Ep #59: You Ask, We Answer

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Christian Sakamoto joins the show again today to help answer some of the top questions we get from people who want to make sure they’re on track for retirement. He will help tackle common misconceptions about being ready for retirement and discuss the details of what actually makes the biggest difference for retirement. 

Listen in as Micah and Christian look at the most valuable investment strategies and share how to make a decision on what to prioritize before retirement. What should you pay off and what should you wait to pay off? This episode will help you make those important decisions and understand the main areas and action items that will ensure that you are heading toward your goal retirement.


What We Cover:

  • Common misconceptions of what people should do to get on track for retirement.
  • Running the numbers on the benefits of payments.
  • The minimum time period people should leave money in the stock market.
  • The most valuable investment options.
  • Where to draw the line on what to buy with cash and what to finance.
  • What to prepare for when pulling money out in retirement.
  • The one thing that may make or break your retirement.

Resources for this Episode:

Ideas Worth Sharing:

I haven’t seen paying off your mortgage be the sole driver for someone making it and being successful in retirement vs. not. – Christian Sakamoto Click To Tweet

We want people to make an educated and informed decision. Before you make a decision, make sure you look at both sides of that equation and make sure you understand it. – Micah Shilanski Click To Tweet

One of the common things we see with federal employees is that you have a tax problem in retirement that you just don’t know about. – Christian Sakamoto Click To Tweet

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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 to another amazing podcast with Plan your Federal Retirement. I’m your co-host, Micah Shilanski. And with me, is another great advisor and not a stranger to the podcast at all, Christian Sakamoto. Hey Christian, how’s it going?

Christian Sakamoto:     Micah, I’m doing well. How about you?

Micah Shilanski: Ah, it’s another beautiful day in Alaska. Kind of more on the fall-ish, I know we’re talking about that. You said it was a little hot and in your neck of the woods, but I think we’re slowly getting to fall up here, but it’s a beautiful change of pace. So, I’ll take it.

Christian Sakamoto:     Good. Yeah, August, September, we’re still rocking the heat and the sunshine, but I don’t think in Alaska you can say the same. But hey, you got to live with it. And I know you love it up there.

Micah Shilanski: Yeah. Well, in Alaska and I figured out we have a lot of Alaska listeners on this podcast as well, which is really cool. They’ll probably agree, once it hits over 70, it’s hot in Alaska. They’re like, “Oh my gosh, I need air conditioning.” And Arizona people will be freezing at that, but it’s a good mix.

Well, Christian, we had some other stuff kind planned for the pod today, and I really appreciate you being flexible because some other kind of news and articles, and some things have come out that’s talking about what do you do when you max out your TSP, or what do you do with kind of what’s the best investment that’s out there, in order to make sure that you’re on track for retirement.

And as I was going through some of the content, I was like you know what, that’s a solid (I wouldn’t want to be polite, I like the guys kind of putting the stuff out there, and I’m not going to name them, putting some good stuff out there) — but it’s solid B plus advisor information.

That’s what I see it as, because we’re missing some key fundamentals in human psychology a little bit. So, there’s a little bit that’s inside of there, and really elevating everything from kind of a B plus to an A plus level of retirement advice.

So, Christian, as you work with us in the office, we specialize in working with federal employees and we kind of see some things that are in place, and we see some misconceptions that are out there, and I’d love to spend this next little time that we can go through this.

Let’s run through some of these misconceptions that we see. Let’s run through some of these setups, and kind of go through, I don’t know, maybe we start off with kind of, what are the top questions that we get from individuals, from people saying, “Great, what’s the number one thing I can do that makes sure I’m on track for retirement.”

And let’s start with what the answer is not, because we’re always missing that one. But Christian, what are some of the top things that you hear from clients, from prospects, from federal employees, et cetera, that says, “Man, if I only did this, I know I would be on track for retirement?”

Christian Sakamoto:     Yeah, I think the first would be, should I pay off my mortgage before I retire? Is that going to be the best route for me? And I think that’s a big possible misconception there that you’d have to do that before you retire.

Another one along those same lines, should I pay off all my debt? Maybe take the Dave Ramsey approach, paying off my cars and credit cards and any other toys that I might have. Another one, should I max my TSP contributions?

