#132 Understanding How the Economy and Your Retirement Portfolio Are Related

Micah Shilanski 00:48
Welcome back to the Plan Your Federal Retirement podcast. I’m your co host, Micah Shilanski, and with me is a great advisor to talk about some fun things that we have going on right now in the economy, the world all these things, and more importantly, what should we be doing about them and how do you take control on this. And as a returning advisor, so Christian Sakamoto. Christian, thanks for being on the pod, bud.

Christian Sakamoto 01:12
Hey, Micah, really glad to be back. It’s always so fun to chat with you about this. I feel like it’s just a normal conversation that we have, and ends up being that we pressed record on it, because a lot of times, this is the conversations that we have, even offline. And, yeah, it’s just a lot of joy. It’s a lot of fun. And this is our passion, is being able to discuss these things and talk about them and grow our knowledge a little bit, but also then be able to translate that to helping clients.

Speaker 1 01:37
You know, Christian, I was just looking at this, and our bookcases and our both of our backgrounds are almost lined up on a couple of shelves. If we had changed the camera angle, it would almost look like we’re in the same room.

Christian Sakamoto 01:49
That’s right.

Micah Shilanski 01:49
Sorry, you were being all serious, and I’m joking around, all right… But you know, this is a lot of the conversations we have behind the scenes, right? And that’s one of the things that I love working with the team, is these are things that we don’t just think about solely as this one advisor, running kind of a solo shop, working with individual clients, which is great. I’m not trying to rag on that whatsoever, but I really enjoy the team approach, because not only do we help more people in the day, but we get to see things from slightly a different angle. And I know Christian you kind of CO with me on several clients, and that’s one of the things that positive comments I got back from clients as well, it says, hey, Christian does really good. And one of the like, this is a slightly different approach, right? It’s a slightly different angle that things are looked at, and that’s what I like about working. We’re all plug in the same direction, right, between all of us on the team, but there’s always a slight different angle, and that gives us a lot more perspective into what’s going on, and really helps kind of filter down to better information at the end of the day that we want our listeners to know. So let’s go over a couple of things that, this has kind of come up throughout the year, right? So this isn’t kind of particular to right now, but it probably is. Is with it we started off the beginning of the year with a deferred resignation and inferior offerings, concerns about riffs like all of these things are happening, and I know we talked about this kind of multiple times, but we’re still getting questions. Actually, this week alone, I think we had what, 53 people contact our office, non clients, you know, because they had questions and concerns about their benefits. And so again, this isn’t trying to be a plug in solicitation, but if you have questions and you don’t think you’re getting the right information, or you just want to make sure you’re getting the right information, pick up the phone and call us. Our goals of another 1 million federal employees with retirement. And the reason behind that is you guys have such a great benefit set, we want to make sure you get the most out of it. All right, there’s my commercial. I’ll put that aside for now. But, but, Christian, let’s, let’s jump into this just a little bit. I want to get to markets. I want to get to investments. I want to get to things that we’ve already done with clients, things we’re thinking about doing clients, and what our listeners should be thinking about. Listeners should be thinking about as well. But before that, walk us through a little bit of what’s happening with the deferred resignation, still in progress and working its way. And then let’s get into rules again on the Vera and the riff, because rules and understanding how that work is so important.

Christian Sakamoto 03:57
Yeah, absolutely. So, you know, the deferred resignation, it seemed like, from what I heard, and I wanted to hear, if you had this experience meeting with clients recently, that it got opened up again for some people, and some people had some extended deadlines. So that was new news to me. That was pretty interesting. But for those that accepted it, quickly found out that that admin leave really kicked in right away, because then within a week or two, or however, you know, however quick it was, they had to turn in their computer. And maybe they thought they were going in on work on Monday, but turns out they they were just going in to just turn in their computer, for example, yeah, that disrupted a lot of people, right? I mean, we’re not federal employees, but I can only imagine that impact that impact that that would have. And we heard so many stories of how people were just upset, rightfully so, of how that whole process happened. But the big question in the beginning was would I even get paid? And so far, everybody’s been getting paid even past the, you know, the March 14 deadline that was there. It’s now been pushed to the budget being September 30. People still getting paid. People are, you know, just on that admin leave status. So that’s been what I’ve still been seeing on the deferred resignation. What about you?

