#135 Your Last Year Before Retirement: The Ultimate Prep Guide

Micah Shilanski 00:35
Welcome to the Plan Your Federal Retirement podcast. I’m your host, Micah Shilanski, and today we’re going to really jump into some good details about getting ready for retirement the year of, what is this, 12 months out really look like now, if I could wave my magic wand, we wouldn’t be talking about retirement 12 months out. We would have first started the conversation several years ago, making sure. But sometimes life happens, and that’s not an opportunity. So we want to take a high level approach today and really go through some key things that catch people by surprise. And as I’m going to take some thunder away from my dad, because Floyd is rejoining us on the podcast. But one of the things that he likes to say, and he is 100% spot on, it’s not what you don’t know that’s the problem. It’s what you think you know that just ain’t so that creates your retirement issues. So let’s make sure we’re talking about these things that we see so often, to make sure you’re prepared for this in retirement. So, Papasan, welcome to the podcast.

Floyd Shilanski 01:32
Well, thanks for having me back. I do appreciate it for sure, and as I’m listening to you go through that scenario, why you bring back lots of stories. You know, the last 40 years the firm, as well as myself, of course, we’ve helped so many retirees, especially in the Fed side, as well as private sector. And I’m always amazed. I guess I shouldn’t be, but I’m always amazed that we get down to the final quarter, six months, and it’s like, oh, I didn’t do this. Oh, I forgot about that after they retire. Why didn’t I do those things? So I think, as you were talking about Micah, what we really want to do is elevate it from this 30,000 foot view, just to say here their general concepts, if you will, what everyone should be thinking about before they decide to submit their papers and retire.

Micah Shilanski 02:18
It’s really easy for us, Pops, to say, hey, look, here’s all of the things that you should do. Because guess what? This is our job. This is what we do every day, right? We talk to people at retirement. This is the preparation we go through all these things. But when you start adding this on top of everything else you have to do, right? It’s still, you know, helping the kids finally launch or, you know, where are you at in your career? Are you guys gonna move? Are you getting ready to retire? Finishing things at work with all the turmoil that goes on now? The honey do list, right? Now, you’re attacking one more huge, emotional thing on the table that you have to tackle. It’s going to happen one way or another, right? Whether you’re prepared for it or not, it’d be better to be prepared. So try not to get overwhelmed as we talk about all of the stuff we’re focusing on today, tackle this one step at a time, right? So maybe it’s one month, and this is a reason we like more than one year for retirement, but maybe you break this down into six things, and hey, here’s all of the things I’m going to do, one and take one for one month, and here’s all the things I’m going to do for that month. So the next month, here’s all the things that you’re going to do, etc, and kind of calendar out, so kind of spread these things out through the next six months. Don’t wait till retirement time to figure this out. Don’t wait till six months before retirement. You really got to be working on this stuff prior to that to make sure you’re getting ready to go, Pops. Did you say that’s a fair way of addressing it?

Floyd Shilanski 03:33
100%, you know? And one of the best things to do, and I go back, way back, even when I started doing financial planning in the late 70s is, I’m an analog guy, even though we’re coming to you today digitally, I like binders, right? So, you know, gives you a three week notebook or do it digitally. And then started saying, Okay, this month, I’m going to make sure I do ABCD, all right? And then the next month, and start breaking it down. Human nature is we work very good when we have deadlines and we put off and we procrastinate right up until that deadline. And this is something I hope you’ll agree with me, son, they really don’t want to put off. They want to get it structured outline, so they’re rocking and rolling when they say, adios to the job, and they’re off on their next adventure.