Micah Shilanski: That sounds horrible, we got a lot to dive in right there. So, hold on a second. Alright, so you went through a couple of good ones, and I don’t want to skip the rest, but let’s get to those in a minute.

So, you went over one of the top, says, okay, I should pay off my house, pay off my debts, total Dave Ramey approach, totally agreed. Now, not throwing any shade on Dave, he does phenomenal work to help millions of people in some phenomenal ways, which I absolutely love it, but I would love to kind of push back on that a little bit and tweak in this.

We can take this a hundred percent, no-debt approach. And that is absolutely one way to take retirement. But in my 20, oh my gosh, 22 years of doing this, I have never run across a client that because their house wasn’t paid off, that was the sole factor in determining whether they could retire or not. Christian, have you?

Christian Sakamoto:     You know, I haven’t. And even though it’s not been 22 years of practicing, even with-

Micah Shilanski: Don’t worry, time will fix that for you.

Christian Sakamoto:     Yeah, I haven’t ran into that either. Again, a misconception, I think the biggest thing for this Micah is theory versus reality, as well. A lot of things sound good and as long as I got my mortgage paid off, as long as I got my credit cards paid off, then everything will sort of fix itself into retirement.

And I’ve got my three-legged stool, I’ve got my pension, I’ve got my TSP and I’ve got social security, and I’ll be just fine. But I think it’s missing the mark on a few areas, and no, I haven’t seen paying off your mortgage, be the sole driver for someone making it, and being successful in retirement versus not.

Micah Shilanski: Yeah, I think you’re right. Again, not taking away from having a plan to pay off your mortgage, like if that’s your plan and you want to go forward, I think some phenomenal things can happen.

But it is a misconception that says if I pay off my house, I’ll be able to afford retirement because guess what? I’ve met people that have had their houseless paid off that didn’t have some other things in order that we will chat about today that could not be able to retire.

So, it can help. And not to get too geeked down on this, Christian, what do you say we go through some numbers about paying off a house, or not paying off a house, and kind of what that difference is. Is that okay?

Christian Sakamoto:     Yeah. I think that’d be really helpful for our listeners.

Micah Shilanski: Fantastic. We’re going to put Christian through a mini CFP exam. We’ll see how fast he is on these numbers as we go through this.

So, one of the things that I hear a lot is saying, “Mike, if my house is paid off, it’s going to free up X amount per month.” True.

So, let’s say you have a $500,000 house, let’s say that’s a 4% interest rate. Quick math and I cheated, we did do a little bit of math in advance, but quick math on that, your payment is around $2,400 a month for a 30-year mortgage. That’s principle and interest.

So, normally, your payment’s going to be around three grand a month. So, first misconception I hear from clients, Christian, is saying, “Hey, when I pay my house off, I’m going to free up $3,000 a month.”

And I got to hit the pause button on that and say, no, because remember your house payment is made up generally of four things: principle, interest, taxes, and insurance.

So, even though you pay your house off, you still have to maintain some type of escrow account. Whether you do it yourself, you do something others set up, but you still got to pay your property taxes, and you still got to pay the insurance on the house. Now, yes-

Christian Sakamoto:     That’s huge

Micah Shilanski: That is a much smaller dollar amount than that PI payment, Principle and Interest, but you still got to make those payments.

Christian Sakamoto:     Yeah, no, that’s huge. Absolutely. So, to reiterate, half a million dollar house, 4% interest, $2,400 a month just for principal and interest.

Micah Shilanski: Right?

Christian Sakamoto:     So, the question is what if we doubled those payments, and decided to pay off that mortgage in 15 years, instead of 30? So, what does that look like on a monthly basis? How much would someone have to pay, and how much above that $2,400 is that?

Micah Shilanski: That’s a great question. So, if we just do the math, instead of doing a 30-year mortgage at $2,400, and we’re rounding, so I’m sure someone’s going to follow along with calculator. Yep, we are totally rounding for the sake of an example.

So, just go with this at concept here, but its $2,400 a month. And if I move that to a 15 year mortgage, and I keep the interest rate the same, yes, I know 15-year mortgages are slightly less, but go with me in concept here. It’s not that big of a difference. Your payment then goes to about $3,700 a month in payment.

So, now, there’s an extra $1,300 a month that you have to make to your house payment. Now, this is very easy to justify, and this is one of the things we get into about psychology and investing, is people are like, “Well, I’m putting that money in my house, I’m getting it paid off.”

