Ep #41: TSP & Market Volatility: Part 4 – Q & A

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In this episode, Tammy and Micah continue with the insights into TSP series and answer some great questions from active TSP participants. Whether you are deciding at what age to take Social Security, wanting to calculate a FERS pension, or trying to find the best savings and growth plans in retirement, this episode is for you. Not only will they be addressing these specific topics, but they will also provide insight into how the answers can affect you, as well.

Thinking of moving money into a ROTH? Tammy will clear up how that works (and if it works for your TSP in retirement). Micah also discusses the ROTH IRA vs. ROTH TSP, where you can be putting money that you aren’t using, and more.

 

What We Cover:

  • Should you wait until age 70 to take Social Security, or is it risky to delay?
  • Will Social Security run out of money?
  • How do the challenges the Postal Service is going through affect employees?
  • Do installments need to be ongoing?
  • Can a federal retiree convert regular TSP to ROTH TSP?
  • What equals cash and what equals income?
  • If taxes go up in 2026, how can you lower yours?

 

Resources for this Episode:

Ideas Worth Sharing:

People who are most impacted by the changes Congress has to make are the people who still have 30 or 40 years left to work. – Tammy Flanagan Click To Tweet

Not necessarily as a result of what’s been happening this year, but as a result of what’s been happening since 1983, we know that Social Security has a limited time frame at its current funding.” – Tammy Flanagan Click To Tweet

ROTH IRA and ROTH TSP are a bit different animals. Same tax-free vehicle, but sure, if you have cash that you don’t need, maybe look at that ROTH IRA. – Micah Shilanski Click To Tweet

Listen to the Full Episode:

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Full Episode Transcript
With Your Hosts
Micah Shilanski and Tammy Flanagan

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. As you know, this is a special series we have going on. If you’ve listened to our other previous two episodes, we’re talking about your TSP and volatility.

Now, this is snippets from a webinar that Tammy and I did that we got a lot of great attendance on, a lot of great people ask some wonderful questions about the TSP and how it works. We talked about what happens when the market moves up and down, what happens to your TSP in retirement. We talked about a strategy to build your income, so it’ll last with your investments over time called buckets of money in our previous two episodes. Today, we’re going to get into silver linings, some great changes that TSP has made and the TSP is a great investment tool to help build wealth.

                  It does have some limitations like any other tool does, and you got to understand how those work and you got to understand how the new changes the TSP has made back in 2019 when they went into effect, what effect that has on your retirement and what I can tell you, a lot of people still don’t understand how those changes are implemented in effect. So, listen today’s episode of Silver Linings, some great news about the TSP.

Tammy Flanagan:        All right, so coming up this year, coming attractions for the TSP are number one, more life cycle funds. You know, right now we have five, the L 2020 fund, guess what? It’s going to disappear this year because it’s 2020. So, when those L funds reach their target date, they roll into the L income fund. The L income fund is very heavily invested in the G fund, a little bit in F and very little in C, S, and I because that’s the one that’s really kind of the safe of the L fund, so what it’s meant for people living out their retirement or withdrawing money from the fund, even though you can’t choose which fund to take it from. The other thing that’s going to happen this summer is five-year increment. So, you’ll now have an L 2025 introduced in July of this year most likely, L 2030, all the way up to L 2065.

                  So for the employees who still have a 30-year time horizon on their career, the 2065 might be the way to go. The L 2020 fund like I said it is going to retire. The L 2060 fund and 2065 fund will be almost a hundred percent stocks, which kind of lines up with what you were telling your clients, Micah, that if they’re a long way from retirement, you don’t really need much in the G or F fund, because you have time to recover from a downturn like we’re in right now and the other thing that’s getting a lot of attention in the TSP is the introduction of a new I fund. It’s a new international fund, so if you have money in the I fund, it’s currently in the EAFE index, the Europe, Australasia, and the Far East fund, which is mainly a European large company fund.

                  And under this new proposal, actually the TSP plans to implement this, this year, they’re going to use an all world fund. It’s going to include emerging growth, different types of stocks in that fund, Canadian stock. So it’s going to be a much more broadly diversified international fund, much like people would have in the private sector versus the more limited options we have in the thrift. It’s getting the attention, unwanted attention because it does have Chinese stock in it and there’s some political concerns about what’s happening there with the underdeveloped countries and I guess China in particular with the way they manage their employment.

Micah Shilanski: So I guess Tammy as we go through this, right, and we’re going to run a little bit long, I hope that’s okay for everyone because I know there are some difficulties with some people getting in. So, we’re going to spend a little bit more time kind of addressing some of those questions and recapping some information. But the important thing as we go through this is stick to your plan, right? Where people get in trouble. There’s several different ways that you can take out distributions for retirement. My fan is, I’m a huge fan of this bucket’s concept because it just works.