Micah Shilanski 04:15
Boy, there is something nice about that paper, that binder, flipping through while all of our files are constructed digitally, for all of the reasons we love digital. There is something nice about a binder and really going through one chapter at a time, seeing the progress that you’re making, having the stuff all together, etc, is so funny, right? Speeches about this. You know, every single day, my end of day checkout that I do is I always write down for the next day, Hey, what are the top three things that I need to do. And it’s always on a sticky note. It’s not on a spreadsheet. It’s not on to do’s etc, because I will do like, a bazillion things. So it’s like, great, what are the top three things that must get done tomorrow? And I just love it. I love checking those things off and lying about and saying I got those things done. And I can really see them looking at right now. I can really see the progress that you make with that. And we lose that digitally. So again, whatever works for you is the best system, but it really is the let’s make sure you’re tackling these things all right. So a lot of talking at it. Let’s dive into a Papasan. There’s a list of things we don’t really have these in our order. These are all things that must get done. These aren’t necessarily in an order of when you need to do them by but let’s address one we address so so often on the podcast. And the reason I keep addressing it is we keep seeing this again and again and again with new people coming into our office. And this is you’ve probably already nope, not cash flow, not taxes. Yes, I love talking about those ones as well. This is credible service, preparing for retirement.

Floyd Shilanski 05:39
Micah ,and where most people go for the credible service. They go to the Les ,and they see the SCD date, and they go, Well, I got this right here. And what do we find out?

Micah Shilanski 05:47
Yeah, the SCD date on your Les is only for leave purposes, only, right? Or they’re like, Well, I know I’ve worked on it for this long, therefore I know I have 30 years of service, because that’s how long I’ve been here. Or I got my 20 year pen, so I know I’ve been here for 20 years. I saw a new one the other day, which is super fascinating. Got an email from an advisor we had met previously. He said, Hey, Micah, I got a new federal employee as a client, and I’m doing some research on it. And he read to me the HR email that his new client received. He goes, This doesn’t feel right. What do you think about it? It was very interesting. This new hire came on to federal service, and he goes, Hey, I want the 11 or 12 years that I’ve worked outside of the federal system to count towards my retirement? And his agency said, Yes, not a problem. Those 11-12 years are going to count for your retirement. And they said, We’ll adjust your RSCD date so they’re using the correct terminology. And the advisor’s like, Micah, is this real? I’m like, Hey, I love learning new things about federal benefits. I have not learned that new thing about federal benefits, and in fact, there’s certain rules on what counts in service or not. And so we started asking more questions, and we’re not getting great answers back from the HR department. So this is one of those things that people can get in trouble with, is because, and again, I’m not trying to throw HR under the bus, like whatsoever, so please don’t take it that way. But just because we got an email from HR that says we can do something doesn’t necessarily mean you actually can do that thing, or you actually have that creditable service. So creditable service, very broadly defined, is time that you have paid into the retirement system. That’s kind of my general rule, right? If you have worked for the government, you have paid into the system if you have military time that you’ve made a deposit for that time, 99.9999% is going to count for your retirement. If you have time that you have not paid into the system? Oh yes, there are exceptions. I can think of several off the top of my head, but really rare, most of the time that is not going to count for your retirement. One of the things I hear time and time again from federal employees that we work with is how dedicated they are to the mission, to helping their service, to helping grow and being a true civil servant, which is absolutely amazing. But inside of that silver service, you have a great set of benefits that you really need to understand how it works for your retirement, because there’s going to come a time, whether it’s sooner than you would like, or maybe it’s on your schedule, which would be amazing, that it’s time for the next exciting chapter of your life, retirement, doing the things you want to do, when you want to do them, where you want to do them, but to get the most out of that, you need to understand how the process of retirement works, and that’s why we’re putting together a one day event, a one day class really going through, soup to nuts, your retirement benefits, but more importantly, the key things that you need to know to get the most out of your retirement. You already know the challenges with OPM and him processing retirement and how long it’s going to take to get a retirement check, but that’s just one of many obstacles you need to avoid in your retirement. So the class fills up fast, so make sure you register, join us for this event. It’ll be taught by myself and several great instructors that really understand your federal benefits. Our goal is to help another 1 million federal employees with retirement, and we want your retirement to be successful. So join us in the workshop until next time happy planning.

Floyd Shilanski 09:01
You know Micah, the only time they brought that up that I remember seeing that was when the military had a shortage of surgeons, and they were crediting doctors that enlisted with the time that they had working at a hospital to be included for their 20 year retirement plan. But that was back in the early 80s. I haven’t seen that since then, and nothing in the feds. I saw it on the DoD side, but haven’t seen it on the Fed side.