So, they’re excited about making that payment, which I don’t have a problem with. I think that’s fantastic to do. But over that period in time, I think one of the things and Christian, you and I, when working with clients, we always say we want someone to make an educated and informed decision.

So, if you look at all sides of something and say, “Hey, I want to go this way because I feel better about it.” Well, outstanding go for it. But before you make a decision, make sure you look at both signs of that equation, and make sure you understand that before you make your decision.

Christian Sakamoto:     Yeah. And so, ultimately, what does that $1,300 difference look like? And Micah, to your point, what’s the other side of this? If we instead took that $1,300 and parked it in our TSP, if we have the ability to add more to our TSP, we haven’t maxed it yet, maybe we start putting it into Roth money, Roth IRAs, maybe we start putting it into just some sort of investment account, a brokerage type account.

What type of interest rate maybe we would expect on that money as opposed to the 4% guaranteed interest rate we’re getting or paying rather on our mortgage?

Micah Shilanski: Now, Christian, you hit that. I want to pull that out what you just said right there is fantastic. You said the 4% guaranteed rate, that’s coming from the mortgage rate, right?

Christian Sakamoto:     Correct.

Micah Shilanski: Which is assuming a fixed mortgage. So, you know you’re at least going to get that (I hate saying return because you’re getting charged) — but you’re getting that knocked down by that amount. So, that’s a quantifiable.

So, now we move from the fixed world of saying, “Great. I know this is a 4% mortgage,” to the variable world which is investing, and we don’t know what we’re going to get.

Now, we could use averages, we can do all these other types of things, and it really depends on where you’re going to put your money and how disciplined you’re going to be. So, let’s just be conservative because again, this is a 15-year period in time.

And one of the things that when Christian and I are working with clients, whenever you’re investing, it is a time question. How long are you going to be invested? If somebody said, “Hey Micah, I want to put money aside for six months,” that does not belong in the stock market.

And unfortunately, my crystal ball is a little foggy for the next six months. So, Christian, what’s the minimum time period, when people say they want to invest money in the markets, they want to invest money in stock market, et cetera; what’s the minimum time period we’re normally looking at?

Christian Sakamoto:     Five years. If we can access that money within five year, if we need that money within five years, we’re really hesitant, and it really doesn’t belong in the stock market. And we’ve probably shared this before. But the main reason behind that goes back to really what happened in 2008 when the market was down for five years.

And it took that five years to recover from 2008, 9, 10, 11, 12 to fully recover. So, we use that as a more recent really extreme example, where if you want to spend that money, doesn’t make sense. It doesn’t belong in the stock market.

So, on the flip side, hey, if you’ve got longer than five years, yeah, it makes a lot of sense to put some of your money. It really comes down to Micah, your point, what’s your time horizon?

If we’re speaking to somebody again, who’s retiring in the next six months, 12 months, yeah, probably doesn’t make sense, but it really comes down to our listeners, and what age they are, as far as far as how much time they have until they retire.

Micah Shilanski: Yes. Yes. So, I love that. So, the time element. And so, Christian, now I want to get back to your question. So, we’ve already solved one thing whenever we talk about investing is time. Perfect, alright.

So, what’s the timeline on this investment? Well, 15 years, right? That was the plan. We’re buying a house, we a got 15-year … so, presuming in our example a 15-year mortgage, fantastic.

So, we get that 15 years, now we start saving money in that account. So, we can save that $1,300 a month give or take. And I would say conservatively, for example, we’re going to use a 7% rate of return. Yes, it could be higher. Yes, it could be lower. I think 7% for a long-term investment is a doable number, if you have things set up correctly.

So, Christian, let’s say you put that $1,300 a month then for 12 months, times 15 years, times a 7% interest rate that you’re going to get every single year.

Well, just your contributions in that account would be roughly $235,000 in change. But now, when we add growth to that (this is the really cool part) now, that money transforms and becomes almost $395,000.

So, just under $400,000 in this period in time, that means, in the same 15 years, if I put twice as much on my house, correction, and I turned my house into a 15-year mortgage versus investing that money, now I would have $160,000 more in my account than I would if I just put it down on the house, assuming I got that 7% rate of return.