                  It’s worked with our clients in up and down markets. It gives us confidence of we know what’s going to happen when markets are going to go down, but stick to your plan. Don’t get emotional. Now, if you don’t have a plan, you need to get a plan, right? What’s your plan for your accumulation? What’s your plan is you change into some preservation. What’s your plan as you move into that distribution phase of your life to make sure you know when the market goes down, how you’re going to react and that’s really going to help.

Tammy Flanagan:        Yeah. Hey, Micah, before you go on, I hate to have somebody be lost throughout this whole thing, and Lyle was really wondering, what do you really mean by bucket strategy? Because this can be a really new concept to a lot of our listeners today, they’ve never heard that because the TSP doesn’t really talk about a bucket strategy so much because we don’t have those distribution flexibility to do that within the TSP. So, could you just put it like in a two sentence, simple explanation of.

Micah Shilanski: What we look at in a bucket strategy Lyle is we’re looking at saying in the next five years, what money do you need out of the stock market and whether it’s distributions, right? Because we need to make up the difference in how much money we want to spend versus how much income we have coming in, maybe it’s a big purchase, a house, a boat or something of that nature. Any money we need to spend in the next five years does not belong in the stock market. Why? What if the market falls 30 or 40% in a short period of time, right? It’s going to take time to recover. So, we set up these buckets that are going to be there and the buckets, the first one’s going to be our cash bucket, then we’re going to have an income bucket, and that’s going to be five years of any money that we need.

                  So that’s the first concepts of the buckets. The second is our growth bucket, that’s going to be there, right? And that growth bucket is our long term, five plus years. We don’t need any of that money for north of five years that’s going to be in growth because as the markets go up and down, it allows us to weather those down markets and allow it to grow. So not quite two sentences, but that’s the concept of our bucket strategy.

Tammy Flanagan:        That’s helpful.

Micah Shilanski: Tammy, let’s talk a little bit about some silver linings and I know we’ve got to get into a bunch of questions that we have coming in, which will be great. There’s silver linings when the market goes down, right? And one of the things that we’re looking at for a lot of our clients right now and I’d really suggest that you look at as well is tax planning.

                  We do taxes, right? One year at a time, generally it’s about a month ago, now it could be in the next couple months because we have this extension, that’s there, but we only do taxes and way we normally do taxes is looking in the rear view mirror. We look at last year, what happened last year? And now I need to make decisions based on how much taxes I’m going to have to pay. What I want you to do is start looking at taxes through your windshield like you were driving, right? Yeah, we got to glance back every now and again, but we really need to make decisions for the next 20 years. So, one of the things we’re doing with our clients that are like Roth conversions, we had a question earlier about funding Roth IRAs, now could be a great time to do that. We’re doing Roth conversions where we’re taking some of retirement account monies, IRAs, TSPs, et cetera.

                  And we’re removing them from a pre-tax status and into a tax free. We’re converting them into a Roth IRA. Now when we do that, we have to pay taxes on that money. But the markets come down a little bit, right? So the markets come down and so we’re able to move money over into a tax-free place, a Roth IRA. We got to pay taxes on that but now as that market recovers, comes back up, it’s all going to come back up, hopefully in a tax-free environment. So, that’s a great way that we could look at taking advantage of a down market, funding Roth, IRAs, Roth conversions, those types of things, just be aware of what taxes are going to be and where that money’s going to come from to Pam. So Tammy, let’s talk about some action items, right? Because while it’s fun getting together for a webinar, I love talking about benefits. What I like most is our attendees to take steps. What is the next action item for them to do with information we talked about today? So what are some of the first things they should do?

Tammy Flanagan:        Well, you got to get your tools together. You need to have what you already have in front of you so that you can start to sort out. You know, there’s a lot of questions coming in as far as what is our cash bucket? What is this other? And you have to also remember that I guess in a way you can sort of think of your cash bucket to also include your first basic benefit and your social security benefit, because that has no volatility. It goes up, it may not go up 7% a year, but it goes up with a cost of living adjustment, which does help maintain its value. So, it doesn’t really drop too much in value as inflation increases. So, you have to get an estimate of your first retirement. Your agency should be able to help you with that. Somebody had asked how do we calculate that ourselves?

