Ep #73: Costly Mistakes

Full Episode Transcript
With Your Hosts
Micah Shilanski and Christian Sakamoto

Micah: Welcome back to another great podcast with plan your federal retirement. I’m your host Micah Shilanski and with me is another awesome financial advisor joining in from Washington, Christian Sakamoto.  Christian, how it’s going bud?

 

Christian: Micah, it’s going well. Great to be back on the podcast. How are you doing? 

 

Micah: Man? I’m just getting super excited. We get a, March is here so that means we’re getting ready for tax season. Reviewing dozens, there I say hundreds of returns would be a pretty fair statement. What do you think? 

 

Christian: Yeah, we’ve got a few 100 of those clients that we got to review tax returns for.

 

Micah:  Yeah, and this is something that we that we enjoy doing now. It’s a bit of a crunch right but, one of the things that I want to take anything away from a tax preparer or CPA etc., because they do a fantastic job. They get to work with a client a very limited segment of time and get all the data from the client that they think they need, put that information on the right line on the tax return and get that produced. Whereas, when we get to look at a return a couple of things is one we get to review it because we didn’t prepare it we can review it a little bit better. So it’s like you know when I when I try to preview and write my own articles right I can’t be the one that reviews the articles because any everything I’ve written I read it correctly. I don’t find the mistakes in there. You got to hand it over to somebody else to really see those mistake attrition. Do you find that same thing? 

 

Christian: Yeah. 100% All right, something I’ll make a video on something and I get some good feedback that I just wasn’t looking at from my own perspectives. I think everything I do is great, but it’s not true. So when it comes to news, great humility is high.

 

Micah: All right.

 

Christian: What I do when we when I review tax returns, same kind of thing. We’ve seen little things and then we’ve seen some pretty big ones that we ended up having to go back to the CPA for and just saying: Hey, look, we got to miss this and this is something that we really want to make sure is on the tax return for and so I think it adds a lot of value just to have a second opinion on that. Not opinion but just a second review on the taxes. 

 

Micah: A second set eyes right and that’s another benefit that we have is we can work with a client all year long versus you know, a one hour engagement or period return. We get to see a lot of things with the client and know what’s happening etc. You know, we’ve seen sales get missed. I have one client when they’re selling their business it got missed. I don’t know how it got missed, but it got missed on a tax return. We’ve had pensions get missed. We’ve had the last piece of goodness. There’s a common one that I would see happening for anyone that retired on 12/31 of last year of 2021. They retired but Christian they still got a W two in 2022. Right because, when the leave was cashed out the leave was cashed out in the 2022 tax year. So you’re going to get a W two on that. That’s one that’s commonly missed, because think, Oh, I’ve been retired the entire year and only getting a 1099 or you’re mailed a W two but maybe you moved maybe you weren’t looking something of that nature. And that’s a very easy one. That you could miss. 

 

Christian: Yeah, yeah, absolutely.

 

Micah: All right. So I know I would be fine geeking out all day talking about taxes. But this whole episode that we want to talk about today is costly mistakes. And these are things that are not coming out of a laboratory of theory. These are things they’re I say are coming from the trenches. Christian I’m meeting one on one of the clients, helping them review their retirement situation, everything that’s going on their life, and these are constant mistakes that we see. That’s why we want to talk about them, right? We’re not perfect. There’s always areas to improve. There’s always things that we can be doing. And we want to share more of this information because we have a goal of helping more than 1 million federal employees with their retirement. So we need your help. We need you to share this information. Get it out there. Let more people know about this email, send with ideas and things you want us to talk about, Because it’s really important to get the message out. We want you to get the most out of your benefits, but Christian in order to do that, you got to not make costly mistakes, right?

 

Christian:  100% I’d say let’s get right to it then. The first costly mistake that we see is Net vs. Gross. Right. And this ties well into our cash flow planning that we do with our clients and what we talked about on the podcast is really having a good understanding of what are we earning what money comes in the door every month. And then what are we actually spending from that net income? And again, it’s key that it’s net income, right? Because net income is what we actually hit our bank account was we actually get to spend. And so as we’re planning our client’s retirement, one of the things that we’re always talking about is net versus growth gross on their first pension or on their first supplement. Right. Same thing with any sort of TSP distributions and retirement distributions. We always have to think about it from a net versus growth gross perspective.

