#124 TSP Benefits: What You Need to Know Before Retiring

Micah Shilanski  00:00

Welcome back to the Plan Your Federal Retirement podcast. I’m your co host, Micah Shilanski, and with me returning because it’s been too long since we’ve done a pod together the amazing Tammy Flanagan, Tammy, how’s it going Ma’am?

Tammy Flanagan  00:12

Hey Micah, it’s good to be back with you again. It’s been quite a while, but hey, we’ve both been really busy, so that’s not a bad thing, is it?

Micah Shilanski  00:19

Not a bad thing at all, but we got some exciting things to kind of talk about and go through, right? One of the things that Tammy you and I kind of always joke about is sometimes I have clients come in and says, Micah, you meet with clients all the time, you’re helping a lot of federal employees, don’t you get tired of answering the same question again and again and again? And I said, well, sometimes I answer the same question again and again and again, but then Congress changes the rules, and so my answers change all the time. It’s always the same questions, but sometimes a slightly different answer, right?

Tammy Flanagan  00:47

Yep, and I also think that because we had thought about standardizing some, you know, frequently asked questions, but that doesn’t really work, because everybody’s question has a little tilt, little slant to it, so even when we’re discussing things and people are listening to what we say, it’s like, okay, that applies to me, but I hope I’m getting the whole picture, because I have one extra little thing with my situation that could change the answer, so you got to be careful when you’re listening to someone give you a kind of a general answer, or when you’re providing general information, because there is, you know, the little fine print we have to always remember. 

Micah Shilanski  01:24

Yeah, that’s the difference here, right? A distinction I’m going to make it between the general information and advice, right? Advice is when Tammy or I could sit down with you individually, we can look at your situation, and we really get to know these ins and outs that are particular versus the pod is all about, you know, general information for you to be informed to then take this but Jamie, I like your point. No, even though you and I, which still a little bit about federal benefits, right, even though we say it’s something, it’s really important for you the listeners to pause and be like, okay, there’s probably a lot of truth to this, but what area in my life is this different? Where it’s a different outcome, a different answer? For me, there’s so many different things out there, I just it was talking to somebody that has a combat related income payment not coming in, and so it’s like, great, well, how does that work when I’m buying back my time, right? So it’s a slightly different angle to refer to, you know, versus a normal military buyback, so all these different things you got to be thinking about.

Tammy Flanagan  02:18

Yep, that’s right, and I think when you hear something, we say, my goal, whether I’m teaching or doing a podcast, is that whoever’s listening hear something, some little nugget, and they write it down, and they take it a step further, they go post it out, where they talk to their benefits person, or they talk to their advisor, because then you get the whole story, but you know, I think this will spark things that people maybe hadn’t heard before, something some new information that, like you said, some laws have changed in regard to the TSP, and you know, if people are getting ready to retire this year, probably prior to pre retirement, they never thought much about what am I going to do with my thrift after I leave? So just, you know, understanding the withdrawal options is very helpful. 

Micah Shilanski  03:02

Yeah, super important, both the year before retirement, the year of retirement, what are you withdrawal options, do things make sense, do they not make sense, should I max it out, should I not max it out, how do I take money out? And then the you have a few distribution options, but you got to be really careful in how you select these, because they have some pretty big impact, and then timing becomes a consideration with these as well, and I’m not ragging on TSP, so please don’t take any of it this way. We just need to know how it works, and TSP when you’re setting up distributions is not always really fast, so in Cash Flow Planning for our retirees, when they go to retire, okay, who knows how long it’s going to take OPM to process your retirement check, let’s just say six months for fun, and then, okay, TSP is not a bank account, so that doesn’t mean the day you retire, you get to reach into your TSP and make withdrawal. Several things have to be in place for that. Now, this doesn’t make your TSP bad, by the way, your TSP is phenomenal, but we have to know how to use it, and we got to know how to pull that into the retirement plan, so when we’re thinking about these distribution options Tammy, timing is always something I’m thinking about, like, how are we going to do this in a certain time or certain tax year if we’re trying to get something done.

