Ep #33: Risks in 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 joining me as usual is the amazing Tammy Flanagan. Hey, Tammy.

Tammy Flanagan:        Hey Micah, how are you doing today?

Micah Shilanski:  We’re doing just great, wrapping up a beautiful summer up here in Alaska. So I really can’t complain. And excited to talk about some fun stuff. But how are things for you? It’s a little warm down where you are.

Tammy Flanagan:        Yeah, it’s been a little hot and muggy. We averted the tropical storm, so that’s always good.

Micah Shilanski:  Yes.

Tammy Flanagan:        And we’re in the hot and muggies of our summer season. So that’ll continue probably for another couple of months during hurricane season. But it’s good, it’s all good.

Micah Shilanski:  Nice. And then hopefully, it’ll wrap up to a beautiful fall for you.

Tammy Flanagan:        That’s right, we look forward to the winter here in Florida.

Micah Shilanski:  Well, kind of on that subject, we’re talking about retirement. Florida, big retirement destination. But Tammy, what we really were chatting about before was talking about what are some risks of retirement?

                           Now, these may be things you’re thinking about, but it may be things you’re not thinking about as well. But something that both as myself, working one on one with financial planning for federal employees, and Tammy, you working one on one with retirees while going through benefits, these are some real-life things that we see, and misconceptions that I’m going to say a lot of federal employees have about what are the actual risks in retirement.

Tammy Flanagan:        That’s right, Micah, and I think managing risk is a big thing to really try and wrap your head around as you’re planning to retire. Because first, I think you have to identify what are the things that can derail my financial security and retirement? Sometimes, we don’t even know what those things are. And then once we’ve identified them, are these really things I need to worry about?

                           Because like you said, there are so many misconceptions about things. We’re constantly busting myths, right? We hear all these myths about retirement, and a lot of them just plain aren’t true. So, that’s the good news.

                           The bad news is, there are some real risks to your retirement if you don’t plan ahead. So, I think today, if we can identify some of those and bust the myths and come up with the real strategies to get around some of these risks to your financial security, I think that’s going to make for an interesting show. What do you think?

Micah Shilanski:  I think this’ll be great. And so, we broke these down in our pre-game going through these in advance. About four or five things that we really see affecting federal employees. And again, maybe not things we’re thinking of.

                           So Tammy, let’s start off with one that we all think about from time to time, and that’s longevity risk. To put it a different way, how long are you going to live? Now, I jokingly say when we’re in a seminar about if anyone knows what their longevity is. And what most people probably don’t know, Tammy, is on your birth certificate, they actually put it on there. Did you know that? Your longevity on your birth certificate?

Tammy Flanagan:        I did not know that.

Micah Shilanski:  Yeah, it’s on most states. You can go grab yours. It’s kind of interesting and creepy. You look at the bottom right-hand corner, and it has these things, it’s COD, and it has a date. You know what the COD stands for?

Tammy Flanagan:        Something of death?

Micah Shilanski:  Crap out date.

Tammy Flanagan:        Crap out date. You are pulling my leg, Micah.

Micah Shilanski:  Yes, I’m pulling your leg, right? We don’t know what our life expectancy is going to be. We don’t know what our longevity is going to be. And so often, and Tammy, I’d love to know your opinion on this. But so often, I feel people underestimate their life expectancy. They say, “Well, my parents didn’t make it to their 80’s, therefore I’m probably going to pass away in my 70’s.” And they’re 65 years old.

                           It’s like, “Wait, wait, you think you only got five years left? You’re healthy, you’re active, you got all these other things going. There’s no medical issues, and you’re only planning on the next five or 10 years.”

Tammy Flanagan:        That’s right, and I think people underestimate it as well, because we hear life expectancy is 81 or 85, or depending on your gender, depending on your race. But a lot of these factors we read about are life expectancies at birth.

Micah Shilanski:  Yes.

Tammy Flanagan:        No life expectancies taking into account that we’ve already lived 50 years or 60 years, or 75 years. So I think once you’ve attained a certain age, you kind of gotten rid of all the things that would have wiped you out at a younger age. Now, you’re just worried about those other things that are waiting for you down the road.