Micah Shilanski 05:16
The same thing is the people that took it, or Glenn, they took it, as you said, the way it went down. There’s, there’s always some questions about but this really worked out well for those that were, and we’re gonna check this Bureau works out too, for people that were ready to retire, that were either gonna retire this year and wanted to punch out a little sooner, or those that were financially ready to retire but hadn’t met age requirements. That’s when this deferred resignation made a ton of sense. And why are we talking about this now? Because it’s already placed, because that’s what we’re because that’s how it rolls into a VERA, right? The voluntary early retirement action. This is the same thing. And I hear a lot of people like, say, man, it was so great if there’s a VERA, all these other things. But it’s like, Hey, if you’re not financially prepared for a VERA, VERA is not really helpful for you. Like a VERA is only helpful if we’ve done the things that we need to do. Same thing with a VSIP, right? Voluntary Separation Incentive Pay, is that extra 25,000 bucks you get. Several clients have pointed this out when it came out. They’re like, I could just work a few months. And it’s more than that. I was like, yeah, the reason a VSIP makes sense is you are planning on going out anyways, and might as well get an extra 25,000 to leave, right? So all of these things that the government is offering, and I’m not trying to put them down, because it was certain people they work out really, really well. But the key is, you have to be ready, number one and number two, you must understand the rules for what applies and doesn’t. I know we’ve been talking about a lot of the pods. We won’t get into too much depth, but Christian walk us through the VERA rules real fast, a voluntary early retirement action. What does it take to qualify? What does it look like? All those good things

Christian Sakamoto 06:46
For sure. So it’s the age 50 with at least 20 years of creditable service, or any age with at least 25 years of creditable service. And so that lowers the threshold for a lot of people. Whereas the normal would be MRA with 30, 60 with 20, 62 with five, it lowers that threshold for a lot of people that were close, but no secure, just quite yet. So it gives them that interesting opportunity there and then, as you know, we’ve talked about too, what’s nice about the VERA or a deferred resignation, or really just any discontinued service retirement is the option is still keep health insurance. You get to keep it, and you get the FERS supplement. FERS supplement would then begin starting that MRA. So there is that time between, if you separated sooner that you wouldn’t have it, and then starting at MRA would start up until 62. So all of those are great for a lot of people who are, again, pretty close to the normal rules, but just not quite there yet.

Micah Shilanski 07:51
And the key is you must through the health insurance I just had to pick up on this, you know, a little more definition Christian, what you’re saying, is you must be eligible to maintain health insurance in retirement to keep it but and so what are those rules? Number one, you must retire with the eligibility of an immediate pension. And Christian, just as you said, VERA, if I’m, you know, 52 and I got 25 years of service, I’m vested in the system, but I haven’t met my MRA ,my minimum retirement age, so I kind of work another five years if my MRA is 57 before I can retire, VERA comes out. I’m 52 okay, and I got more than 20 years. I’m good to go. I can take that, and I’m eligible for an immediate retirement, which means as long the second row final returns, as long as I’ve been in FEHB for five years prior to retirement, I get to keep all those great benefits. Now, Christian one of the things that comes up as we’re talking about VERAs with clients or potential rifts that come up, actually, before I get into those other things, let’s go over the RIF rules, right, the discontinued service. So if there’s a reduction in force and a discontinued service, it’s basically the same rules as a VERA, but a VERA is a voluntary action. A Rif is a mandatory action, right? You don’t have a choice inside of a discontinued service, your service is selected, it is discontinued, and it’s going to follow the same set of rules. Age 50, with 20 years of service, any age with 25 years of service, and you’d be eligible to maintain a pension. There’s slightly different rules on how they do the sick leave. It’s actually a little bit more beneficial under a discontinued service. You don’t lose it. It’s just how they calculate it. It’s actually a little better for you. But the short answer is, it’s very, very similar, and how all of that is play out. Now, that’s all well and good, but the question is, and this is common I get from my clients that are looking at the VERA, the disconcerting service, or, you know, how are these things going down the pipe? You’re gonna get a pension, they are like, Micah, but if I kept working, I’d have more. Well, yes, yes, 100% that is correct, right? And that’s always correct. But mentally, like, sometimes we fall in that trap. And so with some of our clients, it’s like, hey, the VERA it gives you a good opportunity right now you’re not happy with the things that you’re seeing in the federal government. Do you want to make a change? Go work somewhere else. You get a pension, you get health insurance? Now you can go be employed somewhere else. And I don’t, you don’t got to worry about getting benefits, because you already have all the benefits from the retirement side. So now you can get a job somewhere else, and now you can, you know, double dip a little bit. You can dip into the benefits that you’re getting, which is fantastic on the retirement side, and you’ll get a little bit more of a paycheck, maybe in the private side. And so this can be a really good way to, kind of like catch up and get back on track for this unexpected curveball you received on the track of retirement.

