Micah Shilanski (00:00)

Welcome to the Plan Your Federal Retirement podcast. I’m your cohost, Micah Shilanski I’m a wealth manager and managing partner. was Shalansky and associates, and I have invited a back now becoming almost a regular on the podcast. Luke Eberly, who works in our office as a wealth advisor and Luke, we’re going to be jumping into, I’m going to say some of the big mistakes. No, no, no. We’re going to be focused on almost the big mistake that a lot of retirees can get themselves into. What’s so painful about this is.

 

that it’s easily avoidable if we see it coming. You think that’s fair?

 

Luke Eberly (00:33)

think that’s totally fair. And it’s one of the most heartbreaking things to talk with somebody who has made this mistake prior to coming to us, right? And then they come to us and please help. It is one of the toughest meetings that a financial advisor, you and I have to do.

 

Micah Shilanski (00:51)

Yeah, it’s spot on right. Or, know, equally challenging when you’re meeting with a client and they’ve made it, they’ve hit financial independence. Working is now optional, right? They can choose to keep working. Hey, maybe they still dedicated to the mission. They still love what they’re doing. They want to keep working. Fantastic. But they don’t have to work anymore. They’ve made it to that level. Then they go into retirement mode and they’re still financially independent. And then they start making these mistakes and now it jeopardizes their financial independence.

 

And it’s so painful to watch, right? Cause I can see on one side of the aspect that they’re coming from, but I can see the price that they’re paying and how their future self is calling out to us and being like, Luke, Micah, tell him to stop, right? It’s that future self that that’s really who clients hire us to help is not just their current selves, but their future selves. And while when we’re having this conversation in 10, 15, 20 years from now, I want to make sure it’s a fantastic conversation in your setup for success. And we have to find ways to balance that.

 

Luke Eberly (01:45)

couldn’t agree more. Should we dive in?

 

Micah Shilanski (01:47)

Dude, let’s do it. All right. Enough teasing about it. So what we’re going to be talking about is a couple of different angles and it kind of, we’re going to boil it down later on the podcast to the one thing that’s really comes down to, but retirement income is huge. Right? Now this comes in many flavors. I’m going to say retirement income. Number one, how much do you need successfully to be comfortable in retirement? Number two, what are the sources of that income?

 

And then how much can you quote unquote safely take out of your retirement accounts? And I’m safe in a very broad term. It’s really is a lot of depends that it’s going to be around there. But Luke, real quick, walk us through the types of income that are generally going to be coming in. And then let’s spend some time on this concept of what is or what is not a safe withdrawal rate. And then we’ll tie it into that big mistake. Yeah.

 

Luke Eberly (02:32)

Totally. So most of our listeners here are going to have a FERS pension coming in. Maybe one, maybe two, if your spouse is also a federal employee and eligible for a FERS pension. That’s going to be coming in at retirement for most people that are listening to this. There’s also social security from age 62 to 70. You can turn that on in some point, right? And then once both of those things are on, Micah, that’s pretty much your fixed income coming in, right?

 

That’s your fixed income. They increase, we had a previous episode talking about that COLA, that it goes up a little bit at a time. But then that’s where your portfolio comes in, right? For a lot of listeners, TSP, there could be some other savings out there, but that’s the other bucket that now you can pull from if your FERS and your Social Security does not meet your living expenses. And this mic, as we were talking about earlier,

 

is where people get into some trouble is pulling from accounts and not having a plan, not having a sustainable plan for that access because of some key factors that happen when people go to retire that I’m excited to talk.

 

Micah Shilanski (03:45)

Yeah. And comes down to this. This is a symptom of the big mistake, but it’s not the big mistake, which is using your TSP. I’m going to say TSP general TSP IRA Roth IRA, all of your investment accounts, right? Whichever format those are going to be in as an ATM accounts, right? As Hey, I need money. I’m going to randomly reach in here and pull money out to sit, to pay the bills. And it can kind of make sense, right? You have a vast amount of your wealth inside of investments more than likely, right? You have your real estate, you know, your home.

 

⁓ may or may not be paid off, guess what? You’re not going to, you shouldn’t have a plan. It forces you to sell your home to make retirement a reality. So let’s just take that aspect off the table. So that assets gone. So really all we’re doing is talking about your investible assets you have, and you need to turn those onto an income stream. But so many times people will use this as a lump sum and reach in whenever they want to pull money out of the TSP and Luke, think it creates, it creates two problems.

