Listen to the Full Episode:
There are a couple of times a year when it’s really important to have clients come in and review things. As we move into the fall/winter season, this is one of those times for both Micah and today’s guest, Christian Sakamoto. Today Christian and Micah talk about some of the key things they’re discussing with clients and how they use this transitional season to ensure everyone is on the right track.
Listen in as they talk about how to address the TSP when the markets are down. They also discuss their plan for clients and how they help people make important decisions while the future is still foggy. You will get some great strategies and ideas that will help you get through market ups and downs with the most success.
What We Cover:
- How the seasons play an important role in financial planning.
- Why emotional decisions are often the worst decisions.
- The problem with understanding your clients’ risk tolerance.
- What to do about the in-between times that lead up to and come with retirement.
- How to ensure you have the right cashflow available.
- The difference between contributions and allocations and why you need to pay attention to these.
- What to do if you’re already retired and the markets are down.
- The up-side of down markets and where Roth conversions and tax law come into play.
Resources for this Episode:
Ideas Worth Sharing:
When the market goes down, it’s important not to make those emotional decisions to where it will devastate you financially in future years. – Christian Sakamoto Click To Tweet
We need a plan that will allow us to bridge through the emotional gaps that we have. – Micah Shilanski Click To Tweet
Cash flow is the heartbeat of your retirement. – Micah Shilanski Click To Tweet
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Full Episode Transcript
With Your Hosts
Micah Shilanski and Christian Sakamoto
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 co-host, Micah Shilanski. And with me today is another great advisor, Christian Sakamoto. Christian, thanks for joining us today.
Christian Sakamoto: Micah, super glad to be here. How are you doing today?
Micah Shilanski: Oh man, it is another day in paradise. Well, in Alaska we are getting ready for winter, as you know, because you’re actually up here, which is fantastic. And that snow is starting to come down the mountain, so we have passed the termination dust, and snow will be here shortly, hopefully.
Christian Sakamoto: Yep. It’s about to be here. So, I wasn’t here during this summer into fall, but all I kept hearing is how much rain you guys got. So, I’m lucky to be here while it’s starting to turn to snow.
Micah Shilanski: Yeah. Who know we had to bring the Washington guy up to get the rain to stop. I mean come on, it’s a little odd.
But yeah, we’re getting into this right now. We’re getting into winter time period, which is always a great time Christian, because this is a time that you and I love to make sure we’re seeing all of our clients.
There’s a couple times a year which … we’re open to seeing our clients at many times throughout the year, but there’s a couple times that are like, you know what, we really need to bring clients in, in order to review things to make sure we’re on the right step in their financial plan.
And for doing this for me for over 22 years now, one of the things that I realize is that there’s spring and fall times, which are really important for clients to come in, because we have the most opportunity to deliver value to our clients, and that’s really what we’re going for.
And especially right now, it’s actually really well-timed because the markets have been, at least by the time we’ve recorded this, just a little bit down, 20 to 25% depending on how we’re looking at it. And now, we’re going to get ready, we’re going to see all of our clients, we’re going to go through things.
And I think the super important part about this Christian, is when the markets go down — not if, and you know this, we talk about this all the time. When the markets go down, what’s our plan?
So, Christian, as we’re thinking about this, what are some things that our listeners should be thinking about, how they should address their TSP. Like now in the future, we could talk about retirees, we could talk about workers, et cetera. But I’d love to start digging into that and give our users some great actionable items that they’re going to be able to do when the market’s down 20, 25% like it is now.
Christian Sakamoto: Yeah. And again, not a matter of if, but when, and here we are in that scenario. I don’t know about you, but my crystal ball is pretty foggy. So, what I can’t do is I can’t go to my clients and say, “Well, it’s down right now, but in the next six months or in the next year we know it’s going to be up or down more or whatever.”
So, without knowing what the future is, we have to still stay the course. As investors, we know that it will go down and when it goes down, it’s going to be really important to not make those emotional decisions to where it’ll devastate you financially in the future years that are to come. That’s what we want to try to avoid the most is try to make those rush emotional decisions.
