Micah Shilanski (00:00.904)

Welcome to the Plan Your Federal Retirement Podcast. I’m your
co-host, Micah Shilanski. And today I want to jump into a couple of topics that
really come up when we’re working with clients as we’re getting close to retirement.
and it’s a really big transition that happens.

As we’re getting closer and closer to retirement, this
becomes more and more of a reality of saying, when we retire, my paychecks are
going away. What’s my plan? How’s my income going to come from? And when OPM is
delayed in giving me my retirement check, even if things go really well, you’re
not going to get your retirement check right away. You already know that. So,
what’s our plan in that transition time? And how do you set retirement up for success?
So let’s kind of jump into this.

One of the things that comes out that right is that when OPM
comes out and finalizes your retirement, we don’t know when that’s gonna be,
right? that could be as soon as three to four months after retirement. I don’t
get your hopes up on that one. That’s extremely fast. Normally it’s five to six
months, or it could be over a year. Now it’s really rare that it goes over a
year. Those are super complicated cases with a lot of things generally going
on. On a normal retirement, hey, I worked for the government for 20 years, for
30 years.

I’m now 57. I’m going out in a full and immediate
retirement. We’re generally not waiting over a year for your pension to start,
but five months, yeah, that’s pretty normal. I wouldn’t be surprised at that in
the slightest. In fact, I wouldn’t even start contacting OPM or following up
until six, seven month mark because that’s just in that normal window. So what
do you do while you’re not getting paid? Now, a lot of federal employees are want
to retire at the end of the year and they’re gonna save up their leave, right?
They’re gonna have that 240 hours that they’re gonna bank, plus they’re gonna
build up the leave for this year, and they’re gonna have that big cash out.

So some thought is, hey, that giant leave payment will help
bridge some of the gap. And that could be part of it, but it may not be the
entire part. So let’s kind of break this down a little bit. Cash flow is the
heartbeat of retirement, right? If you have enough cash flow coming in,
retirement’s good. You’re able to do the things you want to do. You can travel,
you can do everything that you want to do in retirement. If cash flow is not
good, retirement becomes a little bit more challenging, right? Same in our
working life. If cash flow is good, we can do a lot of fun things. When cash
flow is not good,

Micah Shilanski (02:07.468)

We can’t do those fun things and it gets a little more
stressful around the house. So we got to look at it the same way as we’re
getting into retirement. But before we get into your income sources that’s
coming in, let’s talk about something else that you can control. Where do you
spend money? Right. Now, one of the things you guys have heard me say on the
podcast time and time again, I love a cash flow plan. Now, a cash flow plan is
not a budget, right? I’m not a big fan of budgeting. The B word has negative
connotations with it. I don’t care where every penny of your dollars go.

right, what I want to know for the vast majority of you is
generally how much money a month do you spend? Now, it’s normally everything
that comes in, I get that, right? But I want to know in dollar amounts how much
a month do you spend? Then I want to know what’s your biggest expense that you
have every single month. Could be your mortgage, may not be your mortgage. And
then I want to know what are the top four to five categories.

In how you spend money. Now, generally, with most of my
clients, this is going to break down between household, travel, entertainment,
medical, and kids, maybe grandkids, right? Those are those top five categories
that we generally spend our money. Now, what’s the difference in a cash flow
plan versus budgeting? Budgeting, I very accurately look over the last 12
months and I say, or last month and say, Great, where did every single penny
go? And I put all the categories inside of it, and I generally have a fight
with my spouse while I’m talking about budgeting, right? Yeah, that’s not
really a great thing. Cash flow planning is about saying, hey,

Generally speaking, where do I spend my money in those five
categories? And what’s my range in each of those categories? Right. So let’s
take household. So household expenses, anything that I need to operate the
household. Utilities is inside of there, mortgage payments gonna be inside of
there. groceries are inside of there. Eating out, nope, that’s not inside of
there. Dining out is entertainment. Uber Eats, right? Any of that type of
stuff? Nope, that’s all entertainment. So the grocery stuff, the core stuff to
operate the house is on the household.

expenses. Now, entertainment is gonna be other stuff we want
to do. Maybe it’s dining out, maybe it’s date night, going to a movie, buying
other things, right? For any of the sports or hobbies that you’re in, right?
That’s gonna be on that entertainment side. Medical self-explanatory kids,
pretty much anything I’m spending on my kids, I like to track because that’s an
expense that’s gonna be different in the future, right? It’s not gonna entirely
go away because yes, kids trickle down, eventually grandkids come up. But I
want to know kind of what that dollar amount is. And then we have travel.

Micah Shilanski (04:28.62)

Now, the beautiful part about when you break this down, and
I’ll have a client that are gonna push back on me, right? And you’re probably
pushing back on me on your head right now, saying, Micah, I don’t need to do
that because Bank of America does a great job or insert whatever credit card
company you have, is when I do that, they’ll break down all of my annual
expenses for me. They tell me all the categories. I don’t even need to do these
five categories. Great, but how is that working for you? Can you tell me how
much you’re spending without looking at that?

