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Whether you are 30, 50, or 70, a subject that has a hold on you is how to improve your financial situation. How much are you saving, and how can you save more? How can you organize your income better?
It is crucial to ensure you are not just following the old rules – you need to know the significant changes in the tax code regarding IRAs and inheriting IRAs. But don’t worry. We’ve got you covered!
We know that cash flow is the heartbeat of Retirement, so in our latest episode, Christian and Micah go through the basics of setting yourself up for success and focusing on retirement income from a ‘net’ point of view.
What We Cover:
- Biggest mistakes retirees make
- Why is cash flow different now vs. in Retirement?
- Cashflow is the heartbeat of Retirement!
- You have a pay raise now. What should you do with it?
- How much ‘should’ you be saving for Retirement?
- How to succeed in being intentional!
- How different is spending in Retirement
Resources for this Episode:
Ideas Worth Sharing:
All that I know doing this for a little while is that the more projections that you run, the longer out you go, the more scenarios we have, they're still not going to be true, right? – Micah 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: Hey PYFR team, got Micah and Cristian here for a PYFR podcast. I believe this is episode 68. Going out in January, we’re gonna be talking about cash flow increases Social Security and cash payments.
Micah: Welcome back to another amazing episode of Plan Your Federal Retirement podcast. I’m your host Micah Schilanski, and with me today is not a stranger to the podcast. We have a great advisor coming out to us from Washington, Christian Sakamoto, Christian how’s it going, buddy?
Christian: Micah, I’m doing well. And happy new year to you. It’s great to be back on the podcast and there have been a lot of changes. So I know there’s especially in the with the secure act 2.0 coming out. There’s just a lot of cool things for us advisors to be really staying on top of to give you guys the best advice so I’m super excited for this episode.
Micah: So Christian is really funny now. To our to our listeners, they’re like I a Christian just said like is really fun and exciting. What part of this is fun, exciting, but right before Christmas, we had a little get together at our house and whatnot. And Congress was just getting ready to pass this omnibus bill and with secure Act 2.0 And it’s also when I was an audio I’m gonna read it this next week. What do you mean, you’re gonna read it this next week, as like, well, this directly affects my clients and I’m gonna pull it down and I’m gonna read the actual legislation and we’re gonna go through and find out how it works for our clients. And I got this big smile on my face. And he’s like, why are you smiling? I was like, because this is fun.
And okay, you know, what Congress does? Sure that may not be the most exciting thing, but the impact that that makes to us as individuals and knowing what these rules are, and also understanding what we don’t know right now because even though secure act pass you know, Congress passes a law it we’re gonna talk about one thing in just a minute.
That doesn’t mean we actually know what’s going to happen, because sometimes Congress passes laws with a little bit of ambiguity and the CPA industry. The financial industry says okay, we think it means this and two years later, the IRS comes back and says actually means something else. So it’s a little bit of guesswork. That’s gonna be a little bit of art kind of in this and I love walking through that with clients. I love being able to chat about this, and kind of help clients understand these things so they can better plan their retirement.
Christian: Yeah, 100% Agree. So stay tuned. There’s gonna be more as we go on and read and read these rules and go through them that we’ll be doing some more episodes related to this, and more, so stay tuned for those.
Micah: Fantastic Well, Christian, one of the things I want to bring up kind of early in the pod as well is we have a bit of an ambitious goal. And I don’t have a timeframe on this one. But listeners I need your help. We have a goal to help 1 million federal employees plan their retirement, 1 million federal employees plan their retirement and that is a pretty audacious goal, if I do say so myself, but we can see the impact of when you positively plan for retirement versus not. And we really want to get out there we really want to get the message across to help more and more people. This is not a sales pitch. There’s no close that’s coming at the end of this. This is something that we are very passionate about and want to do and we need your help with that. We’re going to do our best to create lots of great content this year. We have a whole new content calendar. We’re going to come at you with some great information which is fantastic. And I need your help to share it we need your help to push this information out to get it to people that might know it so they can help play in the retirement. Yes, it’s a little selfish because I want to help with our goal of hitting that 1 million federal employees planning their retirement but this is about helping federal employees understand the great benefits that they have. So not only is the podcast coming at you again another fantastic year, but we have some really great co-hosts we have some great content with them. One pagers that we’re gonna be coming up better understanding your benefits, so you can apply it so make sure you stay tuned for that. Christian I’m super excited about it.