Christian Sakamoto 10:25
Yeah, we call those the golden handcuffs, right? Then we have, in our mind, we have to meet these thresholds so that I can get the pension, get the health insurance and any other benefits there. Well, now that that’s off the table and you’ve met that eligibility, sure, working more is going to mean your pensions more. Yeah, yeah, right. But if you got it and you got your health insurance, you met that goal key, then you go work somewhere else. You might even be making more and getting that pension at the same time. So we’ve been seeing that with clients too, and I’m not talking about a rehired annuitant I’m saying, you know, go work outside the government and get extra money and bank the pension as well. So there’s another opportunity there.

Micah Shilanski 10:26
I would not go for a rehired annuitants right now. That would not be a good option for you. Yeah.

Micah Shilanski 11:15
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Micah Shilanski 12:06
Christian, we talked about being financially ready, right? And then there’s a decent amount of economic concerns with everything that we’re seeing take place. So let’s kind of talk about that in concept of how it goes. So a couple of key things that we’re going to talk about how things work. Now, this is Micah and Christian’s opinion, by the way, on how things work. And it’s also a short podcast. So we’re going to stick at the high level as we go across these things. But sometimes we get people that come in like Micah, the market’s down 20% 30% whatever it is, whatever current crisis that we’re in, because this isn’t new. There’s it’s a new flavor, but this isn’t new, right? We’ve seen things like this before, and so they’re like, Micah, I can’t retire because of X. Okay, that could be true, right? But one of the things that’s really important to do is start today, set yourself up for retirement, and remember our first rule of investing, our first rule of investing any money you want to spend in the next five years doesn’t belong in the stock market. Rare exceptions, right? And why do we say five years? 2008, 9,10, 11,12, right? Five years to recover from the Great Recession. So these are things that we really need to be thinking about, because our clients that are following these rules, when, not if, when the market goes down in value. We got money in cash. We have money in bonds. We’re going to talk about that more in a second. You have money on the sidelines that you can live off of. We have time to recover. One of the things is really important. The market should not determine when you retire. You should have a plan. Now the market’s going to play a key in it, growing your money over time, but you need to have a solid plan to get there.

Speaker 1 12:47
100% Yeah, so we talk about buckets a lot, and that’s really what we’re answering here is that first rule of money that any money that you plan to spend in the next five years doesn’t belong in the stock market. So where does it go? Right? Cash. Cash cash in the bank, cash in maybe a money market, maybe a CD, right? Short term money that you have access to, that wouldn’t lose value. Maybe have a couple years worth of cash, right?

Micah Shilanski 14:12
And when you say, a couple years, what does that mean? What does that mean? So if you’re spending $10,000 a month, right? What does a couple years of cash? Does that mean 10 times 12, which is 120 times 20,000 bucks that I need in cash. Or is it slightly different?

Christian Sakamoto 14:27
Well, it could be if we needed $10,000 more than what our pension would provide us with, more than what the FERS supplement would provide us. Or, you know, social security, you know, yes, it’s going to be what is your total household income minus what the what this..

Micah Shilanski 14:47
the fixed income is, the Social Security? Yeah.

Christian Sakamoto 14:50
Yep, yeah. And any other pitches, are there any other wages that? Are there any other rental income that’s there? Right? Go down the list, right, right. Whatever that gap is, that that’s left over. That’s the that’s the cash that we’re quantifying. Okay, you started at 10, your fixed income six. So now we need 4000. Okay, so now it’s 4000 gross stuff for taxes. But just say 4000 times 12 times two. So would that be somewhere around 100 grand?

Micah Shilanski 15:19
100 grand. Yeah, yeah, yeah, yeah.

Christian Sakamoto 15:21
So that would be the answer to that. You just have to solve for what is the gap between the fixed income with what the total income need is, that’s the two years of cash. Then what’s the other three years? We need five and two of them is cash. What’s the other three – that’s our fixed income bucket, right? So that’s fixed income. You know, you could throw in there. We always waffle out. Is it G fund that’s going to be in the fixed income, or is G fund going to be in cash? We kind of go back and sure, but sure, we can say G fund or the F Fund inside of the TSP, the Fixed Income Fund that that that definitely goes there. Bonds go there. That’s a big portion of it. Maybe longer term CDs would be another example as well. So again, very safe assets that you have access to maybe in the next year or two. So you know, the CD that’s got a year maturity date that might be pushed over in that fixed income category, but it’s still safe, and it’s still you have access to it next year. So that’s what we want to fill up with about three years.