Micah Shilanski: I really think that’s the key Christian. I love that you said about those rush emotional decisions.
I always jokingly say, especially whenever I’m talking to like a large group in an audience about saying, “You know what? I know all of my clients in this …” quote — And we’ll talk about this in a second why I don’t like it; “Risk tolerance.”
And the risk tolerance is where a financial advisor gives you a worksheet, a piece of paper and you go through and score yourself; “If I won the lottery, what would I do with the money? If the market dropped 20%, what would I do with the money? If it went up 20%, what would I do with the money?”
And you go and you fill out this question, it gives you a score, and that supposedly is how you’re supposed to invest your money.
And we don’t put a lot of credence in those, and we’ll talk about why in just a second. But I jokingly say I know every single one of my clients’ risk tolerance. It’s simple, when the market’s up, they’re long-term and bullish. And when the market’s down, it’s oh crap and we’re conservative.
And the reason I jokingly say that, is because it’s emotional. Now, it shouldn’t be, but it is. This is your money, this is your life savings, this is what you’re counting on to get you for the next 30, 40 years throughout your life.
You’ve got your pension, which is fantastic, you’re going to have social security, but that third leg, that third stool, your TSP, your Thrift Savings Plans, your 401K, your IRAs, your Roth, they put a huge component inside of that retirement.
And if you’re listening to this, you’re not a federal employee, it’s even a bigger side because you don’t have a pension that’s going for you. So, you really got to have a plan on what we’re going to do.
So, the money is emotional. We can say all day long we shouldn’t look at it emotionally, and I agree with that, we shouldn’t, but it is. So, we need a plan that’s going to allow us to bridge through these emotional gaps, these emotional turmoils that we have that says, “Okay, what are we going to do?”
So, Christian, let’s first separate this out just a little bit. Let’s go and say, okay, let’s take one side of this and say if someone is retired … Christian, no, let’s do employees first.
So, if you’re employed and you’re listening to this, what are some things we should be looking at? Then let’s look at our retirees, what you should be looking at. What do you think?
Christian Sakamoto: Yeah, that sounds great. Let’s start with the easy one, which would be everybody who’s still working. The reason I say that’s easy is because if you’re still working, now, if you’re retiring next year or in the next six months, maybe a little bit of a different scenario.
But if you’re still working, if you’ve got another five years plus, you really shouldn’t be concerned at all. We’re not going to be accessing this money anytime soon. And when the market is down, really, your dollar cost averaging every two weeks into the market when it’s down, you’re buying everything on sale is what I like to say.
And it should be something that you find actually appealing, and something that you should be looking forward to if you’re not turning your money on as income is, “Hey, everything’s on sale right now. Let’s continue adding into the market and if we haven’t maxed our TSP contributions, it might be a good time to even increase them during these times.”
Micah Shilanski: Yeah, that’s a solid point. Now, Christian, would we modify that a little bit and I a hundred percent agree. We’re a long-term, we’re still employed. But when do we get into that time period from when we go from an employee to retired? Because it’s not like tomorrow.
If I’m retiring on 12:31 of this year, I got two months left less than that, so I’m going to retire. When do I transition from that long-term investment employee to a retiree but I’m not retired yet? What about that in between time? What should we be considering?
Christian Sakamoto: I would think, less than that five-year window and really, into the two years away from retirement, we really want to have a little bit of a change in what our allocations are, not what our contributions are going to. We still want you to put money in when the market is down into the market, but how is it allocated between the accounts?
And in podcasts before, we’ve talked about buckets. And for those who aren’t familiar with buckets, we have three. The first is our cash bucket, the second is our income bucket and the third, is our growth bucket.
We want to have those separated in different buckets because when the market’s down like it is right now, we want to have at least five years of money that’s not in the stock market.
And so, if you’re within that five-year window of retirement, now pushing closer to that two years or even less, it’s going to make more sense to have some of your money that’s not in the stock market that’s in cash and that’s in income. So, think of the TSP, that would be your G fund and your F fund.