Tammy Flanagan  04:09

Right, and you made a good point there about possibly taking six months for your retirement check to process, so I think you have to really plan, as you’re getting ready to transition from employee to becoming an annuitant, that there’s going to be like this little, little holding area where you have to figure out, what am I going to do during that time, because, like you said, I may not be able to get my TSP that first month, or even maybe the second month, and now I’m getting either partial retirement checks or maybe no retirement checks for a month, so always, always plan ahead and have some cash on hand before you walk out the door, because I know a lot of people now are planning to retire this year, and you gotta make sure that you kind of know about that transition period, as well as that whole many decades, hopefully after retirement, that you’ll have to live it out.

Micah Shilanski  04:59

Amen, well, Tammy, let’s talk about some like, the year of or the year before retirement, right? Let’s go through that. Let’s kind of talk, then transition a little bit to after retirement, how our distributions work, and some pros and some cons. Is that going to be okay?

Tammy Flanagan  05:13

Yeah, that’s good, and I’d also like to hit on a few things that it’s kind of like, did you know things? I better write them down. 

Micah Shilanski  05:28

Well you do and writing those down. We’ll kind of talk about some TSP things, one contribution wise. We talked about this multiple times, but you know, this year, you guys can put 23,500 in the TSP, there’s the catch up, the year you turn 50 of 7500 you can also put that in, but there’s this extra catch up, which is kind of unique between, you know, the 60 and 63 that you can put this extra 3750 and $3,750 and that you can put in. Now, I haven’t seen anyone do that at this time of the recording, so I don’t really know what the process is for them to do it. I’m assuming it’s going to be the same as the TSP catch up. You’re gonna have to fill that form out, and then you can put that money in throughout the year. 

Tammy Flanagan  06:08

And the other thing too, the TSP has reminded participants that, if you’re what is it till 63 or is it 64, 63?

Micah Shilanski  06:16

63.

Tammy Flanagan  06:18

So they remind you, like, let’s say you turn 64 you may need to cut back a little bit, because you might end up losing some matching if you keep putting in that same amount the following year. 

Micah Shilanski  06:29

Oh, that’s just such a good clarification, so they don’t automatically stop it when you’re not eligible they keep the dollar amount the same, okay, so what this means is you’re going to hit the I’m going to make my math up here, but you’re going to hit the max now in in, let’s just say you work a full year, you’re going to hit the max in October, so that means November and December, you’re going to have at least four contributions, you’re not getting your 5% match in, that’s something really to pay attention to. 

Tammy Flanagan  06:54

Yeah, so, yeah, I think this was a little bit of a catch 22 because it’s nice to be able to put extra money in. I know if my husband was still in the government, he’d be jumping on that, because he loved saving in the thrift but it’s also something you got to be aware of, because you know, if you continue to work past age 63 you go back down to the 7500, or whatever it is in that year, yeah.

Micah Shilanski  07:18

That year, yeah, super interesting. So making sure your contributions are set, and this kind of goes into a question that we get about the year of retirement Tammy, I always get this question, let’s say someone’s going to retire mid year to make our math easy, they’re going to retire in June, I always get the contribution like, should I max out my TSP between now and June? Tammy, what are your thoughts on that?

Tammy Flanagan  07:38

Well, if you were really retiring, like, true sense of the word, not going to work anymore, why not as long as you can afford it, right?

Micah Shilanski  07:46

I think the latter part is that right there, right? What’s your cash flow look like? Like, do when we have that six months that I’m not going to get paid, do I have enough money in cash reserves? That’s the first question I’m going to go to If no, then no, don’t max it out, because what’s the putting it in, then turning around and taking it out the same calendar year, there’s not a benefit build up your cash, but then, Tammy, to your point, if we don’t need that cash and we’re still committing it to the longer term investments, boy, now I could put it in a Roth TSP, potentially. Okay, well, in that way, now that money’s all growing tax free, that could be a great reason to stick that money away into max fund it, so it’s a bit of a bit of a depends question.

Tammy Flanagan  08:23

Yeah, yeah, I think you’re right, but I think it is something worth considering, because that’s your chance to put a whole year’s worth of contributions, but you’re not going to get extra matching, because the matching only happens through the date of separation, through the last pay period before you retire.

