The Power of Your LES Paycheck

LIFESTYLE, SELF IMPROVEMENT

APRIL 8, 2024 | GERALD JONES

I have notice one pattern that concerns Federal Employees while serving civilian service 

• They’re paying too much in Federal Income Taxes
• They’re figuring out how to grow their Thrift Savings Plan
• They’re not clear on how to maximize their Federal Employee benefit deductions 
• They have debt and do not know how to get out of it
• Indecisive on if they should invest in the Traditional or Roth TSP

They Have No Financial Planning Advice during their Years of Federal Service

"Boy I wish I would've met you 10 or 15 years ago - I wouldn’t be in the position I would be in a better position than what I am in today” - Just about every retiree I’ve met with." 

It doesn’t matter if my client has…

$1,500,000

$400,000

$700,000

$37,000

In their Thrift Savings Plan at retirement, the feelings are consistent. It's never enough. 

When working with Federal Employees that are retired or getting prepared to retire, I realized that during their years of civilian service, most did not have access to financial planning advice.

During their years of service, they would join financial planning programs, work with a friend or family member that was affiliated with a company to perhaps sell them a financial product. 

*But still no actual one on one fiduciary financial planning guidance.

• Investment Advisors 
• Insurance Agents
• Financial Advisors

Typically, these licensed professionals will not show up to help until you are 59 ½ or ready to separate service and retire. The reasoning behind this is because they are typically motivated to transfer your retirement account to be managed under their supervision. 

However, you needed financial planning advice during your 30’s, 40’s and going into your 50’s. By the time you're ready to retire, you are dealt with whichever decisions you have made, good or bad. 

This means the majority of the working class are stuck trying to figure out their own financial planning and lack the resources to get to their destination. 

“ Without guidance, navigating the financial terrain can feel like wandering in the dark. For Federal Employees, the absence of a Financial Advisor during their civilian years of service can leave them stranded in uncertainty, but with knowledge & diligence, they still can still chart a path to financial security ”

 

KEEPING MORE TOYS IN YOUR TOYBOX

Imagine you have a big box of colorful toys. Every two weeks you have to give away some of your toys to the library. The amount of toys you give away depends on how many you have. The more toys you have the more you give away. I'm going to show you how to have more toys and give away less. 

You have to establish maxing out your Thrift Savings Plan contributions and be aware of your FEHB health insurance premiums as your foundation. This has to be your priority if you want to become wealthy. 

Maxing out your Traditional TSP contributions will increase your investment performance and give you the pathway to multiple 6 figures and maybe clear the 7 figure mark in your retirement account. Achieving this task will give you the leverage and options to retire on time or most importantly, when you are ready to. This will increase your self esteem and your work performance. 

There are several factors that prevent Federal Employees from taking action, but I will only discuss one and that is our HOUSING CRISIS that we have in the US. 

Especially, if you live in the metropolitan areas such as Los Angeles, San Diego, San Francisco, New York, DMV area to name a few. If you live in these areas…

• You might find yourself with high levels of consumer debt (car loans, credit card debt etc) This will lifestyle will limit your long term wealth building 
• Lower savings & low investments in metropolitan areas and discretionary spending leave little room for wealth building, having financial security or being able to weather financial setbacks 
• You become dependent on your income. Government shutdowns affect this group the most. This brings on additional stress because you have to maintain this lifestyle. It also discourages you from pursuing entrepreneurial opportunities. You have to stay in a high paying job even if it compromises your health. 
• The root of this has to do with social comparisons and to keep up with peers and colleagues

Am I suggesting you move to somewhere outside of the city in a rural area or into another state, yes I am. It's something you should strongly consider.

When your priority is to become wealthy, you keep more toys in your toy box. You can increase the amount of toys you will accumulate in regards to investment returns. You will have overall peace, financial security & wellness. 

8 Steps to Building Wealth as a Federal Employee

Building wealth as a federal employee comes with a unique set of opportunities and challenges. Unlike the private sector, federal jobs offer a stable income, generous benefits, and unique savings and retirement plans such as the Thrift Savings Plan (TSP). However, navigating these benefits to maximize wealth accumulation requires knowledge and strategy. 

