Latest / Federal Retirement Advisors | FedLegacy / The Retirement Red Zone: Protecting Your TSP in the Last 5 Years
Transcript
- William Smith: Today I was talking to a lady. she she was a widow. And and well, she is a widow. And she was just talking to me about her her retirement benefits and how she was planned on using the retirement benefits in retirement. because you know, her her husband was a federal employee. She raised her six kids, or is it raised and raising her six kids, but a lot of them out of house. But she she she she didn't have a lot of income when she was working, but her husband saved up a lot of money. And now she's in a place where she has to use the federal benefits. And one of the conversations that we had today was around how she was going to use her TSP. And so she was saying she just had a grandchild, and her main thing was I want to be able to use my T to use the TSP so that I can that I can have income for the rest of my life. Now, that's not the story for most federal employees. Right. Most federal employees, most of you all are sitting here. You probably are the federal employee. You're gonna have a pension. She didn't have a pension. She had the money that was left over from the survivor benefit. But this could be the story that impacts someone you love, right? And because she had a plan she had a plan in place, we were able we we're beginning to put the pieces in place. And so the reason why I brought this up is because today we're talking about the the red zone when it comes to how you protect your TSP or some things you need to think about when it comes to protecting your TSP, when it comes to your retirement. Now, a lot of you all who have been coming to our webinars for a long time, you know I'm a big proponent of making sure you invest your TSP aggressively while you're working. So that as you as you as your TSP grows, I mean as a as the market goes up, your TSP goes up. Right. And so most of the people that we come across that are TSP millionaires and things like that, they started putting their money in the CSNI when they first got into government. They left it alone. 30 years now, 30 years have gone by. Now they have, you know, well over a million dollars in their TSP or very close to it. But what we have to talk about is how that strategy shifts once you get into retirement. And so today, today we're going to talk about that. And one of the things that I've been selling, telling people a lot of folks, the way the market has been going this last 10-year run or so is not normal. And at some point, this this similar something similar to happened like to this in the 90s and in the early 2000s. There was three hard years of the market. And a lot of people are talking about, especially like today where where you saw a lot of treasury bonds bonds bonds got got got liquidated. You know, those are signs of things changing. And so this 10-year run where people are like, well, I'll just leave it in the market. I don't care. You know, we've been spoiled. The market is way overvalued when you talk to a lot of experts. This doesn't make sense why the market's so high. Now, AI's a lot of AI stocks are driving that. And if some of those valuations begin to change. You can see a significant change because a lot of companies that were doing well for years are not doing well anymore. Like you saw Nike drop out of the S P one hundred. A lot of companies are beginning to start to feel the impact of these elevated interest rates, unemployment overseas expanding, all these different things, right? G gas prices higher, instability in politics, all these different things are beginning to impact the market. If it wasn't for these AI stocks, the market would have been Has some level of correction. So the point of this is at some point, especially as you get close to retirement, you want to start taking, you want to start taking some of that risk off of your TSP. Now, the way we strategize this with our clients is this. We talk a lot about the financial house. The financial house is it's three elements to any retirement plan that you should have. And we we map it out just like you do your house, right? When you have when you have you have your house and you're building your house, the most important part of your house is that foundation. The weaker the foundation, the weaker the house. You could have the most expensive material on top of sand, and guess what? It's gonna, it's gonna, it's gonna, it's gonna just it's just gonna nosedive, right? You can have a crack in your foundation, and you can have major, major structural problems that could lead to you have to having to rebuild everything. So when it comes to your federal retirement, You want to make sure you have a strong foundation. Now, what is that foundation? That foundation is money that's protected, protected from the market going up and down. And the reason why that's important is because let's say we had a market correction and you're in the middle of taking income that you need, that you absolutely need. The market corrects market being down impacts how much you can take or how long that money's gonna last you. And so and the and the market having a nosedive while you're drawing income, it's almost too late to try to make a trend trade make make a change because at that point you don't win the market's gonna bounce back. You've already lost the money because of a sudden drop. It can it can be a a game of catch up, and I'm gonna show you that in a second. And so