Amazon Is Your Frenemy

Let’s face it, Amazon is the store we all love to hate. If we look at Trailing Houses, Amazon is the source of all things good in the world, and the reason that many have massive credit card bills. You need it, you want it, and you wish you didn’t. It’s your very best frenemy. It’s ok – we’re all there with you.

I’m not saying Amazon is inherently bad, or good. It’s a tool – it does what its user does. That said, there are some hacks that make Amazon a bit friendlier to your wallet, while making your life hopefully easier.

Note: all links are referral links, because this is about Amazon, after all.

Amazon Smile

Before we go any further, I want you to update your default path to Amazon. No more shall it just be www.amazon.com. No. You are going to use your consumer habits for good. You, my friend, are going to go to smile.amazon.com. 

Amazon Smile allows you to send a (tiny) fraction of your purchases, including the first round of Subscribe & Save, to the non-profit of your choice. Personally, I support a local veterinary NGO in the country in which I work, but you can find anything on there.

Note: that a teensy tiny fraction of your spending now goes to charity does not mean that you can justify extra spending ‘for charity’. Nice try.

The 72 Hour Rule

<something annoying happens> “Ugh, this would have been so much better if I’d just had some fancy widget. I should go smile.amazon.com and buy it!”

We’ve all been there. Often. Most recently, I was exhausted, to the point where even going out to get food rather than cooking was just TOO MUCH. And I wanted grits – my comfort food of choice. So, of course, my exhausted self went online and looked up Quaker Cheesy Grits. Because, who doesn’t love cheesy grits? All I have to do is add water and I don’t have to even think about breakfast, though to be honest I think grits are an any-time food. Into my cart they went.

Normally, that would be it. $12 and a month later I’d have received a box of cheesy grits, not even remembered ordering it, and wondered why I thought I needed to order grits when I could get them, and cheese, locally.

But not now, oh no! Now, thanks to Mrs. Frugalwoods and her 72 hour rule article, while the cheesy grits still go into my cart, they stay there for a while – 72 hours to be precise. If that item is in my cart 3 days later, and I still want it, chances are it’s probably worth it. Otherwise, I delete it. This has saved me a lot of money since implementing.

I wholeheartedly recommend reading her entire article, as it’s well thought out and clearly articulated, but here’s the TL;DR: Online instant shopping makes it too easy for us to get things that we want but don’t actually need. By separating the time between when we want it and when we buy it, we can reduce the extra stuff we buy, save some money, and hopefully make our mailroom colleagues’ lives easier.

Camel Camel Camel

Not only is the name hysterical, but the site is a wonderful tool. In line with the 72 hour rule above, CamelCamelCamel helps you optimize the price you pay for purchases. If there’s something specific that you really want, you can track the price, looking at its historical price on Amazon. You can set a price threshold for something that you want, and it will send you an alert when the price drops to or below your set price. Very handy.

www.camelcamelcamel.com

Amazon Prime

Chances are, you already have Amazon Prime. If not, please checkout my referral link 🙂

Amazon Prime started out as a benefit for those who didn’t want to pay for shipping, and wanted a faster shipping service. That doesn’t really work for us (I love that DPO exists, but I don’t understand its timetables, or what happens in that vortex between Chicago and post), but there are a bunch of other features that Amazon Prime gives access to that, in my opinion, make Amazon Prime worth the price.

Amazon Video

Yes, if you were being super frugal you’d only watch AFN and local TV stations. But, let’s be honest here: that way lies madness. Or at least a high chance of having no idea what the cool kids on the FaceBooks are talking about with their fancy meme things.

While you probably also have Netflix, there are several shows and movies that are available only on Amazon Video. Take, for example, the new Jack Ryan, which has us all looking at our GSO and EXO colleagues in a new light. “State Department Supply Chain Logistician”….mhmmm…

While Netflix and normal Amazon Video pretty much have you covered, there are some shows, usually those currently playing in the U.S., that aren’t available on either. For keeping up with those, there is the option to add certain ‘premium’ channels. You can add HBO to watch Game of Thrones, or maybe STARZ to catch up on Outlander. Even better than with the cable packages you’d have to add in the U.S., you can subscribe to the channel only as long as you want to watch, and can cancel without hassle. Plus, the link there will give you a 30 day free trial – plenty of time to binge 🙂

Amazon Music

As part of the Amazon Prime subscription, you get access to the basic level of Amazon Music, which declares that it has over 2 million songs to stream, through the website, your Alexa, or an app for your phone. Personally, I use this a lot as I’m working out – I like to run to the 80s mix – and at work, when I put it on one of the many ‘new age/meditation/zen’ channels to provide white noise. I used to use iTunes radio for this, but I prefer the Amazon music app as it will allow you to downvote or skip as many songs in a row as you like without forcing you to listen to a certain number of songs, presumably because they’re not trying to sell you something as Amazon music was already included with your Prime membership.

If the basic package isn’t enough for you, there is also the option to add the wider Amazon Music Unlimited, which claims to have over 10 million songs. I realize I may be a bit of a stick in the mud, but 2 million has served me just fine.

Prime Reading

A fairly well-hidden feature of the Prime subscription is access to their Prime Reading library of Kindle books. While the library doesn’t include all available Kindle books, it does include a fair number of them, including the majority of the Lonely Planet travel books. Prime Reading allows you to check out 10 at one time for any period of time – they are automatically delivered to your Kindle device or the free Kindle app. I use it to help me plan trips, and to stock up on ‘vacation reads’ for the journey.