                           But I think, I was looking at CDC. And of course, we’ve all been looking at CDC over COVID, the Centers for Disease Control, but they also keep track of life expectancy, because they’re dealing with medical advances and medical everything.

                           So they say if you make it to age 65, this was as of 2020, so it’s pretty recent, that if you’re a male, anybody in this country of that gender is going to live another 17.8 years on average. So that gives you till, let’s see, 75, 82, almost 83. That’s average.

Micah Shilanski:  Yeah.

Tammy Flanagan:        So, a lot of you will live beyond that. And if you’re female, 20 years, 20.4.

Micah Shilanski:  And let’s think about that. Average means half the people don’t make it that far, but half the people make it longer, right?

Tammy Flanagan:        Right.

Micah Shilanski:  And so, most people we’re going to talk about, and also we can bring income into this a little bit, if you have a good middle-class … which most of our audience is going to be that or upper class … then your life expectancy is normally longer because you’re more proactive in taking care of your health. You’re more proactive in doing things. You stay active, you go see the doctor regularly. These are all things which help promote life expectancy.

                           Now, God forbid if you have a disabling disease. We’re not trying to be insensitive to that by any means. We know that can be different. But there’s a lot of us out there that think, “I’m not going to make it that far,” and that translates into several other things as well, Tammy, about saying, “Well, if I’m not going to make it, really, my spouse is going to be fine on their own. So when I die, you know what? It’s going to be okay because my spouse has … You know what? The house is paid off. So therefore, they have no other bills because the house is paid off, and they’re going to be fine.” They don’t need to leave them a pension.

                           And this is something we hear a lot of times.

Tammy Flanagan:        I hear it too. I hear a lot of misunderstanding about how it’s going to be different when there’s one of us, versus two of us.

Micah Shilanski:  Yes.

Tammy Flanagan:        So, I think this whole thing of longevity is not just our longevity, but ours as a couple, if we’re married. Because there’s this idea of both of us living on maybe two incomes, maybe two retirements, two social security checks, two retirement savings accounts. But what of that is going to continue when there’s one of us? One of those checks is going to disappear from Social Security. One of those retirement checks may disappear, as well, unless you at least leave a survivor benefit.

                           So I think we misunderstand or kind of misinterpret the dependency our spouse might have on us, even though they might have their own retirement.

Micah Shilanski:  Now, if you’re one of those that says, “You know what? I don’t think it’s an issue in my case. I’ve checked off that box.” Then indulge us for just another second, because I’d love you to run through an exercise in your house.

                           As you know by listening to this podcast, Tammy and I are big fans of trying things before you actually do them. So retirement income, simulate living on retirement income as close as you can before you retire. Change your allotments in your pay. If your retirement income is going to be less than what you’re making now, perfect. Reduce your income now. See what it’s really like.

                           And do the same thing here. If you’re looking at yourself and saying, “You know what? I don’t need to leave a survivor benefit. My spouse will get my social security check, and she’ll be good,” whatever that case is going to be, okay, great. If that’s the case, try it today.

                           Now, you’re going to say, “Micah, but it’s different. Both of us are alive.” Very true. What, does your house payment drop when one of you dies? Nope, that stays the same. What about utilities? Goes up, down, stays the same? Normally goes up. Why? They want to leave lights on more, a little bit of loneliness. Food bill doesn’t really decline—four thousand dollars a month. So how much are you really going to stop spending if one of you are gone?

                           Simulate that today, and does that actually work? Nine times out of 10 you’re going to find out it doesn’t. It’s not enough. Then, how do you need to tap your other resources? Maybe you’ve saved enough money. Okay, great, how are you going to tap that to make sure they’re taken care of?

Tammy Flanagan:        Yeah, I think it depends on which one of us goes first, because in our family, we have a spender and a saver.

Micah Shilanski:  Yeah.

Tammy Flanagan:        And you would probably not guess this, but I’m the spender. So if I were to die first, I spend everything I make, plus most of what my retirement brings in. So if I died first, he would actually get a pay raise without me leaving him any kind of survivor benefit, no problem. But if he goes first, I get half of his pension. And now, I’m left to draw my social security, start spending my retirement savings. I’m going to have to be a lot more careful, because I’m living within that means now that before, I had a lot more flexibility.

