Ep #76: Streams of Income

Full Episode Transcript
With Your Hosts
Micah Shilanski and Floyd Shilanski

Micah: Welcome back to the plan, your federal retirement podcast. I’m your host Micah Shilanski and with me is the legendary Floyd Shilanski. Pops, how are you doing, sir?

Floyd: I’m doing well.

Micah: Oh, look at this; we’re going to play sound effects. So how are you doing?

Floyd: I’m doing well. Doing well. As you well know, I’m traveling a little bit. So if you hear that the jets in the background is not at an airport, it is where they’re practicing the F35, and the new aviators are learning to fly, so I call it the sound of freedom.

Micah: A sound of freedom in the background is a great thing, though. You’re traveling in your RV, which is fantastic. So I appreciate taking some time so we can talk about this; actually is, as I look out, so you’re down in Arizona enjoying the beautiful weather, and as I look out my window right now, I have a moose eating some of our trees. So we got a little bit of the opposite is going on.

Floyd: Yes, sir. I just saw a road runner go past the road. So yeah, extreme contradictions. You bet.

Micah: Well, pops, one of the things that we wanted to talk about today was really jumping into retirement streams of income and I know one of the things are some kind of misconceptions we have are classic streams of income that I thought would be really fun to talk about, like pensions, right. And Tammy and I have talked about this a lot how it works in the federal pension. We’ve talked about Social Security. We’ve had some other social security experts on the podcast as well going through how this works, but there’s other streams of income as well, that clients sometimes want to talk about and bring to the table. So you know, maybe it’s rental properties, maybe it’s some other ones. So let’s go through some kind of pros and cons. Now, as we’re addressing this, one of the clients at one point in time came to me and says, Oh Micah, she was a new client, and she was referred to me by an existing client. She’s like, Micah, I know you don’t like rental properties, but I have four, and she said well, why don’t what everybody thinks I don’t like real properties? They said, well, the comments we’ve heard from, you know, this particular person is you don’t like rentals. I was like, Ah, I was like, It’s not that I don’t like rental properties. It’s that it’s a tool. Know how to use them when they’re good and know the downsides of them. And sometimes I think we tell ourselves too rosy of a picture of rental properties or on anything and I think it’s important to look at that other side of the coin as well. What are the areas this can go wrong? But pops you come up with us with twice as much experience as I have over 40 years in the business. So what are your thoughts on that?

Floyd: You know, the funny thing is, as you’re saying that I can remember clients telling me early on, Floyd real estate never goes down in value until it does. In the 80s at Anchorage, Alaska we watched the price of oil go from $30 or $40 a barrel down to $8, $10. And we watch real estate values just plummet back when you were in elementary school. And the joke in Anchorage is you could buy a mansion on the hillside and get a free condo downtown because of the disparity in values. Okay. You know, whether it’s real estate, whether it’s investments, whether it’s pensions, you know, it’s all part of that financial puzzle that we take, you know, and if you just want to be very simple with it, you got four pieces, four quarters, if you will, and I normally don’t have a problem with real estate being one of the four quarters to do it. Just don’t overload it. It’s like our Do It Yourself stock jocks. They want to have everything in high risk NASDAQ stocks, I’m okay with that. As long as we don’t overload it, because everything’s great when it’s spiraling up. But it’s just quickly it can come down. So to your question, as long as it’s balanced. I like real estate.

Micah: Yeah. So it’s a piece of the pie. Right. And on the comment on stocks, it was really important what Floyd said, was that saying, Hey, it’s okay to have a piece of it, but not everything in that area, because now we’re taking a lot of risk. And so now we say, well, is this really the risk we should be taking? And we’re talking about this in the context of retirement income, right. And one of the things that I’ll tell you time and time again, are retirees like their income to be A) consistent and B) increasing. They do not like having decreases in income. So we really got to look at that. So I mean, the first piece of the pie course is your federal pension. So there’s other podcasts we talked about other on this podcast. We talked about our earlier episodes all about that. How do you calculate your pension? What’s credible service, what are the rules for retirement, etc. Those are good things to go back and listen to. We talked about Social Security, and boy, it’s not as simple and that pops we’ll talk about this for just a couple minutes. It’s not as simple in my opinion as saying 62 turn it on FRA which stands for your full retirement age between 65 and 67. To turn it on, there’s a lot of other things that come into this mix as well. Right?