In addition to the standard Prime Reading library, there is also Amazon First Reads, which gives prime subscribers a choice of 2 free pre-release kindle books from the editors’ picks. The selection changes monthly.

Twitch Prime

For all you nerds out there, Amazon’s purchase of Twitch means that you can get one stream for free with your Prime membership via Twitch Prime. Personally, I’m a fan of Critical Role, but to each their own 🙂

Amazon Photo

In a bid to keep up with Google, Shutterfly, and others, Amazon has offered a fraction of their massive server capacity to their prime members, providing 5GB free of photo storage to each account. Users can upload photos to Amazon Photo via a phone app, or from their computer. Upgrades for more space can, of course, be purchased, and Amazon is starting to offer photo products such as wall prints.

Whole Foods

Of less value to those of us overseas, Amazon’s purchase of Whole Foods does provide a benefit for times like home leave, and can help stop Whole Foods from turning into Whole Paycheck, especially when you consider that you’re not getting your overseas bonuses on your forced vacation.

Having an active Prime Membership can get you access to special deals at Whole Foods as you shop. All you need to do is install the app on your phone, and it will provide a barcode that can be scanned at checkout. Further, if you purchase using your Amazon Credit Card, you can get 5% back, which is delivered to your online Amazon account for other purchases.

Subscribe & Save

Caveat: Online shopping through the DPO should not be used to replace your consumables shipment. DPO is highly subsidized and very expensive – buy as much as you can ahead of time, especially the heaviest things, and send it in your consumables rather than relying on Amazon and others to ship your supplies monthly.

That said, some times you don’t realize what you need until you’re there, or you need things that expire. For known, recurring needs, Amazon’s Subscribe and Save offers benefits. Subscribe & Save allows you to set up automated monthly shipments that allows Amazon to combine items into one shipment. For most items, there is a 5% price cut on the items you add; if you add 5 items or more to a monthly shipment, that increases to 15%. Shipment frequency can be adjusted per item, with the maximum gap between shipments set at 6 months. Further, if you find yourself accumulating an item, not using it up as you expected, you can skip or cancel your subscriptions easily.

So, what’s on my Subscribe & Save list? I use it for toiletries, some snacks, and my vitamins. I don’t have a lot of space in my current housing assignment, so I can’t get a lot of things at once. Plus, I look at the list each month and can skip things that I haven’t used up yet. It’s very flexible.

Wrap Up

I hope that this post has been handy for you. With our reliance on the postal service to provide our basic needs and a taste of home, Amazon can be a lifeline, or it can be the anchor dragging us down into debt. Taking full advantage of the services provided within your Prime membership, and remembering the 72 hour rule, can help you put Amazon to its best use for your overseas life.

Case Study 1: Me

While budgeting only on your base salary can seem intimidating, I offer you the following case study: Me, and my monthly budget plan. I am your average single FSO, I’m an FS-03-04 at the moment, living overseas. I have a mortgage back in the U.S., but I don’t have student loans, so YMMV (Your Mileage May Vary) on that. No children, one spoiled cat. Here is how I budget on my base salary.

What IS My Base Salary?

I’ve done a walkthrough on how to calculate your base salary, so I’ll shorthand here. My base salary, with Overseas Comparability Pay, is $89,609, which translates as $3,446 per pay period, or $7,467 each month, which is how I personally budget, though it does make things a bit odd looking at pay periods. Budgeting monthly makes my life easier as I use Mint.com, and it ‘thinks’ monthly.

Pay Yourself First: I max out my TSP ($1,584/mo), which brings my taxable income, on my base salary alone, to $70,609. On that, I pay $11471 in Federal Taxes ($956/mo). My state does not have state income taxes, though I do pay real estate taxes, which are bundled into my mortgage. I pay for my Social Security, Pension Plan, and Medicare as well from my salary. I also max out my IRA, and while I did that as a lump sum at the beginning of the year to make it something I didn’t need to think about, I do still mentally count it in my monthly budget.

Starting Monthly Salary$7,467
– TSP-$1,584
– Federal Taxes– $956
– Social Security– $365
– Medicare– $85
– Pension Plan– $80
– IRA– $500
MONTHLY REMAINDER$ 3,897

Where Does It Go?

As I mentioned, I am, I think, a fairly average FSO. Here’s where my monthly base salary goes, on average.

Monthly Remaining Base Salary$ 3,897
– Mortgage, Home Insurance, Real Estate Tax$ 1,200
– Utilities (at my house, but also Skype, etc.)-$300
– Shopping – $500
– Food/Dining – $200
– Personal Care – $200
– Health Insurance – $200
– Vacation Fund– $500
– Entertainment– $125
REMAINDER$672

A few notes:

