Ep #31: Derailing Your Retirement

 You can spend. You can save. What is the right thing to do? Federal benefits, great savings plans too. You can save your own way, with help from Micah and Tammy. You can save your own way. Save your own way.

Micah Shilanski:  Welcome back to the Plan Your Federal Retirement Podcast. I’m your cohost Micah Shilanski. And with me, as usual, is the amazing Tammy Flanagan. Hey, Tammy.

Tammy Flanagan:        Everyone’s going to think my first name is Amazing.

Micah Shilanski:  It is Amazing Tammy Flanagan. It just goes.

Tammy Flanagan:        Well, thank you, Micah. I appreciate that. And it’s good to be here today.

Micah Shilanski:  You know, Tammy, we were chatting a little bit kind of on our pregame, going through things. And it’s amazing as we meet with people… Now, when I say with people, that’s not just clients. Sometimes it’s family as well. Sometimes it’s friends that were going through, about the conceptions that we have about retirement, or I should say the misconceptions we have about retirement. And sometimes some huge things can really derail your retirement plans.

Tammy Flanagan:        Yeah, I know. This is one of the things that you don’t know what you don’t know, like we always say. And there’s so many little things that you think you understand how these are going to impact your life going forward. And you make decisions while you’re still getting a paycheck. But when the reality comes that you’re living out that life after retirement, you don’t want to feel like, “Oh, my goodness, I should have worked longer.” Or, “Oh, my goodness, I should have saved more.” Or all these different things that can happen. So I think if we can give some framework as to how to think about these potential mistakes, these potential things that can derail your future before you retire, maybe we can help some people avoid those problems.

Micah Shilanski:  I think so too. And I’m going to be a little dramatic about it, Tammy. But I’m going to call it lying to yourself about retirement. We could soften up and say misconceptions, but at some time, nope, we’re just flat out lying to ourselves about this. We’re telling a fish story, we’re drinking our own Kool-Aid, whatever terminology you need here. But sometimes what we’re picturing, what we’re saying, what we’re talking about retirement is completely wrong. And man, this is just such a huge, devastating or derailing your retirement plan because reality will set in, regardless of what you think or not think. And when it does, if you lie to yourself long enough, it’s going to be detrimental.

Tammy Flanagan:        Yep. And I think it’s a problem because we hear things that we just assume. Like for one thing I heard my sister-in-law say one time is that she was under the impression social security was meant to be her retirement. So early in her life, she didn’t think she needed to save. She goes, “When I’m 65, I’ll stop working and I’ll get social security and live on that.” I’m like, “No, that’s not how it works.” You hear people say, “Well, I’ve got 30 years of service. I’m 57. I’m going to retire. I’m eligible.” Well, being eligible and being able to afford it, may be two different things. Maybe you can afford it, but have you really done the homework? Have you really run the numbers?

Micah Shilanski:  Yeah. These are really, really important things to look at. And again, that’s the reason we’re talking about… I’m talking to somebody with a dispassionate point of view and somebody that knows what they’re talking about, not just water cooler stuff. Because as we talked about in our last episode, Tammy, there’s a lot of water cooler misinformation that’s out there. We had one comment on our website and by the way, I love it when people jump in and put comments, we try to do our best to respond to those. And people have really good questions, but we wrote an article recently about survivor benefits and the cost of survivor benefits, but the value of survivor benefits. And someone wrote back to me and says, “You know what, Mike? I think your math is wrong. Really, you just need to take the survivor benefits, times it by how long you’re going to live and that’s your money. And you need a plan to live a long life and not worry about survivor benefits.”

                           Now, part of his statement is true and this is where we can get in trouble. You should plan to live a long life. Absolutely. That part of the statement is true. The second part of the statement, not needing survivor benefits. Okay, this is probably a misconception that’s there, because just because we’re going to live a long life doesn’t mean we don’t need to plan for survivor benefits. You got to hold both of those things in your hand at the same time. We got a plan that we’re going to make it to a hundred, but we also got to plan if we die, where’s our spouse going to be, our loved ones? What position are we going to put them in? And we got to make sure they’re taken care of.

Tammy Flanagan:        Oh, yeah. There are so many misconceptions around that single topic of survivor benefits. Anywhere from people thinking that, “Oh, my spouse can live on half the income we have. There’s only one of us, so she or he should be able to live on half of that.” Or the one where they think life insurance is a good substitute for survivor benefits, not taking into account cost of living adjustments or tax considerations. So there’s so many things. I think there’s a lot of misconceptions around electing that survivor benefit. And the problem is it’s a permanent election. When you make that election at retirement and you realize five years later that, “Uh-oh, I should have done something else.” You can’t go back and change it. So we really need to have a better understanding. Have we done a podcast on just that topic? I think we have.