Floyd: Oh, without a doubt last week, we did an in person seminar talking about fed benefits. And one of the things that we do is we had estate planning, we had cash flow, and we had Social Security as one of those three major late stools for the first retirement right and typically we get three, four or five minutes and then no one asked questions. And we went on and on. What about this, what about this? Final personal security is complicated, and it changes you know, the process is gonna go bankrupt. The Press says, Oh, don’t worry about it, file this, do that. And then you get the individuals go Oh, my goodness gracious. This is a major lay in that three stool retirement process. I better pay attention. I had had one of the gentlemen come up and say, Floyd, I’m gonna follow 62. How does that affect my spouse? I said, Well, she takes a permanent reduction just like you. And he goes, why? I says, Yeah, you file it. 62 And you’re gonna hit him between 25 and 30%. permanent reduction, and she has to live with it. Even if even if. If she delays filing against you until she reaches her full retirement age. Okay, she gets 100% of your reduction. But if she files, you file a 62, she files at 62 to get your half, her half of that it’s still an additional penalty. So yeah, he’s not like checkup block. Let’s do it. It’s like you need to sit down with a competent advisor, walk through it to see longevity, you know, and regrettably, if you have a disease that’s going to take your life in a short period of time, different conversation, but statistically, we’re going to live into our 70s and 80s. And you will, I want your surviving spouse, male or female to get the maximum benefits instead of giving up something because we’re excited.

Micah: Just to pull that thread a little bit. Let’s also do a little more clarification for our listeners, pops,what you’re talking about there on Social Security was that, you know, husband and wife married, and so if the spouse in this case did not was not claiming on her own benefits, right, if what you elect only affects your benefits, and then your potential, but it does affect your spouse’s survivor benefits or your spouse’s ability to claim on your benefits. So if you’re both working this time, and you both have relatively equal Social Security amounts, if you turn on your benefits does not affect your spouse’s Social Security benefits. The only thing that’s going to affect is your spouse claims on your benefits, number one, or it’s going to affect survivor benefits that is you pass away what is she entitled to from the benefit standpoint? So really important to know these things? It’s not just a you question. It’s a survivor question. And then that’s also a you know, an investment question as well, in my opinion, if we have social security and you take it early with a 30% penalty, man, that’s pretty substantial. If we delay it and then every year past your full retirement age, it grows by a guaranteed 8% a year, man that’s a fantastic number of what could be increasing. So that’s definitely something you need to go back and to look at, I think in Episode boy, 6 and Episode 14, and then episode 27. By the way, just some quick numbers. As to episodes we’ve gone into Social Security in depth. So again, on this podcast, we have multiple episodes where we talked about Social Security and going in claiming strategies, right? So no one understand these benefits is really important.

Floyd: You know, Micah, you just added one further step to that, now imagine you retire at 62 your spouse is a five years younger, she hits 62 and you pass away so she’s in you know, she gonna take her Social Security at the same time, but if her cash flow is short, and she has to go back to work, lo and behold, what do we have? We have an Hermes cap, don’t we? Currently at $21,600, If she has to make earn more than that, plus Social Security to live, now, security’s gonna call back $2 for that $1 for every $2 above that number. Plus, you have to pay taxes on it. So it’s not just as simple as check the box. I want my money and I want it now.

Micah: Yeah, it’s really important to know these issues to know these things that are coming up, etc. And more importantly, know how it works for you. It’s not about how it works for somebody else. It’s about how it works for you. So actually, on that note, let’s transition a little bit popsicle, rental income, because I think it’s a good one for us to talk about because it’s always well, not always, but it’s a very frequent question that comes up is should you have rental properties for retirement? So what’s your two and I think we’re gonna have some slightly different opinions. This is gonna be fun. So what what your two cents on that?

Floyd: You know, as you know, real estate is treated your mom and I exceptionally well, especially from the realm of capacity.