Micah Shilanski 09:28
Yeah, you saw it on the uniform service side, right? Not on the civilian service side, yeah, right, yeah. So I mean two different sets of rules, and this is another way that your 100% spot on where people get in trouble is they’re like, oh, uniform service works like this. Hey, I’m employed by the federal government, therefore civilian service works like this. No, that is not the case. Like terminal leave is a great example. There’s terminal leave for folks in the military. When you have your out date, you just burn all your leave until your retirement date is not allowed in civilian service, right? So you have all these little things with credible service, which are very important. So you’ve heard us talk about it time and time again. And thank you our listeners for your patience, because I’m going to keep bringing this up until I don’t see it as a problem anymore. Get a certified summary of federal service. Go in your OPF, your official personnel file, get all of your SF 50s, verify that time. I got two or three stories this year alone, we’re working with people that knew they had their service. They knew their had the time they knew they qualified for the Vera, and when we got the information, they didn’t have 25 years that they needed for the Vera. And so now they’re listed crap. They had in their mind. They’re like, Oh, crap, I wanted to retire. I was going to be there, etc. And now they can’t, because now they’re not eligible, because they don’t meet the age requirement and they don’t have the years in service requirement for that time. Now they have to work longer.

Floyd Shilanski 10:41
I just got one. We’re six months short, not years. We’re six months short.

Micah Shilanski 10:45
It is what it is, right? Your services, what your services, your benefits are, what your benefits are. And we’re not knocking those things. Know what they are is really important. So credible service, tackle that one sooner than later. This isn’t one to punt to the end. So I’d say that’s really important. Gosh, we probably like dove right in without actually stepping back and asking a first question, which I love to pose to you, is, let’s talk about, what does retirement look like, and what is that going to look like, and how do we start planning for that? So that’s kind of the first question we start with clients, actually on is when they talk about retirement, etc. What does that look like for them?

Floyd Shilanski 11:22
You know, Micah one of the first things that I talk to all of them about is cash flow, because cash is king. You know, you’re used to spending, say, $10,000 a month, and it comes from your paychecks. And you have two feds, and they retire, and all of a sudden their take home pay is about $6,000 a month. How does that affect things. So I really like to see a spending plan. I hate the word budget, but I like to see a spending plan. And I start with, you want to spend the exact same money that you’re spending today. You don’t want to take a 30% haircut and say, Well, let me start over again. So let’s look at that first to determine if there’s a gap between income that we’re receiving today and then when I retire, than what we’re spending, and I’d love to see a three, five year spending plan. This is what we anticipate. You may be staying in your hometown till the kids graduate school, maybe not. And so many times we talk about, all right, we’re going to retire. What’s next? And up here in the state of Alaska, we have a large percentage of people that decide they’re going, we call it outside, but they’re going to relocate to the lower 48 someplace. So how does that affect the cash flow? So I think that you know cash flow is a heartbeat of the retirement. Micah, your thoughts?

Micah Shilanski 12:30
100%, right? And I want you to start living on your retirement dollars two years before you retire. So if you’re one year out, awesome, start living on those retirement dollars. Simulate that as much as possible, is going to be really good. And especially dad, one of the things that you like to budget for is so funny. We both say cash flow. Not so much budget in this aspect. And I just saw a clip that Dave Ramsey is now removing the word budget from a lot of their materials, and they’re coming up with cash flow. So I’d love to say he heard it from us. Dave probably didn’t. He’s a genius in his own right. 100% I love his content and his information, but he as well, just because of the stigma of the word, is starting to move away from that b word, that budget word, into that cash flow planning. So cash flow is going to be really important. And then, as you and I are working on the planning side, what do we normally anticipate? I don’t encourage but I’m planning for this in my back pocket, so to speak, that next, that first 12 months of retirement, what happens from time to time?