  • Shopping – this is a catchall. I don’t have quite the Amazon addiction now that I used to, but my house is no stranger to the smiling brown boxes. I also have several subscription boxes that I love, including GlobeIn and InkJournal. All of that goes here.
  • “Personal Care” – this is basically my massage fund. Even though this gets reimbursed at least in part by my insurance, I like to track it.
  • Health Insurance – I have high option medical, dental and optical. I’m risk averse. I understand that there are FI arguments out there to skip high option and instead go for an HSA, but I’m not comfortable with that.
  • Food/Dining – YMMV a lot on this. Where I live now food is very cheap, and this is essentially used to spread out my consumables shipment and cover vacation eating 🙂 I’ve lived in other posts where this was around $500, between the cost of basic goods and the availability of delicious restaurants.
  • Vacation – I don’t spend $500 each month on vacations, but instead I set up a separate, online, high-interest savings account specifically for this bucket. Anything that doesn’t get spent during the month under this category gets moved to the bucket, and then spent all at once on my R&R. I love travel, and this is one of the few areas I’ve embraced “lifestyle inflation”
  • Entertainment – This is my Netflix, but also my video game addiction, movies, etc. At other posts, this has included sport fees, though you could separate those out.
  • This doesn’t include household help – I don’t have any at the moment but in the past this has been around $200.

You’ll notice that, at the end of the day, even all my budget categories don’t fill up my paycheck, and that’s only considering my base salary, not any incentive pay I may get as I move around. That ‘extra’ $672 serves as a buffer, and starts helping me meet my FI long-term goals. Right now, the $672 is helping me grow my emergency fund from 6 months to a year, in part due to the ongoing shutdown. Psychologically I need that more than I need a higher-yielding index fund investment.

I’ve mentioned multiple times throughout the blog that I use Mint.com. I set these individual budgets to reset at the beginning of each month, except for vacation, which rolls over with the prior month’s budget.

Very rarely do I max out any one of my budget categories, except for my mortgage, which is fixed. At the end of each month, I look at what’s ‘left-over’ and sweep it into one of my buckets, along with the additional pay that is coming from my incentive pay. All of my incentive pay goes towards FI goals. This includes paying my house off early (I have a low rate but I’d prefer not to have debt), boosting my emergency fund, and investing in low fee index funds. I don’t consider those bumps as ‘real’ – they mentally bypass my checking account and go straight to their destinations, mostly automated.

I hope this helps, and encourages you to give it a try. It can be done, and without feeling any hardship. I still take amazing vacations when I can, spoil myself with massages, and have far too many expensive hobbies (under shopping). I love my life, and the psychological buffer that being on the path to FI gives me. I hope this helps you get there, too.

Budgeting Within Your Base Salary – Step 1: What IS Your Base Salary?

I suggest budgeting within your base salary, as it’s fixed no matter where you are. From that base salary, after taxes, you’ll meet your basic needs, and pay yourself first – your TSP and your IRA. If you are chasing FI, the remainder, everything in your paycheck that is above that basic number, will go into low-fee index funds or other earnings vehicles.

Throughout this post I’m going to be working on the assumptions that you are J. Doe, a single, mid-level FS-03-01 for simplicity, but you can pop your numbers into the calculations instead.

What’s My Base Salary?

The first step, is figuring out what your base salary really is. The Department of State has a handy list of tables that are updated annually.

J. Doe, without taxes, without incentive pay, without COLA, makes $69,022 annually, or $2,654 per pay period.

As an FSO posted overseas (lucky duck), J. Doe makes what is called Overseas Comparability Pay, for an extra 18.81%, meaning that they make $69,022*1.1881 = $82,005 (this is before incentive pay percentages)

If J. Doe were posted in Washington, DC (they say we can’t avoid it…), they would get a single percentage bump to account for the expenses, etc. that one incurs in D.C. of 28.22%. So, they’d be making $69,022*1.2822 = $88,500 (there are no additional incentive pay percentages in this case)

What About Withholding?

Starting out at $82,005, we assume that J. Doe will be getting 1/26 of that each pay period, or $3,154, but that’s not actually the case. Several things get taken out of J. Doe’s paycheck before J. sees it in their account.

Thrift Savings Plan (TSP)

The TSP is the government’s equivalent of a 401(k), with different pools to contribute to. Contributions to the TSP are removed pre-tax, and thus decrease the salary that the government sees to tax. This is called decreasing your tax liability. Because J. Doe wants to decrease their tax liability, they contribute the maximum per year, which is $19,000 per year, or $730.76 per pay check.

Taxes

As mentioned above, J. is contributing $730.76 per paycheck to the TSP. This decreases J.’s tax liability by $19,000 annually, bringing their taxable salary to $82,005-$19,000 = $63,005

With that in mind, J. now needs to figure out their tax bracket.

For singles, the tax brackets for 2018 are as follows:

Lower LimitUpper LimitRateJ.’s CalculationWhat J. Pays in this Bracket
$0$9,52510%0.10 * $9525$950.20
$9526$38,70012%0.12 * (38,700-$9,526)$3500.88
$38,701$82,50022%.22*(63,005-$38,701)$5346.88
$82,501$157,50024%NA0
$157,501$200,00032%NA0
$200,001$500,00035%NA0
$500,00137%NA0
Total$9,797.96

So, Federal Tax alone, for a single FSO-03-01 stationed overseas, looking only at their base pay, will be $9,798 a year, or $377 per paycheck withholding. This will change in the case that J. Doe is married, filing jointly or separately. At the end of the year, J. will also likely get some tax credits back via the standard or itemized deductions, and any other extenuating circumstances. For now, however, that’s what the standard withholding would take.

NB: Keep in mind that this is based only on your base salary. Your actual pay stub will vary to include your overall pay, with incentives and COLA.