 

I think one problem that it creates is without knowing when and how much money you’re going to pull out, this creates a potential and investment tax issue. Right? What if like recently the markets are down, right? Well, what if the markets are down 30 %? That’s a normal occasion, by the way, like that’s not an abnormal thing to be saying. The markets are down 30 % at one point in time. So what if the markets are down, you go to pull it out. Now you’re selling at a loss, right? Sequence of returns is a real risk that’s there. And then taxes would be a huge portion of that as well.

 

is now we could artificially bump us up into a higher tax rate. If we’re over 65, now we have IRMAA we have to deal with all because we weren’t thinking about how to use money. And again, those are symptoms of the bigger problem. But Luke, that bigger problem at the end of the day really comes down to the heartbeat of retirement and that’s cashflow.

 

Luke Eberly (05:22)

You got it, Micah. And cash flow, let me ask you a question, Micah. Does cash flow for most pre-retirees and what they’re spending pre-retiring, does that look the exact same as when they go to retire, Micah? Because what do most people think? ⁓ it’s going to look the same, right? What I’m spending now is going to look the same in retirement or maybe even go down. Have you heard that before, Micah?

 

Micah Shilanski (05:46)

⁓

 

I’ve heard that a bunch just like taxes, right? My taxes will go down when I retire, right? I’ll spend less money. Micah, don’t need work clothes anymore, right? So great news, I’m going to retire. I don’t need work clothes anymore. I’m not going to be spending all this money. I don’t need to commute into the office anymore, right? I’m not going to be spending all of this money, et cetera. Now I’m not saying those aren’t legitimate expenses that go away. They very well could be. But look, what you and I know working with people for so long in this business is that we’re creatures of habit.

 

And we get in the habit of spending money. Let me give an example. have a client who they love to do projects. They love to do remodels, right? They’re always tinkering with something and they were kind of getting this aspect that says, when I go to retire, I’m going to be done with our remodels. Now they’ve done remodels pretty much for the last 10 years. They’re getting ready to retire. But then they go to retirement and sure enough, within a year of retirement, guess what they want to do? They want to work on a remodel project. Right now. Great news is in the cashflow planning, I was already planning for that.

 

And they kept saying, Mike, we’re going to be done with this. And I’m like, no, no, no, you’re not Bob and Sue because this is just what you do. And you’ve created a habit in the last 10 years of spending this money and you’re in this habit. And it’s not just going to go away because you retire all of a sudden. Right now, maybe the house gets paid off. Okay, great. You still have escrow, right? But okay, we can debit out the house. Maybe that expenses will be less, but the way we’re used to spending money is pretty much going to continue in the last.

 

real serious approach to our finances into retirement. Is that fair?

 

Luke Eberly (07:14)

Yeah, I couldn’t agree more. also, know, to that point too, I’ve had a lot of prior retirees come to me and say, and we talk about their spending, right? And I do the math of their net pay stubs and I say, you’re bringing in X amount of dollars, but you’re saying you’re only spending 60 % of that each month. Where’s this extra 40 % going? Is it going into a savings account? Well, no. Well, we bought a boat last year. Well, I guess two years ago we bought new cars. Three years ago while we did this house remodel.

 

And it ends up being these exclusions that a lot of people think are one-time expenses are actually just in different categories each year. Really have to be a look yourself in the mirror, be honest, be how much are we spending? And this is not calculating one of the most important things and important changes that occurs when you go to retire, Micah, is that you go from having five days a week in the office to having seven days a week as vacation.

 

Micah Shilanski (07:51)

You re-

Yes.

Luke Eberly (08:13)

You spend more on vacation Micah or less on vacation?

 

Micah Shilanski (08:17)

Boy, Luke, if I can look at that a little bit more detailed, not just the vacation, I absolutely spend more money on vacations, right? But when do I spend more money throughout the week? Monday through Thursday or Friday, Saturday, Sunday, the weekends, right? What happens when every day is a weekend? Now all of sudden we have this ability that weekend, you know, like I love it when my super busy season, cause I could see my credit cards, right? There’s me personally in tax seasons, like one of our super busy site seasons, my credit card is down for like two months because

 

Luke Eberly (08:30)

The weekend, yeah.