The reason we want to have that five years of money set aside, is well, when the market’s down. But the most recent kind of most extreme example was what happened in 2008. And we always mentioned this, it was down for five years.
Now, Micah, I don’t know what the future’s going to be with where we’re at right now with the markets, who knows? But if we can be at least five years of money set aside, that’s not in the market, we’re going to be in a better spot to be able to weather the storm of its recovery.
Micah Shilanski: Christian, I really like that. And yeah, we talk about buckets frequently on here cause I’m a huge fan of how those work in retirement plans.
Now, on average, and I’m going to get this slightly wrong, so we get the “ish” aspect of it. On average recessions, markets are down for an 18-month period in time, the vast majority of time; between they’re down, between they come back up and recover.
So, you get about a year and a half. Sometimes some bad ones that are going to be out there, could be two to three years. And I love that you referenced it 2008 because that kind of was the worst that we’ve seen, and that was a five-year period in time.
And so, this gets into the question that any time — and so I talk about clients all the time, Christian, I know you do the same; we always have a cash flow conversation regardless if you’re employed, you’re about to be retired, you’re retired. We always want to talk about cash flow because cash flow is the heartbeat of your retirement.
So, I love talking about it from that side. Where’s our money going? How are we spending it? Let’s make sure you’re having the best life you can. But in the back of our mind as financial planners, another reason I’m asking that cash flow question Christian, I bet you’re the same with this as well, is I am thinking about, huh, what money are we going to need in the next five years?
And if the client’s talking about doing some big trips or they want to buy something or they want to move or you want to go do A, B and C, well, fantastic, but where’s that money going to come from?
So, that’s kind of the question behind the question a lot in our minds is where is this money going to come from that we need to generate and any money that I need to spend in the next five years?
We need to have a conversation at least about, maybe that shouldn’t be in the market. Maybe it should, maybe we should have that conversation.
But that’s the lens we need to start with, is any distributions any time you’re going to take money out in the next five years, you need to think about moving it outside of the market.
And Christian, when we get into the TSP — our listeners know, I love the TSP. It’s fun freaky fantastic. It has so many things that go for it really, really well. But that doesn’t mean it’s perfect. It does have a few limitations that need to be addressed.
One of them will be the L funds. I see a lot of clients Christian, that come in and say “Hey, I want to retire in 2025 so I’m going to grab the 2025 L fund. I’m going to put a hundred percent of my TSP inside of the 2025 L fund.”
Now, the challenge that that happens is the TSP is assuming – and I’m not blaming the TSP, this is how L funds lifecycle funds, retirement date funds, they all work the same concept. That means at that date, they’re expecting you to use almost 100% of your account.
So, that means it’s going to start getting more and more conservative. We’re about 80% of your investment is outside of the stock market. It’s in the GNF fund when you get to 2025, so that money’s available to use.
So, concept-wise, you’re like “Well, that does make sense, I want to use the money, it should be out of the market.” But the problem is how much it does; it moves so much out of the market now it’s not growing for you.
So, again, what’s the rule that we use? Christian, you brought it up, that five-year rule, I love it. Five years, any distributions. Okay, maybe that money should be in that target date fund but maybe our longer-term money should be focused longer term.
And then Christian, I want to go back to you and I want to pull out something you had said. You had talked about contributions and how that’s different than allocations.
Now, everybody’s different. We’re not going to tell anyone how to invest money, these are just things you should be thinking about. But from the things you should be thinking about, why are contributions different than allocations? Would you explain what those two differences are first and then how they’re different.
Christian Sakamoto: Yeah, absolutely. So, the contributions; we have to see when we’re adding money to the market, we call that dollar cost averaging over every two weeks. Those are the contributions, those are the new dollars that are entering the TSP.
And a lot of times, we’ll recommend that our clients add to the market between the C, S and I funds. Maybe it is an L fund, but we’d love to see those fresh new dollars be invested into the market because you’re taking advantage of buying in different intervals that no matter what the market is doing, you’re always adding to it.
It eliminates one of the, I guess, risks with investing, which is trying to time the market and trying to know exactly when is the best time to buy into the stock market.