Floyd Shilanski 13:28
You know, Micah before I get into that, what do we do every time a client says I want to build a home and I’ll bring it in under budget? You and I both know it’s going to be 20 to 30% above budget, yeah, and that’s even my, my our construction guys and gals. But you know, in retirement, here’s what I know. I know that when you retire the first 12 months, you’re going to overspend, Micah and I project about a 20% increase, and somewhere around the 10th month on that bell curve, we better be trending back down, all right, and you’re going to overspend because you got honey dues, got all these things you haven’t done, there’s going to be travel, you know, now you’ve got time to go do things, and all of a sudden you’re spending more money. And you go, Oh my God, you know, we’re outside of our spending plan, or our budget, which and then you sit with Micah and I, and we go, you know, we anticipated that, but now we got to trend back down towards those numbers. So I think that’s a huge thing, just maybe we shouldn’t tell them they’re going to overspend and tell them they really need to stay within that budget. What do you think?

Micah Shilanski 14:28
You know that’s it’s it just happens, right? And so making sure we have enough tolerances, enough guardrails, enough space in the plan, etc, to accept it, just life happens, and it makes sense, right? When every day is a weekend. Now you’re spending more money. It just happens that way. And you got to get in a new habit. We had a client that was building a house. Great guy, been a client for a long time, and he’s built multiple houses, and so when he was planning on building this, he gave me the budget. I said, well, great news. You don’t normally homes have an overrun, so I love your price point. I’m probably in planning going to do 20 to 30% more. And he corrects me. He’s retired colonel. He goes, Micah. I know what I’m doing. I have built five houses before we will come in at budget or under I was like, Man, that’s fantastic. Well, kudos to you for being able to do this. He goes through, starts building the house. Eight months later, he calls me up, they’re over budget. They’re about 25% over budget. And he calls me that’s quite hat in hand, but he’s like, What do we do? I said, great news. You were gonna do A, B and C. And he stops. He’s like, You already knew this, you son of a gun. And I’m like, I was like, Oh, this is what you pay us for, right? You pay us for the planning aspect of it. Of course, I’m gonna have a plan. And he was very grateful for it. And this isn’t negative at him at all. These are just real life experiences that we see working with people. And so we want to prepare you for that. So in retirement, sometimes we go over and I don’t want to wrap you on the knuckles too hard with it, the question is, are we getting back in track? Are we getting back in line with our cash flow? Now, where this really goes off the rails is this is almost a deal breaker for me. Now, this is how passionate I’m going to be about it when about it when we work with people, if, instead of taking monthly distributions from tsp IRA accounts, etc, they want to use it as a slush fund, they want to go in once a year and pull money out of that account says that, and I’ll just keep all the money my checking account for the year, and I’ll kind of use it appropriately, and then, you know, refill it. I have never once, I’m sure it can happen. I’m just telling you my experience right here. Never once has a client done that and limited to the dollar amount of the annual amount comes out, and it’s this whole thought process, and it’s the psychology, dad, which you taught me, which is the way the money thermostat

Floyd Shilanski 16:37
Yeah, on a money thermostat idea, when you tell that story, the first thing that pops in my mind is your grandfather, when we retired him the third time, you know, and he said, Well, you know, all I need is an extra couple $100 a month. I would buy my last new truck. And when my pop passed away, he was on his third or fourth new truck. It’s human nature is what comes in the checkbook – gets spent. And so balance again, balancing those things out is just crucial to us. We talked about knowing your cash flow, knowing what to anticipate. And I love this thing with forward forecasting, determine what your cash is, what you believe your cash flow will be for 30, 60, 91, year, two years or three years, and then just gut check it. You know, every three or four years, what I like every year, I call it kind of up Periscope. Look around. Everything’s going well, I got a load in. We worked our spending plan. We’re right there. And then what’s what are we gonna do next year? We’re gonna plan an international trip. Great. Let’s price it out, even though we’re not gonna pay for it for a year. Let’s price it out, because you don’t want surprises when you go to write the check or put it on the credit card to get the error miles and say, Huh, we overspend again because we have a limited amount of money and we don’t want you to have to go back to work unless you want to.