So, this is a great benefit. So, what are some flaws that are inside of this? Because you can look at the numbers, you’re like, “Well, duh, this is like a no brainer.” Why wouldn’t people do this? And Christian, I’ll go first on this one, if that’s alright; is the number one reason, psychology.

When the market (not if) falls 30%, just like Christian was talking about in 2008, what are you going to do? Are you going to stay invested for the long-term? Because we’re all long-term investors when the stock market goes up.

But all of a sudden, when that stock market goes down, now it’s like, am I a short-term investor? Now, am I going to sell out? Now, am I going to cash in? And now, you’ve hurt yourself. The beautiful part about the house is you know what you’re getting.

So, you have that, I’m going to go back to that G word you used, that normally we can’t use, which is fantastic, which is “guaranteed.” You know what’s going to happen if you make this payment and you pay off your debt in 15 years, your house will be paid off. There’s a lot of psychology behind that that really people can get behind.

Christian Sakamoto:     Yeah, absolutely. And so, yeah, at the end of the day, it really comes down to the psychology of it, guaranteed, my house, my mortgage can be paid off in 15 years.

But if we have that diligence knowing, hey, if I took this money, invested it, knowing that I know the market goes up, I know it goes down, I know it’s flat at sometimes — on the aggregate, a 7% is a very fair number and interest rate to assume for getting it if you’re invested in stocks. Just right there, that math makes sense.

Now, it does come down to, if you needed that, we’ll call it $160,000 difference in your account  the day you retire because you just paid your mortgage off, well, it’s not a good plan. We should have money in other accounts.

In our planning, we do for our clients (and we’ve mentioned this on the podcast), we have three buckets. We’ve got cash, we have income and growth, money that’s in stocks.

So, as long as you have money that’s in cash, and income, money that’s not in the stock market, well, who cares that the market’s down when you go to retire? You still have at least those five years in your cash and your income accounts that if you needed money, you can pull it from there, instead.

Micah Shilanski: Yeah, that’s a great point. So, this provides options. We’re not saying one way is the best, one way is not. Now, let’s get into another misconception about the home if I may, Christian. And actually, this is so funny, because it happened today on a client call.

I was on a client call, I had some clients move several years ago, and they bought “their last house,” and they wanted to work on paying it off, they wanted do all these other things, and the clients are relatively young.

And I said, “Guys, look, I appreciate that you think this is your last house (this is a couple years ago), and it very well could be. And you could prove me wrong. Statistically speaking, this is not your last house. You don’t have any kids in the area, you don’t have any grandkids in the area.

Once your kids start producing grandkids in a different state, you’re going to want to move. So, would you just humor me, what if we did a mortgage? What if we did this things versus liquidating retirement accounts, paying taxes, doing all this other stuff. What if we got a mortgage on it?”

So, and great news, they did follow our advice. And so, they did get a mortgage on the property. They didn’t get it paid off. And lo and behold about fast forward the clock, Christian, three and a half years later, I’m chatting with them on the phone today. And they’re like, “Micah, we’re thinking about moving to Colorado.” And I said, “Oh great. You guys, have been thinking about moving to Colorado actually a couple years. Did your son move there? Blah blah.”

So, we start going through this and whatnot. And Christian, he comes up on the call and he’s like, “And Micah, it does dawn on us that you said this wasn’t our last house.” And I said, “No, I wasn’t going to say I told you so. I wasn’t even going to bring that up.” And they start laughing. And they’re like-

Christian Sakamoto:     He remembered.

Micah Shilanski: Yeah, he very much remembered. And he was like “I’m really glad we listened to you.” Why? Because now when they want to buy a house in Colorado, guess what? We have cash. We don’t have all of our capital tied up in a property that says, “Well, great, how do I get a mortgage on this? Now, do I got to sell this? Like how am I going to buy another home?”

Christian Sakamoto:     Limits the options, yeah.

Micah Shilanski: That’s it, Christian, you just nailed it. He has options, he has flexibility. When I dump everything into one investment, I don’t care what it is, but one investment, I have eliminated a lot of options. Now, maybe that’s worth it, maybe that’s a good idea, but maybe it’s not. So, you really got to think about it.

Now, once it’s our last home and it really is our last home, okay, let’s talk about paying it off because it just feels good. But again, going back to the podcast, just because a lot of people say, “If I paid my home off, I could retire” and that very well could be true for a lot of people, just no one that I have ran into.