For those interested in other options for taxes, AFSA provides a fairly handy Tax Guide.

Social Security

Per the IRS, the current Social Security withholding rate is 6.2% for the employee, which is matched equally by the employer. So, looking only at the base salary of $63,005, 6.2% annually is $3,906, or $150 per paycheck

NB: Keep in mind that this is based only on your base salary. Your actual pay stub will vary to include your overall pay, with incentives and COLA.

Medicare

Per the IRS, the current Medicare withholding rate is 1.45% for the employee, which is matched equally by the employer. So, looking only at the base salary of $63,005, 1.45% annually is $913, or $35 per paycheck

NB: Keep in mind that this is based only on your base salary. Your actual pay stub will vary to include your overall pay, with incentives and COLA.

Foreign Service Pension System

As I describe in another article, the U.S. Government is one of the few places that still has a pension system. It pulls out 1.35% of your basic salary, so that becomes $851 annually, or $33 per paycheck

NB: Keep in mind that this is based only on your base salary. Your actual pay stub will vary to include your overall pay, with incentives and COLA.

Pay Yourself First

While this is not an automated withholding, you should also be paying into your IRA, up to the annual limit, which is $6,000 in 2019, according to the IRS. Whether or not you decide to go for a traditional IRA vs. a Roth, and/or whether you can get tax rebates for that is beyond the scope of this article, but Motley Fool does a good walkthrough using 2018 numbers.

Even if you decide to front-load your IRA, just to “get it out of the way,” we will distribute that over 26 pay periods, for $230 per paycheck.

What Does That Leave for J. Doe?

With a base salary of $82,005, J. Doe’s biweekly paycheck starts out at $3,154, from which they pay TSP, Federal Tax, Medicare and Social Security

Starting Base Salary Paycheck$ 3,154
– TSP-$730
– Federal Taxes – $377
– Social Security– $150
– Medicare-$35
– FSPS– $33
– IRA-$230
REMAINING: $ 1,599

So, that is $1,599, per paycheck, that J. Doe has to spend on whatever they need or want for two weeks. Their taxes, and their future, are already calculated for.

That’s HARD.

This may be difficult to do when you first start out, but I promise you that it can be done. I’ll be doing a walkthrough of my own later, as well as for those who have families.

If you’re having trouble, here are a few wiggle space calculations to help you get started.

  1. If you can’t fit your budget on your base salary, can you fit it on base salary + COLA? COLA is something specifically added to help buffer your expenses when you’re posted to an expensive post.
  2. Can you fit your budget on your base salary if you pay your TSP and/or IRA out of your incentive pay + COLA? That would mean that J. Doe started with $2,573 per paycheck.

As with everyone on the path to FI, the idea of the FS Path to FI is to optimize your spending and your budget. If you start out using these, it is in your best interest to try to identify those areas of spending that aren’t optimal, and reduce them, if possible, to be within your base salary. Every extra dollar that you can squirrel away into a passive income fund will bring you one step closer to FI.

Understanding Your FS Benefits

You know that being an FSO comes with a lot of benefits, but how do you find them, and know what they mean for you? Thankfully, the Foreign Service Pension System (FSPS) provides an annual update on the benefits you have received. It’s the PBF10 form, and can be found in your HR system. Here I’ll walk you through it.

First, though, I want to highlight the caveat that the PBF10 gives you: “Benefits amounts shown in this document are estimates. If you are considering retirement please seek more precise information from your employing organization.” Seriously, double check with an HR professional before pulling the FI parachute. (I am not an HR professional).

The Box on the 1st Page

On the top right, you’ll find a box that has some very important numbers.

  • Retirement SCD – This is the date that the government is using to compute your retirement. It reflects the total amount of time that the USG thinks that you have been working for it. This is the date that they will use when determining if you’ve hit your 20 years for full pension.
  • Leave SCD – The length of time that you’ve been in service also dictates how much leave you get per pay period. Make sure that you’re getting your time off! This is doubly important as it can help you with ‘retiring’ early either through selling your leave back, or tacking it on to the end of your service to hit your 20 years.
  • TSP Contribution Amount– This is the amount that you’re contributing PER PAY PERIOD. Make sure that this jives with how much you think you’ve been contributing – if not, talk to your HR specialist. Ideally, this amount is 1/26 of the max that you’re allowed to contribute to a 401k – $19,000 in 2019, so it ‘should’ be $730.

The Grey Sections

Pay

This number is your base pay – the pay level that they are using to calculate from. If you are overseas, this will include your overseas comparability pay bump of 18.81%. It does not reflect any of the bumps you will get from locality, danger, or COLA. This is not what you actually got paid this year.

Total Compensation and Costs

This is what you actually got paid this year. It includes varying overseas pay bumps, pro-rated for time that you spent in individual posts. It does not cover any additional benefits, such as employer contributions to health insurance, life insurance, TSP, or pension.

Leave

These are your leave balances as of the date of the report. Make sure that they match with what you see in your HR system. Also, keep a mental note of your sick and annual leave if you are getting close to FI, or are getting burned out. These give you an idea of how much leave you can take to either reset your sanity, or provide an ‘early’ retirement.

For example, if you’re close to retiring and you have 176 hours of leave, that is, on average, about a month of paid vacation. So if your 20 year retirement date is December 2019, you could stop working November 2019 and use up that leave. This is something you’d need to clear with your boss & HR, of course, but it should be allowable.