Micah: Oh boy. Oh, okay. All right. We got some family drama we got to air apparently this podcast. What pops says, real estate treated him very well, which is an accurate statement. I’m not detracting from that. What it meant was as soon as my sister and I could start taking over and managing these properties, we would do that. So we would go over there and clean up properties. We’d go over there and collect rents. We’d go over and help with basic maintenance and things like this. So pops again, to your standpoint, real estate worked really well. We had a little bit of that child labor which is coming in which is great gave us a great educational background on this but there’s still a lot of maintenance in there. So anyways, yes, real estate should do well, just a little bit of that family history for our listeners to know.

Floyd: We won’t go too deep into the history okay. But when you when you learned a lot, especially being an entrepreneur how to do these things, right? When you start thinking about it, I don’t want to be a passive landlord. Well, the problem with passivity is that well, the good thing about passive, you just turn it over to a real estate agent and they do all the work for you. The bad news is you have to pay for it. So in the in the past, the idea was if we can rent it, and we can get cash flow or cover it, we would have the appreciation for our gain later on. Love the idea, but real estate’s a two edged sword while you’re working, you love to depreciate it while you’re working you love to see it appreciate until you sell that, when you sell it, you got to pay capital gains. You buy it for 10 sell it for 20, $10 is taxed out of long term caand pital gains, which ilong-terme. But all that great depreciation you had to write off over those years to save your tax dollars. What do you have to do with it? Bring it back into ordinary income. All right, tax planning extremely important. We just talked about Social Security, tax planning, real estate, tax planning, right? And this shouldn’t be something you wake up one morning, you know, and you watch one of the TV shows I’m going to flip this house or how I built my million dollars by you know, with real estate. It’,s great when you’re 30 and 40 years old. But if you’re retiring at 65 and 70, do you want to have 14 pieces of property to manage? Maybe you do maybe that’s what your life is at’s okay. But I know your mother says we’re not buying any more real estate because when I want to leave I don’t want to worry about someone taking care of it.

Micah: And that’s a good progression. Right? Sometimes we have clients in here that normally will save the rental properties, great couple things we need to look at to make sure that they’re a good deal. We’ll talk about those in a second. And but there’s going to be a time in your life where you’re just done with the hassle of rental property. Just like there’s a time that you love working and you want to do it then there’s the time you’re ready for the next chapter. That’s the same with rental property. Does that make rental property bad? No. Know how it works know how it’s a tool inside of the investment game. So here’s some misconceptions that I think people bring into when they’re talking about rental property and pops feel free to push back on me on this. Number one, I like to say everybody can do addition, but nobody can do subtraction. So what does that occur? If they come in and says Micah, I look at this property maybe it’s an Airbnb property, I’m gonna buy it for Hawaii and it’s gonna make all this money or you know, I’m gonna do Airbnb southern place or I’m gonna buy a traditional rental property right? They say look, if I only rented it for x amount per month for 12 months, look at how much money this is. And they’re doing the basic math correctly. But that’s addition. They’re adding up all the possible revenue they have. They’re not doing subtraction, all of the expenses that we’re going to have with that property. Again, as I talked about this, this doesn’t make it bad. Really understand how it works. So we got to pull up property management costs, we have to pull up maintenance costs. That’s one of the things that a lot of times people they’re not saving for. I want a separate account set up as a sinking fund for maintenance repairs, right? What about vacancies when they come up? What about all the utilities and things that you have to do all of these things that are going to come up are really important. So if you’re going to buy a rental property, one of the things I always recommend to my clients, especially if they’re buying it from somebody else who has it as a rental as well, or is marking it saying hey, look, this is a great Airbnb property. I’m like fantastic. Why don’t you ask them for the copy the last two years of their rentals tax return? That’s right, go ask them for their tax return. Why do I want to know this? Because no one overestimates their income to the IRS. Right. And so now when we get their actual schedule E or their potential LLC, depending on how it was structured, we get that tax turn out we can go through it. And now I get to look at the net income number not the gross income number just like your paycheck we don’t care about the gross we care about the net, how much is hitting your bank account every two weeks. That’s the same thing we got to look at on a rental.