Micah Shilanski  08:39

Right, right, yeah. If you’re iffy, don’t do it.  So here’s the catch on that one as well for the matching right? And it would have been burned on this one once with a client, and so now it’s like a how, if it’s a maybe retirement date, and it’s not a set in stone retirement date, we do not change your TSP funding. So what do I mean by that? My guy, I’m probably gonna retire at the end of June, like, high likelihood I might work to September or the end of the year, and this guy was like, 80% chance I’m gonna retire in June, and so my ignorance are like, should I max out the TSP? I was like, absolutely, we changed the contributions to max in June, and Tammy, you already know where this story is going, in June, they decided not to retire, they pushed it to September, which really pushed it to December, and we lost six months of matching on that, so it was just more planning. Yeah, yeah, the match is just based on that 5% not necessarily your contribution, so if you put more money in, you’re not getting more of the match once you’ve hit the five.

Tammy Flanagan  09:33

Right, that could be a risk, too, for someone who is, I’m leaving next June, no question about it, but then something does happen at the last minute. It makes you want to change your mind, so be sure you are aware of that, that you’re not going to get matching if you max it out too early, and that’s true for people who are keeping working, because I’ve met so many people who think they’re doing a good thing by front loading their thrift like putting in the full amount by the end of September, and then they got those last three months of the year, nothing coming out of their paycheck for the thrift but if they look in their thrift account, there’s nothing going in from the agency other than that 1% automatic, because you have to put it in to get the match, and that’s every period, every single pay period. 

Micah Shilanski  10:18

Yeah, so really important again, it’s a cash flow game, as always, do we have enough money? If so, we can put some extra side to think it’s great. Then you get to a tax question, right? I’m just thinking my decision tree. Then the next thing is a tax question, do I put this in the traditional side or the Roth side? I am a huge proponent of tax free money. I really like that. Now who knows what the future tax laws are going to be? It looks like the tax laws, the TCJA Tax Cuts and Job Act is going to be extended so tax rates won’t go up in 2026 we’ll see what actually happens with Congress. Tammy, I’m still a fan of tax free money, though, if I can have that money growing in the future, tax free that adds to my diversification play, and I do think this is a big thing. Most federal employees that I meet with are underfunded in tax free savings for retirement.  One of the mistakes that I see as a financial advisor after federal employees go to retire is not understanding how it’s different, when you’re in accumulation mode, saving money for retirement, building your TSP to you’re in the distribution mode, pulling money out of the TSP, sometimes we think that we can manage everything the same, then it comes to retirement, and we, all of a sudden, we have this flood of different types of emotions, and it only happens to people that generally aren’t emotional about investments, and if you are, it happens to you even more, so we put together a guide for you, a free guide in order to help know what questions you need to ask, know what learning lessons are out there, and how should you build a proper distribution plan with your TSP. This is so important, because how you got here in order to be able to retire is not how you’re going to stay retired. There are some differences that we need to keep in mind, and more importantly, we have to come up with a plan that not if, when the market goes down for a long period of time, how do we say dispatch in investors, how do we hold for the long run, but have a plan that you won’t run out of money. In order to get your free guide, jump on our website at planyourfederalretirement.com/tspafterretirement. That’s planyourfederalretirement.com/tspafterretirement. Take control of your retirement savings. Get this guide so you can make smarter decisions about your retirement till then, happy planning!

Tammy Flanagan  12:33

And I speak from experience. I mean, we’re trying to, you know, backdoor Roth IRA money, because we didn’t do it, you know, when the Roth TSP came around you, we put some in, or my husband put some in he was the federal employee, but, you know, I wish we would have took more advantage of that when we had the opportunity, so now we’re trying to convert some things to to Roth every year.

Micah Shilanski  12:56

Right, those Roth conversions are great. Well, Tammy, let’s transition a little bit then, and talk a little bit about distributions, and I know we’ve done entire pods on them, so we can just kind of hit this, kind of briefly, what some of these options are, but we have just a handful of options. They’re a lot more flexible now than they used to be, which is beautiful, but we have just a handful of distribution options from the TSP. What are those? 

Tammy Flanagan  13:17

Right, well, the one that’s the most popular is to do nothing, because a lot of people are leaving federal service, but there’s a lot of people who are just letting it ride in the thrift I don’t know if they’re working with second career, they’re just trying to live on their FERS annuity and their Social Security, which great if you can, but that is an option, you don’t have to touch it. But the other popular option is monthly payments, so there’s a lot of people, I think, what did I say Micah, about 3 billion a year coming out in my installment payments.