Federal Employees Health Benefits (FEHB) Program

One of the benefits of working for the government is access to very niche health insurance packages. Here is where you see how much you, and the government, have been paying to keep you covered. The values will vary, but essentially you’re paying somewhere between 20-25% of your health care coverage, with the rest covered by the government.

Your FEHB Contributions are Pre-Tax. What this means is that the money is pulled out of your salary before that salary is used to compute Medicare, Social Security, or income taxes. So, you’re effectively lowering your tax basis while ensuring you’re staying healthy. Not Bad!

For those close to FI, please read carefully the side block:  “To continue health insurance coverage in retirement you must retire on an immediate annuity and have been covered for the 5 years immediately before retirement, or since your first opportunity to enroll, if fewer than 5 years.” My reading of this means that to stay covered you have to take the ‘normal’ retirement at 50 years old and 20 years of service, but that may not be the case. Make sure that you work with your HR team as you’re retiring if you want to stay covered.

Federal Employees Group Life Insurance (FEGLI) Program

In addition to providing you health coverage, another benefit provided by the U.S.G. is life insurance, which essentially means that your survivors (usually your relatives) will have some money to cushion your loss, and help them get back on their financial feet if you are the primary breadwinner.

There is a lot of information in this block of the benefits statement, and it will vary according to your own circumstances. Of most interest to the FI folks is the section on “Coverage in Retirement after Age 65″… but who’s going to retire at 65? We’re all out of here at 50, max, right?

To be eligible for life insurance coverage during retirement (including FECA benefits), you must retire on an immediate annuity and be enrolled for the 5 years immediately before retirement or since your first opportunity to enroll. Again, as with my reading of the health insurance, the phrase ‘immediate annuity’ seems to require that you’re retiring at 50 with 20 years, which is the standard retirement figure for FSPS.

Thrift Savings Plan (TSP)

This is your 401(k) statement, essentially. It shows your contributions on both the bi-weekly paycheck level, and at the annual. The first thing that you want to ensure is that your Employee annual contribution is maxed. In 2019, the maximum 401(k) contribution is $19,000, so your employee contribution ‘should’ be $730 per paycheck.

These numbers change annually, so be sure to check with the IRS to make sure you’re putting the most in that you can.

Now, take a look at the Agency match portion. The Agency generally matches your contribution up to 5% of your Base Pay (the first grey box not your total compensation). This does not count against your contribution limit – it is ‘free’ money.

As I intend to discuss in another post, there are strong arguments for ONLY contributing up to that 5% match in the TSP, and then using the rest of the buffer between that 5% and the max for the 401(k) contribution in a private investment vehicle. For example, if you look at an FSO at FS03-01, they have a base salary of $82,005. Annually, the Agency will match 5% of that, or $4,100. Hypothetically, the employee could contribute only $157.70 to the TSP per pay check ($4,100/26), to get the full match, and then contribute the remaining $14,900 ($19,000 max – $4,100 match) to a vehicle of their choice under the pre-tax 401(k) rules. This is more complicated, but allows for more control, and potentially more growth.

The benefits statement also provides you with some nice numbers. First, the balance of your TSP account at the end of the year. Here’s hoping there are lots of digits in yours! Second, it makes some assumptions to calculate how much you would get in retirement. It assumes that:

  • You continue to contribute at the same rate until you can retire
  • That the returns average 7% per year
  • That you wait to retire at the 50 years old/20 years of service threshold.

Using that (hopefully very long) number, they calculate how much you could receive monthly for life as an annuity. Again, they assume you retire at 50, minimum. For me, the monthly annuity at 50 is less than half of the monthly annuity at 60. This is due to the miracle of compound interest. But, the real question is, is the extra money really worth the extra 10 years of your life? If you’re here, the answer is likely ‘no’, but it is something to consider when making the transition to FI.

Benefits Under the Foreign Service Pension System (FSPS)

Another benefit of U.S.G. service is access to a pension plan – something that is quickly dying in the private sector. I’ll go in depth into the FSPS in a separate post, but in general, know that the pension calculations assume that you will not retire until a minimum of age 50 with 20 years of government service.

The amount of your pension is based on two factors

  • The average of your highest three base salaries (provided by FSPS)
  • Your length of service when you retire (provided here by FSPS)

The value of your pension is calculated by multiplying the average salary by a percentage based on your length of service. For each year up to 20, you get 1.7%. For each year after 20, you get 1%. So, if you retire at 25 years with an average high three of an FS03-01 (let’s hope not!), your annual pension will be $82,005 x ((20×1.7%)+(5×1%)) = $82,005 x 39% = $31,982, or $2,665 per month. This is in addition to the TSP payout.

If, by the time you hit 50, you don’t have 20 years, you are not ‘allowed’ to retire with the full annuity. You can work until minimum retirement age (55 or 57) as long as you have 10 years of service, but they’ll take away 5% per year that you’re younger than 62 (mandatory retirement age).

Social Security Benefits/Medicare Benefits

In addition to your TSP and FSPS annuities, you will also be eligible for Social Security and Medicare when you turn 62. It would make more sense to work with your HR person or the Social Security Administration on this if you have questions; the details provided here aren’t particularly detailed. You can contact the Social Security Administration at 1-800-772-1213.

