Latest / Federal Retirement Advisors | FedLegacy / TSP Income Gap
Transcript
- William Smith: What's going on, everybody? I hope everybody's doing well tonight. Today we're gonna talk about the income gap when it comes to your TSP, right? When you come to your TSP and your overall federal retirement. So a federal employee, the thing that makes you different that we talk about all the time is the fact that you have your pension, you have your social security, and then you have your TSP. Now, again, when you're watching the news and you're watching CNBC, you're talking to your friends and your neighbors, a lot of times all they have Is their 401k and their social security. That's it. So they rely a lot on their 401k to spend the rest of their life. So we're not gonna spend a whole lot of time on that, but I'll I just want to set the context as we go into the night's topic of the TSP income gap. And so when we talk about the TSP income gap, the thing we're gonna talk about tonight, I'm gonna help you understand why Fed Legacy, we have a system that we built for Fed for federal employees that we've built over our over the 18 years we've been in existence. And we've seen it work year over year with our clients that are now retired, right? And so we want to make sure we give you that insight and help you understand why. And so a good place to start when it comes to understanding our why and why we set the the structure of the plans that we do is this month. So if you've been watching the news, you see the back and forth with the war and all those different types of things. And so if you look at your TSP this month, the month of July. Four of the TSP, four of the five TSP funds have had a negative return this year. The F fund is at a negative seven per net point seven. The C fund is at a negative point nine. The S fund is at a negative three and a half. And the I fund is at a negative negative three point two. And today was one of the the worst days in the market of the month, right? So so when you when you have those down months, it becomes a problem when you're taking income. From your TSP. And so what I want to show you all today is why that matters. So I'm going to share my screen and walk through a a presentation that I created that just shows you an example of what this could look like when it comes to your retirement. Now, when we meet with folks, what we do is we put you into our retirement analyzer system, our retirement analyzer system puts your first pension numbers in there. It puts your social security numbers in there, not social security number like the actual one, but social security income numbers. We don't put that stuff in there, but we put your social security income numbers in there, you, your spouse. Then we also put your TSP numbers, and then that calculates what the inflation risk is, the tax risk, and all that. But the thing we're going to focus on tonight is just the income gap and how we address it at Fed Legacy and why it matters and why it's different. Than what you might see from ⁓ your friends and family who are non-federal employees. So, for this example, I'm gonna show you an example of somebody that has 500,000 in their overall TSP. Now remind you, I'm not gonna talk about pension, I'm not gonna talk about Social Security today. I'm not even gonna talk about taxes. I'm just gonna talk about how to fill an income gap and how we address it and how you can address it yourself when you think about your TSP. So, when it comes to that, what we like to do is we like to look at what is the income gap that Person sitting in front of us needs. So, this example, we have a person that has $500,000 in their TSP. They need it, they have a $1,200 income gap. They need that $1,200 to last them for 15 years. Okay. What we like to do is we like to put it in different buckets. We have our protective bucket that we like to use for income, and we talk about our financial house. If you've been in any of our webinars, we talk about our financial house, how you have your foundation, you have your where where that's where the protected money goes in this case. Protected money would be this 200,000 because you need this for income. You need it, you can need it for long-term care. You can need it for what you want to leave to your spouse, a whole host of reasons. But that's for that 200,000. We figure out what that amount is, we put that amount in the protected bucket. In this case, we have the 300,000, we put that in the growth bucket. But we like to have a growth bucket because a growth bucket is important because you definitely want to be outpacing inflation. As a federal employer, you could take on more risk because all of your 401k or TSP. Is not used for income like most people. So again, we have our protective bucket we use for income. We have our growth bucket we allow to sit. So out of 500,000, we put 200,000 in in the protected bucket, because that's what we're going to draw on for income. We have the growth bucket at 300,000. So let's look at the funds, right? If you leave all the money in the TSP, you have five places outside of we're not gonna go into the lifecycle funds. We're just gonna talk about the five individual funds. We can you can put it into five different funds. Most people when they have their money in the when they have their money in the TSP, they go and they move that protected money to the G fund. Now the G fund is is is is a US Treasury bond account. So based on how US Treasury bonds are doing, that's how the G fund's gonna perform. Now the G fund over the last 10 years has returned 2.8. We always talk about how inflation is higher than that. So with the TSP, with the G fund, you're you have you can have money there, but you're not you're not losing anything. But you're losing buying power. So that's one option. You have the G fund. Then you have the F fund. Now, the F fund used to be was it's technically supposed to be a protected account, but as we've seen over the last couple of years, the F fund can lose money. So that's not necessarily a place where you can go now to protect principal. It just can't