Pension versus annuity, FRA versus MRA, and lump sum versus annuity on today’s Fenobabble
This is Fednobabble.com, where Kevin and Cassie make federal retirement benefits understandable for humans like you.
These two don’t hold back as they answer questions from the Fed Pilot workshops and webinars or from questions submitted by you at Fednobabble.com.
Well, welcome, Cassie, that’s a long title for this one. That is so these are questions that you get from your workshop, what’s going on here?
Well, let’s see. This first one is pension versus annuity. What’s the difference?
Hey, can you can you explain what the difference is between this is a little bit difficult? Well, I’ll just let you go for pension versus annuity. All right, so your pension is going to be it? Well, if you look up the definition right, it’s going to be something that you get once you’ve separated because you’ve contributed to a certain retirement plan, OK? So for six hours or first employees, we call this your the money that you receive at retirement or in retirement is your pension because it’s something that you’ve contributed to, you’ve worked towards.
They’ve deducted it from your paychecks because you’ve worked for that company in that retirement system. Now, OPM calls it your annuity. How confusing, I hate that, let’s just confuse everyone even more, right? OK, yeah, go ahead. Sorry.
Yes, but annuity is simply just something that you’ve contributed over time and you decided to take money on a monthly basis. And that’s an annuity rate. So it’s a very they could be one in the same, but they can also be different if you would like to keep it easy for yourself. Yes. Because you can call your TSP, you know, monthly income an annuity and call what you get from your from the federal government, your pension. I oh, really?
Yeah. And really, that’s what we do because this is so confusing because. The pension, the way they decide to pay it out, is a type of annuity, that’s the way the annuity is. The way they paid out the pension is what they build up. They could offer it as a lump sum.
I know there are some pensions from companies, although those are very, very rare from a company doing a pension. But they could just do a lump sum. There’s your pension and it’s not given to federal employees in an annuity style. But they chose the annuity style and opium calls it an annuity. But then there’s the TSP annuity as well. And people get those confused all the time. And so typically in my workshops and Cassie, when you and I are talking about it, when we say pension, we’re talking about CSRS & FERS, CSRS Offset all the rest.
When we talk about annuity, we’re going to be focused on the TSP because we don’t want to cross the nomenclature. We don’t want to confuse people. So we will. That’s how we’ll talk about it.
Right, because annuity is so general. That I don’t understand why OPM does not distinguish, right, that there first and Sirrs monthly income is a pension, because that’s what you it’s you’ve contributed to that because you worked for the federal government. Right. That is an employer sponsored program. So that’s where that’s where pension and annuity are different. Right. An annuity is simply just I get monthly, I get money on a monthly basis because I contributed to something that could be an IRA.
Whether that’s traditional, whether that’s ROTH, that doesn’t matter. Right. But a pension is specific for. Deductions that have been made because of your to an employer sponsored program, right?
OK, so that’s why we differentiate pension as your employer sponsored program for FERS or CSRS, an annuity to your outside TSP or other kind of programs because those are not employer sponsored.
I think that’s the easiest. Yeah, different and or and distinguishing factor.
I want to just point out that this. A play of words and how it’s all named entitled and how we refer to things. The confusion is not uncommon when it comes to federal benefits. It is very, very common to have that confusion and why the government doesn’t do a better job of clearing that up, because people make they say, oh, I’ve got an annuity and they think one thing, but not what it really is. And so they make plans based off of what they thought it was or what they saw somewhere else.
Because every agency I mean, I remember one person saying I’m a temporary employee. And I talked to him and I said, well, according to your agency, you’re a temporary employee. But according to OPM, you’re not a temporary employee. It’s like, what? Yeah, that’s exactly right. And so you can actually make decisions based on what you think it is, but it’s not really that. And you hurt your retirement because of that. So that’s that’s why we have we do real quick.
I got a funny story. So I was meeting with this guy when I was first getting into helping federal employees and coordinating their benefits with other insurance plans or whatever. Right. Yeah, and I was not Scelzi. I was not I simply wanted to get him his benefits report. Right. And I’m talking with him a little bit and everything else about just getting him the benefits report and, you know, talking about finding some some outside planning, if if that’s something that is needed for him, then I would have that availability to help him out there.
And I remember. When I was walking up to him, he’s kind of got this like, oh, great, kind of, you know, spoke to him and everything else. And I walk up and is the first words out of his mouth were, I don’t want to buy an annuity. And I was like, you realize that you have an annuity with the federal government. Like, people don’t think that it’s actual annuity, but it is your pension is an annuity, right?
