#102 Key Things Advisors Wish Their Clients Knew

Micah Shilanski  01:02

Welcome back to the Plan Your Federal Retirement podcast. I’m your co host, Micah Shilanski and we have a very special episode today because as we’re recording this, we are in the heart attack season. And this is a planning fees that we really dive into deeply with clients. And so we wanted to have a good episode and talk to the other advisors on our team that kind of all come together. What are some themes? What are the things we’re seeing with clients, with our federal employees, whether they’re working or they’re retired, and they’re things that are coming up right now. So we got a great crew of advisors on here to kind of go through with everything, and I’m sure we’re all going to have great things to say. So, listeners, please forgive us when we probably jump in and over talk each other, we’ll try to limit it but there’s so much great information to share. So, to start it off, we have the legendary Floyd Shilanski! Pops, welcome back to the pod.

Floyd Shilanski  01:50

Thank you, sir. Pleasure to be here.

Micah Shilanski  01:52

Awesome. We also have from Washington – Christian Sakamoto, which our listeners know. Christian, how’s it going?

Christian Sakamoto  01:58

Micah, I’m very well, a little under the weather, but getting better feel much better. So hopefully I is well up there in Alaska.

Micah Shilanski  02:05

Perfect. So getting out is that like April 15 is tax time is coming you’re gonna get better and better is that’s closer or…

Christian Sakamoto  02:12

Sure! Hope it’s sooner than that.

Micah Shilanski  02:13

Fair enough. Fair enough. And then also from Alaska, we have JT Ferrin. Thanks JT for joining us.

JT Ferrin  02:18

Thank you Micah, I’m excited to be here.

Micah Shilanski  02:21

We spent I don’t know how many meetings a day that we’re having right now as a team. But we spent a lot of time this last week in front of clients helping solve real problems, which gets us excited, right? This is what we love. We love client questions to be able to come in and say how do we improve your life? How do we improve your situation? And really get that roadmap out there for your success? And pops, one of the things you taught me so long ago, and it’s still true today, so this is me saying my dad was right, I guess right, but it’s still true today is cash flow is the heartbeat of retirement. 

Floyd Shilanski  02:54

In 50 years we’ve been doing this is that, you know things with cash flow gets tight, communication gets tight, and then relationships with communication gets tight. Things get kinda rock. Alright, and that will we all predict cash flow, is so important. And one of the nice thing about the Federals, or the Feds is and we have predictable pensions, we have predictable TSPs, we can actually do it, what we call referred to as a retirement timeline, how the funds are gonna come in, or diminish, or increase. Love the timeline, because now becomes calculable. Right? I don’t have to sell the house because of this. I don’t have to do that. Because here’s the income. Here’s when social security clicks in, here’s how we’re going to phase this thing out. The biggest few that I see so many times, with especially with our Feds, life expectancy. And that’s the real key is you told me that you’re gonna die. I tell you how you spend your money. The problem is we don’t know when the COD pops up, right, Micah?

Micah Shilanski  03:52

That’s 100% right, right? Not all of us on our birth certificates had that COD right? For those listeners that are may be new to the pod, that sounds crap out date, right? How long are we going to live? And as cashflow is the heartbeat of retirement, it all starts with how much are we spending today? And that can be a hard question sometimes to answer, and I’ll say that sometimes clients resist kind of coming in and wanting to chat with us because they don’t know the answers to these questions. Well, great news, that’s our job as advisors to help answer what some of these questions are. And it’s how we’re going to be spending our money in retirement. In fact, Christian, you and I were talking before we went live about it’s not just the cashflow of like day to day expenses we need to pay for, yes, we got to take care of those, but what about those extra things we want to do in retirement? So, what’s an example of something we’d want to do in retirement that’d be extra. How do we think about that from a cash flow perspective?