 

Micah: Christian, I agree 100%. Now this can be a couple of different ways, right one, you can make this mistake because you can look at your first pension. And let’s say you had a 37 year career, right? Your pension is 6000 bucks, fantastic. Right? I mean, kudos to you. But that’s not what’s hitting the bank account. You got survivor benefit, you got taxes, you got health insurance, you have life insurance, maybe Long Term Care Insurance, right? We have all of these deductions that are going to come out that’s going to lower that. So one, that’s one simple area that nets versus gross gets messed up. Here’s another area that you may not be expecting. When we work with clients we always want to talk to them and net dollar amounts, how much they want to spend an income. We had one client that we’re meeting with recently, a new client and they’re like, hey, we want to spend $150,000 a year. Okay, great. 150 grand a year, 12 you know, ish $1,000 a month kind of going through there. And then as we start looking at it, they’re nowhere near spending $12,000 a month right now. So when we had that initial call with them, we were chatting with them. And I said well, I need to replace the income I have now and the income I have now my high three. My pay now is 150 grand a year. So I can totally see where they’re coming from right even in this podcast we talked about replace the income that you have that like, sweet I’m going to listen to Micah and  Christian I’m going to replace the income I have it’s 150,000 bucks, so I totally get that but when we’re talking about is replaced that net income and here’s why. Because Christian as you already know out of that 150, deductions that will not exist in retirement time. Right, the TSP funding, that’s a simple one, you’re no longer going to be putting money in your TSP account. That’s what almost what $30,000 now you’re going to be putting inside of your TSP account for your contribution plus your catch up. It’s fantastic but that’s 30 grand right off the top. So it brings us from 150 down to 120. Plus, there’s other deductions as well. And so we got to be looking at this from a net perspective. spendable money, how much do we want and Where’s that coming from? 

 

Christian: 100% Let’s move on to the next one.

 

Micah: Oh, sorry, a little bit of a lag. Go Christian. Go ahead. 

 

Christian: We’re too excited. We’re too excited. So the next one we were talking through was your service comp date, your SCD versus your retirement service comp date. And this is one that a lot of times gets confused as being the same. Because on your LES you’re leaving earnings statement oftentimes it’ll show what your service computation date is. And so people will look at that and they say great, this is when I started and they’ll plan they’re in there. They’ll base their retirement when they can retire off of their service comp date or service competition to SCD. Well, not all the time, not 100% of the time is your SCD the same as your retirement service comp date and those times those can sometimes be different depending on if you had bricks and service or temporary time seasonal time, that sort of thing. Maybe some military time. So there’s lots of different reasons where your SED is different from your RESD, and that can be quite costly, especially if you’re saying well, you know, I’m gonna retire at 57 years young, and I know by then I’ll have you know, 30 years of service and you’re basing that off of a particular date. Well, what happens if you go to retire 57, but it turns out, based on your retirement service competent you only have 29 years or 28 years? Well, there’s gonna be some issues there. So we just really want to make sure it can’t stress it enough to really have an understanding of what your retirement service company is.

 

Micah: Yeah, these little things that you’re like, Well, I know I got credit for it because I paid back and I bought my military time. Right. Well fantastic. Does your agency know that? Does OPM know that? You’re like Micah, of course they know what I went through my agency to buy it back. I had to send OPM the check that it is big calculator. Sure they got the money, but do they really know it? Is it part of your EOP of your electronic official personnel file? Is it going to be included in your retirement application? Right? These are things that we have to look at and Christian you’re 100% Right on. We have seen more than a few people come to us that have a difference in their SED versus RSED. In fact, I have seen dozens of people that have come to us and I started chit chatting with them about their federal service because when you come in and meet with Christian and I one of the things that we’re going to talk about right away is I want a timeline of your federal history. Because every now and again and it happens more often than you think we’re going to find something that the timeline doesn’t add up with what there are SED says it is. Sometimes Christian we even found people in the wrong Retirement System. I got some of the thinking there in a FERS and I start doing the math and everything they’re telling me it says you are not a FERS employee You are a CSRS employee or a CSRS offset employee you are placed in the wrong retirement system that’s undera different set of rules. So this is why this is really important because we want to discover this Christian, is your No, we’re gonna discover this while you’re employed. Because if we wait till after you’ve retired, now we’re dealing with OPM and I jokingly say when you’re in you’re a guest and when you’re out your past, and you’re gonna be saying, well, Micah is a pain in the butt to deal with the systems right now. I promise it’s a lot more challenging. Here’s one thing that’s challenging, you’re not getting paid. You don’t have income coming in. Right? Not even an interim check, not even an estimated check because all of a sudden everything got messed up in your in your EOPF, OPM doesn’t know what to do. I’ve seen delays eight months before an insurance check started. We just had a client that everything was pretty much in order. There’s a couple of caveats inside of their pension that we knew were going to take longer. It took 12 months for them to finalize their pension their pensions over $8,000 a month. And they were only getting an estimated check of like 1200 bucks because OPM didn’t know what to do for 12 months. So that’s why these things matter is that rather sort this out while you’re on full pay and you’re working and let’s get it as clean as we possibly can before it goes to OPM. 