Micah Shilanski:  I think we have. I think it was one of our earlier ones when we were talking about survivor benefits here. Well, I know we did it in our second episode, your agency estimate talking about survivor benefits. And then I think we did one later on, off the top of my head, but I don’t know. I’ll have to go back and look, maybe we do want just on survivor benefits.

Tammy Flanagan:        Yeah, I know because that’s one thing that comes up at seminars all the time and I feel bad because sometimes people are single and they don’t think they need a survivor benefit at that point. And they worry about us spending so much time on it. But it’s such an important topic. And even if you are single, you might not be single forever. So it’s important just to have an understanding about it.

Micah Shilanski:  Absolutely. So that’s one of the things that people get in trouble about or derail their retirement, lying about their retirement. Now, they could be lying about several different areas to themselves about, “You know what? I’m not going to live that long in retirement. So therefore, I need to spend a lot now.” I’m going to tell you a story about that one in just a second. But you have the people that say, “Well, I’m going to live forever. Therefore, I don’t need survivor benefits.”

                           But we also have things, Tammy, about cashflow, where this is where I see a lot of the times, and lying is a strong word for this one so maybe it’s a misconception, but about how much we’re going to spend in retirement. Generally, people are wrong. They say, “Oh, when I retire, it’ll cost me less because I don’t have to commute.” Really? That’s what’s costing… That’s where you’re spending all of your money right now, is commuting? Or the other one is, “Well, I don’t need professional clothes.” Really? Your professional clothes is where you’re spending all of your money coming in. Granted that’s a slice of the budget, but more than likely, that’s going to be replaced. You’re going to be spending money elsewhere.

Tammy Flanagan:        Well, didn’t we all just have a good practice at that during the pandemic, where we didn’t need to commute, we didn’t have to buy clothes. We could just wear the same nice shirt and anything else goes. So did you really spend much less money during the pandemic? I think the real reason why we spent less money is we didn’t go anywhere. We didn’t travel. We didn’t take vacation.

Micah Shilanski:  And now that that’s coming back, this next year will be the real example. Now that everybody wants to come back and travel, what is that going to look like?

Tammy Flanagan:        Yeah. And I think too, that whole idea of not understanding how much money we need to have in retirement may come from some of those rules of thumb that we hear. That, “Oh, you can live on 80% of your income or 70%,” or whichever rule of thumb you want to go by. But I really think it’s more individualized than that, because we all save different amounts. We all have different salaries. We all have different lengths of service. Not everybody has a pension. So we can’t just use a rule of thumb when we’re planning our own retirement. We really have to dig a little deeper.

Micah Shilanski:  Well, let’s talk about a rule of thumb and how it went wrong. I met a lady one time and she wasn’t a client. And I met her when she was 97 years young and she was great. It was down in Florida. My dad and I were actually down there presenting at a conference and it was for a Centurion conference. They had a bunch of people in a room that had made it to a hundred years old, it was really to talk about longevity and whatnot. So it was really fascinating to see that and to see again how mobile they were and how they were able to do things. And we were kind of outside and whatnot. And this lady, she had purple hair. She was great.

                           This lady kind of called us over and says, “Sweetie, why are you here? What are you doing?” And we chatted for a little bit. She’s like, “Oh, you’re in finance. Sit down. I got to tell you a story.” And so we sat down and she goes, “Look, when I was working, I designed clothes. I had clothing manufacturers and boutiques, stores all up and down the east coast. It was amazing. I was doing these wonderful things. I was busy. I had all these things going on. Then I was about 57, 58 years old, and I looked back at my family history and I realized that everyone in my family had died between 63 and 65. So I was like, ‘Look, I got six, maybe seven years left of my life. And then I’m going to die. And I don’t want to spend it doing all this.’ So I sold everything. I had a ton of money. I went on cruises around the world. I traveled with my family. We did everything you could possibly imagine. I have been broke since I’ve been 65.”

Tammy Flanagan:        Oh geez. Now, she’s 97.

Micah Shilanski:  97. I was like, “What?” And she just let it hang out there for a minute, Tammy. And I was like, “What do you mean you’ve been broke since you’ve been 65?” She’s like, “Literally, I spent everything by the time I was 65, because I knew I was going to die.” I was like, “What have you been doing?” “Well, I had to move back in with this kid for a little while. Then I moved back in with this kid and now I’m dating this other guy who has money.” But now she’s very dependent on that side. And yes, she has some social security income coming in, but she blew everything because she looked at her “family history” and knew she was going to die.