This guide will explore eight crucial steps federal employees can take to build wealth effectively. From making the most of your benefits, such as pension plans and health insurance, to strategic investment in the TSP, and understanding tax advantages, these steps are designed to help you secure a financially prosperous future while serving your country. 

Whether you're just starting your federal career or looking to optimize your financial plans as you near retirement, this guide is your roadmap to financial success as a federal employee.

1)  Identify Your Federal Income Tax Bracket 

Maximizing Retirement Contributions 

Federal employees often have access to retirement savings options such as the Thrift Savings Plan (TSP). Knowing their tax bracket proximity enables them to make informed decisions about maximizing contributions to tax-advantaged accounts or post taxed accounts Roth TSP. Contributing enough to stay within a certain tax bracket can optimize their tax situation both now and in retirement when they withdraw funds from these accounts.

Planning for your FEHB Benefits  

Federal employees may have the Federal Employees Health Benefits (FEHB) program, deducted from their paychecks on a pre-tax basis. Understanding their tax bracket proximity helps them assess the tax benefits of these deductions and make decisions about benefit options that minimize their tax liability.

Optimizing Tax Withholding 

Federal employees can adjust their tax withholding to align with their tax bracket. Being aware of how close they are to a lower bracket allows them to optimize their withholding to avoid overpaying taxes throughout the year, ensuring they have more take-home pay without facing a large tax bill at tax time.

2) Your Top Line LES Payroll Deductions 

Understanding Federal Employees' Top Line Payroll deductions is crucial for maximizing their Thrift Savings Plan (TSP) contributions and comprehending their Federal Employees Health Benefits (FEHB) health insurance premiums. 

The top-line deductions directly impact an employee's take-home pay, making it imperative for them to grasp how these deductions affect their financial planning. By comprehending the nuances of these deductions, federal employees can strategically allocate their income towards TSP contributions, thereby maximizing their retirement savings. 

Additionally, a clear understanding of these deductions allows employees to make informed decisions regarding their FEHB health insurance premiums, ensuring they choose the most suitable coverage without overburdening their budget. 

The difference between Gross Pay and Taxable Wages are Non Taxable Wages and Tax Deferred Wages. Non Taxable Wages is your FEHB Premium. Your Tax Deferred Wages is your TSP contribution. The more you increase these deductions, the less you pay in Income Taxes

Overall, familiarity with top-line payroll deductions empowers federal employees to navigate their financial responsibilities effectively, optimizing both their retirement savings and healthcare coverage.

3) Your Bottom Line LES Payroll Deductions 

Understanding your bottom line deductions is important for one reason and one reason only, so you can stop complaining. These deductions you are paying into are benefits that will reap sometime in the future.

Les go through each one,

Federal and State Taxes, these are the deductions that we want to reduce.

FEGLI Group Life Insurance is your Group Life Insurance that you elect to enroll in when you 1st begin Federal service.

Medicare is insurance that you pay into now. When you turn 65 years old you are eligible to enroll in Medicare A for free.

Retire, FERS is your pension contribution. When you retire you will be able to collect your Federal Pension based on your age and years of service. 

OASDI is your Social Security and Disability contribution. Your Social Security Benefit is another retirement check that you can claim once you turn at least 62 years of age. This is also your Social Security Disability contribution, so if you are deemed medically disabled you can retire. 

Your FEHB deduction is your health insurance premiums. This is one deduction that will reduce your Federal Income Tax liability.

Your TSP Savings is your contribution towards your Thrift Savings Plan. This is one deduction that can reduce your Federal Income Tax liability. 

4) What is Your Taxable Income 

Now that you have made the necessary adjustments to your TSP contributions and decided if you need to increase your FEHB premium. 

Lets check to see what your taxable income is? How far away has your income been reduced from your original tax bracket?

1. Subtract your annual TSP contributions from your base salary
2. Next subtract your annual FEHB premium
3. Now subtract your standard deduction 

Now let's review your taxable income

5) Adjust your Federal Income Tax Withholdings

So now that we have identified our taxable income, we need to adjust your tax withholdings. It is important to adjust your tax withholdings for the following reasons:

1. Accuracy of tax payments 

2. You're doing a better job of managing your cash flow

3. You avoid penalties being paid to the IRS 

 To figure out how much you will pay I would suggest contacting your tax preparer as your first option. Option 2 using a calculator online, if you can find one. Option 3 use chat gpt.