                  And it’s a pretty simple calculation. So, I’ll give it to you in one sentence and this is going to vary a little bit and there’s a lot more to it, but the basic concept of the first calculation is to take your length of service. So, you know when you started into government, you know when you might want to leave, so whether that’s 30 years or 25 years or 42 years, you take that length of service times your salary and the salary we talk about for retirement planning is your high three average, your basic pay, so your basic pay is your locality adjusted pay rate and so you take that basic pay averaged over three years, which is generally your final three years, times 1% and if you’re over 62 and you have more than 20 years of service, you can multiply that by 1.1%, get a bonus. So that’s a basic idea of your first benefit.

                  And some of you may get a supplement if you’re younger than 62, some of you will actually be eligible for social security when you retire. So you have that basic income, you have that foundation. That’s what you need to figure out what else do you need? How much more income will you need on top of that? And that’s that Delta that Micah was talking about in his timeline. So that includes your savings, whether it’s TSP and IRA, you might even think about your health savings account if you have one of those as another bucket of money to help you pay for Medicare or help you pay for long-term care insurance. So, those are the tools you need to figure out, what do I have right now? What’s in my retirement toolbox? Then Micah, how do you get a plan? What do you have to do there?

Micah Shilanski: Next action item is definitely to get a plan. So figure out what stage you’re in, accumulation, preservation or distribution, right? And then what are you going to do? And then what triggers you to the next? So if we’re in accumulation, right, we got more than five, 10 years from retirement, awesome. What’s our plan for saving money, maybe you shouldn’t be so heavily invested in the GNF, maybe it’s more appropriate for the C, S, and I, and then how do you trigger, right? How are you, once you start moving within five years of needing retirement money, this is my definition, not retirement, right? We got some law enforcement, special provisions on the line. Well, if you guys transition to a second career, you don’t need your TSP account right away, you’re not going to be spending that money. So when you need money within five years, you need to start transitioning.

                  You need start taking money out of the market strategically and start putting it in those cash and those income buckets and then you need to stick to your plan, right? And that’s really hard to do when the markets are going up. It sounds crazy, right? Because you’re going to have five years of money and cash and an income and now the market did 23% rate of return, your cash did one. You’re like, why do I have any money in cash? This is ridiculous, right? And then we get greedy and we transfer that money into that C, S, and I, the stock market, it falls 30% and we move everything to the G fund, right? Not a good idea. We got to stick to your plan that’s going to be there because you need a plan that’s going to work for your retirement. So, come up with how it’s going to be, what are you going to save? What are you going to do when the market goes down and understand the markets are going to go down, but you’ll be okay if you can hold out for that long term.

Tammy Flanagan:        And I guess the way to summarize the whole thing is if you already have a plan, what you’re doing right now is nothing, you’re just sticking with the plan. But if you don’t have a plan, no time like the present to come up with one.

Micah Shilanski: Amen. So, let’s talk about taking the next steps in your education that’s going to be there. Now, I’m going to spend just a couple of minutes talking about this. We want to talk about how do you further your education? How do you build this plan in more depth and go on. If that’s not something you’re interested, now’s a great time to grab a cup of tea, maybe a cup of coffee, I’ll spend about five or 10 minutes talking about this. Then, Tammy and I are going to jump into your questions. We’re going to do a little bit of recap. We know some questions are coming in on those buckets, because some people couldn’t jump in the webinar at the beginning. So, we’re going to recap that just a little bit. One of the most important things is, is Tammy and I and Tammy travels all over the nation, giving these classes.

                  And as I talk with federal employees and give classes, it can be a little bit of overwhelming, right? There’s a lot of things that are going on when we talk about federal retirement. When we talk them in an in-person class and I applaud you all from making a decision to get informed information, making a great decision to understand how your benefits work and how they’re going to work in retirement and you need to keep that education going. So, one of the things that we have created is called a bootcamp program and our bootcamp program is an eight-week online program, which is designed to walk you through all of the questions you need to ask and answer to have a plan to get ready for retirement. We spent a lot of times today kind of going over just on the TSP, but that’s only one small aspect of your overall plan.

                  And as I meet with people and I do in-person classes and I highly recommend if you have a chance to go to an in-person classes and you absolutely should do that. But what I find is when I go to these classes and I teach them, people get overwhelmed, right? Because all of a sudden we’re talking, you’re drinking from a fire hose, you have all of this information coming out at you and it’s overload, which is there. It’s good every now and again to get that but if you’re not taking steps and you’re not moving forward in your plan, it might be a waste of time. What I found working with clients one on one, if we break things down to little bit of training and a little bit of homework, you’re able to make progress, right? And that’s the reason we’ve come up with this eight-week program is so that you can learn about your benefits, but also do a one baby step at a time.