And by doing it consistently, over two weeks with every pay period, that would help eliminate that risk of buying at the wrong time because you’re spreading out that risk over 26 pay period year versus just doing it one time per year.
Now, your allocations, those are different. Those are not the fresh dollars, the new dollars that you’re adding in every two weeks. That is how is your portfolio allocated between the C, S, I funds as well as the GNF funds, how is that money distributed across the entire portfolio and how that is allocated.
And so that is going to be how a person should be invested is going to be different based on their time horizon when they’re retiring, when they’re going to be using that money. But that’s the difference there, is the new dollars going in but it’s the allocation of the entire portfolio.
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Micah Shilanski: And this is really important too and we may not have time on this podcast to discuss it. We’ve done on other webinars; we’re going to do it on future ones as well. So, make sure you are signed up for a newsletter because we go into these concepts a lot more in depth.
You can jump on our website, planyourfederalretirement.com. Make sure you sign up on the newsletter cause we’re going to again, go through this information a little more in depth.
One of the limitations of your TSP is proportionate distributions. That means when you go to take money out, it doesn’t matter how you want to take money out. If you allocated 20% between the G, F, C, S and I — no that’s not a recommendation, it’s just an easy example,.
And you go to say, “Hey, send me $10,000.” What they’re going to do is they’re going to take $2,000 or 20% from each of the G, F, C, S, and I funds. However, you’re allocated is how that money’s going to come out.
So, when we’re talking about these concepts, we talk at them, but sometimes we can’t apply them perfectly to the TSP because of those limitations of those distributions.
Even so, I want to see a healthy G fund or a healthy F fund if — right now, not so much the F as interest rates are going up. I like the G fund for that. However, I want to see a healthy fund because we do need some protected money in your accounts for those distributions when you’re within five years of retirement.
So, be really cognizant of that. And the biggest thing here is it’s a planned approach. It’s not emotional approach.
We’ve met with some people, Christian, you and I met with a client last month or so and one of her comments was, it says, “Hey, I’ve lost 20% in the markets I just sold out, I went to the G fund, so I’m going to wait till the market kind of settles down before I put money back in.”
Theoretically that sounds like a fantastic idea. “Hey, the water’s a little choppy today, I’m going to stay on the shore, I’m going to let it calm down. As soon as things calm down, I’m going to go back out, start sailing again because I don’t want to be beat up in the rough seas.”
Well, that’s fantastic if you have a boat and you can get off and sit on the sidelines, but that’s not how your TSP is designed, that’s not how the investments are designed.
One of the things is, you don’t know when it’s going to stop being choppy and in fact, it’s never going to stop being choppy. It’s always going to be choppy. The question is how are you looking at it in a time perspective? So, we really need that.
Okay, so we talked about it from an employee perspective. We talked about it from a transitioning perspective, from that employee to retiree, where does that work? But then Christian, now we have retirees that are retired, “Crap, the market’s down 25% again, what do we do?”
Christian Sakamoto: Yeah, that is the question. And what we have to do is we have to take a step back and we have to figure out where is money coming in the door right now, because if you’re retired, you will have three sources of potential income.
You’ll have your first pension, possibly social security if you’ve turned it on, and TSP withdrawals or any other investment account or retirement account withdrawals, let’s just say TSP.
So, when the TSP is down and you’re living on your pension and maybe social security, but let’s say you’re not taking distributions from your TSP — similar concept where it’s okay that the market is down. You haven’t realized any of those losses with the market being down, so you’re in a good spot.
Now, let’s just say you are taking distributions from your retirement accounts, your TSP, that’s where we have to really come up with the strategy on what’s the best way to do that because as you mentioned just a bit ago, those proportionate distribution rules really are amplified when the market is down as far as the negative side, the negative effect of those proportionate distribution rules.
When the market’s down, again, you’re forced to sell between your C, S and I funds that are in the stock market. That’s what we want to avoid fundamentally as investors, is we don’t want to sell when the market is down. We want to try to avoid that as much as possible.