 

Micah Shilanski (08:47)

I’m working on taxes. I’m working with clients. I’m not doing these extracurricular activities. And it’s kind of funny to see. And it’s the same thing that we see with clients is that when we have more time, we spend more money. That’s not a bad thing. The mistake that happens is we don’t have a plan for these expenses coming up. The mistakes that happens is get into this aspect. says, ⁓ when I retire, I will fix this. ⁓ when I retire, I will do this. Or God forbid you go into retirement saying,

 

I have sacrificed the last 20 or 30 years of this. I deserve X, Y, and Z. Boy, I got to cringe a little bit inside whenever I hear that because it’s generally justification for a pretty poor decision we’re about to make. Right.

 

Luke Eberly (09:27)

I couldn’t agree more, although I love saying, all right, here are your living expenses. What about your travel budget? Right above and beyond, right? I agree. You are retiring. You do deserve it. But before you go and say, I’m retiring and I want to spend 20,000 a year more in vacation without a plan, making sure that works. Right. You got to have that plan three, five years before retiring, putting a number to that.

 

starting to think about what are we going to spend in retirement, then you can say this plan works or this plan doesn’t work. You can do that analysis, right? But you got to start thinking about it before that final work day.

 

Micah Shilanski (10:10)

 Luke, if when I get clients to live on retirement income, two years prior to retirement, it’s a smooth, easy transition. Now notice that Luke and I are talking about this. We’re never saying live on less. We’re never saying spend less. We say live on retirement dollars, right? And that’s going to be different for everybody, right? What are your retirement goals? What do you want to do, et cetera? But here’s in my ideal world. What we get set up two years before retirement, we got this plan already in place. Then we start moving a hundred percent. This is where people get uncomfortable.

 

I want to move a hundred percent of your paycheck instead of getting paid every two weeks. I wanted to go into an investment account. So not going to be invested, but then from that investment account, you’re not going to get paid once a month from that account. Why? Cause you only get paid once a month in retirement. Right. And I want to simulate that income. And then Luke, to your point, this is, okay, let’s say it’s $6,000 a month. went for basic paying the bills and I want an extra $2,000 a month for travel. And I want a thousand dollars a month for the grandkids for a Christmas fund or what any of these we’re going do with that. Okay, great. That’s nine grand a month. Right.

 

Then I went three separate accounts. want a household account, get 6,000 a month. want 2,000 a month going into a separate travel account. I want a thousand dollars a month going into that grand kid account. And let’s see how that actually works in before we’re retired, living in that retirement mode. Right. And now this will, this really tests our theory. Is this the right number? And I always tell clients the wrong number, a bad number is the wrong number. If we think it costs $7,000 a month and it actually costs nine.

 

that was a bad number, right? We got a problem that we need to deal with. I want to flush those out before we retire.

 

Luke Eberly (11:41)

couldn’t agree more. And you know what I like about that Micah is that, you know, we’re so used to while working, you, people are working 30 plus years, so used to getting a pay stub every two weeks and investing it in their accounts, right? And then all of sudden they have to go and flip a switch and go from putting money into an account to withdrawing from an account. And it just feels weird to withdraw.

 

So I also really like that in preparing you mentally to building up, you’re building up this TSP balance, you’re building up your portfolio to use it during retirement in a sustainable way, which is what Mike and I are really pressing here. But it also helps to start getting used to it’s okay to start withdrawing if you have this plan. And if that’s a sustainable withdrawal, let’s start getting used to that because it’s a weird flip of the switch.

 

that a lot of retirees aren’t prepared for, it’s scary.

 

Micah Shilanski (12:40)

It is

 

Luke. I’m so glad you brought that up because so many engineers that it’ll work with, but the bath is the same. Like I’m bringing home nine grand a month right now. There’s no reason to put it in a separate account. There’s no reason to do these different buckets of income, but Luke you nailed it. It feels wrong for savers, right? For spenders who don’t necessarily have this problem, but for savers, you have this issue. It feels wrong to withdraw that money from the retirement accounts, you know, and, it begins, I like to do things that I recommend for clients. I kind of do the same thing for me, even though I’m not within a couple of years of retirement.

 

I kind of put money in there and I take the money out and it feels wrong to get that distribution from my Schwab account. And so we need to sample what that’s like and you need to see that it actually works as you’re going, getting closer to retirement before that emotional swing of retirement happens.