Speaker 1 16:23
I like that. Available is a big thing in that bucket, right? And there’s a reason we don’t call it a bonds bucket. We call it an income bucket, like a fixed income bucket. Why? Because it can change. Christian, I like what you’re saying, right? Everything’s constant. There is a time bonds are paying nothing, right? And it just was not a good thing to have in there. Interest rates change. That means how we’re going to approach the sustaintion. The formula stays the same. But sometimes what you’re going to put in those buckets are a little different, but I like what you said. It has to be available when that cash runs out, that money has to be available for you. So whatever that investment scheme is you’re putting it into, making sure it’s really there. Now, here’s a mistake that sometimes happens is saying, hey, the market’s down. X, I’m going to wait covers, and then I’m going to refill my bucket, which, what do you think about it at first, you’re like, Okay, this makes sense, right? Like, I took a bath inside of there, and so I’m going to wait till the market recovers. And once it recovers, then I’m going to move my money to the side. My problem with that is that violates our first rule of investing – any money you need to spend in the next five years doesn’t belong in the market. Rare exceptions, right? There’s always going to be exceptions, but in that particular case, I kind of disagree, and so Christian let me know if you have a different opinion. But it’s like, no, we start with where we stand, and if we’re going to retire in three years, that means we need to start today, making sure money’s on the sidelines and available. Does that mean when the market recovers, there’s going to be less – absolutely right, because we’re moving money to sidelines, but we’re doing this really intentionally, becoming disciplined investor. And this is one of the things that kind of happens, whether it’s the TSP, IRAs, etc, people get emotional about things, and I know when Jamie was on the pod, we were talking about the amygdala and how that kind of hijacks your brain, but then really happens, and when we start becoming an emotional investor, we don’t always make the right decisions, so we really got to be dispassionate about this. Follow formulas for really good reason.

Christian Sakamoto 18:13
right? And it’s that timing the market aspect, as you mentioned, presents itself a bigger risk, because what if you’re within that time of retiring where you’re getting closer and closer and you’re like, markets down, wait, I’m going to wait. I’m going to wait. Now we don’t have time to wait. So that’s the ascpect to this too. Is avoiding that those situations of timing the market to make those decisions. I do respect that, that choice. Now, what about, Micah, I’ll ask this as a question. So what if someone is retired and they are drawing their cash, and every year, if the markets up or flat, we’re replenishing the cash that was taken out that year? That’s no big deal. What happens when it does go down, they take out a year’s worth of cash. Are you still suggesting after that, that they would fill the cash up? Or do we wait and let that recover? Because we still have four more years there.

Micah Shilanski 19:10
That’s ,the reason we got the four years there, so this allows us time to recover, right? Yeah, I keep emphasizing this word when it’s not if the markets are down, it’s when the markets are down. We know it’s going to happen. We just don’t know when, right? And so we’re always prepared for that. And then when we’re prepared for that, we weather that storm so much easier. So Christian kind of on that note, let’s make a little bit of a kind of a left turn in this. Let’s go up just a little bit and just talk about, let’s talk about the markets as a whole, right? What are things that we’re constantly watching? Because I know that’s one concern is sometimes we feel like we’re on the flea on the end of the tail of the dog, the dog that’s wagging the tail, right? As to what’s happening with the markets, right? We’re way there at the end, just being whipped all over the place. And it can definitely feel that way. So let’s walk through like, our our theory and how the markets work. Let’s simplify it for the sake of time, and then get into some action items that we can kind of think about. So if I had to simplify, like, completely oversimplify our perspective of the market, it’s consumer spending drives markets. Supply and demand, right? That’s what I would say. And so we’re always watching for things that affect consumer spending jobs. Good news is relatively good jobs are not relatively good jobs reports, right? More jobs, there’s good things. So as jobs continue to grow, this is a good thing. We’ll look at wages, or wages going up or going down, look at unemployment, look at payroll, right? All of those things, corporate profits. It’s a good leading indicator of the things that we’re seeing as well. So those are all things that we want to be looking at to say, long term, how is the economy doing? Now, if those things are not doing well, that doesn’t mean we panic and we just sell everything out. It means we approach our last bucket, which is our growth bucket. That’s where more the equities are, the C,S and I funds, the long term things. And depending on our investment level, we’re going to look at that, maybe approach it a little bit differently. And Christian, there’s a good example of how people spend money in a boom market versus, like, a recession. Walk, walk us through what that is.