                           So I think there’s some common sense to this as well when you’re looking at the way you spend money, the way you view money. I think there’s a whole other psychological piece to it.

Micah Shilanski:  Yes, absolutely. And this is all about making an educated and informed decision, right? As you just said, Tammy knows, between her and Brian, they’re different. They know each other. She knows finances. These are things they’ve talked about and gone through. She’s making an educated and informed decision. You need to as well. Don’t just turn a blind eye to it.

                           Yes, it’ll work out, but it may not work out comfortably for your loved ones.

Tammy Flanagan:        Yeah, and you can always live with what you have, but it’s not going to be the same. If you have to start pinching pennies or setting up a shopping list when you go to the store, that’s not as much fun as being able to have the freedom to spend your money as you wish.

Micah Shilanski:  No.

Tammy Flanagan:        So, I think getting a little disciplined ahead of time will help you down the road.

Micah Shilanski:  I love it. Well, we’re going to talk about that one in just a minute too, because that’s another big one.

Tammy Flanagan:        I don’t like that word, discipline.

Micah Shilanski:  A little financial discipline. So Tammy, let’s change gears a little bit from the longevity one and a second major issue that we see that affects and doesn’t affect retirees. But we maybe spend a little too much emotional time on it, but it’s proposed law changes. I know when I’m working with any retiree that’s coming up, they’re always concerned, they say, “Micah, I got to retire right away, because they’re going to change it to a high five, and I’m going to lose my pension.”

                           So, how do proposed law changes actually work? What’s in the mix right now? What do we actually think’s going to be happening through Congress?

Tammy Flanagan:        Yeah, Micah, there are very few laws that actually pass. In fact, let me pull that number up for you.

Micah Shilanski:  Yes.

Tammy Flanagan:        There’s right now, I just got this off of govtrack, which is a big service that keeps track of all the bills that are being proposed. So right now in Congress, there are 8,810 bills and resolutions currently before Congress. That’s a lot of legislation for the 117th Congress to have to handle.

                           But only about seven percent of those 8,000, almost 9,000 bills will actually come to pass. And the majority of them, I hate to say, are not relative to federal employees. They’re gun laws, they’re violence and drugs, they’re all kinds of other issues that are big hot-button issues for this country.

                           So the bills and laws that we’re looking at that affect federal retirees, most of them have about a four percent change of passage, whether we’re looking at the elimination of the Windfall Provision or the government pension offset. That’s been on the books for as long as I’ve been doing this, and that’s a long time. So I don’t see those passing anytime soon, although that would help us out a little bit. But that’s not happening.

                           The cola, to equalize the cola between furs and CSRS, that would be another one. A lot of people would welcome that. Less than three percent change of passing. There’s one that’s going to create more law enforcement covered employees, the people who work in those type positions would just love to see pass. Unfortunately, another snowball’s chance in hell of passing that one, so don’t get your hopes up too much.

Micah Shilanski:  Right.

Tammy Flanagan:        I mean, don’t stop writing to your elected representatives. Don’t stop supporting the unions that do lobby Congress for this. But it’s just, it’s a hard road to battle. The only one that looks like it might pass is the Postal Reform Legislation. There’s about a 70 plus percent chance of that one passing because the postal service affects everybody in the country, and we don’t want to see it go under. They’ve got some severe financial difficulties. And most of you are probably thinking, “Yeah, but what does that have to do with us if we didn’t retire from the post office?”

                           Well, because they’re talking about in this legislation pulling all the postal employees and retirees out of FEHB. Well, so what? Yeah, but you pull this younger, healthier set of people out of a huge health plan system and you’re going to change the risk pool. And likely, you’re going to increase the cost to the rest of us, because we’re going to be the older unhealthier side of the government, the retirees and the active federal employees that are on average, older than postal workers. So, it could increase your cost. It could require Medicare enrollment, which now it’s an option. So that’s one we’re watching closely, because that one does have a change of moving somewhere. It’s been gaining a lot of momentum.