                           This is a misconception with our life expectancy tables. With life expectancy tables, when you’re looking at an average age, that means half the people died before that, half the people live longer than that. Well, the reality is most of us who are working, who take care of ourselves, who have a decent income, we’re on the top end of that. We’re not going to die before that age. Most of the time actually we’re going to live much longer into life. And we got a plan for that.

Tammy Flanagan:        Yep. And science is doing that too, between curing illnesses and coming up with technology to advance our life expectancy. Like it or not, we’re going to live longer than our ancestors did. So that’s just the way things are going. It’s showing even in the numbers in the Census Bureau today. So I think it does pay. Now, I always do my projections out past age 100, whenever we’re thinking about taking money out of the thrift or trying to figure out how long we need to have income for. So I think it’s important to plan for the best and not hope for the worst. What is it? Hope for the best and plan for the worst.

Micah Shilanski:  There you go. And yep, exactly right.

Tammy Flanagan:        I always get that saying turned around, but it’s an important one.

Micah Shilanski:  It is, you really got to focus it. Now, that can be in other areas that we have misconceptions too, that this affects us. But this could be about taxes and retirement. I think we talked about this last podcast, is we had a lot of people who were asking us about taking lump sums of money out in retirement. Well, this goes into taxes, but this also goes into spending. This also goes into habits and mistakes. So through our working career, how many times have you made a mistake? Probably frequently. I mean, come on. We’re human. We’re trying new things. We’re learning, we’re making mistakes.

                           Well, all of a sudden when we transfer into retirement, we have a new stage in our life. Do we think we’re going to make mistakes? Yes, absolutely. It’s the first time we’ve done something, whether that’s not adequately planning for taxes, we’re going to talk about long-term care in just a second, cash flow spending, et cetera. You got to have some buffer. You got to have some wiggle room. If your plan is so tightly narrowed that it can’t allow for mistakes to happen, you are going to run into a problem in retirement.

Tammy Flanagan:        Yeah. Not maybe, you will. Just like when you were working, life happens, there’s emergencies that come up. There’s things we weren’t planning on. That’s why I always had a hard time with a budget. Because you can budget those things, like your utilities and your mortgage and all of that, but you can’t really budget necessarily for when the car is going to break down or when the roof’s going to leak. It seems like every month there seems to be an emergency that requires you to go outside of that budget.

Micah Shilanski:  Yeah. Really important. And also, kind of changing this a little bit, let’s talk about long-term care. Now, we’re going to talk about it in a slightly different lens. We talked about long-term care insurance before, but there’s more than just the insurance or financial aspect of it too, right, Tammy? There’s the aspect that people have a misconception about, and then this can, again, derail their retirement, of saying, “Great, I got enough money to pay for it.” But what about the level of care you want versus the level of care you can afford? Now, this is a little different. What if you have enough money to afford your level of care, but you don’t want to move into a home? You don’t want assisted living. You don’t want people coming into your homes. What if your plan is to rely on a family member in that time, have you chatted with that family member about what it’s going to look like? What’s your vision of this in retirement and what’s their vision of this in retirement?

                           And I can tell you, I have a client who has bounced back and forth between the east coast and west coast many times, because she wants to live down in Florida on the east coast, but her family’s in California. So every now and again, she’ll move back to California. She moves in with her niece and nephew, which there is a 40 year age difference between them. And I’m like, “Do not move in with them.” She’s like, “No, Mike, it’ll be great. We get along all the time.” I was like, “No, no, you don’t understand. Vacation living is not living. That’s completely different. Everyone can tolerate stuff for a few days or a week or two at a time. But after months and months, this is completely different.” Sure enough, she moves in with them. They get in fights. They can’t stand it because their lifestyle’s different. What she had imagined moving in with them, is not what they had imagined when they said, “Yes, come live with us.” So what does that picture really look like?

Tammy Flanagan:        Yeah. And that’s probably so much harder to plan for than the money part, because we can crunch numbers and say, “Here’s how much it’s going to cost. Here’s how much we need to have insurance for, or to save.” But even when it comes to long-term care insurance and people will say, “Well, how much do I need? Or why do I even need it in the first place? I have plenty of savings.” I always say, “I call it crisis insurance because when dad falls or a mom has a stroke, or dad starts down that journey of dementia, that’s a crisis in the family.” If there’s children, grown children usually in the family, if there’s siblings, brothers and sisters of that person who’s got the crisis, that throws that family into turmoil. Who’s going to take care of dad? Who’s going to take mom into their home? What’s that going to look like? Are they going to want to go?