                  So, you actually make progress. So, what we’re going to be talking about in our eight-week program, number one, we’re going to go through your federal retirement system, people are asking how to calculate your pension, we’re going to go through all the intricacies of that. How does it work? What do you need to do? What are the questions you need to ask for HR? How do you evaluate your HR estimate that you received? Is it the accurate numbers or not? We’re going to dive into social security, when should you turn it on? Right? Should we do it early? Should we do it late? Now, there’s a funding question with social security, how do we balance that out? The second week, we’re going to drive into probably one of the biggest misconceptions retirees have, which is when I retire, my taxes will be less, that’s not always the case, right? Almost 90% of the time.

                  It’s the opposite. Your taxes will be equal if not more when you retire, because if you want to spend the same that you’re spending now in retirement and your pension is taxable, your social security is taxable, your TSP is taxable. Why are your taxes going down? And we know in the tax code in 2026 unless Congress does something, our taxes will go up, they’re going to be higher. So what’s our plan to lower taxes over the next 20 to 30 years and you can do it. In week number three, we’re really going to dive into the best benefit that you have, which is your FEHB, your Federal Employee Health Benefits and I say that with envy, right? Looking on the outside end, but how does it work in retirement, how does it work with Medicare? What are those blends that you need to look at? You always want to keep your FEHB, but there’s different ways that you can use it in retirement.

                  From there, we’re going to springboard a little bit into a state planning and these are the things that we know we’re supposed to do and we just haven’t got around to getting them done yet, right? What should you for a will, a healthcare director, a durable power of attorney beneficiary designations? When people come into my office for the first time, more than half of the people have the wrong beneficiary designations when I’m meeting with them and I know Tammy, you see the same thing when you’re teaching classes as well, people not having that up-to-date information, and then we’re going to get into the week five, we’re going to get into what we call our risk management sections. My fancy way of saying insurance and life insurance should be simple. If you die, can your loved ones maintain their standard of living? If yes, you don’t need life insurance, right?

                  If no, you need life insurance and that is as complex as that question needs to be. So how do you evaluate if that’s going to be the case to make sure your spouse and your loved ones are taken care of, then we’re going to get into kind of the hardest question that a lot of federal employees have a hard time answering when retirement, how much a month are you going to spend, right? Now when every day is a weekend, when you can do anything that you want to do, when you want to travel and what’s this, what is that spending look like and how are you going to make up that gap? From what we want to spend to our pension and social security, that gap that’s going to be there, how do you make that up over time? And we’re going to talk about your TSP, how that’s going to come in, what are those things and how it’s going to help fill that gap?

                  And then we’re going to wrap this up talking about taxes because it’s so nice you got to talk about it twice, right? Who doesn’t like going through taxes, but they’re so important, I know we had some questions about taxes that came in today that we’re going to answer because understanding how your taxes will affect you in retirement is different than how they affect them where they are today. So, really important information. This is for federal employees within five years of retirement, so if you’re kind of 20 to 30 years out, this probably isn’t for you. You might get some value, but it’s really designed when we’re getting in that transition mode, right? We’ve gone from accumulation. Now, we’re in that kind of preservation and distribution, that’s going to be there. When federal employees go through the class and before they go through the class, I should say their first kind of worried, right?

                  What is retirement going to look like? Do I have all the paperwork filled out? What questions do I ask my HR? They’re unsure, they’re a little bit anxious because guess what? You never retired from federal service before, right? It’s a new thing that you’re going to do. So, we’re going to go through that experience that we have working with people who have retired and what people have felt after they have finished bootcamp is they’re calmer, right? They feel confident in their retirement. They know what questions to ask. They know what the timeline is going to be. They have a plan. So, they’re prepared for their retirement because you’re going to learn what questions to ask your HR, you’re going to learn what the timeline’s supposed to be. What documents should you get after you separate from federal service before OPM start processing your pension to see if everything’s correct, you’re going to know those questions as we work through this.

                  We’re going to do a couple of extra things as well inside of bootcamp, because we want to make sure you get value out of this. One is some of the questions we got is how do I calculate this retirement income timeline? How do I build these things? Well, we have a custom tool just designed for you, that’s going to calculate first. It’s going to give you scenarios. What if I retire early? What if I retire later? What happens with social security? You know, if you’re within retirement within a year, you’re going to retire soon, this is something you should be looking at, that’s there. We’re going to do a special video for people that are retiring, which is just about retirement paperwork, Tammy and I are going to go through and Tammy, I don’t know for people that are one year out, this is probably the top question that they have, right? How do I fill out my paperwork?