Christian: Yeah, me too.
Micah: All right, a couple things. So I really want to get into Christian in this new year as it kicks off is cashflow. Cashflow. We said this again and again. Cash flow is the heartbeat of retirement. This is so so important that we can talk about and there’s several things that we can apply to it. I do want to hit one thing real quick, quick on some rules that change this wasn’t secure act 2.0 which passed, you know in that Christmas time, but before that the IRS did make a clarification on some ambiguity that was insecure at 1.0, which talks about RMDs required minimum distribution on inherited accounts. So if you inherited an IRA account from someone in the last three years after 2019 you need to make sure you’re talking with your financial advisor because the rules have changed. And if you do the same thing you did last year, you’re gonna run into a problem. The rules have changed on those accounts is a little too complex to get into because it wasn’t quite our topic for today, but a little bit of a warning sign out there. If you haven’t inherited account, talk to your CPA, make sure they’re up to speed on the new changes. That came out in November December for secure 1.0 and 2.0. Because there’s two overlap, one doesn’t overwrite the other and make sure you understand that so I know it’s a bit vague, but if that happens to fit into your category, make sure you’re talking to somebody understands it. Alright, Christian, let’s jump in and let’s kind of talk about some cash flow. I know one of the things I love talking about this in January, especially because didn’t federal employees get a pay raise this year.
Christian: Never heard some about that. Y’all it’s actually 4.1% across the board, which is just outstanding and to some very significant increase. There also was a point 5% increase on locality so, so just right there as a 4.6%. And that doesn’t factor in, you know, any potential promotions or any other locality adjustments there. So yeah, quite the pay race into this 2023 year.
Micah: Now, the reason we bring that up is can I the general rule, and we’re gonna talk about this more detail. Whenever I’m working with a client and Christian I know you like to do the same thing is that got a pretty simple 50/50 rule. It says any new money that we received any unexpected money, right? We live in Alaska, so this could be Permanent Fund dividends coming in. This could be a pay raise. This could be a step increase, anything like that. I love to apply 50/50. 50% of that pay raise goes to the future increase that tsp increased that catch up Max fund that Roth IRA rate, whatever those numbers are, put more money to the future with half of that money than the other 50% let it come to the bottom line. It’s okay to increase your your living a little bit. It’s okay to increase your lifestyle a little bit. As long as we’re applying this 50/50 rule where people get in trouble is they put 100% of their pay rate right in their pocket, and then their lifestyle immediately goes up Christian, I don’t know about you, but to me, if money goes in my checking account, it goes out of my checking account. I’m pretty good at spending that money that goes in there. And so if that continues to happen in my pay goes up and up and up and up and I’m spending more and more and more and more and more and I’m not saving more and more and more. You create a wedge you create a gap. That’s not in a good way because you’re not really on track to replace that income when you retire.
Christian: 100% agree and that’s what we want to encourage you as we move into this new year, as we’re starting to see those increases think about that 50/50 rule or think about being able to, you know, continuously increase how much we’re saving and putting away but then also spend some of it. So let’s say you know make $100,000 And just for easy math you your increase was $4,000 this year, great put two more 1000 into the TSP and spend that $2,000 over this year. I think that’s a very easy concept. And again, it’s going to help with that. Continuous increases in pay continuous increases in spending. We just want to avoid being in a position where you get down the road and you regret not having saved enough for your retirement. You don’t want that.