 

Christian: Good point.

 

Micah: All right. I would definitely say the next one is on retirement rules. I know we get a lot of questions about these. I do a lot of first federal fact checks first and I think you do as well on the rules of benefits. So MRA and 10, postpone retirement, deferred retirement, FEHB 62 and 20, right, 60 and 20, all of these different rules that are going to be there. And so the biggest thing I’m going to say with this is you have to understand what the rules are and sometimes understand what the exceptions are because, Christian, one of the things that we like to talk about is it’s not just the rules, right, but it’s the exceptions to the rules. In fact, we were chatting with a client today that was working with an estate planning attorney. This doesn’t pertain to federal employee benefits directly but estate planning attorney was like no, these are the rules. This is the way it has to be set up this is what you can do. Well, I guess the problem was they weren’t an estate planning attorney. They were an attorney that was doing estate planning. Okay, so there’s the distinction. They didn’t do this all the time. And Christian were like, No, that’s actually not the rules. Yes, that’s a rule. But here are the exceptions to that rule and we qualify for an exception, but it was just blowing the attorneys mind because it’s not something they do on a frequent basis. So this is something about these military or military time rules, but retirement rules MRA and 10, FEHB 62 and 20, etc, and exceptions. You got to know what the rules are, how they apply, and you got to know what the exceptions are and really well documented those exceptions if they apply to you. 

 

Christian: Yeah, yeah. 100% agree. So let’s look at the next one. Ignoring changes in insurance needs when retirement comes around. Right? This one is really important because we have to see what when it comes to insurance. We’re talking about life insurance, we’re talking about health insurance. We’re talking about long term care planning and insurance as well. So it’s really good time before you retire to have that discussion to say what are our needs moving into retirement? When it comes to life insurance? Life insurance is one of those questions that we’re simply asking the question, do we need it or do we not need it? And if we go through sort of this scenario, we say okay, God forbid one of us passes away. What’s the other spouse going to be left with? And we add up the pensions, survivor benefits and TSP distributions, and all of that looks good, then great. We don’t need as an example. And if the answer to that is well, we don’t need it, but we still want it. Okay, that’s another discussion. We need to have a really clear understanding of our life insurance fees, as well as planning for long term care. As we’re working, we’re young and we’re healthy and we’re working throughout our career. Life just catches up and we start to not really take time to think about the future when we’re in retirement. And what our health will look. Like long term care planning is another one that we really have to stress and have a plan for it doesn’t mean we need insurance per say. We seem to have a plan because as a federal employee, you have access to the Fed, long term care plan which temporarily is suspended I know that but at some point, you’ll hopefully be able to have access to it again, can be a useful tool. We want to make sure that you have full knowledge of all the insurance that you have available to you. Same thing for you know your  health insurance, your FEHB, making sure we have a plan for retirement and eventually once you’re 65 age looking at Medicare, we’ve done lots of videos podcast talking about signing up for Medicare Part A and B in a lot of scenarios and there’s a cost to waiting if you do not follow directions and don’t sign up at 65 for Medicare. And what we would want to do is avoid those costly mistakes simply by just understanding those rules a little bit better when it comes to Medicare.

 