                           But other than that, I don’t see anything on the horizon that’s going to change the supplement, change the high three, change any of the basic concepts of our retirement that we’re planning for. So, don’t worry too much about those proposals.

                           Once they become law, then we talk about them.

Micah Shilanski:  Exactly, that’s what we’re going to take away from this, right? We can get really concerned about a lot of proposals, but once they become law, now we have to plan. So that means when we build a retirement plan, you have to build it for flexibility.

                           Because the only thing I know which is going to take place in the future is it’s going to be different than we think. The laws are going to change. What are they going to change to? I have no idea. Are taxes going to go up? Are they going to stay the same? Are they going to go down? Great question. I have my own guesses and hunches as well, but that’s where they stop. They’re guesses and hunches.

                           So, you got to build a plan that’s going to be flexible, and you also got to commit to not worrying about things that you can’t control. So the example, if FEHB, so there’s roughly what, 500 thousand career postal employees or somewhere in that neighborhood, if all of a sudden they leave and they aren’t in FEHB, you’re absolutely right Tammy, that could change the risk pool, and your FEHB premiums are going to go up.

                           Okay, is it still a good idea to be in FEHB? Yes, it is. It’s still a great program. So, I’m not going to build a plan that says what happens when all of a sudden, these costs are going to go up. Yes, we need to understand what those are going to be, but I’m not going to fret about it with my clients, because again, this isn’t something we can directly control.

Tammy Flanagan:        Nope, and I think that’s true throughout your career. When I teach a mid career planning class, I call it the what if class.

Micah Shilanski:  Yeah.

Tammy Flanagan:        What if I stay in till retirement? What if I leave early? What if I become disabled? What if I die? There’s so many different what if situations, and it’s good to kind of play those out in your mind to say, “Well, what if that happened? How would I react?” But to do anything about it today is just to be proactive, just to be prepared for whatever happens down the road.

                           And a lot of things can happen, both in your personal life, as well as in your federal benefit area.

Micah Shilanski:  And Tammy, one of the best things that I’ve seen for people to do is to plan on the soonest retirement date possible. Because a lot of these proposals, if you’re mid-career and you got 15 years left, well you know what? If you’ve made a commitment to stay, it really doesn’t matter what’s going to happen with these proposed law changes, because you’re here for the next 15 years.

                           Now, if you’re eligible to retire and you’re planning on working another three years, okay, now this could be a different story. So, what we like to do with our clients, whenever you’re doing planning, plan for the soonest retirement date possible, because it’s super easy to extend that retirement date when you need to. But sometimes, it’s hard to accelerate it.

                           So an easy example, what we all dream of, with the day we retire, they announce an early out, and all of a sudden we’re going to get paid 40 grand to retire when we wanted to. Okay, well if that’s what you want to plan for, then plan for the soonest date possible. So now if that opportunity comes, you’re ready to take advantage of it.

Tammy Flanagan:        That’s right. Yeah, I always say look at different peg points along the way. There’s one, your first eligibility date. There might be another one when you’re eligible to retire much more comfortably because the calculation might change. So I always like to compare a couple of different dates and kind of keep those in your back pocket as points where, okay, if I don’t go here, then maybe I’ll stretch it out to this next bend point or this next time in my life when it might make more sense.

                           And I think trying to have these shorter goals makes it easier to get there than trying to say, “Oh, I got another 20 years left to go. Maybe I can do it in five, maybe I do have to work 10 or 15 more.”

Micah Shilanski:  Absolutely.

Tammy Flanagan:        That’s what planning is, right?

Micah Shilanski:  Well, and on that next stage, let’s move onto the third one, that same thing about costs going up, inflation. Now, we’ve been hearing a lot about this this past year. We’re going to continue to hear about it for the next year or so about what inflation is. And I think we’re going to break inflation, Tammy, down to two different categories.

                           One category is all right, what is inflation? It’s too much money chasing too few goods. So all of a sudden, you have all this money in the economy. Things and prices start to increase. And that’s traditional inflation as we know it.

                           There’s also a different type of inflation that we need to be planning for, and that’s the change in lifestyle inflation. And when we work with, all of a sudden at 50 you decide to make certain life decisions. Well, at 60, at 70, at 80, guess what? You’re still spending money, but we’re spending money differently when we’re doing things.