Micah Shilanski: Christian, sorry, I’m going to interrupt you real fast to pause. I really want to emphasize this point that Christian is making. This will devastate your retirement accounts.
And we saw this in 2008, I saw this in 2001 when we got emotional, the markets were down — not we, but clients or individuals got emotional when the markets were down. They sold out at a 30, 40, 50% loss because that happened in 2008. 50% losses, they sold out and they were crippled.
Now, it doesn’t matter if you’re selling all out, this could be taking out money every single month. If I’m selling in the market shopping every single month, I’m taking out more shares. I know it’s hard to talk about in a podcast, we have this nice little graph we can go over if we’re in person. But you’re taking out more shares and that devastates your retirement account.
And that’s what we’re trying to solve for, is we don’t know when that market’s going to go down. I wish I did; I’d be broadcasting from a private island with a yacht. But we’re not, we don’t know when that’s going to be.
So, we want to make sure we have a plan that when it happens, you’re not forced to take money out of the market when it’s going down. That’s the big thing that we’re going with here. And it’s really critical that we understand how that works.
Christian Sakamoto: Absolutely. And that’s what we’ve shared in the past is the TSP is great. When we’re an employee, we get to dollar cast average, fees are low, investments are simple. Things are great with the TSP when we’re an employee.
Where things get a little bit hairy, especially now when the market’s down is when you’re no longer working and it’s time to take distributions out. And again, just to emphasize, the proportionate distribution rules really can put a devastating factor on your overall success with your money, and not outliving your money to where we would have to look at some alternative ways to access our money.
Ways that we can take money out of the specific accounts that we want to, and not proportionately.
Micah Shilanski: Yeah. So, this is really important. So, one of the things that I’m hearing inside of this, is going to be a written plan.
Now, it doesn’t have to be complicated; I don’t want to see a hundred pages, I really don’t want to see 10 pages, just a simple one pager; what’s the investment plan that you’re going to follow and how are you going to implement that?
And the reason I think that in writing is so important, whether you work with a professional, you do it personally, whichever way you need — you need a simple plan because when things go wrong, and they will, we need to be able to go back on the plan that says, “Okay, I planned for a drop in the market. What was my plan when I wasn’t super emotional about it? When I was more methodical about it, more logical and I wrote down what this plan was, what did I say I was going to do in a down market? How do I take advantage of that?”
So, let’s talk about some opportunities. When the market’s down, it’s not all bad. There’s some really cool things that are happening right now. One cool thing that’s happening with a lot of our clients is interest rates are going up.
Now, we look at interest rates sometimes with rising interest rates and saying, well, it’s really bad. Okay, we can talk about that from a macro standpoint, that’s a great … I like to call it a beer conversation. Let’s sit down with a nice glass of wine, a nice beer. We get theoretic eyes about all this type of stuff. But day-to-day, here’s what I know about interest rates.
If you’re borrowing money, so I need to go get a mortgage, I need to go get a loan, I need to go get a new car and I’m going to finance that. Yep, higher interest rates they bite, things are going to cost more. That’s a reality.
Let’s talk about some retirees. Most of our retirees are not going out and getting a mortgage, they’re not getting cars financed. These things are already paid off. We already have those things allocated, et cetera.
So, what do higher interest rates mean? That means your G fund’s going up, that means you got like a 8% call you’re going to have this year, something crazy like that. We’re going to see these great numbers and things that are going to come out for our retirees that allow some better investment opportunities.
So, rising interest rates — that’s not just tied to down markets, but rising interest rates, they’re still investment opportunities that make a lot of sense. So, I like that as one piece of the pie.
The other piece that I like and Christian, I know you did a lot of work on this in the summertime, we’re doing even more work this fall, is Roth conversions. And you know what, it always bites when accounts go down, no lie.
I would prefer it if accounts always went up in value, it just makes everything so much easier. But they do. They’re going to fluctuate and go down. So, what’s my plan?
Well, with a lot of clients, we’re already planning on saying, hey, in two years, based on the tax law we know today — it’s a whole separate podcast we’ll get into. But based on the tax law, we know today taxes will be higher in a couple of years from now. If Congress does nothing (this is my only political joke) — and they’re good at that; your taxes are going to go up.
