#91: Cashflow and Retirement Income Timeline

Christian: Welcome back to the Plan Your Federal Retirement podcast. I’m your host, Micah Shilanski. Just kidding. Just kidding. I am Christian Sakamoto, and with me today is another great advisor, JT Ferrin. How are you doing JT? 

JT: Pretty good, Christian. Super excited to be here on this podcast, filling in for Micah and Tammy. 

Christian: I’m super excited today to know they entrusted us with today’s episode, so that’s a great honor. But I know we’ve got some really good things to share, some important information, especially when it comes to some real-life examples of clients that we recently met with. In particular, I know some of the things we want to cover today have to do with the retirement income timeline. And so we use this tool for all of our clients, and we’re always talking about their retirement income timeline, whether we’re drawing it out by hand or whether we’ve got our nice report to show that information. So it’s a nice tool that we talk about a lot, and I figured it’d be good to share some examples about it today. First thing that we want to do when we’re talking about the retirement timeline is really just start with cash flow planning. Cash flow planning, we’ll often say, is the heartbeat of retirement planning and retirement income. Right. So we want to make sure that we’re getting a good pulse, checking the vitals, so to speak, on what cash flow is right now. And it’s very basic. It’s very simple, but it’s super, super important. I mean, there’s been so many meetings that I’ve been in where I ask the question, you know, how much money are you making right now? And I’ll get mixed answers. I’ll get blank stares. I get well, I don’t know. And then it’s kind of like going through the math of trying to figure out how much my making, I can’t remember. I think it needs to be more simple than that. Instead of trying to back into what your gross salary is and all those deductions, this is the simple question of how much it’s the bank account every two weeks. Right. What’s the income that you’re making right now? That’s what I want us to think about as far as cash flow planning is what are we making right now between you and maybe your spouse and any other sources of income that you have? The next question that follows is great. You’re making whatever that is. How much of that is actually getting spent and then going through to really see what this spending is?

And again, it’s a similar conversation. Well, I’ll ask that question to a client, and they’ll say, I don’t know all of it. And maybe it is, maybe all of it is getting spent. But whatever that is, whatever that number is, that’s the right answer. So if it’s, we’re not sure. Well, now we need to figure it out. Now we need to go back to see, well, how much actually is getting spent. We cannot plan your retirement successfully without knowing how much you’re making now, but also how much gets spent. So we spend a lot of time talking about that. And I think that’s super duper important when we’re doing the retirement timeline. Planning of retirement income is really understanding that cash flow planning.

JT: Yeah. Christian, you make such a great point here of understanding how much you’re spending per month here. We always say cash flow is the heartbeat of retirement. And so really looking into how much you’re spending every month is so important. The money that you’re making every month is different than the money that you’re spending every month. And we’re looking at that spending because that’s the number that we’re going to try to replace in retirement. And so in building out this retirement income timeline, that first step is to identify your monthly spending and then we can list out all the different sources of income and how those change over time and where we can expect that money to come from. 

Christian: Great. And I’d say after we have that mapped out now, we have to understand the rules in order to retire under the FERS system. There’s different retirement rules, right? So there’s the normal immediate unreduced pension rules, normal and reduced retirement rules under FERS, right? So we’ve got our MRA and 30 minimum retirement age with 30 years of service. We’ve got our age 60 with 20 years of service, and we have our age 62 with five years of creditable service. And for our special provisions, you’ve got different sets of rules there. But four for normal FERS. And then underneath that we also have other retirement options that are available. We’ve talked about a lot before with postpone retirement, having at least retired at your MRA with at least ten years of creditable service, we can qualify for a postponed retirement, and really anything else would be a deferred retirement. So really understanding your rules, this is super important when we are planning, you know, when you can retire. Just kind of know what those retirement dates are, what are those key dates are, and this is why we stress quite a bit too, is not only understanding the rules, but understanding what your creditable work history is. We have lots and lots of meetings with clients and trying to understand when they started with FERS, what agency they were with, if they had any breaks in service.