Micah: Yeah, Amen. Now, one of the areas I think this can come in, I’m going to call it a mistake Christian, a mistake that pre retirees run into all of the time at least this is what I see. So let me know if you see something different is there’s a misconception and that misconception is is that when I retire, I will spend less when I retire my taxes will be less right. We’ve been told that for so long and I think that is just inaccurate. It’s almost like an anti truth. Right? It is the exact opposite of really what we see working with people one on one. And here’s a simple example. Let’s say you have a traditional work schedule. That’s Monday through Friday. When do you spend more money Monday through Friday, or Friday, Saturday, Sunday on the weekends.
Christian: I’d say Friday through Sunday, on the weekend.
Micah: What happens when every day’s a weekend.
Christian: Good point.
Micah: Where are we going to be spending money right? We’ve created a lifestyle you’ve created a life now it’s possible you can change it. I’m not saying you can’t. I’m just saying on average. What do we say on average? What do we see is people want to spend the same amount of money in retirement that they have coming in now. We’re creatures of habit I’m used to X dollars hitting my checking account every month and I spend X amount of money federal boys right you do it every two weeks. Fantastic. You just get that money coming in and you spend it we got to keep on that same track. So I would say this is the big mistake that retirees especially younger retirees get into is that my… It’ll cost me less in retirement. Therefore I don’t need to save as much today.
Christian: Yeah, I don’t see that. We don’t see that working with our clients and that’s one of the things we’re coaching as we’re working with individual clients in their switch situations is saying, okay, great. You’re a few years away from retirement maybe 10 years away. It’s really unrealistic to think we’ll be spending less in retirement. There might be a few exceptions. And I know right before the podcast we were chatting about one of those exceptions being you know, let’s say my mortgage is going to be paid off by the time I retire or maybe a few years after retirement. And that’s a really good example of potentially spending less into retirement. But we have to have a plan with that. And the first question is taking this example is with the with the mortgage is saying, is this going to be our forever home or not? Right? Is this a home that we’re going to see ourselves living in in a retirement or are we already planning on moving and downsizing or moving and moving somewhere other a different location? And I’m not talking about going into a nursing home right or moving into a home like that? I’m just mentioning is this the house that we see ourselves in? Now if the answer to that is yes, great. Now we can look at what is the the actual principal interest, taxes and insurance that we’re paying for our monthly mortgage payment. And that’s where we have to separate out those parts and take out and essentially look at it from where are all those dollars going. Principal and interest may go away, but we’re still going to have taxes that we’re going to have to owe property taxes. We’re still going to have insurance. So we have to look at it from that perspective. And so you know, let’s say your your mortgages are, say your monthly payment is $2,500 a month. And let’s say your principal and interest are $2,000 a month and then 500 for taxes and insurance. Well great if we plan that you’re going to have that mortgage paid off into retirement $2,000 goes away, but you still have 500 that we have to account for. So it’s worth thinking about that as removing it.
Christian: So another example we could look at would be a car payment. So Micah, let’s chat about that and see what’s the difference between a house and a car into retirement.