                           I give one great example, I have a client that always wanted to do this big trip, but he kept delaying it, kept delaying it. One knee surgery, then he had another knee surgery. And now his issue is, “Micah, I can’t do this really big trip.” And I finally talked to him, I was like, “Jack, what’s the issue? Why can’t you go on this trip?”

                           He says, “You know what? I can’t pick up my bag and put it in the overhead. And so, I’m not going to be able to carry my bags to the boat and do this other trip.” Well, we hired a Sherpa. We hired someone to go with him, so he’s still able to do these trips. But now, his costs have increased because his lifestyle has changed. And so, that’s a form of inflation. In order to keep up with your current standard of living, you’re going to have to spend more money. How are you planning for that in retirement?

Tammy Flanagan:        That’s right. Yeah, that’s true. Because we do spend money, even if you look back over your life, the way you spent money 10 years ago is probably a little different than what you’re doing today. So, that’s an important looking forward type of thing. And then the other thing I look at with prices increasing is, is your retirement income going to keep up with that?

Micah Shilanski:  Yeah.

Tammy Flanagan:        And feds are pretty fortunate in the fact that we do get cost of living adjustments, both on the federal pension side of it, as well as on social security. But you have to build some of that into your planning, because just those colas alone may not keep up with those increased costs.

Micah Shilanski:  And it’s a good change they won’t keep up with it, especially with the diet cola or social security, the way it works with inflation. More than likely it’s not going to keep up. And we can have a great argument that says the inflation number the government uses is not a retiree’s inflation number. So everything we look at, those numbers are going to be sure. So how are you going to bridge that distance?

                           And that kind of leads us to the fourth thing that really comes up are mistakes that people make on the risk side, which is emotional investing. What are you going to do with your TSB? With your IRA? With your Roth? With all of your investible assets? And I got to say, the closer people get to retirement, Tammy, the more emotional they appear to get in what they want to do with that money.

Tammy Flanagan:        Right. I see it. I know you see it, too, Micah, where people just get scared. They’re like, “I have this much money left, and I don’t want to expose it to risk and volatility and all the real types of risks of investing in the stock market.” But we’re forgetting about the risk of inflation.

                           Because if you look at the G Fund returns, I did a timeline going back it’s inception in 1987. And back then was kind of the hey day of the G Fund. Back in 1988 it was earning 8.81 percent. I mean, who would have thought? But banks were getting good interest. But inflation was double digits.

Micah Shilanski:  Yeah.

Tammy Flanagan:        But today, the G Fund is getting, let’s see, from January to July of this year, .13 percent, about the equivalent of a 12-month CD rate at the bank. So that’s not going to keep ahead of inflation.

Micah Shilanski:  Wow.

Tammy Flanagan:        We’re talking about inflation this year of upwards of six percent.

Micah Shilanski:  Yeah.

Tammy Flanagan:        So, if you have everything in the G Fund, you’re actually losing money by keeping it there. But people are afraid of the stock market, because we see these swings where in 2008, the C Fund was down almost 37 percent. 2000, 2001, 2002, there was three years of negative returns. We focus on those negatives things and forget that there were 27 years of positive returns of the last 33 years. And some of those positive returns were well over 30 percent, 25 percent, 19 percent.

Micah Shilanski:  Yeah.

Tammy Flanagan:        So you have to take the good with the bad when you have volatility in the market. Er time, it kind of evens out. That jagged line becomes smoother when you push it out over a longer period of time.

Micah Shilanski:  Now, we all know past performance doesn’t equal guaranteed for future returns, right? Got to throw our fun little disclosure inside of there.

Tammy Flanagan:        Right.

Micah Shilanski:  But Tammy, you bring up really good points. And I like to bring up this example, because you and I were teaching a webinar about retirement in March of 2020. Now, least we forget what March of 2020 was, right? COVID was first coming out. Who knew what this plague was going to be? And the market was reacting pretty violently, as in going down. And we had people jumping in the chat that said, “You know what? I have lost over a hundred thousand dollars in my TSP. I just moved everything to G Fund. I’m scared, what do I do?”