Tammy Flanagan:        Yeah. What do I need to fill out? How do I hand it in? When do I turn it in? So and some of the questions on those forms, it’s fairly simple, but some of them have lifelong impacts if you answer them wrong. So, we go through also what are some of the pros and cons of how you answer those questions?

Micah Shilanski: Exactly and so as you said some of these questions are irreversible decisions that you’re making. We need to make them correctly as you go through this. So, we’re going to go through, Tammy and I, are both going to go back and forth through the application. We’re then going to give you a timeline of what that should look like that I use with my clients when you’re retiring, when can you expect things? And when things don’t go, right, what do you do? Right? What’s our plan with that and I have some fun stories that we can share, good stories and also ones to avoid. We’re going to do a special topic just on TSP, just on Q and A, because so many people have questions, we have them today. We’re going to jump into these a little bit more, but we have so many questions on TSP. How do I use it in retirement?

                  So, we want to train you. You want to get some good education on it, then we’re going to circle back and make sure we’re answering the questions as it pertains to you, and then we’re going to do a group call when this is done and just saying, all right, after you’ve gone through bootcamp after you’ve had this, let’s bring everyone together and let’s go through this and answer the questions that you have with Tammy and I. And how does this apply to you? What are these different things? So, this can be actionable for you. We don’t want this as an exercise in futility, right? We want you to make good changes as you go through this. And as we talk about this and we talk about bootcamp in the process, one of the things that I want to implore with you and whether you do bootcamp or not, go do your own training, that’s absolutely fine.

                  What I want you to know is the value of your retirement. How much is your retirement worth? You’re going to retire and let’s say you want to spend five thousand dollars a month in retirement, that’s $60,000 a year. Let’s say you live for 30 years, that’s 1.8 million dollars that you are going to spend and it’s your money and it’s your retirement, make sure you’re making the right decisions, make sure you know the right questions to answer, and again, it’s with us, it’s with someone else, make sure you’re are informed to get the information that you need. And as Tammy and I are going through this, we want to make sure that this is a value to everyone that goes through bootcamp. So, at any point in time with everything we do, we have our 100% promise, love it or your money back and that goes for this webinar as well.

                  Just like with everything else, if you’re not happy for any reason, you don’t like the color of our tie, you don’t like the aspect of what we covered, it didn’t pertain to you or you didn’t learn anything new, shoot us an email, we’re happy to refund your money because we want you to have value in this information. All right, so how do we get it? Well, we’re going to push a link out, that’s going to be out there that you’re going to be able to see, and you’re going to be able to click on that link, you’re take it right to our website and then once you’re on our website, you’re going to be able to click out the information, should be receiving it now as it comes through and then you’re going to be able to click that link and just go through signing up for bootcamp. You’re going to see this sign up page, which is going to be there.

                  You can put in your information, you can hit join us in planning and then once you’re there, you’ll hit the go to the confirmation page and it’ll say click here to create the new account. Bootcamp starts on Monday, by the way, it is a combination of live and recorded videos. Some of the recorded videos we already have. So, we’re good with that. Some of the videos that are out there, we’re going to redo and we’re going to do live with participants. So, it’s going to be a blend between the two. Yes, you’re going to, questions came in, you’re going to have access for 12 months, absolutely, that’s going to be there. So, you’re going to have access to this for at least a year to go through it and as we have any updated information or updated webinars, you’re also going to have access to this. Well, I really hope you enjoyed this episode.

                  As Tammy went through some different rules and changes with the TSP and a lot of great ways that it affects. Now, some of the most important time we have on a webinar is directly from the Q and A, and that’s what our next episode is going to be all about, questions we’ve received and how Tammy and I have addressed those and things you should be thinking about in your retirement. So, make sure you stay tuned for our next podcast that goes over that Q and A. If you have questions that you want answered about your federal benefits, then you’re welcome to jump on our website at planyourfederalretirement.com/insights to get more information on these episodes and other things coming up. Until next time, happy planning.

Hey, before you go, a few notes from our attorneys. Opinions expressed
herein are solely those of Shilanski & Associates, Incorporated, unless
otherwise specifically cited. Material presented is believed to be from
reliable sources, and no representations are made by our firm as to other
parties, informational accuracy, or completeness. All information or ideas
provided should be discussed in detail with an advisor, accountant, or legal
counsel prior to implementation.

Content provided herein is for informational purposes only and should
not be used or construed as investment advice or recommendation
regarding the purchase or sale of any security. There is no guarantee that
any forward-looking statements or opinions provided will prove to be
correct. Securities investing involves risk, including the potential loss of
principle. There is no assurance that any investment plan or strategy will be
successful

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