Micah Shilanski  13:52

3 billion, that’s what, that’s what the B is in Bravo, right?

Tammy Flanagan  13:55

Yeah, but if you mentioned, you know, it’s close to a trill. Is the small fraction of that, but that is a popular option. The very least popular option is to purchase an annuity through the Thrift it’s it’s gained a little momentum this year because of the higher interest rates, but I’m talking 1000 a year versus 700 so, yeah, yeah. 750 or so yeah,  so it’s really a small number of people who who take that route, and I think part of that might be that our retirees going into retirement are still relatively young, and I don’t think it hits you to purchase an annuity until you get to the point where you’ve started spending down your assets and thinking, oh, what if I spend down too much, I better put some of this in a stream of income, type of way to collect it, which would be an annuity.

Micah Shilanski  14:42

Yea, you got to be careful with these, right? And that’s the one that we talked about on the pod all the time, and I know when I talk about it, I think, Tammy, you do the same thing in person, which is, hey, this is a red flag, this doesn’t mean it’s bad, but anytime you’re about to make an irreversible decision, that’s a red flag. Goes up for me. It says, whoop, let’s hit the brakes, let’s slowly go into this right? And that’s what the TSP annuity is. A lot of other annuities are not. A lot of other annuities have some portability with them, which actually has worked out fairly well, but the TSP is not portable, so that the TSP annuity, excuse me, is not portable, and then the other thing, Tammy, with any of these distribution options I’m going to look at, even before we get to the investments, I’m going to back it up with my clients and say, Okay, we’re talking about this a little bit before the podcast. We always want to know first, how hard does your money need to work for you to meet your retirement goals? Is that another way? What rate of return do you need to get on average? So let’s just say that you need a 7% rate of return on average in order to meet your retirement goals. Okay, so that’s your number. The TSP annuity is currently paying 4.7% now this doesn’t make it bad, but if I need seven, and this is paying 4.7 in order for averages to work, I gotta take a lot more risk with some of my money in order to make that balance out. Maybe that’s appropriate, maybe that’s not, but I know when I put my financial planning hat on, that’s kind of the analysis I’m looking at in the background, right?

Tammy Flanagan  16:07

Yeah, you make a good point, a lot of people don’t want to take risk at all, but why take more risk than what you have to if you’re if you’re comfortable and you’ve got that money that’s going to last as long as you do, you know, try not to get too greedy, right? 

Micah Shilanski  16:23

Don’t yeah, yeah. There’s, there’s, there’s a great expression, right? We were just teaching the class with a bunch of financial advisors, and as I was teaching them about investments, one of the things I was talking about Tammy is there’s two people that, two types of people that really got hurt in 2008 and who were they? Number one, the greedy ones, right, that were really trying to push it and do things, snd number two, the really scared ones that moved everything to the sidelines, waited 10 years before they invested money again, right? Those are the two people that really get hurt in volatile markets, so I like your point, don’t be them, right, don’t be greedy, right? What do you need to get in order to live a comfortable retirement, go for that. It’s okay. 

Tammy Flanagan  17:05

Yeah, I still remember the old thing where a lot of people were leaving federal service, they had this lump sum option, which a lot of our listeners probably don’t remember, but you could take out your contributions in a lump sum, and what a lot of people were doing is this whole thing about day trading was a real big thing back then. Yes, yeah, and I know so many people who took out that lump sum, which was like 10s of 1000s of dollars, especially under CSRS, for some of them, that was six figures, and they said, I’m going to double this and triple this, and they went into day trading, and six months later, it was all gone, and they had taken a permanent reduction in their retirement as a result of that, so it was some really sad stories back then, luckily, lucky, you can’t do that anymore.

Micah Shilanski  17:48

And Tammy, that refers to taking money out on their contributions for their pension, not not their TSP, so it permanently reduced their pension for life.

Tammy Flanagan  17:58

Yeah, there was no, like a 10% for some of them reduction, so seven to 10% reduction, so yeah, that’s just made me think of those days where some people really regretted thinking they could manage it better than than the government. 

