#103 Don’t Replace Your Expenses in Retirement

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Listen to the Full Episode:

Are you ready to take control of your retirement finances? Your current spending habits could shape your future retirement lifestyle more than you realize. Join Micah and Tammy in this episode as they discuss the critical aspects of retirement planning.

Learn why aligning pre-retirement income with post-retirement needs is crucial to avoid financial stress down the road. Micah and Tammy share invaluable insights into understanding retirement income and expenses, offering practical strategies to optimize your financial outlook.

Discover the significance of living within your means, managing expenses, and building reserves for unexpected costs. Gain clarity on federal retirement income and the importance of accurate estimation and tax planning.

Take advantage of these essential strategies to prepare for a comfortable retirement. Tune in now and take the first step towards securing your financial future.

What We Cover:

  • Retirement Planning, retirement income and expenses
  • Tax Implications
  • Mistakes that people planning for retirement make
    • Replacing the wrong expenses 
    • Going into too much detail can sabotage your retirement.  
  • What do we care more about, Net or Gross? 
  • Pension Benefits
    • Reduction
    • Deductions
    • Social Security
    • Traditional TSP

Action Items:

  1. How much do you make a month?
  2. Sinking funds for expenses coming up.  
  3. Set up at a different bank.

Resources for this Episode:

Ideas Worth Sharing:

So you want to make sure you're taking into account anything that might reduce that gross. Because the good news is those reductions reduce your taxable income, but the bad news is it reduces your income. – Tammy Flanagan Click To Tweet

And so all of a sudden you get your income from three different sources now, right, the FEDS, you have your pension yet your TSP, you got Social Security, and each one of them says it's your only income. They don't withhold enough taxes and you… Click To Tweet

We all have different ways our brain functions. And when I'm aware of that, now I can steer myself in a good direction with things versus getting into bad habits. – Micah Shilanski Click To Tweet

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Micah Shilanski  00:17

Welcome back to the Plan Your Federal Retirement Podcast. I am your co-host Micah Shilanski, and with me as usual the amazing Tammy Flanagan. How is it going Tammy?

Tammy Flanagan  00:27

Same Micah, I am doing great and I am happy to be once again here and ready talk about some important information about federal employees planning to retire.

Micah Shilanski  00:36

Oh, I love it. Yes it is so good to kinda go through this and one of the things this episode came from, I think one of the benefits that we bring to the community, Tammy, maybe it’s my ego speaking, so somebody please let me know, but we get the privilege of meeting one on one with federal employees, and so we see real things that come up, right? And so Tammy and I get boots on the ground, all in the trenches, working through this things thats how we come with things, hey this is a common thing that we see, this is a common mistake that we are seing, and now we are gonna raise our hand and we want to share it to the entire community. We’re saying hey guys, we’re kinda see this trend let’s look at the things a little different – how to improve your retirement.

Tammy Flanagan  01:19

That’s right. Yeah, it is funny how things seem to multiply all of a sudden. Like, you’re seeing couple of these situations, just one after the other. And I am not sure why that is, but we do tend to see little paths and trends that are happening in this world of retirement planning for FERS employees, sometimes is dealing with social security benefits, or sometimes is dealing with TSP. So we have these 3 different distinct benefits that are govern and managed by 3 different distinct agencies. So thats a recipe for potential disaster, right? So, we gotta make sure we know what we are doing, and we understand how to do it smoothly. As smooth as possible. So I carry around a ticking time bomb. You want to make sure you keep it nice and steady. Don’t rock the boat. Don’t make it go off. So you don’t. If you keep it nice and steady it will be a smooth transition and you won’t have any disaster. 

Micah Shilanski  02:15

I was gonna say it’s like a hot cup of coffee, right? We want to enjoy it slowly over time and not spill it on ourselves. But what a ticking time bomb is a slightly different to emphasis on the importance of keeping that steady.

Tammy Flanagan  02:26

I’ve been watching too many episodes of thing bloods in months.

Micah Shilanski  02:33

Well, Tammy,  one of the things this came up from a meeting, I was meeting with a few new clients and kind of working through some things and cash flow, we talked about all the time. It’s just so critical to understand cash flow to be able to retire successfully. But one of the things that kind of came up which is interesting, sometimes it’s the it’s the forest through the trees, right? We’re so into details, too many details. We’re diving into this too deeply to really see where we’re going. So one of the things that I often encourage clients to do, and to me, I think you’re the same way but let me know. I never look at client’s expenses when they’re getting ready to retire.