If the answer is no, I’m gonna push back a little bit and
say, hey, we need a different system. So the way that I break this down, it’s
gonna sound crazy, right? And I’m gonna put people in two different categories,
savers and spenders, right? Spenders, we’re running tight in the checkbook,
right? Where we’re spending all of that money, it’s kind of gone. So this isn’t
a strategy for you. I have a different idea for you guys on that one. On
savers, hey, we build up our checking accounts every single month. We have
extra money left over, we kick it into savings, right? We’re not kind of
worried about kind of running those down. Credit cards are paid off on a
monthly basis.

Right. When we’re in that category, I actually have this
with my wife and I, we actually have five different credit cards, as crazy as
this sounds. One for household, travel, entertainment, medical, and kids. And
what we do is I just write on those credit cards what those things are for. And
if I’m going and getting groceries, I use my household card. If we’re going on date
night, I use my entertainment card. If we’re traveling, I use the travel card.
If I’m buying something for Gabriel, my son, and then it’s gonna be on the
kids’ card or Alana, my daughter, whichever one it’s gonna be, it’s gonna be on
the kids’ card.

Now at the end of the month, when I go to pay bills, right?
This is just between two credit card companies. So it’s not really that more
complex, Bank America and Amex, right? I can log in and I can see how much did
I spend in each category, right? I don’t gotta go break anything down. It’s
already broken down for me. Now I know how much I spent in my household. And I
have a range. We need to spend between X and Y inside that. Now for over, I
just have a quick conversation with my bride. I don’t ask her where she spent
money. I don’t ask her why this expense is going up. Under the end of that, I’m
just saying, hey.

Just as an FYI, we’re a little bit over a household this
month. Just want to bring some awareness to it because that’s what we agreed
to. If we’re over in a category, my job is to bring some awareness to it. And
then perfect. We can get kind of back on track with where we should be. gym
when we bring awareness to an issue, it fixes it before it becomes a problem.
This is why cash flow planning is so important because when we move into
retirement, our income will be different. When every day is a weekend.

Micah Shilanski (06:49.698)

Your spending will be different, right? We spend more money
on the weekends than we do the weekdays when we have time off. When every day
is a day off, are you going to spend more money? Quite possibly, which is why
we have to manage cash flow so well. So if we can really understand what our
cash flow is, what our income needs, then we know what our income needs are going
to be, right? If I know what all my expenses are, I can do all the things I
want to do. Now I can start talking about how my income needs to come in to
augment that spending that I want to have.

All right, now let’s fast forward the clock to the retirement,
right? 1231. You picked your magical retirement date. You retire. The next pay
period, let’s just say your leave gets cashed out. The next one, the following
one, depending on kind of when those dates fall, when it is processed, your
leave is gonna get cashed out, you’re gonna get a giant check. Sometimes with
that giant check, we have a tendency to start spending that money now. So be
careful of doing that. but you’re gonna get that big leave check coming in.
Then you’re gonna get nothing from OPM for a couple of months. Maybe two months
later, you start getting an interim retirement check.

Somewhere between 60 and 80% of what they anticipate your
retirement check being. Now, regardless of what that dollar amount is, don’t
worry about it. Don’t, you know, if it’s a little bit higher than you thought
it was gonna be, if it’s lower than you thought it was gonna be, don’t worry
about it for well, pretty much one main reason. Number one, there’s nothing you
can do about it, right? Until your retirement gets adjudicated, gets finalized,
there’s nothing we can do about those interim payments. They’re gonna move up,
they’re gonna move down, just let it be.

Once your retirement’s finalized, then we like to go back
and look at all the math and say, hey, did you get paid everything you were
supposed to get paid? 99% of the time you do. OPM’s actually pretty good about
that. Every now and again something happens where you don’t, we need to go back
and start asking some questions to OPM. So you’re retired, maybe March you’re
gonna be getting that interim retirement check. Then you got a couple months
later, maybe June before your retirement is finalized, kind of six months, and
that would be pretty great, actually, pretty smooth retirement. So what happens
in that time period? 

Well, here’s the mistake that happens, right? A mistake that
happens is saying, hey, I get this big leave cash out, or I’m gonna take this
extra money, I’m gonna stick it all on my checking account, and I’m just gonna
quote, live off of that money until my pension comes in. The challenge that
comes up with that is with what we call a financial thermostat, right? When we
go into our checking account and it’s between X and Y, we feel pretty good.

Micah Shilanski (09:02.626)

But when that account balance starts going over Y, I start
feeling really good. And I start spending that money, then all of a sudden it
goes below X, whatever that dollar amount is for you. And you’re like, holy
crap, who spent all this money? Right. And we get a little bit more panicked
about it. And so we’re not used to generally larger influxes of dollar amounts
in our checking account. So what I love clients to do simulate those retirement
checks. Any lump, some money you have coming in, let’s

Turn it on as an income, as a quote, paycheck, just like
your retirement check would be. So if you’re gonna get $3,000 a month from
FERS, awesome. In January, get $3,000 automatically transferred from savings
into checking. And that’s how much your spending money is when interim payment
comes in. Let’s say your interim payment is $1,200. Awesome. Reduce that $300
by $1,200. So now you have $1,800 coming in plus $1,200 from OPM. There’s your
$3,000, right? And then once OPM gets finalized and they’re paying you that
three grand, turn that income off.