                           And they were not alone. Many, many people did this. And Tammy and I’s first reaction was, “Oh my gosh, do not do that. That is the worst thing you could probably do.” But you got to have a plan for that longevity. We’ve talked about it before, we Tammy and I work on a course called Three Critical Concepts In Order To Be A Successful Retiree. One of those is a five-year plan. Any money you need to spend in the next five years probably doesn’t belong in the stock market.

                           But the reverse of that is also true. That means if you’re not planning on spending money in the next five years, that probably should be in the stock market. Again, Tammy, to your points, there’s three down years and 27 up years, based on that. That’s a lot of upside.

                           To put some more numbers on it … Excuse me while I geek out on this a little bit. So, and I’m going to round, just for the sake of argument here. The S&P 500, which is pretty much the C Fund lost around 30 percent, if not a little bit more, in March of 2020 when everything dropped. Then all of a sudden, between that bottom and now, it’s gone up almost 70 percent.

Tammy Flanagan:        Incredible.

Micah Shilanski:  So yes, it’s incredible, right? And I still talk to people that are sitting on the sidelines waiting for the market to drop to put their money back to work. And they’re like, “Micah, when’s the market going to drop?”

                           And I said, “Do you know what? I’m great at telling you when the market drops about six weeks after it happens. I can tell you to the day in history books, right?”

Tammy Flanagan:        Yeah.

Micah Shilanski:  But in the future, we don’t know. So what’s your plan? And your plan can’t be the emotional market swings that when something happens, you’re going to get nervous. Or when you talk to people around, or when you sign up for A, B, C, X, Y, Z, TSB Newsletter service that says the world’s coming to an end, sell everything out, is that really the best plan for retirement?

Tammy Flanagan:        Yeah, and I think, Micah, too, if somebody is concerned about that or is unsure about how to manage their TSP account, I think there is something to be said for the life cycle funds that kind of do it for you to some extent.

Micah Shilanski:  Yes.

Tammy Flanagan:        Because they put you in all five funds. So, no matter what’s happening, if one’s up and one’s down, and one’s going sideways, it’s okay. You’ve got a certain portion of your money in each one of those, based on this time horizon.

                           But my question is, we have right now, the L2025 fund, all the way up to L2065. That’s the year, the year 2025, 2065.

Micah Shilanski:  Right.

Tammy Flanagan:        With five year increments in between. So here’s my question, what if I’m retiring, let’s say, the end of this year, and I’m 65 years old, right? So do I pick the L2025 fund, which in three years from now, I’m only going to be 68? Do I really want to be in the L Income Fund when I’m 68 with potentially, 30 years of life left ahead of me? Or should I be in something a little bit more long-range?

                           That’s the problem I think a lot of people have in choosing which one of their life cycle funds fits their time horizon based on their age now, their age at retirement, and their longevity.

Micah Shilanski:  And so Tammy, I’m going to push back on that one just a little bit. I think you’re a hundred percent right, that’s the issue. And my pushback is going to be, I think we look at the L Funds incorrectly.

                           Now, this isn’t saying the L Funds are bad. Quite the opposite, I like what they do. But I think we’re not using them correctly. People look at it as a target retirement date that says, “Oh, I’m going to retire in 2021, therefore I need the 2025 TSB L Fund.”

                           Okay, that’s not exactly the way it’s used. I like to change it versus a target retirement fund to a target use fund. When are you going to use all of that money? So quick example right here, the 2025 fund has roughly half, a little bit more … I think it’s like, 52, 53. Forgive me, I’m not pulling up the numbers right here. I think it’s like, 52, 53 percent of your money in the G&F Fund.

                           Okay, well let’s say you go into retirement with 700 thousand dollars. Half of that money, just 50 percent, is 350 thousand dollars. So my question would be to a retiree in the first five years of your retirement, are you going to use 350 thousand dollars?

                           If the answer is yes, we have a different question, right? We have a different problem.

Tammy Flanagan:        Yes, that’s a good way to look at it, Micah. Because that’s a lot of money to have a flat line going on it with the G Fund. So therefore, maybe think a little differently about that. I love that.