                           So if you have some insurance to cover that initial crisis, even if you don’t have 10 years worth, but you have two years or three years worth of coverage, at least you can say, “Well, we have some resources. We have some resources for a while until we figure out what to put into place permanently.” And even if it does mean maybe temporarily having somebody come into the house until we figure out what to do next, maybe the solution is to move to continuing care community. Maybe the solution is to move in with one of your children. But that has to be thought out. And the initial conversation can be so upsetting for a family because it’s not what you thought, what they’re thinking. Just like you said with that client you had, the reality we have in our mind is different from the other person when you’re dealing with two different people. So that’s a hard one, a very hard one to plan for.

Micah Shilanski:  It is, but it’s something, we got to have these difficult conversations before you need to have them. Because now we can pivot and we can make changes differently. Another one, Tammy, that’s going to be out there. I’m going to say again, things that can derail your retirement is retiring too soon. Maybe this isn’t a financial thing, but maybe it’s a mental thing. And I know we chatted about that a bunch on the podcast as well, about when do you really want to retire?

                           And there’s a difference in being able to retire and being eligible to retire. Eligibilities that we consider are around the federal employee rules, do you meet their criteria, et cetera. But are you able to retire is a two-part test. There is the financial test, but there’s also the mental test. Are you ready to separate? And I got to say, sometimes people retire too young. And then they make a series of bad decisions. Whether they start their own business, maybe they should, or shouldn’t be doing that. But then they spend too much money. And that can also lead to when do you turn income on? When you turn on social security? When you turn on TSP? Those types of things.

Tammy Flanagan:        And I think too, that with some people, they feel almost forced into it. Some people literally are forced into retirement, whether it’s a riff situation, whether it’s someone in the family got sick and they had to retire to have more time. So when you can plan for it and voluntarily retire, it’s usually a more successful scenario. So I do feel bad for people who are forced.

                           My dad was forced into it. His company went under and luckily he was 62, so he could retire. But it didn’t go well at first. It was a very hard adjustment. So when you are planning for retirement, plan for that life after retirement. Start to visualize what that’s going to look like, start to plan your days, how you’re going to spend your time, along with how you’re going to spend your money and make sure you still have cash reserves. Make sure you have money when that roof leaks or when that car needs to be replaced.

                           I’ve heard people who get ready to retire at 62 or 65 years old, “We just bought a new car. We just bought a new kitchen. So now we’re set.” Like that’s going to last for the next 30 years.

Micah Shilanski:  How long did your last car last, right?

Tammy Flanagan:        Right.So you got to have a plan for replacing that car or maybe moving somewhere else again. So you still need to have cash reserves.

Micah Shilanski:  You do. Here’s an easy way that we can look at this. Look at what you’re spending now. Where are you at now? Now granted, if you’re early career, mid career, this might be slightly different, but it’s a place to start. And this is the important part about this. If we don’t start somewhere, you’re not going to start anywhere, or you’re going to wait till one or two years before retirement. And man, it’s a little bit late.

                           So start now. And number one, start with a calendar. This is great. If I was retired and I didn’t have to go to work every day, what would that look like? What would I do? What are the things I would like to do? Then where’s the money going to come from in order to pay for that? Get your benefits estimate. We talked about that before. Look at your retirement income, your TSP, your social security, et cetera. When would that income come in? And then how is that going to pay for it? How close are you to filling those gaps? Really important things to be looking at.

Tammy Flanagan:        And even plan for possibly not necessarily a second career, but another way to generate some income. To give you a story, I have a client who retired from the government, was comfortable with her retirement, but she wanted that extra money to take trips now and then, and to do things that were just frivolous. So she got a job at the state house, where they do the government of the state. And it’s just a short term job because they convene in January. They’re all done by April. So she works four months out of the year, saves up every penny that she makes and that’s her travel money. She takes nice trips every year with that extra income, that she otherwise wouldn’t have had. So sometimes that’s how you can solve a problem, is not to completely retire, kind of do it in a phased manner. While you’re still in those go-go years, you still need some extra money.