you want to make sure that money that you're using for protection is in a is in a place where. Is not disturbed by the markets. And no no matter what happens, that money is going to be there. And so things that you typically want to put there, long-term care, income that you meet that might that you might need for you or your spouse, money that you want to leave your kids if it's a specific amount of money, you want all that money in that protected bucket because those are the things that are gonna emotionally make harm you emotionally, because you're taking care of it in retirement if something would happen. So you wanna you wanna make sure that's already set aside. The next piece is the walls. The walls, insulation. You want to be insulated, like your walls in your house. you want to be insulated from the things that can affect you from the outside. And so the two things that could affect you most from the outside in retirement that you can't control are inflation and taxes. Inflation and taxes. And so when we talk about inflation, we know like inflation has been up because of the war. Inflation has gone up during COVID. All those things we could not have predicted. And so when inflation goes up, things cost more. If if your money's not increasing at a high enough pace, you just have this slow, slow leak that before you know it, you're like, what the heck happened to my savings? And we're seeing that a lot with older, older, older folks that are coming to us now who healthcare costs are impacting them or their spouses of federal employees who've passed and they're living off the survivor benefit. And it's tough, right? So we have we have those we have those conversations. And so You want to make sure that your money is always outpacing inflation. And that's the problem with the G Fund. It's safe, but it doesn't oftentimes outpace inflation. And that's why we oftentimes when we meet with folks, we recommend different IRAs to take care of that protected part, you know, because you're gonna get more money. You're gonna have that same protection, but you're gonna get more money per you know in in interest every year than you will at the G fund in that three to four percent range on the high end, but the last 10 years has been around two. So you want to outpace inflation. That's something we can't control, but we can, we can plan for it. And so that's what we do with the walls. The next piece is taxes. Now, taxes, we all to we talk about this all time. You know, IRS is a silent business partner in your TSP account right now. How much of theirs, how much of it is theirs versus how much is yours is is is whoever acts first. TSP can can change tax laws and all of a sudden now, boom. You know, that a certain amount of that money is theirs. You can also do certain things like put more money in your Roth IRA or Roth TSP and and and move money to those accounts. You could do that and you can get ahead of it. Or you could wait and let the IRS decide what they want to do with it. That's honestly how it works. You have one or two choices. And so you want to make sure you have a strategy there. And the last piece we have, we called it the roof. The roof is the part of the house that takes on the most risk. That is your C fund. That is your S fund. That is your I fund. Now, how much do you have there? All depends on what your goals are. But we want to make sure that you have all three elements of that in your retirement plan. Because if you have all three elements of that, no matter what the market does, you'll have peace of mind because we've planned for all three aspects. And so when you can, when you when you when we get a phone call and somebody was like in 2022 when the market was down 18%, we got phone calls, but then The return was you're okay. We planned for this. And exactly how we had had scheduled up to almost, I mean, technically, it worked out. Like the market bounced back a couple years later, nobody had to panic because they had money set aside in the protective bucket. We had planned for it. Now, those that didn't, they panicked and we helped them adjust. But you want to be in a position that when no matter what the market does, you have control over the situation because you just don't want to be making mistakes. So We're supposed be talking about the red zone today. So what I wanna share is I'm gonna share my screen. Here's a calculator that illustrates what money looks like at different if it if you were to take it out at different points. And this is why it's very, very, very important to have balance in your retirement account. So what this what this calculator does, it has the G fund returns going back to 1988, has the C fund returns back going back to 1988. Okay. And we talk about a concept called the sequence of returns. The sequence of returns means. What are the what are returns in the 10 year period in which you take the money? Now, we all know the last 10 years, the market has been very, very good. And so anybody that has had to take money out of their out of their TSP in the last 10 years has been retired. They you probably listen to them talk, they're like, Yeah, I took 40,000. I had a client last week. She said she took 40,000 out of her TSP in, I think it was, she said she took it out in in December. And now her TSP has gained back 38,000 of that, right? She's retired. That's that's great for her, right? Because she has her money in the she has we have our money invested aggressively in the C because we had some money we