Christian Sakamoto  04:43

Yeah, Micah, so the biggest example and one that came up a couple of times just this week with clients, was when they retire, one of them is and one of them is planning retirement would be their travel goals that they have. And so going on these different vacations, which I’m very much encouraging them to put a list together of all the places they want to travel to, when they want to go, how long they want to go, who they want to go with, right? Start visualizing what their retirement goals are, especially when it comes to travel. So, that is one in particular as it relates to cash flow is how do we plan for that when my normal day to day expenses are x and now I’m going to increase it because of all the different travel goals, now it’s going to go to Y. How are we going to get that that difference accounted for? And so, good news is, we came up with a good plan. And looking at it and with what Floyd mentioned, looking at your awesome fixed income that you have between your pension income, eventually what Social Security will be and then filling that gap with different investment income, right, for anything that we’re short, and there’s going to be a typical projection to say okay, normally this is how much we could spend in our retirement years. But if we know we’re going to be traveling a little bit more for a little bit longer, we need to have a goal to be able to replace that income for maybe a brief period of time while we’re in our go-go years, so to speak, of our retirement. And so, what I did was I drew out that retirement income timeline to show what that looks like, and to show them okay, these years we’re taking out more money and then after this period, then is going to look a little bit different and it was really pretty much appreciated to see okay, visually, where’s this money gonna come from? 

Micah Shilanski  06:41

Christian, I really liked that right now we have a tool, right, to help visually to illustrate it, which is great, but it’s also the aspect of saying how is retirement going to be different? And spending is different as you’re alluding to in retirement with cash flow, because when every day is a weekend, how are you going to spend your money? And it’s kind of a good pause moment that says, Huh, what I’m not going into work every day, where do I want to be? How am I going to spend that money? And to answer your question, where’s that going to come from? Now, Christian question for you. That was an example that you gave for kind of travel. But, what if a client had different, or larger expenses that were kind of coming up with the same concept. Could you use that same theory in order to answer you know, other cashflow questions that client might have?

Christian Sakamoto  07:23

Absolutely! Right. And so, biggest thing is going to be developing that timeline. You have to come up with a distribution rate when it comes to your investments, right? We have to have some certain set of rules that we have to follow to make sure we’re not going to run out of money post retirement. That’s probably the number one goal that we’re solving for with our clients is making sure we don’t run out of money. So, as long as we develop those principles, then you can apply that for a travel goal, you can apply that for moving, if you’re going to be relocating in retirement, you could be doing that for different house projects. Maybe it’s buying a car. All of these are similarly related to each other. You just kind of have to make sure you have the right rules set in place. So you don’t run out of money in retirement. 

Micah Shilanski  08:08

Yeah, right. As we tend to say – nobody wants to go back to work in retirement when they’re 80 years young. So what’s that plan that you’re going to have in order to keep up the cash flow? Now, pops as we go through and we talk about cash flow, the greatest expense any of our clients are going to have almost across the board is something they’re not even thinking about in retirement time. Now our listeners are, because they’re pretty astute and they understand how these things are going on, but so many times we’re talking to people and they don’t get the things that are coming up, that largest expenses they’re going to have, and you know what it is? It’s your family! Well, not just your family. It’s your aunt. It’s that favorite aunt IRS, which is so expensive in retirement. Right, dad?

Floyd Shilanski  08:50

You know, that’s exactly right. How many times and you’ve heard me say this over and over and over. The best retirement plan is the check to who bounces.

Micah Shilanski  09:00

The undertaker, but he didn’t like that very much. 

Floyd Shilanski  09:06

You know, and then that’s back to that question about the COD date. If we know that date we’re going to expire, it’s easy to backfill. The real question is today with artificial limbs, surgeries, lifestyle changes, better lifestyle changes, if you will, the actual timeline is growing. Isn’t it? And also, how many years ago was it that we talked to that group of Centurions that the average age was like 105? Hard to even get your head around. But with lifestyle changes and all, we are living longer. And so many times when we talk to our friends, they say well, I know Joe, Joe retired, in two years later, he died. So I want to spend all my money. One of the things that I really liked to see people, and I tell them every day, we don’t compare you with Joe. We don’t compare you with someone else the same age We compare you with you. Your lifestyle, your expenses, the things you want to do is not like everybody else. So the customizing the retirement timeline. Customizing what you’re doing is just so important. And you know if you’ve got $1.98 left, put it in your will to give it away to charity.