Micah Shilanski:  Yeah, so it’s just a different lens to look at it. And so, maybe you want to look at this from a dollar amount versus a percentage. And that’s the reason we like our buckets approach. How much money you’re going to spend in the next five years? How much money do you need to pull out of your TSB, pull out of your stock market, in the next five years? And I’m in total agreement, Tammy, that should be protected in the G and the F, and different things. But that needs to be somewhere protected.

                           But the other money, yeah, we got to look long-term. Because this year, we could be pushing six plus percent inflation rate. And if you have half your retirement money earning less than one percent, that’s not going to work out well. That’s not a very good longevity plan for you.

Tammy Flanagan:        Yeah, and I think too, the L Funds don’t work as well when you’re drawing down your money, because if everything’s in the L Fund and I’m going to take 2,000 dollars a month out to live on, I’m taking some of that CFGS&I money all out at the same time. So it kind of defeats the bucket.

                           So, I also like the idea of considering moving some of my money outside of the TSP to manage that differently than the money that’s left inside of the thrift, because we know that some of the other issues can be with liquidity, like getting my hands on the money quick enough, being able to manage that risk and have those different buckets set up for when I need it. So I think you can do something with keeping a good portion in the thrift, but also possibly setting up an IRA for the rest of that money to be managed.

Micah Shilanski:  You know, and we also like to say, to make it fancy, tax optimization allocation, which basically means you should take your tax-free assets, like your Roth assets, and those should be invested to get the best tax savings possible, which means long-term growth. And take other assets that are heavily taxed, like an IRA … So if I had to choose, if I had to put a hundred thousand dollars in the G Fund, do I want to put a hundred thousand dollars of Roth money? Or a hundred thousand dollars of pre-tax money.

                           Well, all things being equal, I’d probably say pre-tax because I want that Roth money to grow, and be in the SC&I Funds so it can really get that long-term growth side so it’s worth more money. And we have a little bit of a limitation with that inside of the TSB.

                           So again, this is where you blend your tools for your retirement. Don’t just take the TSB and use it, and only stick with it because that’s what you have. No, you have other options too. The TSB is a part of your retirement plan. But it’s not the entire thing.

Tammy Flanagan:        That’s right, that’s right. And then the other thing I find people doing with it comes to the TSB is just not understanding the different options for withdrawal.

Micah Shilanski:  Yes.

Tammy Flanagan:        You know, some people want to take a big lump sum and pay off their mortgage. Other people want to create some type of an annuity stream of money, or even worse yet, sell it to an annuity provider that’s maybe, not looking out for their best interests. So we really have to understand all the different options.

                           Yes, there’s a blessing and a curse to the TSB and any type of savings or investment, because it does require us to be a little bit more involved. It does require us to make some pretty tough decisions, and also to look at things differently when we’re accumulating that money than when it comes the time when we’re going to de cumulate it and start to use it and live on it.

                           Because I think there’s even that emotional fear of, “Uh oh, I can’t start to use it, because there’s a finite amount of money there, and I’m going to run out.”

Micah Shilanski:  Yeah.

Tammy Flanagan:        So, a lot of people don’t even spend their thrift. They’re just hoarding it.

Micah Shilanski:  You know, Tammy, and I always tell my clients when they retire, especially if they move money to an IRA at retirement time, I’m like, “Look, this is the way the first year is going to go, you’re going to log onto your accounts the first year in the stock market of retirement, I don’t care when you retire, market’s always down, right? That’s just the way it works.”

                           Yes, I know that’s factually not correct, but emotionally, that’s the way it feels. You go to retirement, the market falls, then all of a sudden your IRA account starts going down in balance. And then you’re like, “This is ridiculous. I never should have moved money out of the TSP, because the TSP never lost money. The TSP was always positive.”

                           Now, yes, again this is not factually accurate. But emotionally, that’s the way it feels because you are putting money into your TSP every year. You get a match into your TSP, you have dollar cost averaging. You probably didn’t look at it all the time, so when you did look at it, it was larger periods in time, which means it grew and grew and grew.