Benefits Under the Federal Employees Compensation Act (FECA)

As a USG employee, you have benefits related to disability and death resulting from on-the-job incidents. As with the Social Security and Medicare benefits, these are topics best delved into with your HR team.

If You Leave the Federal Government Before You Retire

This box is actually mislabeled. It should be “If you retire from the federal government before you are 50 years old with 20 years of service”. I guess that was too long.

First it covers your pension (FSPS which is a variant of FERS). It lays it out fairly straightforwardly.

You may leave your retirement contributions in FERS [FSPS]. If you have at least 5 years of service covered by contributions, but less than 10, you may apply for a deferred annuity at age 62. If you have at least 10 years of service covered by contributions, you may apply for retirement at the Minimum Retirement Age (MRA), which is based on your date of birth. Simply put, if you hit FI, and decide to bail prior to 50 years old and 20 years of service, your benefit will change. If you have 5 years, you have to wait to receive anything until you hit Mandatory Retirement Age (62). If you have more than 10 years, you can receive benefits at the MRA, which is 55 or 57 depending on your birth year.

If you are younger than age 62 when you begin to receive benefits, depending on your age and length of service, your benefits may be reduced. So, in addition to not being able to receive benefits until at least 55 based on the above calculations, you will also be receiving less (which is logical – you put less in).

You may also apply for a refund of your retirement contributions. If you do so, however, and are reemployed by the Federal government, you will not be eligible to receive benefits based on service covered by the refund. Essentially, cashing out resets your SCD, and restarts your government service calculation. If you’re not coming back, this may make more short term sense, but often a lump sum payment makes a lot less sense than leaving it in there. YMMV.

Individuals who are subsequently reemployed can make a redeposit of the amount refunded, plus interest, and to have credit for the service reinstated.  Essentially, you would be buying back your service, much as one does to get their Peace Corps or Military service credited when you first join the Foreign Service.

Summary

I hope this walkthrough helps you sort out your Foreign Service Benefit package. If you have any questions, please reach out, and I’ll do my best to answer them, or point you in the direction of someone who can.

Stepping Stones on the FS Path to FI: Understanding Your Pension

The Foreign Service Pension System (FSPS) is one of the spectacular benefits of the Foreign Service. In a world where pensions are going the way of the dinosaur, having a known annuity, in addition to any investments you have, and in addition to Social Security (which will hopefully still be there when you need it), is an incredible bonus.

What is the FSPS?

There are actually 3 different types of retirement pensions available to the Foreign Service:

  • FSPS – the Foreign Service Pension System;
  • FSRDS – the Foreign Service Retirement and Disability System;
  • FSRDS Offset – the Foreign Service Retirement and Disability System Offset;

Barring injury or extraordinary circumstances, most FSOs will fall under the FSPS. The FSPS is a branch or version of the Federal Employees Retirement System (FERS), which is different than the system for civil servants. This post also assumes that you joined the FSPS after 1983, as that’s when rules shifted significantly for the pension system.

With those caveats, the FSPS is a standard pension plan that both the employee and the Agency pays into every pay check. The money is used and invested to generate income and growth, and to pay for annuities (a fixed amount received monthly after retirement) for retirees from the program.

What Does the FSPS Cost?

Participants currently contribute 1.35 percent of basic salary to the FSPS.  The employing agency contributes an actuarially determined amount to reflect “normal cost” (less the employee contribution).

3 FAM 6110.

The FSPS is one of the (many) payroll pullouts you will see on your paycheck. To sort out what the FAM means, look at it this way. First, the people running the FSPS figure out how much you should pay in now to cover your expected cost to the FSPS later (‘actuarially determined amount’). Then, you pay 1.35% of your base salary, not including any of the locality bonuses. Any difference between that 1.35% and the amount the FSPS needs to keep running, is paid for by your agency.

What is this ‘normal cost,’ you ask? According to Note 10 of the
FY 2014 Department of State Agency Financial Report , “The Plan uses the aggregate entry age normal actuarial cost method, whereby the present value of projected benefits for each employee is allocated on a level basis (such as a constant percentage of salary) over the employee’s service between entry age and assumed exit age. The portion of the present value allocated to each year is referred to as the normal cost.” In 2014, this ‘normal cost’ for the FSPS was 25.07%

So, what does that actually mean for you? Let’s say that you are an FS-03-01. Per the FS Pay Scale, you are making $69,022, pre-tax, no bonuses. That means that, at least in 2014, the following went into the FSPS to be used for your pension:

  • $932 from you
  • $16,372 from the agency

For a grand total of $17,304. This money is expected to grow over time, hopefully outperforming both inflation and the draw down that you will eventually take, to ensure that there will be far more than $17,304 when you retire. The miracle of compound growth.

Who is Eligible for the FSPS?

Coverage

FSPS eligibility is covered by 03 FAM 6120, which states:

To be covered under FSPS, an individual must: (1)  Be an individual identified in section 803 of the Foreign Service Act of 1980; (2)  Be covered by Social Security; and

(3)  Have retirement deductions withheld from pay and have agency contributions made to the Fund.



Retirement Age

Section 811 of the Foreign Service Act of 1980 sets the ‘normal’ retirement age at 50, regardless of what your minimum retirement age would be elsewhere (which can get confusing when you look at the larger set of data on government retirement plans). Section 812 covers mandatory retirement at 65 for the Foreign Service.