Micah Shilanski:  We talked about this a little bit, probably in the past too, but I have nurses that do a lot of interim work or travel nursing work. And that’s exactly what they do. They bank that money, whether they want to buy a trailer, they want to do something else. This is great. What’s your livable money? And this needs to stay consistent. You need to stay in budget. Then we have project money. Great. And if you want to go work more in order to do certain things on the project side, then knock yourself out. But we can’t, if you’re with that livable money that’s coming in. You can’t just reach in your TSP, take out an extra 50 grand because you want to travel, trailer, you want to do a big project, et cetera. Nope, that needs to come from project money, which you need to go earn.

                           So it’s okay to mix and match these tools. As long as, again, you’re not lying to yourself about where that money’s coming from. This is where people get into problems, saying, “Oh, I’m going to take that money out of my TSP now, later I’m going to get a job and replace that.” No, that’s a misconception. That means you need to get a job now, save up that 50 grand that you want to spend before you take it out. So really look at that cash flow.

Tammy Flanagan:        Yep. So all these little puzzle pieces have to fit together. So between elections you make at retirement, spending you do after you retire and even just the tax planning ahead of time, because I see so many people who don’t really have a handle on taxes on those benefits they’re going to get, whether it’s social security. Many people think that’s totally tax-free, which it might be on the state level, but it might not be and most likely won’t be on the federal level. And then, the other pet peeve I have with some of the retirement software that’s available at the agencies is they don’t show proper tax withholding from a FERS or even a CSRS benefit, because they’re kind of narrowly looking at that estimate as just that FERS benefit with no other income. So you might see a $4,000 retirement that will estimate $170 a month for taxes. It’s like, “No, you’re going to pay a little more than that. Your tax rate is not 5%.”

Micah Shilanski:  So important things to look at it. So Tammy, we talked about things that derail your retirement, but now let’s transition to action items, because this podcast is all about our listeners taking action at where they’re at to make sure things are going forward.

                           So I’ll kick it off with the first one. And I like to say, sample retirement. Again, get out that calendar. What are you going to be doing in retirement? Where’s the money going to come from? How much do you want to spend? And then how do you sample that now? I would go as far as to say, if you’re within five to 10 years of your retirement, could you, for a period of time, change your net paycheck, where it’s actual retirement income. So if you think that you’re going to live on less in your retirement, wonderful, live on less now. Let me know how it goes.

Tammy Flanagan:        Or work long enough so you don’t have to live on less. Now, I find clients when I compare their net income as a worker, as a salary, and I look at the sources of potential retirement income they’re going to have, even after taxes and insurance withholdings, I’ll do a net to net comparison. It’s surprising to me how many people’s net income in retirement is more than what they’re living on in their paycheck. So for those employees, I’m thinking, “Okay, common sense tells me they’re in a lot better shape than the ones who are going to have to live on less.” And those ones who live on less, like you said, Micah, sample it out. Make sure that that’s really realistic for you to live on less.

                           A lot of people think that you can live on 70% of your income or 80%, but what does that really mean? So figure out those numbers, run those numbers and do a net to net comparison just to see how short you are or how ahead you are. Because we do find people who think they can’t afford to retire, even though they’re going to have a thousand dollars a month more income in their retirement easily, and they still think they can’t afford it. So we got both sides of that coin.

Micah Shilanski:  Another thing that would go out there, and I wrote this down as a little negative, but I’m going to change around, a little bit more of a positive, go out and talk to people that are successfully retired and say, “What’s the one thing that you did that helped attribute to your success?” Now I don’t want theoretical things. “Oh, I wished I could have, should have done this.” Well, that’s a theory. What are things they actually did that added to their successful retirement and learn from that experience that they have. And it might get you thinking outside of the box just a little bit too, because if you have someone who’s done something successfully, great, don’t go reinvent the wheel, learn from success.

Tammy Flanagan:        Yeah. Talk to people who are living out retirement, see what they’re doing, how they’re spending their day. Is that something that sounds great to you? Or is that something that strikes a little fear in you when you think of what they’re doing to take their day? Some people are just happy be peddlers, they’ll get up in the morning and now they can spend two hours reading the newspaper. And then another hour just looking out the window at the birds and the trees, but that might not be your lifestyle. You might need something that’s more scheduled, something more engaging, maybe something more challenging. So start to really think about the mental side, in addition to the financial side.

Micah Shilanski:  I love it. Well, this podcast is all about action time. So make sure you’re doing those things. We have grown, we’re getting over 10,000 downloads a month, thanks to you, our listeners. So thank you guys very much. And if I could ask, share the podcast. Send it to a friend, send it to a co-worker. Tammy and I have a goal to impact better employees, to dramatically change the way you’re planning for retirement in a successful way. So help us with that by sharing this podcast, getting this information out. And until next time, happy planning.