Even though we distinguish the two, because it’s what you it’s an employer sponsored program. It’s still an annuity. Mm hmm.
If you are going to take or use your TSP funds for monthly income, whether you decide to withdraw a monthly portion of that, you know, or get into a separate IRA, it’s still going to be an annuity because you’ve contributed to that plan and you’re making those contributions. You’re you’re paying yourself that income based on your contributions. Right.
Right. So you’ve got to follow Suze Orman. And she said don’t buy an annuity. Annuities, right.
Well, then you’re going to give up your pension will have a choice on all government.
You only have one, right? Look at that. Then I’ll tell you what. You give me your pension. If you don’t want an annuity, you give me your pension and I’ll just take that off your plate. All right.
Good. All right. So, OK, that’s a good. We went along on that one. That’s OK. That’s good. The next question is, is your full retirement age your MRA? So let me put this a little differently. Is your FRA your MRA? What do you think? Well, no. What are we talking about here, right? Are we talking about or the federal government? Are we talking about for Social Security? Right.
Because retirement. Yes. Is this.
Write your full retirement age is something that is referred to for Social Security, right? Yeah, minimum retirement age or MRA is something that’s referred to for your eligibility for the federal government.
So they’re not always the new.
I don’t know that they are the same at all. I mean, they’re they’re different. They’re different things unless people are calling it weird things. But if we look at it in that respect, like you said, FERS Social Security MRA is federal government work employee. Right. Those are two completely separate things that don’t have anything to do with each other.
No. But I don’t know what context we were talking about here. What was the reason for this question?
Yes, no, there is I mean, that’s what I think someone was just I think my guess is when someone asked this question, they were just confuses way.
FERS MRA aren’t aren’t they the same thing? Because they had been my guess. They’ve been told that, oh, it’s you know, it’s all the same and it works well. No. And one thing I have to keep reminding people is Farra is for Social Security and Social Security is for all Americans, not just. Federal employees and all that. That’s right, I guess everyone gets that. Yeah, everyone does get that. But your MRI is for your pension and only federal employees get that.
So it’s I direct payments. All right. It’s way confusing.
I mean, and which MRA are we talking about here? Are we talking about retirement or your retirement age? Right. Right. Yes.
I’m going to go because all regular employees have a minimum retirement age, and that could be between fifty five and fifty seven, depending on your year birth. But all special provision employees have a different maximum retirement age, depending on which agency there is, that could be 56 or 57, right. So it depends. No, they’re not the same. You’re right. So I guess the short answer is no. Your everyday is not your Emerin. Yep.
Have nothing to do with each other. Good. Good answer. All right. Next one. Is there a lump sum option rather than taking the penalty pension annuity? Oh, look at that. We were just talking about that. Look, that did not plan. That did not think about that. But yes, go ahead and add to that one Cassie. Is there a lump sum option rather than taking your pension annuity, I mean, sure, you can get a refund of your contributions that you’ve made to CSRS or FERS.
Rather than actually retiring and getting a monthly benefit, but. I I think it depends on when you separate, because, right, let me go back here.
Well, let me let me ask you a couple of questions in that to have you as you answer this.
First off, sure.
You can bring it all back, but does do you have to do that before you retire or as you retire? And can or can it be done after you retire? Well, it can’t be done after you retire. Now, once you’ve made that election and you’ve filled out the retirement application and you’ve made, then you’ve already told OPM how you want to receive that pension annuity. Right. OK, you’ve already said, yes, I want the survivor benefit or no, I want this amount or whatever that looks like for your retirement type.
Yeah, it’s too late, you can’t go back on that, but. If you separate from service, do not retire. Then you could simply take your contributions and go away, like if somebody is age forty five and they don’t want to retire, they don’t want to wait 15 to 17 years to receive that annuity pension, you bet they can take those retirement contributions and, you know, put them in another IRA or whatever you want to do.
And I don’t care, but you can take that lump sum benefit. But if something is made, it’s only what you put in. There isn’t any growth of anything. It’s exactly what you put in, nothing more.
Right. So if you’ve only contributed ten thousand dollars, that’s all you’re going to get. Yep. Hmm.