Micah: Yeah, one of the things we always recommend with our clients is to always have a car payment. Now, we’re not saying we’re not saying always have loans. That’s not what we’re saying whatsoever. We’re saying as you get used to making a car payment, right. Let’s say that you have a car payment of $600 a month and you pay the car off. Fantastic, everybody loves paying that car off that mean that goes away. You quit spending the money on the car payment well what happens what do you do with that money? You spend it somewhere else, right? The money’s cash. It’s a no you increase your lifestyle whether it’s $600 a month, what sounds great. Four years, five years, however long goes by now. You need a new car. Well, where’s that going to come from? Okay, you’re gonna go finance it, fantastic. You go finance and now you have a $700 month credit because now cars cost more in interest rates are higher. So they have a $700 month car payment. Where does that come from? Well, you have the same income you had four or five years ago hasn’t dramatically changed and gone up, that much in so now this hurts cash flow wise is now it’s painful that we have to reduce our lifestyle and I have 700 dollars less a month in income coming in, in order to make that car payment. So one of the things Christian, as you know that we really like to do is keep the car payment going if we’re making a $600 car payment you pay the car, car, the loan off, fan-friggin-tastic. I love it. Let’s take $600 a month and divert it to our savings account. And let’s put $600 a month in a car savings account. Now that’s $7,200 a year that you’re putting in this account, which is fantastic. That can help with maintenance that can help with repairs that can help with other expenses that come up that doesn’t mean you have to save that money only for the purchase of a new car. But really what we’ve done is we’ve saved that cash flow. That’s the most important thing. Now when you need a new car, you have a pot of money to get that new car, whether we’re going to use that money for a down payment because maybe there’s 20 grand in that account. Or maybe we need to finance it. I don’t know if I’m used to paying $600 a month because that’s automatically going to savings. Now I gotta pay $700. Okay, well, that’s not too bad, right? There’s only $100 more a month that’s a lot more manageable from going from zero to $700 a month in that car payment. So this is why cash flow is so so important in retirement, and we this misconception about oh when I retire I’ll buy my last car. And I jokingly say about my grandmother, she passed away a few years ago, but when she retired she told my dad, she’s like Floyd, this is my last car. I’m gonna buy a new car. I’ve never had a new car. This is my last one and my dad financial advisor for many years says Mom, this isn’t your last car. She’s like dammit Floyd, I know what I’m doing. This is my last car and after my grandma but by the time my grandma had passed Cristian she had bought four last new every single one was my last new car until the next the last new car, etc. So these things just happen, right? We live longer. We want to have that mobility. You know what, especially as we’re getting older, I’m a huge fan of younger drivers and older drivers having newer cars with all of the safety features, right? Oh yeah, you want to talk about some amazing things can happen. You know, you have a seizure going down a car going, driving down the road. Now you’re incapacitated, that’s there. Now they have cars that can automatically break that can detect the lanes that can keep you inside of there, right? They can figure out now some of the guards is really creepy. They’re watching you. And if you’re not paying attention, they’ll automatically start slowing the car down. So if you passed out, okay, you have you know, Link cord industry and keep the inside of the lane now the car is automatically going to start slowing down and stopping you because it detects that you’re not paying attention to the road. So still a little creepy that a camera’s watching you the entire time. From the safety side that could be a fantastic thing to protect people. So we really got to think about these last new cars and cashflow you’re always going to have those payments.
Christian: Oh yeah, yeah. Now I’m thinking about all these cool technologies that are continuously improving and how that can be quite appealing as we are moving into retirement that maybe we do want to get a new one and keep keep thinking that we’re continuing to make those payments even when we pay that car off. I love it.
Micah: So this again goes back to cash flow, right cash flow is the heartbeat of retirement. My clients that have transitioned into a really comfortable retirement are living on retirement dollars one to two years in advance. We know how much they’re going to be spending we know how much it’s going to be coming in. We have forecast in living on in advance what that income is like and Christian I’m sure you’ve run into this as well. But I’ve run into several clients that over my years and doing this over two decades actually in doing this now. I’ve been running to clients that like, Micah I know how much I spend in a 70 to $100 a month. That’s how much I’m going to spend now it’s my turn to spend on retirement. All these things. I don’t need to do your silly exercise about living on this in advance. I’m like I know it’s silly, but at least it peace me me. Let’s go ahead and do it. And then we start living on it. We find out they’re not actually living on $7,200 a month. They’re living on 75. They’re living on eight because they were looking at just a month to month expenses. They weren’t looking at those other things that tend to come up. And there’s always other things that come up. This is why cash flow is so important.