Early retirement

Section 810 of the Foreign Service Act of 1980 states:

Any participant who voluntarily separates from the Service after obtaining at least 5 years of service credit toward retirement under the System (excluding military and naval service) may upon separation from the Service or at any time prior to becoming eligible for an annuity elect to have his or her contributions to the Fund returned in accordance with section 815, or to leave his or her contributions in the Fund and receive an annuity, computed under section 806, commencing at age 60.

In short, this means that if you decide to retire early you can either a) wait until age 60 to start pulling a pension from the system, or b) pull out everything that you’ve pulled in, apparently without any of the interest that money would have accrued, and plop it into your own retirement funds, presumably taking a tax hit on the money removed.

For my money, if you’ve been in for a while, it would make more sense to leave the money in and take the pension when it’s available. Or, work to 50 and make the calculations very simple. But, if you wanted to work to 50 you probably wouldn’t be here 😉

How Do I Calculate My Pension?

Before we can calculate your pension, we need a couple of numbers: your SCD and your ‘high-three’.

The SCD or TIS

If you look on your FSPS benefit statement, in the boxes on the top right you will see something that says SCD. This is your Service Computation Date, which is related to your Time In Service. Essentially, the USG smooshes all of your service together, and subtracts it from the current date to get the SCD.

For example, maybe you worked for 2 years for the FS in 2008-10, then took a break for a couple years, then rejoined on January 1, 2019. Your SCD is not going to be 2008, nor is it going to be 2019. Instead, they will subtract the 2 years from 2019, and give you a SCD of January 1, 2017.

To calculate your TIS, which is what’s used to determine the multiplier for your annuity, you subtract the SCD from your retirement date. In the current example, if you proceeded to work without another break until 2030, you would have 13 years of service instead of 11.

NB: IF YOU SERVED IN THE PEACE CORPS, BUY YOUR SERVICE BACK!! Time spent in the Peace Corps does count against your Time In Service, but because Peace Corps doesn’t take PSPS/FERS deductions from the laughably small volunteer paychecks, getting that time to count requires putting in the funds that would have gone in during those years, along with the interest that would have accrued. Don’t worry, the amounts themselves are pretty small – consider how much you were paid at the time. While this can be an annoying chunk of change that you didn’t budget for, the payout is likely much greater when you consider that your annuity will increase by between 2%-3.4% of your (much) higher salary at retirement age.

The High-Three

The ‘high-three’ is fairly easy to calculate, if you know what it is. Put simply, it’s the highest three consecutive base pay years. Usually, this is the last three years you spend at the agency. For example, if you retired at an FS-01, and your last three years were at steps 08, 09, and 10, you would have made $129,288, $133,167, and $136,659 for an average of $133,038.

The Calculation

Participants who are at least age 50 with 20 years of service receive a basic annuity of 1.7 percent of high three basic salary for the first 20 years of service and 1 percent of high-three basic salary for service over 20 years.

3 FAM 6110

Let’s use the scenario above, where you retired at the top of the FS-01 bracket, with a ‘high-three’ of $133,038. You’ve served the USG for 25 years, according to your TIS/SCD. Here’s what you would make:

  • 20 years x 1.7% = 34%
  • 5 additional years x 1% = 5%
  • Total: 39%

That 39% is then multiplied by the high-three, giving $51,885. That is how much you would receive, annually, from the FSPS. In the SCD example on buying back Peace Corps service, $2,661 of that, annually, comes from that transaction.

In calculating your FI number, the simplest way is to subtract it from your annual expenditures. For example, if your annual budget is $100,000, your pre-pension number would be $100,000*25 = $2.5M. However, factoring in your pension your FI number would be ($100,000-$51,885)*25= $1.2M. Quite the plus up on your path.

FAQ

What rules govern the FSPS?

The FSPS is governed by the Foreign Service Act of 1980 and 3 FAM 6110. This chapter of the FAM covers all things “FOREIGN SERVICE RETIREMENT AND DISABILITY SYSTEM AND FOREIGN SERVICE PENSION SYSTEM”. It’s part of 3 FAM 6000, which covers retirement in general. These are the chapters that I used to put together this article.

FAM chapters can be updated; the information provided here was valid as of January 2019. Please double check the FAM before making any final decisions on FI based on expected pensions.

Stepping Stones on the FS Path to FI: Make a Budget – in Local Currency

As Benjamin Franklin put it, “If you fail to plan, you are planning to fail.” Budgets are key to getting on the path to FI, whether you’re FS or not. As for why you should do all or part of your budget in the local currency, the short answer is that people are lazy at math when we really want something, so we often round down in our heads as to the true cost of things. Putting things you buy on the local economy in the local currency helps keep you on track.

Step One: Know Where You’re Starting From

Living an FS lifestyle is pretty grand, but it can get pretty pricy without warning. The first step to understanding how to get from point A to point FI is getting a better understanding of point A to begin with.

Before you start making budget buckets, track your spending for a week, or a month, to see where the money goes. Track Everything. The mortgage for the home in the U.S. if you have one, the Amazon shopping (I see you, Trailing Houses), the meals out, the groceries, etc. The really delicious cheese and the ‘I couldn’t help it they followed me home’ local handicrafts.