This sounds small, right? It’s like, my good, does that that
doesn’t really matter? Like the money is in savings. The is I’m just moving it
to check and automate. It doesn’t really make a difference. But it does in the
psychology of things because the for the last 20, 30, 40 years, you’ve been
getting paid every other week. You’ve been getting paid on those pay periods
and you’re used to a certain flow of money, and it’s worked. You know how much
you can spend, you know how to tell, you know how to balance that checking
account, you know how to operate throughout the month.

Why monkey with a system that’s working, right? Why create a
whole new system of doing things, right, with your cash flow when you don’t
have to? And you don’t have to in retirement. Sure, your income is going to
come from different sources, but that doesn’t mean we should entirely change
the way that that income is coming in and you should be spending money. So I
love my clients to get that weekly or even bi-weekly payment that replaces
those paychecks in retirement time. So you’re living on that same cash flow.
When we set that up.

Man, you are set up for success as you get into retirement.
Now, just because we’re we’re continuing to maintain the same thing on cash
flow doesn’t mean we don’t need to make other changes throughout your
retirement, right? Not everything that you have while you’re working is set up
where it needs to be set up for retirement time. But cash flow is one of those
things that I want to keep it as consistent as possible because that’s where my
clients are very, very successful.

Micah Shilanski (11:18.466)

The other thing we get successful by sometimes we’ll do a
great job in saving money for retirement. We’ll be really excited about it.
We’ll wanna do these trips and travel and these other things, et cetera. But
you know, we’re worried about overspending our retirement, worried about not
having enough money for retirement, which is a very valid concern. So step one,
of course, is as we’re building our five step process of success building a
financial plan, is going to be going through and making sure we have enough for
retirement, right? Making sure you have enough for those needs. And if you do,
awesome.

Maybe we create a travel account instead of just a credit
travel credit card where you’re spending money every single month, right, on
travel expenses. Maybe we create a travel account and just you know, almost
like an allotment from your paycheck, just an allotment from retirement. Let’s
just start funding a travel account. Then as that money builds up, you guys
know what is safe to spend, right? So instead of just saying, hey, can I pull
this money out of retirement here? Can I pull it out there? That’s not the way
you’ve really operated for the last 20, 30, 40 years of working, right? You’ve
operated on a cash flow basis. Let’s keep that going in retirement.

Let’s create a distribution just for your travel accounts
and have it go directly into that travel account, just like an allotment would.
And now you know what money is safe money that you guys can spend on travel. So
when I say cash flow is the heartbeat of retirement, you can sort of see a
glimpse of why that is true. It affects us in so many other ways. Now, an
element we don’t really have time to get into today is also in the tax side of
the equation, which is huge inside of this. One of the mistakes that sometimes
people will make is saying, hey Micah, I’m gonna retire.

I’m a little worried at how long OP is going take to get my
retirement. So I’m going to reach into my TSP and I’m going to pull out a
hundred thousand dollars and stick it in my checking account so that that way
I’ll have plenty of money. And don’t worry, I’ll quote repay the money back to
TSP once my pension starts. So a couple of things with that, right? You can’t
repay the money. right. If you take that distribution out of TSP, you’ve
separated from service, you cannot, after you’ve retired, you cannot loan
yourself retirement money and then pay that money back. That’s a distribution.

That’s a distribution for tax purposes, could even be
penalized depending on your age, right? So be really careful of that. If you
reach into that TSP into your IRA accession, you pull out that huge lump sum of
money, that’s gonna be a bit of a tax issue for you. And so be very, very
cognizant of that because you can’t put that money back. And what’s gonna
happen is once OPM repays you, right? Because after your retirement is
adjudicated, they’re gonna go back to the last six months or however long it
took and repay you everything that’s owed.

Micah Shilanski (13:39.51)

And now you took excess money out of your TSP, you could be
artificially bumping you into a higher tax bracket, higher than you needed to
be. So tax planning is really, really important. We need to have good cash flow
so we can get through this time. That’s what OPM sets us for our normal full
retirement check. Is it coming in? But we also have a to have a good tax plan
as we’re walking through this to make sure you’re set up that you’re not
overpaying the IRS by tens of thousands of dollars because you’re taking money
from the wrong account.

This all starts several years from retirement. Now, if
you’re not several years from retirement, then that’s okay. Start where you
stand, right? But this is what starts, what happens today. The sooner you start
in that planning process of saying, Hey, what does that retirement look like?
What is that cash flow gonna need to be? How do I need to get set up to for
success to be there? The sooner you start that, the smoother your transition
into retirement is. And that’s what we help people with every single day. So I
hope this information has been beneficial.

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one million federal employees with retirement. Till next time. Happy planning.

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