 

Luke Eberly (13:24)

Couldn’t agree more. Couldn’t agree more.

 

Micah Shilanski (13:26)

Yeah. So on this, so here’s some things that we need to be thinking about as you’re going through it. Number one is really knowing where we spend money. Cash was the heartbeat of retirement, right? We don’t need a budget. don’t need 37 different line items of all the different things you need to do, but you need to know the top several categories of where you spend money. me, household, travel, entertainment, medical, and kids. Those kids are expensive, especially teenagers. They’re great. They’re worth it, but they’re still expensive. So I like to know in those five areas, where am I spending money at?

 

And I want to know if I’m building a retirement plan for myself, how do I maintain that level of lifestyle that my wife and I have throughout retirement? And then Luke, you know, once I have that, that number of how much I need to spend, how do we generically speaking, start backing into where my income is going to come from? ⁓

 

Luke Eberly (14:11)

That’s

 

a great question. So there’s a lot of moving pieces here. This is why retirement, it’s not simple. If retirement was simple, you and I would not have a job. Right? I mean, if retirement was so easy and streamlined, it’s not. You have to know what you’ll be getting with your FERS pension, right? What will be coming in? Is there a supplement prior to 62 or not? You’ve got to understand your survivorship benefits with that as well, as well as social security, when to turn it on 62 to 70.

 

start building up those fixed expenses, and then, Micah, here’s a really interesting one. How much can you pull from your portfolio every year and not see that portfolio just dive? Well, that’s a bit of a range, right? That’s a big depends question that there’s a lot of papers. I believe we’ve done YouTube videos about this as well, but a safe withdrawal rate from that portfolio.

 

We see anywhere from three to 5%, is that fair Micah? Three to 5 % in a well allocated diversified portfolio is what I would say can be a safe withdrawal rate if you’re looking at retiring, but there’s a lot of factors there. So I hesitate to just say a sweeping generalization claim.

 

Micah Shilanski (15:26)

It is possible to get that set up where you can have that income come in. Absolutely. Right. But there’s a lot of depends inside of there and making sure it’s set up correctly, making sure you’re Luke, you know this, right? You’re preparing for those sequence of returns. You’re preparing for the risks that you’re taking. Like there’s a lot of things that go in there, but yeah, somewhere in that range is a good planning range. You know, I think you can do it on the higher end of that as I know you agree to, right? But that comes with setting things up properly and having the discipline to maintain them.

 

Luke Eberly (15:50)

couldn’t agree more. And you have to know what you’re going to spend. know, Micah, you just said to reiterate that point, you’re taking a look at your finances now. You’re spending now. But when you have more time on your hands, when every day is a weekend, let’s take an honest look in the mirror and make sure that your projections, what you’re using to build this plan is in line as much as possible with what reality.

 

may be like in retirement. can’t get it spot on, but we can get it pretty close. And I think, Micah, you know, our pretty good job. And when people come to us, we do a pretty good job of estimating that and building a plan in such a way, but make sure your plan is sustainable for those additional expenses that may come in retirement.

Micah Shilanski (16:36)

So this is all about knowing where do you need to spend, how much money do you need to knowing where is that going to come from and making sure we have a plan for the long run. Well, that’s the main thing that we want to focus on. That’s that big mistake that we see is people not really understanding their cashflow and retirement and the cost that that can be.

So that’s your guys’s homework assignment from this podcast. That’s it. Action item number one, share this podcast with other people. Let them know our goals of another a 1 million federal employees with a retirement. We cannot do that without your help. So make sure you’re sharing this information and go back and look at your cash. We’ll have a conversation with your spouse about it. Let’s make sure you know where it’s going to come from and create a plan in place to make sure you’re taken care of. Luke. Thanks again for joining us on the podcast. Until next time, happy planning.

Luke Eberly (17:19)

as always Micah .

Micah Shilanski (17:24)

Content in Planner Federal Retirement is for general informational purposes only and should not be considered individualized advice. Investing involves risk, including possible loss of principle, and past performance does not guarantee future results. Guests are not affiliated with CWM LLC Investment Advisory Services offered through CWM LLC and SEC Registered Investment Advisor. Planner Federal Retirement is not affiliated with the federal government.