Floyd: You know Micah, two things on that right we need to add legislation to because so many times now our clients talk about I’m gonna get this apartment in Hawaii. Alright, I’m going to Airbnb. And all of a sudden you and I know in Hawaii, they’re really restricting temporary rentals. In fact, I think there’s a couple of years it’s 90 days, and one is 180 days for temporary so that affects everything and up until about two years ago when when my clients bought real estate in Hawaii. We ran it negative cash flow because every year they were coming out in Africa put money into it cause it didn’t cash flow. It wasn’t until after our right during right after the pandemic that all of a sudden everything. Now we’re flushing again, which is great until airfares or inflation or a recession slows down traveling and then all of a sudden you have a unit that is empty for a while and then you have to make the payments and if you’re retired, it’s not taken from your paycheck. It’s reducing the amount of income that you have to maintain your lifestyle month to month very, very important cash flow and again, tax planning.

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Micah: So again, this goes back to this systemic rentals bad and know how they work and where they’re going to come from. One of the things with a lot of Hawaiian rental properties when I see them, as long as you can rent them for about 450 to 470 days a year., you’re gonna be just fine. If you didn’t catch that little joke there’s only 365 days in a year so that generally means the cash flow doesn’t work well. Yeah, sometimes my clients and pops into your in the same time say hey, I want a property in Hawaii, so I’m gonna own one anyways, I might as well rent it out. Ohh. I, now we’re solving for something different and this the primary intent beh,ind this is not saying hey, I want to generate rental income. It’s, hey, I’m buying the property anyway. I might as well rent it out when I’m not going to be there. Okay. Again, I don’t have an issue with that. But let’s be really intentional. And now that comes from discretionary money, not investment money. What’s the difference in these pools? Right, deserve abetweenhow? Go ahead.

Floyd: No, he said investment right now. And that’s where so many people get confused with real estate, because right now I’m working with a client. All right, that he’s got a piece of property we have $1 million of built up equity. What should he do? If he’s put $200,000 in it? And now it’s worth a million dollars. The return is exponential pay the taxes be done with it, right? But always central like Well, I kind of want to keep it. Why? it’s sentimental. That’s a million dollars. Why is it sentimental? It’s not an investment then All right. And that’s what we get confused with. So many times I go home, right, a home you I don’t include a home as part of the investments in my clients’ portfolios. Why? Because if it gets that expected rate of return, we’re not selling it and moving it. So I mean, understanding why we own something. Is it just as important as tax planning?

Micah: Yes, amen. It’s super important. Right? So again, back to that discretionary dollars versus investment dollars. It’s a sentimental thing. It’s our discretionary dollars. It’s there. It’s not investments. Therefore do not take money out of your TSP and go put it in discretionary and think that oh, eventually I’m going to have this money. No, there’s the two categories. We’re going to separate those out on now. If the rental isn’t investment, well, then fantastic. We treat it like any other investment. That means it’s a rules based decisions. It has to be earning X amount of money in cash flow. It has to be appreciating by Y amount over a period not just on a month to month right over a period of time it needs to be doing this. If it’s doing its job, just like any other investment. Fantastic. We want to keep this for the long term. If it’s not doing its job, we need to get rid of it and move to something else that is. Working with a client and he when he came to us about six rental properties, he’s like, Oh my gosh, look at this. They’re just doing amazing. And he showed me all of their gross revenue that they were doing and it was in the six figures. I mean, it was fantastic. So I said, Well, that’s fantastic. How much of that money are you keeping? He said, Well, no, that’s that’s all my money. They paid me and that’s all my money. I said, Okay, great. So I opened up his tax return, and we went to his schedule ease, which is on his tax return, and he had losses for almost every single one of these properties. And I said Bob look at this, every single one of these properties, you are coming up with losses. Now some of that was depreciation. So we added that back in some of the properties were positive, some of them were consistently negative. So we had to look at each individual property and say, hey, great, which ones are the winners that we need to keep and which ones are the ones that are just costing you money we need to get rid of. And we started working on that analysis. And sure enough, out of his six properties, there was half that weren’t making any money, but they were being subsidized by the other ones. We got rid of those half and we did something else. He bought one other rental, we had a little bit more investment so he owes four but now he’s four that are profitable, and it was actually making money on these. So this is really important to look at just because it’s a rental cash flow, doesn’t mean it’s profitable.