Tammy Flanagan  03:10

Expenses are going to change anyway after you retire. So you can’t really predict when the roof is going to need replaced. You can’t really predict every month you’re gonna have a disaster just like you do. Now your car needs new tires. Just when you think you’re caught up. You know something else happens. So you have to look at you know, you’re living on your paycheck now, at least I hope you are. So whenever you hit bring it home and put it in the bank you make that work. And if that’s working now why change it why not try to get used to living on that same amount allowing for future inflation? Maybe if you’re lucky even have a little extra so you can have some fun in retirement, isn’t retirement supposed to be a little fun? So, So I think I like to work for somebody’s net paycheck and converted to a monthly amount because all of our retirement benefits are paid monthly. So we’re looking at that monthly income that you’re bringing home. Let’s see how close we can get to that with your monthly net retirement income that you got three different checks. They only have one paycheck, but you got three different retirement checks.

Micah Shilanski  04:13

Yeah, and I think that’s a great point. Right? And so where do I see people go wrong with this is they come and say Micah, I’ve detailed all my expenses, and we spend $11,000 a month and I’m like, okay, but I’m looking at their pay stubs and they only bring home 8,000 a month they’re not in debt they have money in savings, right? So it’s like, okay, and you’re not overspending, but but they’re racking their brains Tammy, because they’re like, Hey, I gotta replace $11,000 a month and I don’t see how this is possible. So the first thing we got to do is step back and say, Okay, how much do we bring home every month? And that, No, no, no, that’s not the question. The question is where do I spend my money? And it’s like, look, here’s the hack from financial advisor. If you don’t have debt, you’re increasing your savings – you don’t have a spending problem. I’m just not worried about it. Right? Now, you come in and you’re $60,000 in credit card debt, your role in one car to pay the other your home is max finance, you have car debt, etc. This is a spending problem, right? We have cashflow issues there. But if that’s not the case, you don’t have a spending issue. And so I’m not going to spend my time there where I want to spend it on as understanding how much money we have coming in. And this particular client, very smart, good guy, engineer, broke down all of his expenses, but what he did Tammy, he put in there payroll taxes. Okay, well, when we’re retired, we don’t have payroll taxes anymore. And by the way, payroll taxes come out in your paycheck it doesn’t affect your net pay, well infection that pay, but isn’t affected what goes in your bank account. He put in his tsp contribution. He put in like all of these before tax deductions that all go away at retirement time. So that’s the reason, now it’s complicated to say what goes but I have health insurance now, but it changes a little bit retirement. I still have it. And that’s a little bit harder, but conversation, a simpler conversation, Tammy, I love what you said, what goes in your bank account every two weeks? That’s where we’re gonna start. We’re gonna make that a monthly amount, then that’s the goal we need to shoot to replace.

Tammy Flanagan  06:05

Yeah, it is a lot easier to do it that way because the withholdings from a retirement check are just a few and mainly just taxes and insurance. So once we know the gross amount of our retirement, we can easily deduct some taxes from it, we can easily figure out the monthly premium. All of our insurance premiums are paid with after tax dollars in retirement.  Unfortunately, but it does make it an easier withholding so we don’t have to figure out what’s the tax benefit there. Which by the way, if you’re married to a federal employee, and one of you is going to retire the other spouse is going to keep working, why don’t you let the spouse who’s going to keep working take over paying for the health insurance because they get to keep paying for it with pre tax dollars. I just thought that, popped into my head. 

Micah Shilanski  06:48

No, I love that and that’s again for like tandem or dual federal employees. You’re both federal employees is where that works. Right? If one’s a fed and one’s in the private sector, that doesn’t work the same for Survivor Benefit reasons. Yeah. So Tammy, let’s go through that. Right. We talked about it first, net paycheck. What comes in every two weeks? Now, if you ever come and talk to me, there’s a couple things, I always want to know – how much income do you have coming in? How much do we have in our bank account? And what big expenses do we have coming up? Now sometimes clients are gonna be like Micah, I gave you my pay stub and I gave you my bank statement, why are you asking me about this? Because it’s an awareness question. If you are not aware of how much income you have coming in, you are not aware of your bank account balance. If you are not aware of how much approximately a month you’re spending, you’re making bad, poor spending decisions. Now I’m not picking on you. This, I am equally as guilty as, when I take my eye off the ball – I overspent. Every single time! But when I’m just aware of where my money comes, I’m aware of my bank account. I’m aware of my income. I make better financial decisions. 