Micah Shilanski 17:50
Did you know that OPM rejects 20 to 30% of the federal retirement applications that come in due to errors? One of the most common errors that we see working with clients is not understanding our RSCD, our retirement service computation date, which is how much time you have that actually comes through your retirement just a hint, it’s not the SCD. It could very well be different than just your service computation date. Misunderstanding this can lead to costly mistakes in your entire retirement planning. Our free guide on how to verify your RSCD is going to help you understand the different types of service computation you have and how to accurately determine and check with your HR in a very critical way to make sure you have the right RSCD for planning your retirement. To download this free guide, go to our website. Follow this link below that you’re going to see so make sure you get the most accurate information on your federal employee benefits. Get the facts and avoid costly mistakes. Download this guide now and secure your retirement. Until then. Happy planning. So that’s the really key thing with this right Cash Flow Planning is just so important, especially worried about overspending on that first year. And then we’re also talking about your pre gaming is, a couple other really important things about when you choose your retirement date, if it’s before 65 or after 65? Now 65 years young, this interesting thing kicks in, called Medicare, right? And everyone is going to go under Medicare. Part A is an alpha. Your quasi optional. If you want Medicare, Part B, as in umbrado, I say, quasi optional. You don’t have to get it. You just kind of have to get it right. So you’re going to probably get Medicare Part B. And this pesky little thing comes in called IRMAA. And basically what Irma is Medicare premium is dependent based on your income. And so they look at your income as of two years ago and say, How much money did you make? And if you made quote too much money, then they’re going to charge you more on your IRMAA premium, and most clients really don’t like that very much. So this is our forward thinking. Now what that means is Medicare kicks in at 65 and they look at your income as of two years ago, so when you were 63 and this catches people by surprise, maybe they retired when they were 64 their income was higher before now it’s going to be less into retirement and they get this lovely bill that comes in. So there’s things we can do to appeal that if that happens. But Dad, how do we bring that into the planning focus in order to help get IRMAA down for the long term?

Floyd Shilanski 20:15
Great questions. Micah, you know, the other piece of that is that at age 73, and four, right now you have these required minimum distributions, and that’s right, some of the people that we work with that we talked to into the higher brackets. But let’s go back now. So you’re retiring at 61 or age 60, and you’ve got a, you know, pretty sizable TSP, might be prudent to look at accelerating walk conversions prior to hitting at age 63 why? Because that way the money coming out of the TSP will become income tax free, eliminated or reducing that increased armor contribution. I think that’s crucial to look at, especially with those people in the current environment that are retiring a little bit before they had anticipated too. That’s one great way to do it, son.

Micah Shilanski 21:02
Yeah, so this is again, going to do like a 10 year forecast, right? I mean, a 10 year tax forecast is always fantastic, and it’s okay. What’s that income going to be in the future? And does it make sense to accelerate some income today in order to help reduce that IRMAA tomorrow? When we play the game of kicking the can down the road, it normally does not end up in your favor. Hey, I’m going to plan for retirement later. You know what? I’m not really worried about that. I’m putting my 5% the TSP. I’m just going to plan for it later. Plan for it later. 30 years later, your TSP is probably not in a great position for you to retire. You haven’t done a lot of the things that you needed to do. That’s the same thing moving into retirement, but not looking 10 – 20, years down the path and saying, Hey, what’s my long term care plan? What’s my age in place plan, what’s my tax plan? How am I gonna address IRMAA? How am I under Social Security? What are my charitable needs or desires that I have, and how do I best do that tax efficiently with such high standard deductions? Right? There’s so many questions that are out there that if we wait and kick the can down the road, sometimes you’re gonna end up paying more than you have to pay.

Floyd Shilanski 22:03
You know, Micah, as you’re going through this, you know, I’m just soaking it up, because that’s what we do, right? But I can imagine our listeners going, where do I start? What do I do? And I’m going to come back to that, that three ring notebook, one chapter at a time, one chapter at a time. Hit those things and make sure you’re tracking them, all right? So most important thing, of course, is getting your official personnel file to make sure that you’re eligible to retire. And then we can go to the next chapter, whatever that might be, you know. And one of the things Roth conversions, which we believe is such it’s a proven thing to do, is when you start Social Security, if you’re taking the FERS supplement, of course, it goes away the month you turn 62 are you going to replace it? Are you going to delay it? A lot of my clients, our clients, delay their Social Security until they hit age 70 for the max, which is great, but that may add another $25,000 of income to you. And then at 73 or 74 you have to require minimum distribution that may add another 35 or 40,000 and all this planning that we didn’t do kicks in. Here comes IRMAA. Want to take more money away from your Social Security, and it’s going to last for a longer period of time. So tax projections, I think, needs to be high in that list of things we need to be looking at.