happen. Then we have the C, S and I, C obviously S P, S mid small, mid sized companies, I international. And so the C S and I is what we would consider the growth bucket accounts, and that's where we would put your growth money in that case. But in the and the C the G and F technically are what we would call our protected accounts, okay? So when we look at this, as I mentioned before, as we see July, July, you have your F, your F, C, S, and I are all negative. Your G fund is the only one that's positive. And if we go back and look at over the last four years, in 2022, the G fund did 2.9%. But to see the F fund in 2022 lost 12%. A lot of folks had protected money in the F fund and that year lost a lot of money. And then you saw the C fund lost 18%, the S fund lost 26%. I lost 13. Why is that so important? Because if you're filling the income gap, And you're taking 12, let's say in this case, $1,200 for a month from that bucket and the amount and the and and the account is negative in note that year, you're now selling shares in a in an in a in an account that's going negative, which is never a good thing. Because every time you share, every time you sell, you're reducing the the you're reducing the obviously the the value of your account, but you're also selling shares that you bought at a higher price, which can be problematic. Especially if you're already retired because you're not buying any new shares. And so, and so when you look at this and you see these down years, now you see these positive years in the year in the years after that, which is great. And so what we always tell folks is look, the growth account CSNI, great to have for long-term growth, the money that you don't need. Not so good to have for money that you're drawing on on a monthly basis. Because you can't afford those ups and downs, but you want the long-term growth, as you can see here. So those in 2023, the C fund bounced back, you know, bounced back again in 2024, 2025, bounced back even again to more. And in 2026, not doing as great, but you can see the positive returns overall, which you don't want to miss out on. The mistake that people make when it comes to filling that income gap is most people go all G. And they say, okay, I want to be 100% protected. I'm moving all my money to the G because you're drawing income and you lose out to inflation. Or folks draw and the money's in the C S and I and you're experiencing those dips. And when you're experiencing those dips and you're having income coming out, it can get quite scary for folk. And then they retreat to the G. My goal for you all on this call is to make sure that no matter what's going on in the market. you have balance. You have your protected bucket and you have your growth bucket. And so when we look at this, if you had 300,000 and you left it alone since January 2022, right? That 300,000 that we talked about putting aside, by now, that 300,000, if you left it in the G fund, I mean in the C fund, will be at 498,000. Now mind you, this is not including you putting in more money, but it's not withdrawing anything. It's allowing the money to sit and grow and weather the weather the storm. When you're not touching money for growth purpose, I mean for income purposes, oftentimes you can just have a set it and forget it. And that's something that we preach heavy. So C fund, that 300,000 will be at 498. I fund it'll be 476. If it was in the S fund, it would be at 412. Okay. Now mind you, these are historical returns. It is not ⁓ it does not mean what it could be in the future, right? The next three years could be negative, the next three years could be positive. We don't know. This is just talking about the historical return. That's all I'm talking about. Historical returns, that's all we can ever predict, is history. We have to make decisions based on history. And so, well, you can make decisions based on history, but this is how we talk about. And so if you if you put 300,000 in January 2022 and allow it to sit, these are the numbers that it will be. And that's including that negative 18% that happened in G the C fund in 2022 and that negative 2026 in the S. And negative 13. Now, what we want to do is we want to let this money sit so it can continue to grow well into the future. Now, if we look at what it has done historically over a 10-year period and we let this go out even further for the full 15 years that we talked about at the beginning, that 300,000 and the L and the C fund, 1.4 million. With the off the S fund return, 1 million 92,000. The I fund average return. 8.27, I mean 827,000. These are big numbers over a 15-year period of just letting money sit. And so when we see, when we see clients and we're like, look, just let your growth bucket grow, these are some of the results that we've seen them have over the years in retirement. And the only way they're able to do this is because they have peace of mind on, all right, I have this growth money. I'm not touching it anyway, I'm gonna let it sit. The news could come and they could talk about all these things. I'm not changing it. I'm projecting it out for the long haul. This is what creates wealth. When you have money doing, when you have different buckets of money doing what the job of what the different bucket of money is supposed to do. Again, growth bucket, protected bucket. Now, going back to that $1,200 in income. One of the things that you can do, and we talk about this, there's different IRAs that you can use. And I won't go into specifics on that because those type of IRAs change often, you know? And so you want to make sure you're getting the right ones. And so I'm just looking at one that we have ⁓ on the conservative side. It does better now. But here's a protected IRA that had an 8% cap on it. So you get around 8% average on this account in that in this account, right? Let's so let's just put it at that. That's a protected bucket. And it's a place that we talk about helping people put money when it comes to when it comes to drawing out drawing down income. So that's an option, an outside IRA that gives you that's a protected bucket, but