Tammy Flanagan  07:51

That’s true. Yeah. When you have a limitless supply and a credit card account, you just don’t pay as much attention as to where that money’s going until you get the bill and it’s like, oh my goodness, I didn’t know I spent your $10,000 last month.

Micah Shilanski  08:03

Tammy, you’re so kind I never say that. I’m like, who spent all of this money?But yeah, that’s the question, right? The awareness of it is absolutely key and that’s one piece of it. And the second piece Tammy will spend a little bit of time on this one. This is more of the federal employee side, because you have to know how your pension works. Because the other mistake that I see and you and I were just chatting about you know, you see it too, is clients will come in, prospects will come in, they’re like, Micah, here’s my federal annuity supplement, or here’s a estimate, excuse me, and they’re looking at the gross of how much is going to come in, they look at that. There’s three numbers, they have the gross pension and the survivor benefit and then to supplement sometimes they add them all together. That’s not how it works. But other times I’m just looking at those gross numbers, but Tammy that comes with a problem, doesn’t it?

Tammy Flanagan  08:57

Yeah, look, a big problem. I have the retirement estimates that agencies have wonderful software, they do a really, really good job of computing the gross annuity. In most cases, every once awhile you’ll see something left out but usually pretty good. But then when you’re looking at the reductions, know if you’re gonna look to survivor benefit, do they know if you had part time services, has that been factored into it? Do they know that you have a former spouse who’s giving 50% of the marital share of your retirement? So you want to make sure you’re taking into account anything that might reduce that gross. Because the good news is those reductions reduce your taxable income, but the bad news is and reduces your income. So you know, you got to be aware of anything that might cause a reduction. And then you got to take out the proper withholdings. How many times have you seen a retirement estimate for $6,000 a month and the estimate says you’re gonna pay $150 a month?

Micah Shilanski  09:56

No, that’s actually not how this works. .

Tammy Flanagan  09:59

No. And then they live in a state where there is state taxes, and there’s no mention of state tax on that estimate. Yeah, so you have to figure out – federal income tax, state income tax and then insurance. And a lot of times the estimates will show you your health benefit premium on a monthly basis. It may even show your life insurance withholding and perhaps dental and vision, so you’ve got all those insurances that you have while you work, you’re going to keep paying for those at the same price in retirement but with after tax dollars, not before tax.

Micah Shilanski  10:29

So, Tammy, what I like to do is look at this or explain it like why does the HR get it wrong? And I get this question, right. And I don’t mean to blame the HR on this one, by the way, but it’s the Hey Micah. I filled out my W-4 and I said hey, use the same W-4 for retirement, they’re withholding enough taxes today I’m getting a refund. Why when I retire do they not withhold enough taxes? Like what… I told us the same thing? And what happens is every place that sends you money, looks at that W-4 and it says okay, how much money are you getting, then it assumes that’s your total income, but your only income that you’re getting. And so all of a sudden you get your income from three different sources now, right, the FEDS, you have your pension yet your TSP, you got Social Security, and each one of them says it’s your only income. They don’t withhold enough taxes and you get stuck with a bill, essentially penalties, at the end of the year. And so those are things we want to avoid.

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Tammy Flanagan  12:31

Yep, that’s true because people who don’t make a lot of money pay a lot less in taxes. So if your only source of income as 1/3 of your retirement, you’re going to be in a much lower tax bracket because they don’t know you have two other sources of income. So, you got to do like we’ve been preaching all along, is this tax planning is so important because you’ve got to be aware of how much income you have that’s subject to tax, you got to be aware of how much income tax is going to be withheld. And a lot of people I meet, and you might think this too, think that their social security benefits have to be tax free, after all, I already pay that FICA tax for 35 years. Why do I have to pay tax on Social Security, but a lot of our audience will pay tax on at least 50% or more, more than likely 85% of their social security check will be taxable. 