Christian Sakamoto:     Exactly. And I think that same concept applies just on a smaller scale with the other debts that we have kind of transitioning to-

Micah Shilanski: Good points.

Christian Sakamoto:     The other misconception just needing to pay off all debt into retirement, because you can use that same logic. Like this is the last car I’m going to buy. And how many times do we hear that in our client meetings, and fast-forward a few years later and something breaks on it, they don’t like it. A new model comes out, and they want a new one.

It’s just hard to say this is going to be the last big purchase I’ll make for whatever the topic is. And I think that applies just again on a smaller scale, but if you can still borrow money to buy a car, then I think that makes a lot of sense as well.

It’s just giving you more options because you still have the cash that you’ve saved up, instead of tying it all into an asset.

Micah Shilanski: And Christian, you and I talk about this, and we’re not ragged on any of our clients, just to be really clear. This is just life. This is just the way things happen. And we’re not exempt from that personally.

And so, one of the things with cars and Christian already said it, we always want our clients to have a car payment. Whether that’s paying a bank or paying your bank account, you need to have a car payment, because eventually, you’re going to need to replace that car. Then where’s that money going to come from?

Now, if I’m already used to making a $600 car payment and the car gets paid off, and then I stop making that $600 car payment, guess what I’m going to do with my expenses? Well, they’re going to go up to about $600 a month. It’s fancy the way that one works, unless we’re hyper intentional about it.

Now, three years pass by, and now, all of a sudden, I need a new car, and I’m used to spending that $600. Ooh, now that’s $600 car payment now that hurts, because where’s that money coming from?

Now, I got to decrease my lifestyle, if when I have paid off a debt (and I’m stealing this directly from a Dave Ramsey approach quite frankly) — when I pay off a debt, if I allocate that money directly to another savings account, to another debt something else, but it does not go into my entertainment, does not go to my cash flow budget on a monthly basis, now, all of a sudden, I got a bank account that’s building $600 a month for a car.

Now, I got money for a down payment for that vehicle. And when I have a $600 month car payment, or now that it’s 750 for the car payment, because cars are more expensive, you know what? That’s only $150 more a month than I’m used to. That’s a lot better than $750 more a month than I was used to.

Christian Sakamoto:     But you weren’t … yeah, yeah, exactly, exactly.

Micah Shilanski: Christian, what about other toys that come up? What about like RVs and boats and like these other things? These are things that says, you know what, a hundred percent you got to have cash or those you can’t buy them — is it you finance them a hundred percent? Like what’s that line on these things?

Christian Sakamoto:     My perspective is we have to take this as a case by case. So, everybody, it’s not just a one-size-fits all answer, but with interest rates rising, we know that they’re going up. There’s more argument to be made for maybe we put more down payment, more principle upfront on this toy, this RV, whatever it is that we’re purchasing.

I get that there’s that argument, and I’m a fan of that as well; comparing that to the mortgage at 4%, that interest rate was lower. So, it made more sense to kind of put as little down as we had to on it.

But it does come down to emotions for the people we work with. And if someone’s just real adamant on, “Hey, I just want to buy this four-wheeler, or I want to buy this RV” and whatever the toy is, and they really want to do that, we can’t just say, “No, you shouldn’t do that. The only option is to finance it.”

We would just have the conversation and go through again what are we giving up by doing that? Are we okay with taking $50,000 or whatever that number is and dumping it in this, as long as we have a plan, as long as we still have money, meeting their goals, setting up their buckets between cash income and growth, then I’m okay with it.

Micah Shilanski: Christian’s nice. I’ll tell you no, if it’s a bad idea. No, I’m just kidding. But you brought up some great things in there which is paying things off, but let’s also keep in mind as the vast majority of our clients are federal employees, one of the things we see common and so common with federal employees, is you have a tax problem in retirement that you just don’t know about.

Why? Because your pension is taxable. Your social security is taxable. Your first supplement is taxable, your TSP. You know what, for still the vast majority of federal employees that I run across, the vast majority of money is in pre-tax dollars, which is obvious, because that was your only choice for the majority of your career. And you cannot do a Roth conversion inside the TSP. So, most of your money is pre-tax in the TSP.

That means great, I want to go buy an RV, I want to buy a fifth wheel. I want to do something that is going to cost me a hundred, $150,000, where is that money coming from?