Micah Shilanski  18:10

Yeah, yeah, we gotta be careful with that one. Another option that we have is, of course, the lump sum options, right? You can take out a lump sum, and this could be a couple different ways from your TSP. One is a lump sum is, I call the Vegas option, right? Just send me a check. They will send you an entire lump sum. They have to withhold at least 20% for taxes, you get the balance, you got to pay taxes on that money, also, inside of that lump sum, you could also put kind of a partial distribution in there, or a transfer. It could fit inside of this category as well, where you’re going to take all of your money, or some of your money out and transfer it to an IRA account, and please, know our listeners. I know you guys are on top of this. I hate that dirty R word, that rollover word. I do not like it. I like the transfer word, because there’s a lot of penalties that could be implied in a rollover, but not so much in a transfer.

Tammy Flanagan  18:56

Right, yeah, and you’re not suggesting that anybody cash out their entire account and get a check, right?

Micah Shilanski  19:01

No, no. Thank you for that clarification. I was mocking that option. I was I was not saying, take it all out, go to Vegas and put it on black. I don’t think that is a good option whatsoever. It is an option you do have, again, with taxes, penalties and and then again, when you get that money, what are you going to do with it? Like, like, what’s your strategy for growth with it? And anytime we have a get rich quick strategy, whether that’s beanie babies or cold storage with crypto or gold, or like, any of these other things, you know it’s good to hit the pause button and say, hey, is this get rich quick? Is just, am I going on that greedy path again? And generally, greedy people don’t get what they’re thinking. Be really careful on that, because again, once you take all that money out of the TSP and put it in your bank account, you’re done, right? You got taxes, potentially penalties, really restrictive in how you get that money back in your retirement account.

Tammy Flanagan  19:53

That’s right, yeah, and boy, just think of the tax bracket you’ll be in that one year when you take it all out. Man, it never reminds me the people who say, I’m going to take out 200,000 to pay off my mortgage, are you sure you want to do that? 

Micah Shilanski  20:07

You know, if you are thinking about that, your spouse is thinking about that, jump on our website, planyourfederal retirement.com, and I actually wrote a paper on this, on, on two different scenarios, on, let’s say you want to pay your house off if you pay it off in one year, versus paying off in five years or 10 years, right? And Tammy that the taxes are a huge thing. You take out 200 grand for $200,000 mortgage. You know this? You don’t have to take out 200 grand. You gotta take out closer to 300,000 right? 100 goes to Aunt IRS, 200 pays off your mortgage. Boy, that’s a that’s that’s a lot of money to pay in taxes in one fell swoop, versus should you structure this over several years and keep yourself in a lower tax bracket, you can end out ahead.

Tammy Flanagan  20:46

Right, if you were going to do that, other option of taking out the lump sum, you’d have been better making double mortgage payments instead of putting money in the thrift.

Micah Shilanski  20:54

Yeah, yeah, right, because you would have known what that’s going to go down, and it’s just slightly off topic too. I know Dave Ramsey is, like, really big and no debt, and he talks to more people on an hourly basis than I probably have in my life, but for me, it’s not as big as a concern going into retirement with the mortgage, and sometimes it doesn’t feel great, but it’s a cash flow question between your pension, your social security, your fixed income, your variable income, all that stuff you have coming in, can I pay the mortgage comfortably? If I can, and my mortgage is especially the mortgage, and several years ago, at three 4% boy, why would I pull out $300,000 pay 37% in taxes when my money is earning north of 7% to pay off a 3%, 4% mortgage like I got a hard time mentally with that. So it really everyone’s different, so be careful about that one. It’s feels good, but it may be a wrong decision.

Tammy Flanagan  21:49

That’s right, that’s why you always have to think of, where’s the best place to spend down my assets, or where’s the best place to pay down my debt, right? 

Micah Shilanski  21:56

You got 100%, and then try to look at it from the dispassionate point of view, and this is where bring in someone else, and I’m not trying to plug our services, so please don’t take it that way, but bring in someone else to give you a second opinion on that and say, hey, am I making an emotional decision about this, or is this a good financial decision? And Tammy, this is something that personally I do, I’m kind of part of a mastermind group with other financial advisors, and one of the things that I do is I outline to them my financial plan, and I want to make sure that says, hey, while I do this for a living, I’m still emotional about my money. Still a good idea, and I get them to give me feedback and opinion. You need that in your life too, before you make any big financial decision.