Micah Shilanski  13:19

Yeah, you get a little bit tax free, right, which is kind of nice, but it’s virtually all taxable unless you’ve done something different in order to get below that. So we really got to understand this tax game. And then we’re comparing apples and apples, we’re comparing net to net, and that’s what we’re trying to do in this conversation is what is my is my net income coming in pre retirement? What is my net income going to come in post retirement? And how close are those numbers? And now if they’re super close, well then awesome, if they’re not super close that okay, we have a gap. What’s the plan to fill that gap? Now this is where the TSP or your other investments can come in. This is where part time work could come in. But we got to start coming up with a plan for filling that gap. 

Tammy Flanagan  14:06

Absolutely. Because there is going to be a gap, because if you’re trying to live on just your FERS benefit and maybe Social Security, that really was never meant to be your only retirement income, your savings are considered part of the three tiered system. So you got to figure out how much of those savings are going to be needed to make ends meet, to make life worth living in retirement. You want to have a comfortable lifestyle. 

Micah Shilanski  14:30

Amen. Those are things are really really important to kind of look at it right. And that, that will take care of the spending. Now, Tammy I want to get a little bit back on the spinning, this is another question I get for retirees as well. They say Micah look, I have my retirement income it replaced my other income I get that. But how am I gonna afford these big expenses? I’m gonna need a new car I’m gonna need a new roof, right? I’m going to have these other replacements that come in. And so how do we think about those? And kind of the first question I’m going to come back with is saying, Okay, if you had those expenses today, what would you do?

Tammy Flanagan  15:04

Yeah. Do you have money set aside? That’s what we do in retirement? Maybe this is another tip for others, is that we have a couple of retirement checks coming in because we are partially retirees. My husband is, as well as I am, but he’s gotten he’s got a Social Security check. He’s got a pension check. He’s got savings. So we set aside one of those checks. He’s under the old system. So his social security checks really small. So that goes into a separate bank account. So that just sits there and it keeps accumulating every month so that when we need that like tomorrow, the guys bring in a new dishwasher for us. We got that paid for out of that little slush fund that we have set aside so that money kind of accumulates there, just like you do while you’re working. You set aside money for a vacation or you set aside money because you know that next year, you’re gonna need new tires on the car. So you have to plan ahead for expenses just like hopefully you’ve always been doing. 

Micah Shilanski  15:59

Tammy, that’s what I was gonna say right there. Hopefully you’ve always been doing right, so what are you doing now? What I know is the more similar we can keep things moving into retirement, the easier that retirement transition is. There’s already enough mental stuff, we got to do a whole other pod on that one, mental things to kind of go through when you’re getting ready to retire. We want to keep the financial things working. If you were working really successfully, but you have a sinking fund, if you’re putting away money every single month, then awesome. If we replaced your same net income with your name, net retirement income, you should be able to do that same thing. So let’s keep those great habits you’ve built over 40 years and let’s bring those into the next four years in retirement as well. 

Tammy Flanagan  16:39

Yeah, sometimes like, like when do you have to put it somewhere where you’re not seeing it. You know, set that extra money aside even if you got to take him a lot that out of your retirement check then sudden deside to side in the separate account and mark that as your emergency fund using as you still needed in retirement. I hate to tell you that even though you just bought a new car and just remodeled the kitchen, something else is gonna go wrong in the next five years. 

Micah Shilanski  17:01

Something else will happen. Tammy, I love that point. So I always ask clients all right, where do you currently bank at? And then whatever bank name they give me when we’re talking about the savings plan, I recommend a different bank. And if it’s for what you just said, I like it out of sight out of mind. And I know we talked about it before but we have this we like to call our financial thermostat. When I log on in my checking and savings account at my bank or between X and Y, I feel good. When it goes above Y, I feel really good! And I start spending money, it goes below x, then I’m like who spent all my money, right? And I’m like quit spending it and then we build it back up. We have this financial thermostat. So a great hack is set up an account at a different bank that you don’t normally see. That’s where that money goes. I like the online banks or online credit unions. They buy a high interest it’s easy to set those accounts up. Capital One, Marcus bank, Emigrant Direct there’s a ton of them that you can go and look at to set those up. 

Tammy Flanagan  17:58

Boy, I’d just love a good guest we should have on the showsometime is a psychologist because I think there’s a lot of psychology with retirement. In fact, I don’t know if you even know this. The TSP has hired a social scientist. Why would the TSP need social scientists? Well, because they know that there are certain people that aren’t saving 5% near threat. So the social scientists and the experiment to see what’s going to get them to save the 5% and they sent letters out to the people who aren’t doing it with three different strategies. You know, one thing while everybody else is saving 5% while you do it, right one would say anything other than you have the option to do this and the other one use some other strategy, and they can see clearly which one psychologically got more people to jump on and start increasing their contributions. So if you didn’t think psychology was dealing with retirement, you got another thing coming because it is. 