Christian Sakamoto 21:12
Yeah, I think of a lot. But, you know, one example is when the market’s good, everybody’s making good money. Maybe every, we’re Catholic, so, you know, maybe not Fridays, but every Saturday we go out to the market, we get some steaks, right? We want some steaks, and that’s just what we do. But what happens when we’re making less money? We want to go out every Saturday treat the family to steak. Maybe not. I mean, we’re going to go out and buy ground beef. We’re going to, you know, do a meatloaf or something. So we’re still spending money, but it might be just in a different place. It might not be the luxury good. People are still going to be buying groceries, right? People are still going to be buying gasoline. They’re going to be buying toilet paper, right? We saw that in 2020 but when it comes to maybe buying a new Rolex watch or a Louis Vuitton bag. Maybe when we’re making less money, we tend not to spend on those luxury goods, right?

Micah Shilanski 22:08
Through those discretionary spending versus the fixed spending, right? Groceries, right generally fit into like acquired spending, but type of groceries could be fitting into discretionary spending, right, for sure. So for sure, we can see how that affects us as individuals, then cascade that out over. You know, the the total Americans that are out there that kind of make decisions one way. My joke is, Americans are really good at one thing. When money hits our bank account, we spend it. It’s American really consistent about spending money, but we’re going to pivot how we’re spending money, Christian to your point on how we’re feeling the economy is doing, how we’re feeling that we’re that our jobs doing, etc. So this doesn’t mean you don’t invest when markets are going down. This means we have the right timeframe in mind on the investment side. And why do I bring this up? I think I mentioned this previously, but it kind of half jokingly, half seriously. I have two clients that two types of clients that get worried when markets go down. One is younger clients who haven’t been through this before, and the second is new retirees within two years of retirement. And all of a sudden, let’s take the new retirees now. All sudden, you’re living on, quote, a fixed income, which is a funny term, because you were always living on a fixed income. It was just your salary, right? But, but you could keep working so you could replenish those assets that you had, but now your assets are more fixed, so now you’re living on this fixed income, and when the market goes down. Is the joke that says two promises I make about the stock market, right? The day you put money in the stock market tomorrow, now, and the day you retire, the market will go down right. Besides that, what happens is, when we go to retire, instead of putting money into our accounts, into our TSP funding, that every couple of weeks, we’re now pulling money out, and now the markets go down. So we’re pulling out that $4,000 a month in your example, earlier. Now the markets go down 10 or 15% and we get into a bit of anecdote. Now, why do I say this is only affecting my newer retirees and not my veteran retirees have been retired for 20 plus years, because veteran retirees know they’ve been through this before, right? It’s not just theoretical knowledge that this happens the real life experience and be like, I’ve been through this before, and it’s fine. I got a plan. We’re gonna stick the plan. We’re gonna be good. But the new retirees, it’s like, Hey, I did this before, while I was working, but now it’s different, right? Because now I’m retired, not really different. It just feels that way, and we have a lot more fear and emotion, so we gotta be careful in those times, right? And say, Hey, am I making a really good long term decision? So just be thinking about as we’re kind of building this on. So this is a little bit more of a kind of a scout podcast, and kind of more bigger pictures on economies and things to be thinking about. But let’s make sure we break this down into some great action items for our listeners. So Christian, if you like, I’ll go first. I would say the first action item that I would have for our listeners is create a plan. Really important to have a plan of when the market goes down, what am I going to do when the market goes up? What I’m going to do? We call this our buckets approach, right? We know what that’s going to happen before the events take place, so then, that way, we can go in with a little bit more confidence. Christian, what’s another action item our listeners can be thinking about this week.

Christian Sakamoto 25:15
Yeah, I would say, with that plan and the buckets is also knowing the retirement eligibility rules, because so much of what we’re doing and helping our listeners with is on the federal side, and so we really got to understand those rules and those retirement thresholds first to then plan. Okay, are we actually retiring as a fed or do a postpone or defer retirement, or how that’s going to work, and know those rules, and know what your critical history is and all that.

Micah Shilanski 25:49
Yeah, and that’s a really good one, because again, when you hear a lot of stuff around the water cooler, right, it may or may not be accurate. So know what your rules are. You know, make sure you’re getting your SF 50s, your personnel file, all those things we talked about on previous podcast is so good? Well, Christian as always, thank you so much for being on the pod. I really appreciate it and to all of our listeners until next time, happy planning.