For some items, like consumables, you’ll need to ballpark your total spending and divide it over the length of your tour. Those packets of Kraft Mac & Cheese and Ghiradelli brownies didn’t come as part of your welcome kit! (If they did, I want your sponsor, please). If you buy your fuel from the Embassy rather than the local market, put that in there, too, averaging how many fuel tickets you go through per month, and how much that costs.

At the end of the period, take a look at what you’ve spent. Are you within the base salary? Are you within your base salary + COLA? Are there certain items that you are spending an exorbitant amount on? It’s ok if there are – at a post in West Africa I discovered that a quarter of my food spending would go to cheese if I wasn’t checking myself. The trick is knowing that you’re doing it, and reminding yourself, the next time you’re at the cheese counter and the chevre is calling you, that you have better uses for that money, or at least you could probably survive on a couple hundred grams, rather than the whole kilo. Probably.

Knowing where you currently spend will help with…

Step Two: Wrangle Yourself a Budget

Now that you’ve found where the money is going, we’re going to find a way to make it fit into our new lifestyle, and new goals. You’ll want to divvy up your spending into simple to track categories. Food, Car, Entertainment, etc. Personally, I use Mint.com, but there are a million apps and spreadsheets and ways to track your money. Do what works for you, but do it, and stick to it.

As I discuss in another post, for me, the best ceiling limit for your budget is your base salary, plus COLA if you need it. If you can’t get there yet, don’t worry, but that should be your goal. Look for areas to trim, and see if your purchases are things you do because you value what you’re purchasing, or just because it was there and you had the funds available. Part of the path to financial independence, for everyone, not just FSOs, is reducing unnecessary expenditures, which in turn reduces the amount of time and savings needed before you get to Financial Independence.

Make sure that you’re including space in your budget for your Individual Retirement Account (IRA) and your Thrift Savings Plan (TSP). Yes, you can contribute to an IRA in addition to the TSP. As of 2019, the annual contribution limit is $6,000 ($7,000 if you’re over 50) for the IRA and $19,000 (with catchup contributions of an additional $6,000 if you’re over 50). Monthly, that works out to $500 for the IRA and $1,583 for the TSP. This can seem steep, but you should be pulling the TSP funds out of your every pay check ($730.76 per pay period) so you don’t even see the money (and accidentally spend it). Yes, there are potentially better opportunities for the money once you’ve met the employer match, but that’s for another time.

Most people would stop here. You’ve tracked your spending, you’ve set yourself a budget that keeps you within your means. You’re all set. For FSOs, however, there’s one more step.

Step Three: Budget in Local Currency

Many of the items you’ve budgeted for are likely things that you buy on the local economy. Your fresh groceries, your cab fare, salaries for any hired helpers you may have (this is not a slight, I love having a housekeeper to make sure things run right and to be there when maintenance needs to fix something).

Identify those categories, and, at the beginning of every month, figure out what that budget bucket amount is in local currency. I use Xe.com, which has a handy app as well that you can install on your (personal) phone.

Why do we care what the local currency value is? Because, if you’re anything like me, you’re not interested in doing precise math on the fly. You say, oh, that carpet/picture/doll/jewelry/gadget is only 700 francs, there are 70 francs to a dollar, so that’s $10, which is precisely my budget. Which is great, until you realize that the currency when you pulled it out was actually 60 francs/$1, and now that item is $11.66, and with enough of those you’re over budget in every category. Knowing instead that you have 600 francs to spend that week on widgets helps keep you on track and within budget.

I hope this helps you, and please, if there are points of clarification or additional information that you’d like, reach out in the comments!

Welcome to FS Path to FI

Hello, and welcome to my new site, the Foreign Service Path to Financial Independence, or FS Path To FI for short. I’m a Foreign Service Officer on the path to Financial Independence myself, and I’d like to share my journey with you, and hopefully help you take advantage of the array of benefits that the Foreign Service life provides for those on the FI path

Acronyms!

You wouldn’t believe I worked as a Foreign Service Officer if I didn’t use acronyms, right? Let me define a few at the get-go, more later. If it comes to the point where I need a glossary, I’ll know that I’ve truly succeeded in life.

FI: Financial Independence There are a lot of definitions out there, and everyone’s personal definition will vary. Essentially, you have enough money coming in, be it from pensions, investment vehicles, side hustles, real estate, black market dealings, or all of the above, that you could support your lifestyle without your job. FI does not mean you have to quit your job, it just means you could if your job pissed you off enough. It’s the FS, you know that could happen

FS: Foreign Service In this case, I’m talking about the Foreign Service branches of the U.S. Government. A lot of what I’m talking about may be relevant to other U.S. branches, but there are some things that are unique to the FS. You’re more than welcome to take advantage of this site if you’re not FS, but YMMV (Your Mileage May Vary)

FSO: Foreign Service Officer This is anyone working in the Foreign Service directly. Being an FSO generally means that you are hired on a permanent basis with the U.S. Government in a branch that has FSOs. There are other hiring mechanisms, but I’m not as familiar with the benefits available to them… yet…

About Me

I’m going to keep this vague as, while I love my job (now), the mere fact that I’m writing a blog about how to make sure that I don’t need my job to survive could reflect poorly on my annual evaluations. Suffice it to say that I’ve been an FSO for just shy of a decade, that I currently live overseas, and that I want to share my journey towards FI with you, in the hope that I can share some tips and tricks that may prove useful to you as well.