Christian: 100% agree. Now, before we transition, one of the things that I was thinking about too is we gave the example of let’s say someone who is roughly you know, 5 to 10 years out from retirement. What about for our listeners who are maybe in their 30s Maybe they’re in their 40s and they’ve got a few more decades until they retire. How should they be looking at cashflow?
Micah: Well speaking of our listeners, Christian now that you brought that up, which is fantastic. We are coming out with a listener survey. It’s our first annual listener survey that we’re sending out. If you’re not on our email list, you’re not going to get this so we really would appreciate jump on our website plan your federal retirement.com, make sure on our newsletter, we send out great information with that we’re also sending out the listener survey. So we can find out more what are your questions? What are your concerns, we want to create this content to benefit you. And the way that we get that is not just by us meeting with federal employees and thinking we know what we should talk about, but direct questions from you guys. We love answering your questions. So make sure you jump on and submit those. Alright, so Christian back to pluck aside back to your question, which was what about our younger clients? Right? How should they be saving for retirement? And we really need to start with the end in mind. This can be a little bit challenging. We’re in our 30s like, what does retirement really mean? Right? I mean, that’s so far off. Sometimes it’s hard to visualize that. So I like to change the words a little bit and saying, You know what, I don’t want to plan on retirement. I just want to know when do you want to be financially independent? What age do you want to have the choice whether you continue to work or not? And I know this seems like a little bit of a semantic but it really is a different question to that younger generation, or clans. Because when we think about retiring, it’s so hard even in my mind, I do retirement planning all the time. I can not think about my own retirement. I love what I do. I love giving back. I love working with people. That’s not something that I’m envisioning. I’m still saving for financial independence. I’m still saving for future things. But that retirement just doesn’t resonate with me yet. And so we change it to financial independence. What age do you want to be financially independent? And then I love to back into these numbers. Now one of the mistakes that I think younger clients can make is they can get too wrapped up in projections. All that I know doing this for a little while is that the more projections that you run, the longer out you go, the more scenarios we have, they’re still not going to be true, right?
There’s these money real scenarios that can be run. Yeah, Indeed Christian you know this right? We kind of joke about it in the in house is we say look, there’s two different scenarios that run one is your broke and the other one is your Warren Buffett and somewhere in between will be the reality.
But how do you plan for that? Right? I mean, that’s such a wide gap. So let’s start with the end in mind. What age do you want to be financially independent? And then how much money are you spending today? Why do we start with that? Because it’s something we know we can now take action on that. Then we just need to back into it a little bit. So screen, how much do you need to save every single year so that by x age or at least a range? Maybe it’s between 55 and 60? Great come up with a range. What range do you want to be financially independent? How much do you need to save each year to make sure you’re on track with that? And I really liked the aspect of Christian, so I’m gonna bit of a rant and ask you a question second, but I really like the aspect of telling having clients save $1 amount, because it’s something they can control. If we come out and say, hey, look, you need to get 12% every year in the stock market in order to make sure you’re successful for retirement. Holy crap. Well, now I can’t control that. Sure. I can control my investments, but no one knows what the stock market’s going to do every single year. It feels like we’re a little bit more powerless with that. Versus if we flip it around. We say hey, look, you need to maximize a TSP you need to fund a Roth account, you need to do these things. And odds are you’re going to be on track to be financially independent. Okay, this is something we can do this something we can control question. Christian, when you’re working with clients like that. What’s kind of their feedback, what’s your response?
Christian: I would agree in that scenario that you just said we can’t control what the markets are. Let’s focus on what we can. How much are you saving? How much are you put away right now? And we’ll start there and going back to cashflow I don’t want to get into the 72 different line item budget sheet with them but just trying to figure out ways that we can increase how much we’re currently doing, and always just encouraging that we’re saving more and putting more away and then having the conversation, well, does this need to be pre tax does this need to be Roth, that’s going to be a different conversation.