Micah Shilanski  10:14

Pops, you’re just again spot on on this right. It’s about customizing it to your solutions, whether it’s your cashflow, your expenses, your lifestyle, etc. Don’t compare yourself to the Joneses. You’re setting up for someone else’s retirement plan, and you’ve got to look for your own now. The one thing with taxes I’m gonna say is so many people and again, our listeners are fantastic. You guys are forward looking. But so many of people out there with taxes are looking in their rearview mirror, they’re looking about last year when they’re looking at their tax return. What’s that? Well, that’s important to do, JT it’s almost a little bit more important in our opinion. Right to be looking through that windshield as you’re going through retirement and to say what’s coming down the pike. So we got to look at both things at once. But how do you incorporate taxes into conversations with clients?

JT Ferrin  10:59

Yeah, for sure. And right now is tax season and we are looking at the prior year 2023. But it’s also a really good reminder that tax planning is a 12 month deal, right? Right now taxes are fresh at the top of our of our minds. And so we should be looking at 2024 and beyond of how can we save taxes over the long term? What should we be doing today to set us up for success later on?

Micah Shilanski  11:24

Yeah, that’s right. Right. So what are some of those things that are going to be coming up right with clients? So how do we kind of look at taxes for last year? What are some snafus or some pitfalls that might come up? And then how do we incorporate that into our planning process?

JT Ferrin  11:37

One thing that we’re doing a lot with clients right now is helping them round up all of their tax forms, right? This can be very overwhelming for some people, because maybe we triggered some tax consequence, or we did something eight months ago, they forgot about it. And now this 1099 shows up in the mail. And these 1099s aren’t very user friendly, right? They can be hard to understand and they can be really overwhelming. You know, I had an experience with just a client this week that brought in the 1099 and said I have a $200,000 a taxable event that happened and I owe $30,000, or what is this saying? And he said, Well, you know what, let’s look back over the last year and see what happened. We had a transfer from one account to another. That transfer is reportable, but not taxable. That’s a big distinction there. And then from that same account later on, we did a Roth conversion, which is taxable. So this document can be really hard to interpret, but really understanding what happened there is key. I guess, staying sane during tax season, right?

Micah Shilanski  12:37

Yeah, those are emotionally, right. You get a love letter from the IRS. It doesn’t feel very loving when it comes in. And sometimes the IRS makes mistakes and they’d happen to send you a letter. Or sometimes we read a tax document incorrectly because we get a little emotional about it and I totally understand that, right? You get your entire life savings, you make a change and they’re a transfer, then you get a tax form eight months later that says you know, 200,000 is taxable, and it’s a little bit of a heart stopping moment. It’s like oh, my gosh, what happened? And we don’t look at reading the rest of the document that said actually it was a transfer it wasn’t taxable. We kind of get caught up on that first thing. Dad, do you have anything you’d like to add to that? 

Floyd Shilanski  13:18

Or just to go along with what JT said, We had a client pass away two years ago, and then we did a transfer from the IRA to the surviving spouse. And, regrettably, individual did their own income tax return and then enter it in so reportable and not taxable, right? So now we’re almost eight, nine months into it with right the letter from the IRS – oh, no, this isn’t taxable. Well, next thing you know you get a bill for $80,000, plus interest, plus penalties. No, you’re wrong. And all of a sudden, we get caught up in this circle of communication with the IRS. So eight weeks later, she gets a lot of this as well. We have your response. We’ll respond at eight weeks, and then in between that this whole circle goes. So, understanding to JTs point – reportable versus taxable. Keeping good records is just paramount, because we’re gonna forget, and all of a sudden that letter comes in from the IRS that just squirrels everybody up, and then it just kind of falls down after that. And that’s where the advisors come in – at monitoring taxes all year long, not just at the end of the year for last year. But watching that front view mirror is the windshield as well as the rearview mirror to make sure things are working. So yeah, kudos to you JT for what you’re doing with your client.