Tammy Flanagan  22:35

Yeah, yeah. I know my husband’s pretty good with finances and money, he understands a lot about the stock market, but we still have a financial advisor only because of that reason number one, we don’t want to blame each other if something happens, wrong,

Micah Shilanski  22:49

That’s 100% right Blame that guy you could fire

Tammy Flanagan  22:54

Or, you know, sometimes it’s nice to bounce off somebody who does this every single day and say, where’s the best place to take money out to help our kids put a down payment on the house, you know, right? And there’s suggestions I would have never thought of, you know.

Micah Shilanski  23:06

Yeah, perfect. Well, Tammy, this podcast is all about our listeners, not only getting great education and entertainment along the way, but taking some action items along with it. So what are some good takeaways? What are some good action items our listeners should be thinking about?

Tammy Flanagan  23:21

Yeah, I think, you know, pay attention to what’s happening in the thrift and when you get closer to retirement, really start to study it. Because I still get questions from people who say, oh, if I retired 57 I’m going to pay a penalty on my TSP distributions. I’m like, no, you’re exempt from that. So, you know, really get some information about that pre retirement area where you’re trying to decide what I’m going to do with the money, how much do I have to pay in taxes? What’s the best withdrawal option? There’s a lot of information out there, whether you attend a seminar or keep listening to us, of course, but Yeah, listen, listen up to that, because it’s a different mindset than when you’re accumulating the money, than it is when you’re starting to take distributions.

Micah Shilanski  24:04

100%, and I’m going to say, share this podcast, right? Our goal is to help another million federal employees with their retirement. We love getting great information out there, so make sure you’re sharing this, and Tammy, I almost forgot you were writing down a couple of “did you know facts”, do you want to go over those real quick? 

Tammy Flanagan  24:17

Well, two of them we already covered, so that’s that’s okay, but the only other one I was going to say, because you mentioned about the annuity interest rate being about 4.75% which is really high over the past even 20 years of the term, but if you went back to when inflation was really double digits, back in the late 70s, early 80s, I remember my mother saying, I wish I had some money, because annuity interest rates back then were like 9% boy, because you imagine, if you lock in 9% a lot of a lot of those insurance companies went belly up after that because they couldn’t fulfill that, so you got the shareholder too, but yeah, 4.75% not bad, but it has been higher in the past.

Micah Shilanski  24:58

Yeah, be careful that one. Yeah, and this is a really good question to ask, too, if you’re working with a financial advisor and Tammy, you probably already know this, but one of the I geek out on this stuff, so forgive me, one of the fun facts I like to look at is, what’s the worst period in time that a retiree in the last 100 years could have retired from from an economic standpoint, you want to guess on that? A hint, just said it.

Tammy Flanagan  25:21

I heard yes, and I can’t remember now, when it was, was it? Was it in the 80s? 

Micah Shilanski  25:26

It was in the 70s, it was in the high interest rate time period. Yep, so it wasn’t the Great Depression, it wasn’t the Great Recession of 2008 it wasn’t the tech bubble, it was the 70s and and why? It’s because the market was flat and there was high inflation in that period in time, so your assets weren’t growing to outpace inflation, so anytime we’re building a retirement plan, we’re always keeping that in mind is we need a strategy, so if you’re working with someone or building yourself, what’s your strategy for successfully navigating the worst time ever you could have been retired, which would have been in the 70s, right? If all we’re planning for is an oh eight, which we should be planning for as well, we might be having a blind spot out there for high inflation time periods, so just something, well, I think it’s fun to think about, right, but just something in the planning that you should be thinking about.

Tammy Flanagan  26:14

That’s right, yes, that’s a good one, but you have to plan, right? You have to have some strategy.

Micah Shilanski  26:21

Awesome. Well, listeners, thank you so much, I really enjoyed doing this podcast. Tammy again, thank you so much for your time, I always enjoying these pods with you Ma’am.

Tammy Flanagan  26:27

Thanks, Micah, see you soon, hopefully. 

Micah Shilanski  26:30

That’s right, till next time, Happy Planning!