “If you could have an estate tax problem in the future, let’s put a plan in place so your family doesn’t lose thousands of dollars. Let’s look at how you’re going to create this income – do you want to put something more reliable in place? By doing that, you might afford to be more aggressive with your additional assets because you have that safer, reliable base. Each piece is critical to the other.”
Even when retirees don’t need to consider the nuances of federal benefits, each piece of the retirement puzzle is critical to creating the whole. Schmidlin’s approach to financial planning is comprehensive because she believes it has to be, encompassing the total picture. But truly holistic planning doesn’t start with numbers – it begins with goals. “Clients come in knowing how much they have in their 401K, and Federal employees always know their pensions, but I ask them, ‘What kind of income to you desire in retirement? What does that picture look like?’ and they haven’t given it any thought. They haven’t figured out the long run, or the impact of taxes and inflation,” she says. While most retirees have a plan in place for what planners call the “accumulation” stage of their lives, a completely different strategy is needed for the “distribution stage,” also known as “retirement.” Schmidlin compares it to climbing a mountain, “When you get to the other side of Mt. Everest, what are you going to do that’s different? Seriously, in mountain climbing, the way you ascend is different than the way you descend.”
The over-the-hill crowd, or mountain, as the case may be, needs to put safety first – but even the safest investments aren’t guaranteed to prevent loss of money. In fact, the safest investments are frequently those that allow investors to lose money slowly – to inflation. Schmidlin looks at the range of investment options to help her clients keep pace with inflation and taxes, like fixed index annuities in which interest is linked to the potential of stock market returns, without risk of losing principal. She’s also keeping a close watch on a potential “bond bubble:” “We’ve been in a declining interest rate environment. When interest rates rise, we have to be real careful with our bond portfolios and pay attention to that.” Schmidlin recommends looking for bond mixes that have inflation protection built in and “working with a team of professionals who can actively assist you in managing your money.”
After what’s been called “the lost decade” of investing, retirees are understandably concerned about their ability to generate an income that will last their lifetimes. But Schmidlin says many look at the problem backwards: “They think about the income streams they have and try to live down to that.” Schmidlin says cutting back on lifestyle shouldn’t be “Plan A.” Instead, she recommends first calculating your fixed expenses – what you need to live – then seeing how much your pension and Social Security will cover. If there’s a gap, she says, “Let’s look at some of your assets and use them to create a safe, reliable source of income that’s based on math. You don’t have to lose sleep at night wondering if the stock market will prevent you from paying your bills.”
Depending on her clients’ comfort levels for risk, she may suggest investing surplus savings into stocks, bonds, REITS, and mutual funds to pay for “extras,” the fun things that make retirement a pleasure. However, those who have suffered losses over the past ten years might not be able to cover their necessary income, and it may not pay to be more aggressive: “There are no magic answers. You may have to save more, work longer, rethink your income needs and what’s most important to you,” Schmidlin says. If she can get clients to their income goals without taking any risk, that is her preference, “If you’ve already won the game, and you can get there with a conservative portfolio, why take on the risk?”
While entering into risky investments is the last thing on her to-do list, the first item is to perform a “stress test” on new clients’ portfolios to see how much they have at risk already. “If we see another 2008 or 2001, what’s the max draw down from peak to trough that you lost? I see 30 to 50 percent all the time,” she says. The key to real safety is diversification, using assets that don’t react in the same market environment: “You want assets that protect you from those downturns.”
You might say that Schmidlin’s approach to her work is similar – the key for her has always been diversification, not of funds, but of skills. Being able to provide comprehensive retirement planning, along with keeping up with the latest news in federal benefits, requires years of dedicated study that never really ends; but Schmidlin gives the impression that doing anything less never entered her mind. She says “What I enjoy is when I’m doing a financial analysis for a retirement plan, and finding valuable solutions to help someone. Bringing value to my clients is what makes me happy; that’s why I love what I do.”
Written by: Lauren Van Mullem
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