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Micah Shilanski  15:42

So, let’s go ahead and talk a little bit more about that kind of forward looking things. And we talked about a lot before on the podcast, but Christian, I know you’re working with some clients on this too, and you get some questions about the tax planning side of it. You got the TSP, which we say the TSP does several things really, really well. And we love the TSP. It doesn’t do everything perfect. Which by the way, nothing does everything perfect. That’s right combination and diversification is good, but it especially comes through when it talks about taxes and how that’s set up and looking forward. So, Christian, what type of questions you’re getting from our clients on tax planning for this year?

Christian Sakamoto  16:14

Well, the one that came from last week actually in particular was, you know, that same concept with Roth conversions, was just should I convert my TSP to Roth? And, again, if if we were just looking in the news or maybe googling it, it might be, we can find the answer being maybe yes, maybe no. So I appreciated the question as it came in. But, as far as the TSP rules, we wouldn’t be able to do the conversion inside the TSP itself. That’s one of its flaws. It’s one of its downfalls. So in order to actually do a Roth conversion, with TSP dollars, you have to first you know, do that transfer to your IRA, a traditional IRA. Then once it’s in a traditional IRA, then you can do the Roth conversion, you know, to Roth, I had a similar question. Come up as well related to Roth conversions, having to do with an inherited IRA, and they asked that question, which was, can I, or rather should I do Roth conversions on an inherited IRA? And we aren’t able to do Roth conversions on inherited accounts. So, if you, that happens to be you and you have an inherited IRA, cannot do Roth conversions on an inherited IRA. There are, I guess, special rules. If you’re an eligible designated beneficiary, you maybe could roll that into your own IRA but that’s going to category in and of itself, if you just have an inherited IRA, you can also do a Roth conversion, as well. So it’s got to be your own IRA, before we can do a Roth conversion.

Micah Shilanski  17:51

You know, Christian, to add to that is one of the things with Secure Act, was Pre Secure act secure act 1.0. Now secure act 2.0. You have kind of three sets of competing information online. So when you’re reading about inherited IRAs, let’s make sure you’re reading about the right set of laws. I was meeting with one client that two inherited IRAs, one from his side of the family, one from her side of the family, and they have two different sets of rules we’re following. And she’s like, wow, how come I gotta take all my money out, but he doesn’t have to take his money out? And I’m like, well, it’s just when the loved one passed away, what federal rules were we following? This is pre secure act rules, its different than post secure act 2.0 rules. And to make it even better post secure act 2.0, the IRS isn’t even clear in hash proposed to take money out. We’re working with a client this week. They got a large inherited IRA well over into the seven figure marker and the large bank they are working with has said hey, great news, you don’t have to take any money out until 10 years. And I said, Whoa, pump the brakes. That’s actually not what the rules are. You have to start taking money out of this account based on how old your mom was when she passed away. And she’s like, No, Micah, I got an email right here from the bank that says I don’t have to take any money out of this account for 10 years. And so now there’s a little bit of pushback between us and the custodian about what the actual rules are, and how to work through this. So not only online, is there a bunch of confusion because which set of laws you’re following. We’re actually doing some incorrect information come from custodians, which makes it so much more challenging for you, our listeners, to get the right information that’s out there. So this is always a good time to hit the pause button when you’re reading and getting conflicting information. Hey, cite your sources. Right? Let’s go back to the tax code. Let’s go back to the IRC Internal Revenue Code. What does it say? What the rules are on how this is supposed to work?