Well, if I reach into my TSP account, and I pull that money out or into an IRA and I pull that money out, I got to pay taxes on that money. So, if I got $150,000, I got to pull on taxes. Boy, I’m going to bump one, maybe two tax brackets. So, now, I could be looking at like a 28% tax bracket versus my 22% tax bracket. So, quick question-

Christian Sakamoto:     Good point.

Micah Shilanski:           Would you rather pay interest at a 4% loan or 28% in taxes?

Christian Sakamoto:     Yeah, good point. We always have to look at it from a tax perspective, and that is huge, and that’s what we’re proactively doing with the clients that we work with, (of course, if these major purchases come up), is we always have to look at it from a tax perspective. Yeah, that’s huge.

Micah Shilanski: So, another thing kind of misconceptions out there about saying, well, if I just did this, I’d be on track for retirement.

Now, again, all of these things help, and we’re going to talk about this when we wrap up, it’s the one thing that really matters. But one of the misconceptions Christian, I hear is, you know what, if I had only max funded my TSP, if I only max fund my TSP, now I know I’ll be on track for retirement and all set.

Now, max fund your TSP, I’m all about it. I love it. I think its fan-freaking-tastic. I think that’s a great thing to do. A missing opportunity quite frankly, I don’t hear enough people talking about, is maxing out your HSA, your health savings account.

Now, we’ve done some great videos on those, going through why that might be a little bit more advantageous than actually your TSP is, but I’m going to leave that as a little teaser so you can go find those videos where we talk about it.

But let’s say you want to max your TSP, fantastic. I love it. Pre-Tax or Roth, that’s a great discussion that we can have. But either way you putting in a lot into the TSP is phenomenal, but that alone is not your silver bullet for retirement.

That alone doesn’t mean you’re going to have enough money. Easy example, let’s say you’re max funding your TSP, but you never look at your allocations. So, all of your money goes in the G fund, which okay is now earning 2%.

That doesn’t even keep up with inflation. So, it’s great you’re saving money, but where is that money going? So, that alone is not your silver bullet.

Christian Sakamoto:     Yeah, a hundred percent agree, especially if you understand how HSAs are — how great of a tool they are being able to put that money in pre-tax, have it grow tax-free, and then being able to use that money for qualified medical expenses, tax-free as well, you get that triple benefit there of it being, really the silver bullet for folks in retirement.

Micah Shilanski: That is not like Alaska or Washington, that has a state income tax. You have the quadruple benefit, because you can save state income tax as well, which is fantastic.

Christian Sakamoto:     Yeah. Yeah, absolutely. I love that.

Micah Shilanski: So, there’s that concept, then sometimes — this is rare, but I’m starting to see it a little bit more, which is Roth conversions. It says, you know what, Micah, I’ve done a good job of savings, but now, I got all of my money that’s in pre-tax, what if I converted it all into a Roth, then I’d be on track for retirement.

So, look, I love where your mind’s going here, and I genuinely do not recommend everyone at once convert their traditional accounts into Roth. That’ll be a hefty tax bill. I will be off your Christmas list, and I really like those Christmas cards. So, keep them coming.

So, maybe it’s a little bit at a time question, but I love that concept that you’re thinking about as Roth conversions. But this again is not a silver bullet. This is a tool in the tool chest that’s going to help you in retirement, but this is not the silver bullet that’s going to fix it.

Christian, before we get to this silver bullet, we can kind of talk about the one thing that I will say, this is so great because more and more people now … and an issue you’re talking about it, more advisors are doing tax planning. We did tax planning before it was cool. We’ve been doing that since the inception of our firm, as you know. But one of the things that more and more federal employees are realizing is that they do have a tax bomb in retirement.

They do have between their pension, which is taxable, their social security. I know we talked about this before, so forgive me; their supplement and their TSP — they got a big tax issue.

And this tax issue is not enough to derail your retirement, but it is enough to cost you 50 if not hundreds of thousands of dollars to paying more in taxes, than you need it too.

And that’s money that comes right out of your pocket. When you reach in and take money out of a TSP, the first one that steps in line is an IRS (that’s the I-R-S in case you didn’t know that one). IRS wants to get a piece of that pie before you get your money and you need a plan to deal with that.

Christian Sakamoto:     Yeah, absolutely. Same concept there, if we’re wanting to take out money to buy a boat or buy an RV, take the same idea and do a Roth conversion with it, and we convert all of our money all at once.