Lop, you know, leave without pay part time work. All of those good things and all of that. History matters because if you switched from one agency to the next and a box wasn’t checked for some reason, and you weren’t paying into FERSor it just wasn’t shown that you were in that FERSsystem, maybe there’s some time there that doesn’t count. That should. And so we really got to know what that time that we have, what that actually is, and we call that your retirement service computation date, your RSCD. If you look on your leave in the earnings statement, your alias, oftentimes you’ll see your SCD, and in parentheses right next to it, it says Leave. And your SCD, your service comp date is to determine what your leave status is. But it’s not always the case that it’s your RSCD, your retirement service comp date. So again, understanding the rules of when you can retire is just as important as knowing what your retirement service comp date is. And so, JT, one of the things we’re always recommending would be to get a certified summary of federal service, right? I know you’re talking about that with clients. I’m talking about that with clients. It’s the official form that OPM will use to determine what your credible service is between all the different agencies that you have. So, good news. We’ve got our cash flow planning. Now we understand the rules, and when we can retire, the next step would be to develop the actual timeline. So JT, could you tell us a little bit about developing the retirement income timeline?

JT: Yeah, exactly. You you hit it first. Two steps are first, how much income are replacing, and second is when can you actually retire? That’s the keystone of this timeline, right? Everything else kind of revolves around that. So once you have that retirement date, then we can see all your different sources of income. And as a federal employee, most of our employees are going to have three sources of income. Call those the three pillars. The first is your pension. The second one is Social Security. And the third one is your TSP or investment income. And so what we’d love to do is identify all those sources of income and see how they change over time or when we’re going to trigger those different sources of income. What we’re looking for are these gaps in income, right? There’s really two common gaps. There can be more. But the two common gaps that we’re seeing is if you’re taking the FERS supplement, retire before age 62 and you’re getting that FERS supplement at age 62 that goes away. So how are you going to replace that gap in income? The other one, the other common gap that we’re seeing is a postponed retirement. This is where you’re going to separate from service and put your benefits on a shelf, including your health insurance, including your pension. You put it on a shelf, and you’re going to trigger that later on. Let’s, for example, say age 60. So if you separate from service at 57 and you’re going to wait until age 60 to turn on your pension, how are you going to sell those three years worth of income?

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Christian? I agree. And the other thing, when we’re doing our retirement timeline is going to be on planning on when to take our Social Security. Right. If our FERS supplement goes away at 62. One thought is to take our Social Security at 62 and reduce any gaps there in our income, a lot of times we’re talking about waiting, waiting at least to your full retirement age, if possible, with Social Security and even later up until 70. So that’s another reason we use the tool is so that we can plan when we can turn on Social Security and filling the gaps with anything else that we can fill with TSP distributions, IRA distributions, anything else to get to the monthly income need that we have. So, just this week, we use the retirement income tool. I used it for a client and they’re both federal employees or dual feds, and we showed two different versions of the retirement income timeline. So the first was kind of our default plan that we were planning on where one spouse was going to retire at 62 and the other spouse was a little bit younger and was going to retire right around then as well. And with the one spouse who is a little bit older, what we were planning on is by 62; the reason we wanted to be to 62 is they would have the 20 years of creditable service by then. So having a 62 with 20 years of service, they get an extra 10% increase on their pension. So we got to show them that on the timeline what that impact has. So at 62 they would retire, they’d have a bigger pension, but as we can see, no FERS supplement. And so they would go from 62 until however long it was that we showed for Social Security. And then there was a gap there of what their income needs were versus what the pension would provide and not turning on Social Security. So then we knew, okay, we needed to turn on the TSP distributions, IRA. distributions to fill that gap. and by the way, even more complexity is the other spouse is going to be retiring soon thereafter. So there is different wages that were coming in and out, right? So it looked great. It was a really cool presentation. But then, in the meeting, what they said was, Hey, can you show me it a year earlier? And I said, Of course I can. So after the meeting we worked on the retirement timeline and and redid it to show it a year earlier and what that impact would have. And it was great when I was able to show them was, okay, here’s kind of this version, one of retiring at 62 with that, you know, 20 years of service and having that 10% increase versus retiring sooner, say 61, not having that extra FERS pension for that for one of the spouses. And then also having that FERS supplement for a year.

Right. So I was able to map that out. What was helpful in that was not only mapping out the the retiring a little bit earlier and what that was and if it was even possible, but was also to plan health insurance. Right. Because if we retire a little bit sooner and one of the spouses is going to continue to work, well, maybe we would switch to that spouse’s health insurance just because we would be getting a little bit of a discount, because when you’re working, your health insurance goes in pretax versus when you’re retired, it’s after taxes. There was just a ton of cool things using this tool in a real-life example just this week where we got to show it just working out a little bit sooner if we were to retire and helping the client plan. Okay, well, what’s what’s going to be the right date for their retirement And can we make this work or do I need maybe a second job in my Am I going to be taking out too much out of my retirement accounts and I can’t make this work right? So it was really helpful. 