Floyd: You know, Micah, so exactly right. All right. We take the emotions out. When you bring in an advisor, whether it’s us or another competent advisor, they’re going to look at it from as you said, a rules base. You know, one plus one is two to two minus three is as a negative number. All right, and I always love this like don’t worry about the depreciation that’s funny money. I don’t know. So I funny money. Are you gonna think it’s funny when the IRS says pay me back? So in bringing the emotions out of the equation and bring it back into reality, and that’s what a good advisor should do for everyone, do look at the cash flow stage and cash flow. You know, it’s like, the income timeline that you and I talked so much about is at what stage of your life you’re going to do X, Y, and Z and I referred them as turning points. You know, you retire at 60. The first option is 62. Right. The next one is full retirement age 66. And then maybe after 70, when when do we stage all of this? And how do you want to pass it on to the kids if you want to pass? Oh, do the children want your real estate headaches? Well, that’s another congress put another conversation.

Micah: It’s a great conversation. So when we’re thinking about this, if you’re not familiar, you’re thinking about rental properties, and you’re not familiar with how depreciation works. A very basic concept of it. The IRS is loaning you some tax savings. But what do you have to do with loans? You have to pay them back? So a loan so depreciation in this case is the IRS is loaning you some tax savings today, but later they’re going to want that back. So it’s really important to think about that when we go to sell the properties. It does catch a lot of people off guard, does that make depreciation bad? No, no how it works. Also, we don’t have a choice. You have to take it. The IRS has pretty clear rules on that even if you don’t take it they treat it as if you did take it and have to pay it back. That’s the worst type of loan, a loan you didn’t get. And you all have to pay back. Right? That’s not a great way to go. So be very careful with this.

Floyd: Micah, I’ve had clients pay cash for real estate, run their own schedule D take zero depreciation. Yep. And then when they go to sell it or not to worry about recapture it Floyd. I’ll start with what the IRS says. IRS says you have to go back and re amend are considered as you did appreciate it the 10, 15 years anyway, whether you took it or not.

Micah: Really important to understand this again that’s not bad know how it works. Know the upside downside. If it’s an investment write down our rules, right? What are your investment rules that meet your retirement income, so pops, let’s change topics a little bit. This one came in, we don’t normally talk about it at all, because we don’t really recommend it. But it did come in from a listener to chat a little bit about on streams of income. And that’s reverse mortgages, if you’re not familiar with a reverse mortgage, so let’s talk about it real quick. And what it is. So traditional mortgage, we know what that is, right? We want to buy a house we go to a bank and say hey, I’d like to buy a house you got to put X amount of money down and then you’re going to spend the next 20 or 30 years repaying that loan with some interest pretty understandable. A reverse mortgage is where we get a lump sum or more importantly, probably a monthly income out of our paid off house. So now we take a loan on it. We start getting money out on a monthly basis, and then when we die or we sell the property that loan must be repaid. Now, reverse mortgages aren’t necessarily a bad thing, but they’re generally the last resort. They’re generally the last thing that we would ever go to, but pops what’s what’s your opinion on those?

Floyd: 100%, and my 40 some odd years of doing this, I’ve recommended it once and that client just wouldn’t quit spending. Alright, and we’re going through the analogy and here was the newest the rob. He lived in a place where the property taxes is accelerated, accelerated, accelerated accelerated. So even by doing the reverse mortgage, almost 50% of what he thought he was going to get the spin he had reserved a put away just to pay property taxes. Then you’ve got your homeowners insurance, so where he was thought he was on a yet maybe 1500 or $2,000, discretionary cash flow, he was getting 500 bucks. All right. And you know what, for the individuals, I get it, I kind of understand it, but what they don’t think about is the surviving spouse or the kids that have to settle the estate and I’ve waited in more than once on reverse mortgages when grandma and grandpa are mom and dad and one of our clients has had a reverse mortgage and how do we fair that out? Right. And then I’ve watched kids come out of pocket not to settle the mortgage, but now the house has to be sold. And it’s incumbent upon whoever’s inherited the home to sell the house to equalize or pay off the mortgage. And I’ve watched kids actually have to write a check. So if we’re trying to balance out their families, it’s just important to think not only for us, and for your mom and I, but it’s for you and Jamie and the rest of the kids if we were to do that.