Now, if you add so it depends on what age you are or whether or not this is going to be good for you. But is there a lump sum option rather than taking a pension annuity. Yes, but if you’re eligible for an immediate annuity, an immediate pension annuity, then why would you want to take your your lump sum right. Option? Now, there could be a reason, say somebody is terminally ill.
That’s exactly where I was going. That’s exactly it. If you’re terminally ill, maybe you do want to take it all out. So because you’re not going to get it. So you may want. Yeah, that’s exactly what I was thinking.
Yeah. But if that’s the case, you’re going to want to separate from service.
You’re not going to want to retire because once you retire then that’s it. You fill out that application, you’ve submitted your your package and that’s what you get. So I think people get those two dates confused too, on the separation date versus the retirement date. The separation date is not necessarily your retirement date. Usually it is, but is not always, usually is, but it’s just like your LEOs service computation and your retirement computation. They could be two separate dates.
Yeah, usually they’re the same, but there are reasons why they’re not the same. Yeah.
Can I, can I throw in one one example of as as we’re talking about this, I thought of where it gets really as if it’s not complicated already. Here’s here’s an example where it gets more complicated. Let’s say someone is terminally ill and they know that they’re not going to live more than two months. We’ve seen that happen. They may want to say, I’m done, I quit. I’m taking all the money so that I can give it to my family because they’re not going to get it afterwards.
If they do that, they’ve separated from service. They didn’t retire. So their family can’t have FEHB from that point on, however. Right. Right. However, if they pass away while they’re employed, then their family can have FEHB even after assuming assuming some other rules and everything.
But they can have the FEHB after plus 50 percent of the monthly pension from that point on. So financially, which one is better? That is where it is so important to make sure that we’re getting help on this. We’re not we’re not making decisions like that willy nilly and just saying, oh, this is what we should do. Or honestly, we’ve heard we’ve heard the story before where they took advice from H.R. and they were going to do the third option was which was absolutely the wrong thing to do.
So oops, sorry.
Right. So I’m all over the place with this.
So we just you know what, we we have to make sure that the changes are the decisions we make and we need to make our federal employees need to make decisions now for what’s going to happen later.
And we need to look at the different scenarios of what may happen just in case. So if this happens, this is what we want to do. If this happens and we don’t you don’t get into every little oh, you know, if you go terminal, OK, but one of the ones that are most likely to happen here are the situations. And the thing is, is that federal employees are typically going to retire one time. They’ve got one shot at.
Yes. Whereas a financial planner and financial adviser, they have helped thousands of people or hundreds or thousands of people.
They’ve done this again and again and again and again and again and again. They know what’s going to come up. They’ve seen it before. So it’s not like you’re going in blind. You’re going in with someone who understands this already. So, again, that’s why we say, yes, please, you know, go to Fednobabble.com and just get the report.
And Cassie, by the way, Cassie creates the reports. These reports are phenomenal. And she she was just telling me the other day that Cassie you were you stayed up way late to try to get the information just right on one. And you’re up and you get up early, you get up like stupid early.
And you were going you’re going well, at least for me, you know, but you get up at 4:00 a.m., I think. Is that right?
Yeah, something like that. Yeah. But that doesn’t matter, you know. But I mean, people need this information, right? And so not only are we making sure those numbers are right, though, we’re also giving back to the advisors the information that they need for the employee, whether that’s a different option of what that retirement looks like, you know, whether the lump sum option is how and how that’s going to not just affect them, but there are other benefits.
How is that going to affect their spouses if they’re married? How is that going to affect if they’re divorced and they owe a portion of that annuity to their former spouse? What does that look like? Like we’re we’re able to distill down all of those different intricacies in a case so that we we’re getting that specific information to you, to the adviser, so that way they can help the employee, because the whole point of this is to make sure that the employee is taken care of.
They have the information that they need and know exactly how these different benefits are going to affect one another. And until you can just drill down that you can’t do any sort of retirement planning or figure out whether the lump sum option is going to be better than the annuity as a pension annuity for you. Right. And that’s that’s what it’s all about, is finding out what’s best for the employee. So that way they can make the most informed decision.
So if you would please like subscribe get notifications for this to continually be updated, to continually be educated, to know different perspectives on how to think about all this and really dove in. Other than that, we’ll see you next time. Thanks, Cassie to get Cassie’s comprehensive report on your federal retirement benefits at no cost, no obligation and no sales pitch. Go to Fednobabble.com while you’re there. Submit a question for them to answer on the show.