gives you a higher return than what you're getting with the G and then the F. And so if you look at this example, again, the $200,000, taking out that $1,200 a month, what that looks at at the end of the 15 years, if you were to take that from a protected book IRA, one of the ones that we offer, at the end of that 12-year period, I mean 15-year period, you're still left with $124,000 in the account. What that means is we could probably take more, we can definitely take more income than the $1,200, $1,200 a month, right? Because we have some cushion there. But it also lets we know we're not draining out the account either. Another thing with the G fund, if you would have put that tame D fund and put it, take $1,200 a month, at the end of that 12 to 15-year period, you're left with $74,000 based on the average return of the G fund during the last four years. And if you look at the F fund. that money would have been gone after year 14. So those are just the numbers on the historical side. And so why does that matter? It matters because when you're going, when you're, when you're, when you're putting money into a protected account, you want to make sure that you're doing the right math. So you know exactly how much or how little you can you can take. And so in this case, this means that we could probably get more than $1200 a month in income. That means, okay, well maybe we can bump it up to $1,500. Because we have some room. And so these are the kind of conversations that we like to have. The key is, and the reason why I don't like to take up all the room at the beginning is because you might be in a situation where right now you need 12, but in the future you need 15. So we like to give it some runway when we're having this conversation. But the more runway we have, the more flexibility we have. But this is the bucket, the 200,000 that we started with in the protected bucket that we play around with when it comes to income, because that's what you're, that's how we fill that income gap. When we go back here, this 300,000, that is sitting in the background. That is sitting in the background, out of sight, out of mind, growing, while this is doing the heavy lifting in the beginning. And so this is a difference that not it's hard for people that are non-federal employees for the most part to do unless they have a lot of money in their 401k. But as a federal employee, you're able to do this type of stuff because. You have a pension and you have Social Security and your pension's pretty large. And so these are the type of strategies that you want to keep in mind. The mistake that people make is they try to put all of the money going back to the 500,000 into one big bucket. And what most people do is as soon as that, as soon as that 20, that 2020, ⁓ that 2022 comes up and the markets are negative 12% and such, they move their money right back to the G Fund. Which makes sense because you're like, all right, I'm drawing money off this thing. I saw my account was at 500,000. Now it's at 400,000. I'm getting out of here. Boom, move to the G fund. Don't know when to take it back out. It stays there. And then we have a problem. But if you have it set up this way, like we talk about in our sessions, and it's this is just one of many strategies. When you have it set up like this, you panic because nobody likes to see their screen lose money on the screen. But then you understand, well, it's not that big a deal because I have time. And then what you do, we go through the retirement analyzer, we remind you the historical numbers, remind you of the big picture. And it's like, ⁓ okay, I can breathe a little bit because the money that's hitting my bank account every month is not affected by what's happening in the market. But what is impacted is your long-term growth that you are able to continue to experience. And ultimately fill a big, big, big ⁓ wealth gap for you and your family and allows you to do the different types of tax planning, leaving things for your children, ⁓ you know, investing in things you want to do. This just allows you to have peace of mind to live your life without stress. I tell the clients all the time who come to me before they have a proper setup and they're like, Well, I'm not sure. Like this market is up and down. I'm really not sure what I'm gonna do here. And that type of stress you can alleviate to a certain degree by having the right type of structure. And that is what helps you close that income gap tremendously. And so again, here's an example of what that drawdown looks like. You know, it's just as you as you draw down, your drawdown is is is is it is based on the amount of years, the amount of return that you're getting in the accounts. One of things I love to see is when we do these mock illustrations and income models for people is when we show when we see people to say, wow, I really can live off the interest of the money that I've built. And this is the reason why I always tell folks: while you're working, you want to make sure you're putting as much into your TSP as possible. Because the more money you have there, the more options you have. Now, I don't want you to feel bad if you're on here and you don't have a whole lot in your TSP. There's things you could do, but. If you don't have a whole lot of if you if you not if you don't have a lot of your TSP and you're not close to retirement, start putting as much as you can there. Right. Just just make that a focus. And the way the the way to do it is at minimum increase your TSP by 1% per year. If you can, do two. The years you might get a five percent raise or four percent, at least do two. Because the more money you have in retirement, the the the more options you have. Right? We've run into class 600,000 at TSP is like, all Let's just put 200,000 in the protective bucket or 300,000, let 300,000 grow. Gives them a bunch of income. And they just let their money grow. And it makes a huge, huge difference. And so I just wanted to to share that with you all today. ⁓ because that's a that's a really, really important thing when it comes to filling that income gap.