So, if that happens, what should we be doing today? Maybe we should be doing Roth conversions. That’s taking money from an IRA account, converting it. That means you got to pay taxes on it today, that’s the downside, and putting it into a Roth IRA so that money can grow.
Well, if I had $50,000 in an IRA and that’s now dropped to $30,000, well, what would I rather pay taxes on? 50 grand or 30 grand? 30,000, right? It’s a lower amount. I move that 30,000 into the Roth, downsize that, I got to pay taxes on it, but now I keep the investments in the same, now it grows back to $50,000. Guess what? Now, I have $50,000, 100% tax-free.
There’s some rules, there’s some timelines you got to meet and do those things, you got to look into those and understand how that works. Now, I’m getting choked up about this.
But the power of this planning is so important because we can’t just stick our head in the stands when the markets go down and say, “Hey, I’m going to sell everything, I’m going to wait until it comes down before I get back in the waters.” That’s not a great plan. That is a plan, but it maybe isn’t a great plan.
Christian Sakamoto: I agree. Well, we’ve talked about pre-retirement, we’ve talked about that transition period. We’ve talked about the difference between contributions and allocations and then we also wrapped it up talking about what it looks like when the TSP is down for people who are retired and are living on that income.
So, what would be some solid action items for our listeners today?
Micah Shilanski: I love it. Well, the first action item, clearly, if you’ve made it this far, is to jump on iTunes or however you listen to us; give us five stars, share this with a federal employee.
I’m only slightly kidding, but that really does help us grow. One of our missions is we want to reach more than a million people with our messaging this year to positively impact their retirement.
The only way that happens is with your help, is with listeners, get this information out there. There’s a reason we put this out there. We want to give away great information because we’ve seen mistakes that are made.
So, number one, totally selfish. Get that one, give us five stars, share this with the federal employee.
Alright, another one, Christian, I’m going to throw out there; you need to have a written plan on how you should be investing. Nice and simple, don’t make it complex, but understand what your goal is so that when it gets emotional, you can go back and look and say, “Hey, this is what I was doing, this is why I was doing it.”
Christian Sakamoto: Great. Another one on the same lines, create buckets for your retirement plan. Again, using the cash income and growth buckets, plan those out. What do those look like? If you’ve got 10 years until retirement, your buckets are going to look a lot different than if you’ve got one year to retirement.
So, make sure you have a plan and create what those buckets will look like, and they’ll change over time as well. So, that’s where you’d want to revisit this, every six months or every year or so to update your buckets.
Micah Shilanski: Love it. Last action item. Turn the bad into good. That means tax planning. We can’t control … we got to judge our success as much as we can based on the actions in which we can do versus third party actions. There’s nothing I can do about the stock market. There’s a lot I can do about tax planning.
So, what is your tax planning going to look like? How do you get yourself out and put yourself in a position to take some great action to take advantage of this. If you’re not working with an advisor, work with one, work with a CPA that understands this. Look at the numbers and see does it make sense to do a Roth conversion?
There’s some also income acceleration ideas. There’s some other things that you could possibly be doing to really making sure that you’re making an impact in your 30-year tax plan.
Not your one-year tax plan. One-year tax plan, as I looked last year, said, “Hey, I want to pay less in taxes.” That is checkers, we’re playing chess. I need a 30-year tax plan. How do we beat the IRS out of not hundreds, but tens of thousands of your dollars to make sure you can keep them?
Alright. That’s it for this week. Thank you guys so much for tuning in. Christian, I really appreciate having you on the pod, and until next time, happy planning.
Christian Sakamoto: Happy planning.
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Postponing TSP distributions in a down market makes sense, but sometimes withdrawals are unavoidable. It would have been helpful to address required minimum distributions — the market peaked at the end of 2021 and the RMD for 2022 is based on that high rate, but it has subsequently dropped precipitously. Are there any workaround strategies, or are we forced to take a significant hit on our already slashed tsp portfolio?