Micah Shilanski  18:54

It’s 100%. When younger people are saying, Hey, Micah, I want to be a financial planner growing up, what should I take in college, right? They’re looking for what math classes they’re looking for an ecom classes. And Tammy, take psychology.

Tammy Flanagan  19:05

Learn how you think if you’re the one planning your own etirement because you know your weaknesses, you know, what gets you going, right. So I think it’s really important. I think we should do a whole thing on this. So now that we’re talking about these different things, because we’re playing tricks with our mind to help us off track or help us do the right thing. 

Micah Shilanski  19:23

You know, it it’s the whole self awareness thing, right? We all have different ways our brain functions. And when I’m aware of that, now I can steer myself in a good direction with things versus getting into bad habits. So and that’s what all the hacks are right? I use two different bank accounts, because I know like most people, they’ll overspend in certain situations. I’m going to create a hack to make sure I don’t overspend. There’s nothing wrong with that, right. So we want to get all of those tools in your favours, all those arrows in your quiver to make sure you’re set up for your retirement. 

Tammy Flanagan  19:54

Set up for success. That’s right.


Micah Shilanski  19:56

I love it. Well, Tammy, this podcast is all about action items right and our listeners to take the information to be able to implement it right away. So I’m going to kick it over to you first, what’s a good action item our listeners could take away this week from the pod? 

Tammy Flanagan  20:10

Well,  try to figure out what that monthly netting and you know what your paycheck is, you know that it’s pretty much the same every two weeks unless you just got a promotion. So figure out what is that net income you’re trying to achieve in retirement? And then you’ll start estimating your FERS basic benefit, your Social Security benefit, and then figure out how much will you have to take out of your thrift to make life comfortable? And is it going to be too much? Maybe that means you got to adjust your retirement date. 

Micah Shilanski  20:39

It is, but these are things man, you Tammy, you nailed it. You want to know beforehand, right? You got to adjust your retirement date. You don’t want it the opposite that you retired and figured out you don’t have enough money. Those are not fun conversations. And then, Tammy, I’m a huge fan of having different savings accounts like buckets of accounts, I’m a big buckets fan, right, our listeners know, and so I would say if you haven’t done this already create an account at a separate bank. I love nicknaming these accounts. What it is, what’s it for? How much is it for and when do you need that money by, right? And this really helps in a marital harmony things right making sure you guys are on the same page of what you’re spending money for. I love the idea of one emergency account. If you think emergencies action, your wife thinks that’s why you’re gonna have a marital conflict, right? So let’s define what these things are and make sure instead of just in our minds, we’re on the same page with it. And if we have something that’s not fitting in my 911 account, my emergency account roof repair, okay, great. It says you know, Roof Repair 25,000, you know, 2030 is when I need the money for it, but initially it might get it may not be 25,000. Okay, it may not be but if I got 25,000 going towards it that’s really going to help me isn’t it? So what are these numbers and how are we setting it up but set up those sinking funds set up those different savings accounts? It’s a great hack to get you set up for retirement.

Tammy Flanagan  22:01

Yeah, I agree. I think that’s an important thing that we should all do. And that’s just planning. That’s just simple planning, this these things aren’t hard. Don’t complicate it more than it needs to be. So I think this is something people can take and make some use up. 

Micah Shilanski  22:15

I love it. This podcast is all about taking action. So make sure you grab one of those and go and do it and share this podcast, right? We love your feedback and thank you for watching this on YouTube. Thank you so much. Smash that Like button, give us some comments inside of here really helps it grow. Tammy and I’s goal is to help transform the retirement information for federal employees. We want to empower you with retirement you worked so hard for and deserve and you help us spread that message by sharing this with other federal employees. So we really appreciate that. Tammy anything else to add?

Tammy Flanagan  22:45

 I think that’s enough for one day right? Micah we’ve got some to-do lists, we’ve got some marching orders. So let’s get busy.

Micah Shilanski  22:52

I love it. Well, thank you guys all and until next time, happy planning!

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