The other thing I would add is tying back to the whole topic today is with these with these increases, were getting in paid, start thinking about that. Don’t think about where are these dollars going to get spent, thinking about where are these dollars going to get saved? That would be one of the things I really want our listeners to be thinking about today.
Micah: Now. Also, let’s say our listeners in retirement mode, right? Well, fantastic. Got a huge mobile in your first pension, you got a huge bump up and your security, which is great because your TSP probably didn’t do tastic last year, right. So it’s nice to have these other fixed incomes with a nice little bump increase. We love that. One of the things we’re going to work with our clients on is the same concept of our 50/50 rule. Allow 50% to come to the bottom line and I think it’s fantastic in Crete lifestyle. Inflation is definitely their rate or retirees are feeling it, but the other 50% Let’s put that in a project account. Let’s put that in a travel account. Let’s be intentional about this money instead of it just being kind of washed away because we’re not intentional. It hits the checking account and we’re just gonna blow it and spend it and that is an option. Another option is let’s be hyper intentional. What are those projects you want to do around the house? Where’s the places you want to go with the experiences that you want to have in your life? Maybe with your kids or your grandkids? Right, especially after COVID I’m seeing a lot of grandparents saying hey, I want to experiences with my grandkids and I want to plan these trips and I want to do these things and I want to make these memories. Well that’s awesome. Well, let’s be intentional about that. Maybe we create a separate account and put 50% of that pay raise right in that separate account to create those experiences for you.
Christian: I love it. I love it.
Micah: Fantastic. Well Cristian, this is all about action items, right? We want to reach the federal employee audience. We want to get this information out just fantastic. We also want to come through with some action items which are going to be really really important. So Christian, I’m gonna kick it off to you. What’s the first action item our listeners should look at this week to help improve their financial situation?
Christian: Yeah, take a look at the cash flow and figuring out what is coming in the door every month, right? Write that down. If you’re dual income, right, figuring out what the other other spouses is making as well. So have that top of the line. Okay, how much is coming in, and then go back to where you were spending in the last three months or so. Usually in the November, December timeframe, we really see a lot more spending due to Christmas and all that or just holiday spending for gifts and what not, that’s fine, but go back over the last three months, six months or so and really get a good gauge on how much are we spending and how much is actually going out the door every month. Coming up with the cash flow plan is going to be super important. And the first one that I would really be thinking about as an exercise.
Micah: That’s fantastic. I know we’ve done podcasts about it before we call it the buckets right in our Cash Flow Planning. You can have a couple of different expenses like to break those out. There’s you know, household travel, entertainment, medical may be another miscellaneous one, but no more than five general categories of spending looking at the casual plan. I think it’s a fantastic idea. I’m gonna say your second action item for our listeners is it’s time to review your state planning. Yes, I know it’s not we talked about today, but you just got back from relatives probably with Christmas or the new year. That means you might want to make some changes in your state planning. We hear this from clients here. I just spent the time with the family I need to make some changes in my documents. Well great. Now is the time to do it. Pull those documents out. Maybe you don’t know what those changes are just yet be knowing you may get changes physically pull those documents out. Stick them out on the dining room table and they cannot leave the dining room table until you update those documents. We need that physical reminder that’s there. Or maybe you just need to pull them out and read them. Because what you think you said in there is not actually what you said in there. And it might be really good if you’re married as well. Your spouse is on the same page. All right, Christian, any other action items for our listeners.
Christian: Going back to what we said with that cost of living adjustments, go ahead and increase how much you’re saving, increase how much you’re spending, right that 50/50 rule. Let’s actually take action on on that and move forward on that.
Micah: Fantastic all right and the only other plug that we’re gonna give come on you made it this far. Give us five stars jump on there. Give us a positive review. Share this information out there with the audience would be fantastic. We are again when ambitious goal we want to change the lives of 1 million federal employees by helping them plan for retirement and we can’t do that without your help. Till next time. Happy planning.
Christian: Happy planning
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