Micah: Yeah, let’s talk about the coming out of pocket for a check. Right. So the law is changed several, several years ago, a lot of years ago, that the inheritance or receiving the money from a reverse mortgage, the debt that’s on there does not get passed on to the kids into the house, right. So let’s say you have a home with $500,000. And let’s say the reverse mortgage is $600,000. That’s a lot of rules with that. I’m simplifying it, but let’s say the house is upside down. The kids don’t get that $100,000 debt. That’s not what happens, right? But what does happen there’s costs to sell the home. Then you have to do maintenance; you got to do other things. You got to do these little repairs, right? Who’s going to pay for that? Well, the executor or the executor of the estate should be flat, but if there’s no money in there, then the kids are going to stop and pay for but are they going to get the money back from the house? No, because there’s no equity in the house. So while the debt does not transfer to the children, which is a great thing, right? The debt doesn’t go down. There still could be expenses are coming out of pocket for so be careful with ease and understand them. Two quick stories about it one, the same with me. I’ve never recommended a reverse mortgage, but it did tell the client I said hey, you got one year to fix your problem. Otherwise, the reverse mortgage is the only solution you’re going to have and that was a bit of a wake-up call. They were on a pretty bad path and just met the head so sad because they were in such a good position and just massively overspending in difficult times to be in when you’re when you’re in that stage. And it takes a lot of work to come out of it. So we had to say hey, look, if you don’t stop this, the reverse mortgages is the only solution that’s going to be here for you and it’s not a great deal. So that’s one aspect of it. I did go to a class because whenever we have continued education like you pops, I like to take classes and things that I don’t really know and fully understand. It’s an area I’m already an expert in well I might glean a little bit but I’d rather a kind of up my game and some other areas. So I took one time for some commuting and on reverse mortgage and this guy came up and he was a professor and talking all about how great mortgages are. I was like holy moly. I can’t believe this guy likes them so much. And he was doing all the math on it and showing everything made his math on the board made a lot of sense. And I’m like, holy moly. I wonder if this really is a good planning tool. Really was kind of making me rethink some things and he was saying to the this is back when the rates were really low, the rates are low, we could get locked into this low rate. You could do this mortgage; you could take the money out and do this other stuff. And let’s say you can invest it in a fixed-income investment that produces x amount of income. And I started to look at that math a little bit more, and I said, wait, hold on a second. Where are you getting those numbers from? On what you can invest it in? And he’s like, Well, I did the math, and this is what you should get. If you invest it. I said, Whoa, what do you mean you should get? This is what these companies should be paying you. And I’m like, Well, what companies are paying you that he’s like, Well, I don’t know what any companies are paying right now because I’m a professor, but these are what they should pay you. I said well, I’m going to stop you right there. There is no company out there that’s paying those rates at all. And in fact, I just Googled it. And you’re not even in the ballpark of anything with these rates and it’s combos, they know they should pay you this. I’m like, Whoa, you’re doing this whole presentation on theory, and there’s zero reality in it whatsoever. You gotta be really careful with that to our listeners, right? There’s theory about when we talk about some things and what you should do. Then there’s reality and how it works pops just like you were saying, you could do a reverse mortgage and a reverse mortgage company could tell you, hey, this debt doesn’t do anything to your kids. You’re not gonna your kids aren’t gonna have to pay anything out of pocket, which is in one statement sure is true. But in another statement into totality when we look at the entire circumstances, it’s not an accurate statement. Because what if there’s final expenses? What if there’s other things that come up in the house they have to pay for in order to sell the house? They might have to come out of pocket for it. So when we got to look at these things, and really step back and look at that big picture, what position is a putt,

Floyd: You know, again, that’s back to what we started with understanding that income timeline, when you’re going to have White House income, we’re going to come in, you know, you know, the joke that you and I use so much, Tell me when you’re going to die, and I’ll tell you exactly how much money you can spend. And it’s that unknown out there of when we’re going to get like beamed off the planet. So we have to do everything proportionately, like in real estate; I’m cool with real estate, but not 100%. I love equities, but not 100%; I love cash, but not 100%. So we have to balance those out. To do with the happier wants and needs are there. It’s just the two of them. When they have to worry about taking a good age parent, or they have kids or grandkids, they want to take care of how do we balance all that out., So so very important.

Micah: I love it. Alright, pops. Well, this podcast is all about action items. So let’s go into some action items that our listeners could take this week to help improve their position. So what do you think the first action items should be for them?