Micah: Yeah, 100% Correct. Really understand what these rules are. Now, keep in mind, whenever we’re talking, I like to say risk management, right? It’s my fancy way of saying insurance. You need to have a plan for all of these things. That doesn’t always mean you have to have insurance is the solution. Right? We got to have a plan. God forbid a spouse dies. What’s the plan? Right? Do we have beneficiaries up to date? What do we have in place? You know what, what if it’s a spouse that normally pays the bills? Are we talking with another couple today? And one of the things is is one of their friends husbands passed away? He did all of the finances in there didn’t, have anything documented whatsoever. Now the wife’s trying to pick up the pieces she didn’t know where the credit cards are. Right? She doesn’t even know this information that’s out there. These are real life things. So we gotta have a plan for these. We’re not just saying get insurance is not the point. What’s the plan when a spouse passes away? What’s the plan when you have a medical crisis? What’s the plan if you need long term care? What are you going to do? Insurance is a tool that can be used to help or not help, but I don’t even care about that in the discussion. We always have the discussion. What’s the plan? Long term care? Are you going to stay at home? Who’s gonna take care of you? I like to pick up my parents on this one, right? My dad you know, he’s talking about well, I’m not moving into a home I’m gonna stay here and bla bla bla bla, it gets real emotional about it right now. He’s a financial adviser. He’s a smart guy. He taught me everything I know. He’s an amazing man who was having this conversation. And one of the things that I talk about with him is… You want to stay at home your 220 pounds and mom’s 150 pounds. How is she going to pick you up and put you in bed? Right? So you get this whole plan about staying at home? How is that going to happen? Right so so we need an option that’s going to be there have a plan that’s going to be in place then we can have discussions about insurance at a later time. So that would be something that’s really really important, etc. And then Christian, I’m gonna say kind of transition or get off my soapbox of the death and dying for just a minute. The other part thing is working in retirement. I’m going to see this as another one that some mistakes can easily happen around working in retirement. One mistake that sometimes happen is we have one spouse that pulls the other one into retirement before they’re ready. And this is definitely a mental aspect of things to be thinking about right? About saying it’s not just retirement is not just a financial issue. It is a mental issue. Am I ready? And guess what some people are still giving back. They’re still at a point in their career that they’re not ready to stop regardless of the finances. So we got to have this conversation about how that’s going to work. Sometimes you got one spouse that’s retired because they’re older really wants the other one too. Okay, great. That spouse is going to retire but they’re not done yet. We need part time work for them. They need to be engaged in a social project, right? They need something to do we can’t just stop so when you got the emotional side of it, but Christian there’s one other financial things about working part time too, right.

 

Christian: Right. So as you know, for our listeners there, there’s the first pension and then there’s also a component of it the FERS supplement or the Social Security supplement, different names for that same thing. And that benefit goes away that FERS supplement goes away or is phased out rather if you end up working after you’ve separated from service or rather retired and are receiving it. And the threshold for 2023 is I think 21,240 off the top of my head I think that’s the number of your right. So that would say if you make more than 21,240 of earned income, meaning you go and you work another job after retiring that slowly but surely, they’re going to start taking $1 away for every $2 earned past that that number. So we just have to make sure we know that rule if we’re used to earning our first pension plus our first supplement there we go and get another job that that could possibly be reduced depending on if you know how much income you earned from that second job. But the other one is talking about kind of along those same lines. I’ve had recently a conversation with somebody who was going to be a contractor or was offered a contractor position and same kind of situation where they would leave service and receive their first pension, then of course there is supplement, that supplement would go away because they’re a contractor. However, we’ve also seen cases of phase retirements where that phase retirement if we’re not clear on the rules, basically if you’re earning a certain dollar amount from this phase retirement, but then you’re also receiving your pension at the same time, that can get offset and then you end up not really earning all that much more money for doing a phased retirement. So curious your thoughts on those? I’m not sure if I’m a huge fan of the phase retirements if we can avoid it. However, from my perspective, contractor positions could be pretty lucrative.

 

Micah: Yeah, and that’s only looking at it for not saying this negatively. But that’s looking at it from a financial standpoint, right. When we look at the changes, I can’t make a phased retirement work. Now, here’s some reasons that someone might want to do it from emotional standpoint, your agency won’t rehire your position until you leave and you’re like, hey, this is a brain drain, right? I’m going to separate from service then you’re going to hire my replacement. This doesn’t make sense. So I got some people that says you know what, regardless of the finances, I would rather do a phased retirement because it allows my agency to backfill my position and now I can train and mentor that person and move on. That’s the theory, reality doesn’t really happen that often. But I can see that from a concept of things of hanging wanted to make sure that that institutional knowledge wasn’t lost. Okay, that’s a great way for phased retirement. Second way for me is it has deadlines with it, right? So it’s not like I can be on phased retirement for six years. It is you when you start phased retirement. There’s an end to when you were going to be fully retired depending on what your growth agency and OPM setup and all those other things. So one of the nice parts again, from an emotional standpoint, if you have one spouse, it’s like, Hey, I’m retired, I want you to join me. And then the other spouse is like, Hey, I’m not ready yet. Phase retirement actually puts a line in the sand of when they’re going to be stopping working. So sometimes, again, emotional reasons here, but these are real reasons for retirement. There’s those two elements we’ve talked about. There’s the emotional retirement and financial and they both have to be in line for successful retirement.