JT: Yeah, that’s great. It really puts it in perspective. And you know, for us visual people being able to look at it on paper and see how that changes over time and see those sources of income. And one thing you pointed out such a great point is that you can single out a single source of income there, right. Kind of mentioning Social Security when to turn on Social Security. Now, just last week, out of line asked me if they should turn on Social Security at age 62, because I think that they’ll need the money. I’ll say, okay, great. Ultimately, of course, this is a cash flow question, right? Cash flow is the heartbeat of retirement. How much are you spending now? So we built out that retirement income timeline and identified that they could meet their income goal with just their two pensions. They’re dual-fed. So, the two pensions coming in that met their income goal. So they didn’t need to draw any money from the TSP, and they didn’t need to start Social Security at age 62. So the great news is you can postpone that Social Security. And as we know from age 62 to a full retirement age, Social Security grows by 6%. And then from full retirement age until age 70, it grows by 8%. So there’s a huge benefit to postponing that if you’re able to. And so it was hugely valuable for them to see that on paper and say, wow, yeah, that answers the question. I don’t need Social Security age 62, going to be just fine on the two pensions alone. 

Christian: Exactly. I think we must have been meeting with a lot of dual spouses. I’m thinking of another couple I met with this week too, and a different couple. And we did the retirement timeline, and what we were planning for them was one of the spouses being a special provisions, so they’d be retiring at 50, and then the other spouse would be working a little bit longer, so they’d get 20 years of service. So this was good because we were able to show them you’re going to retire at 50, at least with the federal government. Now, what now? Are we going to be done, done, or are we going to be able to just be okay playing golf every day of the week and having our other hobbies? Or do we still want to do some more work? And what I was told was that person want to continue doing some more work. So it was it was neat to see the timeline where one spouse retires, the other spouse continues to work, but then having that additional planned income that was going to come in because one of the spouses, the one that was retiring at 50, they wanted to go work right? So they were going to have their pension coming in while that other spouse was still working. Plus, they were going to go work. So now their baseline what their income is right now will be increasing when he retires because he wants to go and work. And so it was a really good conversation there to say, hey, going back to cashflow, I’m going to make the numbers up. But you’re normally used to spending, are making $8,000 a month and spending about $8,000 a month. But just in a couple of years you’re going to be retiring, having pension income plus wage income, plus your father’s still working, so you’re making eight now. You’re going to have ten coming in the future. So there’s an extra $2,000 there. We got to be careful with that. Right? We don’t want to have lifestyle creep. We want to be intentional during that timeframe where you’re going to have that additional income to where we’re not a slave to this new job that you’re going to have. Right. And so just making sure that we know, okay, today we’re spending eight that’s what we want to maintain. If I make above eight, that’s awesome. I’m just going to use that for maybe some projects around the house. I’m going to use that to go on a vacation. I’m going to use that to save quite a bit because I know that I can’t maintain that once I stop that second job that I have post-retirement because they know, okay, great, eight the number, not ten. So I think that was just another good example there of being able to just map out the income not only for where pensions are going to come from and delaying Social Security, but also situations where there’s going to be additional income because we’re going to have that second job right after retirement.

JT: For sure. There’s so many examples, so many stories about where this retirement income timeline, like I said in the beginning, kind of produced that AHA moment for our clients. And, you know, this podcast is all about action items. So this is something that, you know, our listeners at home can do is first action item, is that first step, know what your net income is, how much are you spending per month. Christian, What’s another action item for us? 

Christian: The second action item I’d have would be to do your best to draw out your retirement income timeline. Right. Go out the next ten years to this year, next year, ten more years thereafter. Plan when you’re retiring and draw that on there. How much more income is coming in now, and what are we reasonably expecting our pension to be net of health insurance and taxes, Right? Survivor benefits. What’s our pension going to be? And then if it’s if there’s room, if we’re within ten years of starting Social Security, when that’s going to turn on. Right. And you’ll probably see that there are some years where there might be a gap and are there enough in our investments to fill the gap. So my next action item, again, develop that retirement income timeline. What’s the last action item for our listeners today?

JT: To have a plan for health insurance? You know, we talked about how there’s these gaps in income, but there could also be a gap in health insurance coverage, especially if you choose to postpone retirement. You’re choosing to put those benefits on the shelf. So I would say have a plan for your health insurance as well. Well, Christian’s on super fund filling in for Micah and Tammy. I’m looking forward to doing this again next time. To all of our listeners out there, happy planning.

Christian: Happy planning.