Floyd: You know, I’m always about, you know, sitting down and writing down a spending plan, not a budget, but it’s been the plan. What does it cost you to maintain the lifestyle as you want? And don’t tell me when I retire. I’m not going to do this, this All right. I’ve done this for too long. The first 12, 18 months, your spending is going to go way up until it comes back down. So a spending plan, and if the real estate is part of the spending plan, that’s cool for no social security. We’ll have a conversation about the lay down the TSP. We’ll have a conversation about it. But understanding what you want to do is what it really costs you to retire, not your neighbors, not your friends, not your cousin, not your uncle, but you, you, and your spouse. What do you want to do? That’s I think that’s plan number one.

Micah: Yeah, and I would say those are two different things right where you’re putting together; number one is what’s the spending plan, which I think is fantastic. Where’s your money really going to go? In the second part of that, and I like this to as two different exercises, what’s your retirement income going to look like? What’s that timeline for the next ten years? Where’s that money going to come from? How much is your pension? When does the supplement start when you’re planning on taking Social Security? What is the rental income going to be etc.? And make sure when you do this, you you do subtraction as well, not just addition. Right? We got to have what subtraction in there as well. It’s not your gross pension; it’s your net pension, all the deductions. It’s not your gross Social Security. It’s your net Social Security after your Medicare premium after taxes. It’s not your gross rental income. It’s your net rental income. After all these things, come out what’s really left and just have an honest conversation with where that money’s going to come from. And when we do this with clients, it’s actually a great exercise to go through to make sure you’re in a solid, solid position. So know what that is.

Floyd: You know, you know, you mentioned subtraction, and I’ll know; I said think, and I had a conversation with a client this morning. He says, Floyd, I don’t know exactly what my soul security is going to be. I go, okay. Did you mind this part B, will know. Well, I got my check. Oh, yeah, that’s okay. I know what we’re good at. All right. How much did you pay in income taxes? What do you mean? I’ve already paid tax on this whole security? Yeah, but your income over $50,000 married filing jointly. So guess why now you got to pay taxes on it again. Why? And they don’t do the W W four V voluntarily to have additional taxes withheld. So now it’s April 15. Today, and he’s going, oh my God, when I need X amount of money because I didn’t have anything taken out of my wife or my spouse’s Social Security. So it’s a negative. So even though we see what per the first pension is going to be minus taxes minus FHEB, then we’ll charge on my Social Security minus Part B if you’re over 65 plus going to have taxes—well, got to do the subtraction as well.

Micah: Yeah. Does your state have state income tax and your Social Security? Right, not all states are created equal. Right. So understanding these things. Alright, last action item I’m going to throw out there for it. Try it before you retire. Now, I know that sounds a little funny, but in our ideal world, 12 to 24 months before retirement, we’re getting everything set up as if you’re retired. I was working with a client that wants to retire; she’s going to postpone or retire a little bit. I said, Hey, great news. We’re going to still pick on your early date. We’re going to get everything set up as if you were retired because I want you to try it out. I want you to see what works, what doesn’t work. Let’s get mentally and financially prepared for this next amazing chapter of your life.

Floyd: And part of that is not your last brand-new car, right? As I joke when I say that, when you start talking about, you know, two to three years on a planning that you and I do, and we encourage everyone to do when we started when I said when I have that conversation, the first thing I watch is we’re going to replace a car, we’re going to replace this so I don’t have to worry about it when I retire. Okay, I kind of get that. But here’s the reality, you’re always going to have a car payment, and you’re always going to want to have travel. So that’s instead of replacing it, let’s start that payment plan, build it into your spending plan as we go along. So important. The more we plan, the more we apply, the easier and the more successful the folks that you and I worked with sail off into retirement.

Micah: I love it. Well, pops, thanks again for joining me on the podcast. I know all of our listeners really appreciate it. If you need more information like this, you want to know how to take your benefits to the next level, then jump on our website, plan your federal retirement.com. We’re always looking to grow, and we have a goal of helping another 1 million federal employees with their retirement, and that starts with you. So share this information, send it to a co-worker, and give us five stars. Come on. You’ve made it this far. Jump on there. Give us five stars. You knew you’d love it. And until next time, happy planning!

Floyd: Happy planning!

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