                           Now, the opposite is happening in retirement. You’re invested potentially a little bit less risky, so it’s a little bit safer, so it’s not going to grow as much. And instead of putting money in, you’re pulling money out. And so now all of a sudden, you can see that IRA really start to decrease in value, and Tammy, your point, it can really be emotionally concerning.

                           So, this is where you got to build that plan out and say, “Great, what’s my distribution plan in retirement? How do I get this retirement income that I can never outlive?”

Tammy Flanagan:        Yep, yep, it’s important to do. And I think too, a lot of people can extend that time between their retirement and the draw down date by doing something part-time. A lot of people at age 58 or 62, or even 65 aren’t quite ready to fully quit, fully retire. So having a part-time gig, we’re living in the gig economy. It’s a good way to extend the life of your savings.

Micah Shilanski:  Amen. All right, Tammy, let’s transition real fast to some action items for our listeners, because there’s several things that … You know, this podcast is great. Well, at least it’s fun for Tammy and I to go through and do. But really, it’s about you taking action on this to improve your retirement.

                           So I’ll kick it off with the first one. What’s your survivorship plan? What’s your longevity plan for both people? Now, if it’s just you, great, what’s your plan when it’s going to be there?

                           If it’s two of you, okay, awesome. What happens when you pass away? How’s your loved one going to be taken care of? And vice versa?

Tammy Flanagan:        Yep, and I guess tied to that, Micah, would be what’s your plan for insurance? Because when we think of insurance, some people don’t relate that to retirement planning.

Micah Shilanski:  Right.

Tammy Flanagan:        But it can extend the value of your other benefits by having adequate life insurance, by having adequate long-term care insurance, by having a plan, like you said, for survivor benefits, which is a form of insurance, to protect our spouse against the loss of our income if we should go first.

                           So, understand how this insurance works. And even for that matter, social security is a form of insurance.

Micah Shilanski:  Yeah.

Tammy Flanagan:        By delaying that insurance payment, you’re increasing that dollar benefit. So there’s some strategies you can use there, as well. So understand how insurance plays a role in risk.

Micah Shilanski:  Really, really important. And Tammy, I like to say I love life insurance. Not people getting life insurance. I love how simple it is. We tend to over complicate it, but it’s as simple as if I die, does my wife have enough to make sure she’s taken care of? Yes or no. If no, I need life insurance. If yes, I probably don’t need life insurance.

                           So, don’t over complicate this. This is a pretty simple math question.

Tammy Flanagan:        That’s right.

Micah Shilanski:  Another action item that I’m going to throw out there is, what happens when the laws change? Now, don’t try to get too focused on what happens if all these acts pass. As Tammy, as you’ve said, the chance of these going through is very, very slim. They normally don’t go through, but you need to have a plan to review it. Whether you’re working with a financial planner or you’re doing it yourself, you need to have a date on the calendar to review and say, “Great, what laws have changed? What are my assumptions that I’ve had before that are now not correct that I need to update in that financial plan?”

                           So, what’s your plan when those laws change? How are you going to review it? How are you going to know about it so you can take action?

Tammy Flanagan:        Yeah, and just have a little bit of an idea of how changes in the law might impact you. For instance, to give you an example, I got a question today from an employee who has 49 years of federal service, God bless him.

Micah Shilanski:  Wow.

Tammy Flanagan:        And he wants to know, “Should I retire before the pay increase in January? Or should I retire to get the Cola for 2022?” And the answer is, if you don’t understand how those things work, you’re going to think that. You’re going to think there’s some magic date around the Cola or around the pay increase. But in reality, the bigger picture is, you got 49 years of service.

Micah Shilanski:  You’re missing the big picture here.

Tammy Flanagan:        You can retire this afternoon. I mean, the Cola is not going to matter, you’re going to be Cola after Cola if you get out in time to enjoy a long life after retirement. So, don’t focus on the small, short-term picture. Focus on the big picture.

Micah Shilanski:  I love it. Tammy and I this fall are going to be doing another course on three critical concepts needed for retirement. If you’re interested in that, make sure you’re on our mailing list. Email us at [email protected]. And put in the subject line, “three critical concepts,” and we’ll make sure you on that, because we’re going to do it for a limited people because it normally fills up fast.

                           And until next time, happy planning.