Yeah, we’ll be off that Christmas list, because depending on how much is in there, yeah, you might be bumping one, two, maybe three tax brackets. And man, that that’d be rough. Unnecessary in my opinion.

Micah Shilanski: Yeah. Very, very rough. So, what’s another thing? Well, actually we’re getting along in the podcast, let’s go ahead and jump into this one. So, we talked about a lot of different things in this. We’ve talked about paying off the house.

While that may be a great idea is not your silver bullet. That does not make or break your retirement. Again, I’ve talked with thousands of federal employees. This does not make and break your retirement.

Paying off all of your debts does not make or break your retirement. Maxing out your contributions does not make or break your retirement. Tax planning, Roth conversions does not make or break your retirement. As much as I’d love to say it does, it does not.

So, what’s that one thing you need to do that’s going to make or break your retirement. Now, I’ve kept you on suspense for this for a little bit, and once you hear this, you’re going to dismiss it.

Christian, once our listeners hear this, they’ll be like, “Ah, well, that’s whatever. Everybody knows that. Oh da-da-da.” But what I’ll tell you is this is also the thing that almost nobody does, but is critical, critical to your retirement planning, and that’s to know-

Christian Sakamoto:     Cash flow

Micah Shilanski:           You got it, cash flow.

Christian Sakamoto:     Beat you to it.

Micah Shilanski: You did. You nailed it. Christian, what do we say about cash flow?

Christian Sakamoto:     Hey, it’s the heartbeat of your retirement. It’s king. It’s the heartbeat. It’s what gets everything going. It’s what we know where our money’s going and how much then we can solve for on what our sources of income are going to be. Because we know where our money’s being spent-

Micah Shilanski: If you come in-

Christian Sakamoto:     Without that knowledge, we’re going to be really lost. Your retirement is going to be unsuccessful if you do not know how much money you spend.

Micah Shilanski: If you’re coming to meet with Christian or one of our advisors and start going through this, you’re going to find out one of the first questions we ask them all the time is about cash flow. Because cash flow again, I’m going to take you to just what Christian said, is the heartbeat of retirement.

This is the thing that will make and break a successful retirement. Now, we’re not talking about a budget, which is 72 different line items and subcategories on all these fun, different programs. And if you want to do that and you’re good at doing that, well, then rock on.

I’m not taking away from that. But that’s a small subset of people that actually want to do this. And I will say for myself, I have Quicken, I update on a quarterly basis. I lament, I do not look forward to updating that.

It’s a pain in the butt. I got to go through the categories. It’s a couple reasons why I do it, and one of them is I have clients that still use Quicken. So, I like to know the things in which they’re going through as well. But Christian, the thing that works really well for us, individually, and really well for a lot of our clients, is we call our cash flow planning.

And this is super simple. Where are you spending money, break it down to no more than five general categories. It’s going to be household, entertainment, travel medical, then there’s kind of like a bonus category that you can kind of throw in there.

So, no more than five, give these ranges. My household cost is going to be somewhere between, $1,800 and $2,600 a month. Give it a range and say, “Great, all of my household costs now need to stay inside that.”

Now, if I’m inside that of the month, I get a high five. My wife and I are in good news, everything is great. If I’m outside of that, then my wife and I need to have a quick conversation about what took us outside of that range.

Now, just by bringing attention to this, that fixes 98% of the issues, just by bringing attention. Where people get in trouble is when they don’t look at it. Or Christian, where I find people get in trouble is they put … and say, “Micah, well, I do that.”

And I say, “Well, explain to me how you do that.”

“Well, we have one credit card that we both use. We put all of our expenses on there. Then we go through at the end of the month, and we look and see what’s household, what’s travel and entertainment.” And I’m going to push back — well, Christian let me ask you; do you think that works?

Christian Sakamoto:     Well, it’s rough because if you have … like to your point, if we have 72 different line items, and we know our mortgage is this, our interest is this, our insurance is this, all these things — when we end up spending even a hundred dollars more, it can create some animosity in a relationship.

It can be a situation where we’re just pointing fingers, and not solving for anything. As opposed to having this range, and having the categories be very simplified. It really puts the couple at ease.