Floyd Shilanski  19:51

Micah, just have an additional point on that to think about. You as the tax filer. Right? You’re gonna do this and IRS isn’t gonna send you a letter. They’re going to send you a letter. When? 36-38-40 months pass to, oh, by the way, let’s go back and revisit this. So in your point, you have a custodian that said and I would go back to the custodian and say if you’re incorrect, who handles the penalties? And that’s something you just have to look at with your advisor. A good tax advisor will tell you document, document, document like Micah said.

Micah Shilanski  20:28

Yeah, and again, it’s tough because the IRS right now isn’t clear on some of those rules. Our position, we’re taking a more conservative position because the penalties are huge. If you get this wrong, the IRS may or may not waive penalties. These are things we don’t know. So especially the larger the dollar amount, the percentages are the penalties are in percent. So that means the penalties get a lot larger. We got to be really careful with that. All right. So let’s talk about some more positive tax planning though. So, I know JT, you’re also working with clients and once we hit 70 and a half, we kind of have some actual really cool things we can do in order to help, not only make the world a better place by giving a charity, but even getting I’m going to say a quasi tax deduction for charitable contribution even if we use a standard deduction. Is that right?

JT Ferrin  21:16

Yeah, that’s right. And once you reach age 70 and a half, you’re able to do what’s called a qualified charitable distribution. And so this is we take money from the IRA and send it directly to the qualified charity. So it doesn’t come to you. And when you make that distribution to the qualified charity, it’s not taxable at all. It’s tax free right. So again, you’re taking the standard deduction, we’re not itemizing this, this contribution to charity, but it’s never tax coming from the IRA, which is fantastic. But, again, kind of going back to those tax forms, the tax forms that they send out can be a little confusing, because it will show, you’ll get a 1099 and I will show that distribution, and it comes up as taxable. The custodians, now whether you use Schwab, Fidelity, Vanguard, any of these, none of these companies are categorizing that as tax free, they’re not labeling it as QCD, they’re all coming through as taxable. Because they don’t know for sure, right? It’s the responsibility of taxpayer and tax preparer, to correctly label that as tax free.

Micah Shilanski  22:23

So this comes to the importance, right, of knowing what tax forms come in or working with somebody that really understands these. Then there’s some other rules too, about QC B’s, right? Don’t don’t jump out there and just go do them right away. Definitely work with somebody that understands these to make sure you get the benefit. But I love this and it goes back to that cash flow question. We have clients that, you know, they’ve done a really good job saving, they’re doing all the things they want to do. They’re having the memories, the experiences, etc. But there’s still some money leftover and they’re choosing to make the world a better place. And that’s a beautiful thing with your money and how to set that up. And I know Dad, you’ve been pretty proactive and encouraging clients to be more charitable too. So what does that conversation look like? 

Floyd Shilanski  23:04

You know, when you take a perspective of the total financial plan, the first thing you want to do is make sure you take care of yourself, your spouse. That, that, has got to be the most important thing and as you guys as we as we preach, surviving spouse benefits, it’s just so important. All right, you gotta love the family you’re with. Number two. When you have kids or grandkids you don’t want to give in, necessarily give all your money to a university or to a charity, when you have kids that might be struggling. You might want to put some fingers or for some straps on it. Alright, now we’ve got an incentive plan. And I always tell my clients after you’ve done all of this and you got something left, make the world a better place. Whatever that is, you know, whatever you believe in, do something because we’re given her talents and we’re able to our treasures. And what we do with that is so important, unless the IRS is just gonna come there and say, well, no one else is claiming it – we’ll take it. And that’s all part of the planning process. Knowing what we want to do. Sometimes it’s confusing. You say I want to give X amount of money to the church and you list all this information down and death occurs, and there’s not enough money to fulfill that. So then sometimes it comes for added, sometimes it just goes opposite. So what, just like tax planning and estate planning, that’s an annual thing just to take a look at, not just once in one and done, but as always looking at always thinking about the windshield as we’re driving for, not to review.