Micah Shilanski 23:12
100%, right? And then to add to that list, as well as it’s definitely going to be estate planning things. I was actually just recording a class today on estate planning. And one of the things that we always talk about is people always say, Micah, I know I should have done estate planning, I haven’t got to it yet. So my standard joke is, great news, you haven’t needed it yet, right? So we’re still above ground, a lot of stuff that we can do, but this is definitely something that comes at the beginning of our process of success when we’re onboarding a client, right? We have a five step process of success for planning for retirement. Step one is estate planning. Why is it estate planning? Because we have to do it before you pass away. Post Mortem planning is really challenging, right? So we want to do it while you’re alive, in getting things in place, from a health care directive to Advance Health Care Directive to a durable power of attorney to a will mandatory. Others would say those are minimum in our world. Maybe a trust, maybe some LLCs, Limited Liability Companies, depending on assets you have, how things are structured, et cetera. But either way, you need to start addressing these things, because, again, postmortem planning becomes really challenging.

Floyd Shilanski 24:16
Micah, you know, interesting. Why did you say we start that at first. Why don’t we do all the other things and get to it at last?

Micah Shilanski 24:25
Two reasons. Number one, you got to do it before you die, and we don’t know when that’s going to be. Number two, if we save this for the end, because we used to be in our process, that way, you never return our phone calls, you never come back in because you don’t want to get to estate planning. But when we put it first, it says, Okay, now we actually can start working on this before we get to the fun stuff and we make progress. And that’s really what we’re going for with all of our listeners. Hire us or don’t. We want you to make progress in your financial plan for retirement. We want you to be prepared. We want you to be set up for it. And these are things that are really important, and we see it from the horror story side of when it doesn’t go well, but we also see it from the success side, when someone’s done the planning and everything goes as smoothly as it possibly can into the next chapters of their life. And it’s a beautiful thing.

Floyd Shilanski 25:13
And the other thing Micah is it normally takes 12 to 18 months, if not longer, between the attorneys reviewing, putting the structure together. For the listeners out there, we understand it’s a painful process, identifying things, putting things down in lists. You know, we talk about who’s going to get what, where and when, and the joke is, I’m going to spend it all. I was driving back out to my home today from being in town at worky, and this motorhome is in front of me and his four, and his license plate says I’m spending my 401 K plan, because I wanted to pull him over. And so tell me about this, right? But the reality is, they want to spend it. And then there’s age differences. You know, people that are my age have a tendency to want to transfer wealth to the next generation. That’s just us, all right? The two generations down, it’s a little bit different three generations down. A lot of our professionals today, they’re not accumulating wealth, they save up and they go have an adventure and come back. So changes are in place, for sure. But I think starting those things, whether you’re just getting started or not, you know, if you have nothing, you’d have nothing to lose or to have a will, and then you build upon those things, and it’s not just something one and done and put it away. Micah, you hear me say it all the time, once a year, pull it out and review it. Do we need to make changes? Do we need to be updates? It’s not a stale document. And how many times do we see? 32 years ago, no kids? Now, they got a parcel of kids, grandkids and great grandkids, maybe. But it still says, Hey, everything goes my wife, and if we’re not alive, give it to a charity, or my parents.

Micah Shilanski 26:43
Yeah, the family, no, really important stuff. So this podcast is all about taking action. What I would highly recommend is, number one, share this. Send this out, right? You know us. Reviews are fantastic as well. But we want to help another 1 million federal employees with their retirement. We can’t do it without your help. Other action item, go back and listen to this and say, break this down into a few steps. You know, if we get enough feedback, maybe we’ll actually create the binder for you guys. I wrote that down as kind of a to do, so reach out to us if that’s something you’re interested in, and we can kind of break this down in a few sections and let you know about it. But I think this would be really impactful in transitioning your retirement. So pops again. Thank you so much for being on the podcast. I love being able to do this with you and getting your wisdom and to our listeners till next time. Happy planning.

Floyd Shilanski 28:21
Happy planning.