moved to an IRA. That's awesome. Now, is that gonna happen for every year? Absolutely not. And so what I want to show you right now is what it looks like at different in in different time periods for people that are retired. So let's this current right here, this current tab. Is if what if you retired in 2000, right? In if the year 2000, if you would have retired based on the next 10 years of how the market ran, what would happen? And so let's say you retired, you have 500,000 in your TSP, is year 2000. And we don't know the next 10 years could be similar to the year 2000. So let's say you have 500,000 in your TSP, you got 75% in the C fund, 25% in the G fund. That's a reasonable mix. And you needed 3,000 a month from your TSP just to be okay. Or you or you passed and your spouse needed 3,000 a month from the TSP. How long will it last? Will it have last lasted in if the 10 year period was similar to the to the year 2000? Right. So here we go. We got 75% G, 25% in the means 25% G, 75% C, reasonable adjustment. 3,000 a month, inflation 4%. Start taking it at age 60. And here we go. At that time period, the average return was 8.222% over that time period. Decent age of return. 2028 was 2008 was in that. So negative 26% return on that account during that time. That account, if you would have started in 2020, I mean 2000, taking 3,000 a month, would have ran out of money in 18 years. By age twenty seventy one, that money would have been ran out, have run out. Okay. That's a really important thing to know because people have five hundred thousand now, think is okay, three thousand a month, not a big deal. Seventy five percent in the C, twenty five percent in the G, not a big deal. Let's say that person retired in twenty twenty two. That person would retire in twenty twenty two. Look at this. That money would last it all the way to age eighty eight. Same, same, you know, same scenario, it would have lasted to to to a person who was eighty eight years old. If the person retired in 1988, that money would have lasted 30 years and still have money left over. If that person would have retired in 2008, it would be 75 years old. And we could pick a year, right? Let's say, let's say that person retired in 2012. 2012, it would be 1.6 million after 30 years. If that person would have retired in 2015, it'd be 202,000 in 30 years. What am I saying? You really can't predict it. And the big part about it is Is the fact that the C fund in those volatile years, even though you're doing well, those years where it runs negative consecutive years in a row can really alter your retirement. Why is that? Okay, let's say the market let's say the market reduces 20%, for example, in a year, 20% in a year. And I moved this so the numbers kind of changed a little bit, but you can go 50-50 approach here. But but why is that a big deal? When you're when when when the market drops 20%, it doesn't take a 20% return to get the money back. Right? Because if you have a million, you lose 20%. Now you're down to 800,000. If you add 20% to 800,000, that's not a million. You see what I'm saying? And and it fluctuates back and forth. It doesn't just automatically jump back to 20%. It takes a while. And every year, every month, you're drawing income, drawing income, which is selling shares, selling shares, selling shares. And this is how people get caught up. When you're overly aggressive. Cause right now I'm telling you, a lot of you all are sleeping at the wheel because in the year 'cause a lot of you all have been investing seriously in your TSP from and w we could even let me actually I'mma stop sharing real quick. I'ma show Most folks, most of you all have been investing in your TSP. And Here we go. Most of you all have invested in your TSP and you're used to returns like this. And this is the this is the TSP over the last 10 years. Look at the last 10 years, 2026, the 20, 20, this is and this is the C and C and S, okay. 2020, 2016 to 2026, the C fund is done. 12%, 21%, negative 4%, 31, 18, 26. Had this one net bad year. But then you see these double digit returns and people are thinking this is normal. It's not. And so the reason why you have to have some level of balance is because if you get caught off guard where the market is like two thousand, where the market returned negative three years in a row. So let me actually share that again, actually. Where the market returns negative three years in a row, if we go back to 2020, you see this? Negative nine, negative 11, negative 22. This hurt a lot of people during that time frame. 2008, market lost 36%. You imagine you're taking long-term care, you need support. The market goes down like this. That's devastating to your retirement plan. And so while we talk about the red zone being those couple of years before retirement and making sure you reallocate, it's for those reasons. Because if you get caught sleep at the wheel, like a lot of people did in the 90s, a lot of people did in the early 2000s, a lot of people did around 2008, it could be very stressful because money that you thought was going to last the rest of your life, all of a sudden now is is is is eating you up because of something that's outside of your control. Inflation's high, rate markets going down, could cause a financial storm that just is devastating. So I say that to say make sure you have that balance. This is why we did build out the financial house for our clients, because we don't want you to have that level of chaos in the time that you need it the most.