Micah Shilanski  24:27

I love it so much great stuff for you. Quite frankly, I would love for us to sit down and start just going through so much more stuff but the goal of this is do a quick podcast with great information, but actionable information for our listeners. So let’s kick off with some action items, some things that you can do visually that would help improve your financial situation. I’ll go first. I’ll say number one is cashflow planning. We’ve talked about cash flow planning in the past, I’m not talking about budgeting, so don’t have a harder time, don’t go build a spreadsheet with 37 million line items on it of where your money goes. Cash Flow Planning should be relatively simple. Knowing in general how much we spend and in general and a couple categories where that money goes. We’ve done previous pods on that so I’ll go into more information on it. But look at your cash flow planning. It’s so so important. Christian, what’s the second action item? Our listeners can do this week? 

Christian Sakamoto  25:16

Yeah, related to that is going to be on the retirement income timeline side. So we go with our Cash Flow Planning and we’re still working right now. Boom. Our retirement income for now is wages is what solves for our income needs. Right? But at some point when we transition to retirement, where’s our money going to come from? You know, we first need to know when you’re going to retire, then we got to know all the different rules associated with your FERS pension right? But start now get out and look over the next 10 years. You know, maybe the next 15, but I don’t need to look over the next 40 to say when’s our income going to be coming from but just kind of narrow it down to the next 10-15 years to really get a sense of where’s this dollars going to come from, you know, especially when it comes to things like the FERS supplement. When it comes to things like when to turn on Social Security. Need to start coming up with a plan on when certain years are going to happen with our income sources that we might have in the future.

Micah Shilanski  26:12

Yeah, that’s fantastic. Now also with that, right, when we got to think about these future things that are going to be there, JT what’s another action item that our listeners can do thinking about kind of the future and things we should be thinking about?

JT Ferrin  26:25

I would say get another set of eyes on your tax documents, and there can be a lot of mistakes and whether that’s a CPA or other advisor, getting somebody to check your work can be huge.

Micah Shilanski  26:37

I love it. That second set of eyes right? I like to say I am a phenomenal editor of dots and the emails immediately after I click that send button. Boom. I know exactly what I did wrong in that email and it’s gone. Right, so great news is Google, he says that 10 Second Undo button. But this is where someone else coming in to look at this before it’s filed. I can’t tell you how many clients returns we have looked at and they said previous, Micah, we already filed that here’s a copy for you and you’re like, Hey, okay, guess we’re moving to an amended return. Because there’s things that we can do on this to save money. Really, really important. Pops last action item for our listeners for this week.

Floyd Shilanski  27:17

Though it’s hard to top what you guys have already said honestly. So I want to add – rigid flexibility. Whether we’re looking at the retirement timeline, I like to when I sit and work with my clients, especially my feds, I asked them for a 1, 3, 5 year outlook. What are we going to do? Alright, it doesn’t mean it’s locked in stone. It just this is where a thought processes that comes back to the retirement timeline – want to take a trip to Africa. I need this extra money to go to that. We’re especting another great grandchild, we want to travel to go see there. So we start ferreting or putting these monies in place. All right. I’d love that. I get that. How many times Micah, JT, Christian have we reviewed a tax return? And quite honestly, double the return for the client by finding an error that was made? Oh, didn’t you tell your client or your CPA or your tax preparer like this? Oh, I forgot. Thenk it’d return. Large check comes back from the IRS because of this mistake. So like the words rigid flexibility, if you love the guy, that gal is doing your taxes on, have someone else just QC the work. And I think that’s the most important thing, especially between now and April 15 that the listeners ought to be thinking about.

Micah Shilanski  28:29

I love it and that’s something that we embrace this as a firm as well, right? So we work as a team. It’s not just one advisor looking at things we like to talk about it together. We like to work together on this to make sure that best information is getting out there. So we try to take our own advice at the same time. All right, you have your action items for this week. You gotta remember of course the last one I’m going to sneak it in there – share this content. Our goal is to help transform the lives of federal employees with better financial information and actions that you can take that improve your life. So click that share button. get this information out there, help this podcast grow so we can help more people and until next time, happy planning!