Again, I’m speaking from my experience here, in this regard as well, because it works, and it ends up being not this, “Why did you spend all that money here” or getting blamed for me spending money in whatever reason. It really ends up putting people at ease, and I think it just works.

Micah Shilanski: It does. And my biggest issue with people putting all their expenses on credit card, it just doesn’t work, because at the end of the day … well, this is what I do. So, maybe this isn’t our listeners.

I look at my credit card statement, and then I get justification Micah, and I justify everything I spend money on, because when I bought it, it was a good idea. Otherwise, I wouldn’t have spent money on it. That’s how this thing works.

So, I go through and I justify every single dollar that I spent. Now, what do I do the next month? The exact same thing. I haven’t-

Christian Sakamoto:     Habits don’t change.

Micah Shilanski: Yeah. I haven’t created any framework around this, and that’s why cash flow planning is so critical of knowing where I spend money, generally speaking, and then being able to categorize it. This is the make or break deal for retirement.

Now, you can believe it or not, that’s a hundred percent up to you. But this is the thing that if I’m getting with a client and I know their cash flow, they know their cash flow more importantly, and we know how we’re going to replace that. Boom, we are set in retirement. I do not have a lot of big concerns.

There’s still some things that could come up, but that is a good 98% right there. The clients that come in and they cannot figure out where they’re spending money on a monthly basis, that is a recipe for disaster.

Christian Sakamoto:     Yeah.

Micah Shilanski: But you don’t got to figure this out before you come in, this is something we’re going to help you with and go through, but you got to know where that money’s going.

Christian Sakamoto:     Right. And I’ve seen people turn it around 180.

Micah Shilanski: Huge.

Christian Sakamoto:     And they came in not knowing where they’re spending their money, and it was scary. It was unknown. It was causing anxiety for them to them opening up, and them really understanding where the money … and then again, talking about the marital happiness there as well. It can really help for that regard, as well.

Micah Shilanski: Alright, Christian, this podcast is all about action items. It’s not just enough to listen to us banter back and forth. Sure, it’s fun and enjoyable, but it’s all about action items as well and taking this to the next level.

So, I’ll kick us off. The first action item I’m going to say, I’m going to end it on the same note I was just talking about, which is know where your money’s going. What is your cash flow plan?

Have no more than five general categories. If you want to have subcategories, go for it; between you and your spouse only have five categories that you guys can go back and forth on, and know how much you’re spending.

Christian Sakamoto:     Well, the second action item I would say is try before you buy. So, going back to the mortgage conversation where you want to pay off your mortgage, your house by doubling how much you’re putting into it.

Instead of doing that, or instead of refinancing your mortgage and locking that in why don’t instead, you just take that double payment and put it in a savings account for now or an investment account rather, and actually see, is this doable? Can we actually make this happen? Again, trying this before we buy?

And that same concept can apply for a lot of major purchases we make, as well before we buy that new car, before we buy that RV, before we buy whatever. Go ahead and put that in a savings account or an investment account for three to six months and see, are you able to make that work?

Micah Shilanski: Such a great idea because the savings account, it’s an easy undo button. If it doesn’t work versus you go bought the thing, and now, you got this extra $1,100 month payment, it’s like, holy crap. I wish I wouldn’t have purchased it. Awesome. Go do it for three to six months. That’s a fantastic idea.

Third action item, have a plan to increase your savings. This is something that’s absolutely critical. This also focuses a little bit on the first one, because it’s going to focus on knowing where our money’s going as well.

But I like to have a good plan inside there that says great, you know what, anytime you get a pay raise 50, 50, works fantastic. Put 50% to the bottom line and 50% to the future.

But what’s your plan, when you have unexpected money coming in when you get pay raises, et cetera? If you don’t have a plan, I’m going to tell you what happens; it hits your bottom line and you spend it. Then all of a sudden, your savings doesn’t go up, you don’t know how much you’re spending.

Then you see me 18 months before you want to retire, and I got to tell you, you don’t have the income you thought you had in order to retire. Please don’t make me the bad guy. Know what these expenses are, know where your savings is, and always be modeling up with that savings, especially as your income increases.

Christian Sakamoto:     I love it.

Micah Shilanski: Awesome. Well, go out there, take action. Of course, give us five stars. Give us a tip. This is growing by leaps and bound because of you because of our listeners getting this information out. Until next time, happy planning.

Christian Sakamoto:     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
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