 

Micah: I love it. Some other things that does really kind of come up as well – Tax Code, not understanding and really applying tax planning to your federal retirement. I know I get to geek out on taxes, forgive me just bear with me just a little bit. But we were even chatting with another client today. And one of the things we’re talking to the client about was taxes. They’ve done a great job and saving money which is fantastic. Absolutely love it. But they even said well my gosh when 73 comes because now RMDs required minimum distributions are at 73 for secure act 2.0. Right, so at 73 there are oh my gosh these RMDs I’m gonna be hitting Medicare limits I guess is RMA, I’m gonna have to pay all this more money etc. I said hey, great news. You’re thinking about it. I love it. You’re already thinking about it. But we have to do something about it now. Kind of their their I don’t want to say their plan but kind of what they were thinking is it was just going to happen to me, right? Because I don’t really need the money. I wasn’t really going to take distributions. I was just going to let my money grow that I have to take these RMDs at 73 which that is an option. That’s generally not something we recommended and Christian. One of the things we’re working through on the numbers was saying hey, maybe for the next couple of years, massively trigger RMA, do huge Roth conversions today in order to pay those taxes and be done but then you’re going to be done with our mind. Now you’re going to be below the threshold. Now the RMDs are going to be what I call punitive. I consider an RMD punitive when it bumps you into a another tax level, whether that’s an additional Medicare tax or a different tax bracket that we weren’t expecting. That’s no punitive. It’s not helping me. So we got to be proactive with these things. And so looking at that 10 year tax projection, how much money am I going to make? Where’s that money going To come from? How am I proactive in my taxes? You know, if you got 30 years left in your career, fantastic. What are you doing today to lower your 30 year tax bill? Not your one year tax bill?

 

Christian: Makes sense.

 

Christian: Absolutely. And coming down to again, the choices when it comes to tax planning, the default is not doing something right. That’s always the default of just do nothing. But that can have a negative impact. And so having the foresight and really understanding the tax laws to say okay, well, we do nothing, here’s where we’ll be, and then eventually we’re gonna have to take out money because of those required minimum distributions. And then… What If, on the flip side, we did some of that about it now, and essentially, that’s the Roth conversions are for our younger listeners who’ve got many years ahead of them. Just looking at the taxes today and asking the question, do we think taxes are going to be lower today than what they will be in the future? Right Do we think that if we’re younger, and we’re working, do you think our income in the future is gonna be higher than it is right now than what it is right now? So maybe it makes sense to be intentionally paying taxes at a lower rate than what we think there’ll be in the future? 

 

Micah: Absolutely. Well, Christian, this podcast is all about action items for our listeners. So really important that we don’t just have a great time, right? That’s hugely important. I enjoy this. It’s worth sharing some great information, I think, but I want you to take action on this that’s going to improve your life. So I’m going to kick it off with the first one, which is know your retirement rules. I’m not asking you to know every single rule inside of the federal retirement book, right. That’s Christian and I shot we got to know and understand these things pretty well. But you need to know what the rules are for your retirement. What time counts what doesn’t count? How’s your high three comes to mix? Can you really retire? What do you think you can, right? And I’m not looking for watercooler information? I’m looking for information from OPM that says yes, these are the rules. So that’s really important.

 

Christian: Yeah, love it. Second action item. Give us five stars. Share this with a friend. We have really ambitious goals like we’ve shared. We want to impact a million federal employees to help over a million federal employees retire so please share this with a friend.

 

Micah: Yeah, get this message out. I love it. Third action item that we’re going to have for you this week is know your cash flow. Understand your cash flow. What are you waiting for your good cash flow plan? So often I talk with people which is fantastic. I love talking with federal employees. It’s so much fun. But one of the things this is Micah I’ve heard him talk about this for a while and I just haven’t done it. Why not? Cash flow is the heartbeat of retirement. Cash flow is the way that we know if we’re going to have successful retirement do the things we want to do or not. And that starts with knowing our cash flow today. I know it’s not super like sexy and cool. And oh my gosh, I can’t wait to get cash flow planning. I did it. But it’s key. It’s essential is one of the things we need to do. And you don’t have to make it super complicated. I’m not talking about a budget with 72 different line items and quickens and downloads and all these fun things. I’m talking about a simple cash flow plan. If you don’t know what that is, jump on our website plan your  federal retirement.com. Check out this actual plan and we walk you through step by step on how it works.

 

Micah: Well, Christian, as always, I enjoyed putting this information together. So thank you so much for joining us and until next time.

 

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