Latest / Federal Retirement Advisors | FedLegacy / Building Your Income Engine
Transcript
- William Smith: If you're a federal employee, you probably heard this term multiple times. The three legged stool. And if you haven't, we're to talk about it tonight because the three legged stool and understanding how to use those three legs is super important. If you take, if you have a three legged stool, you knock one leg off, it becomes problematic. And so it's the same way in retirement when it comes to your federal benefits. And so I had a client named her name is, well, I have a client, name is Carla for the purposes of this. webinar. And so when I met Carla, Carla was 20 years into the government. She retiring in about four years and we going through our numbers. ⁓ We went the strategic plan that we put through the finish line process. We went through the whole thing. And unbeknownst to as Carla was going through a divorce, Carla, when she turned just accepted her social security. She ⁓ just took the social She didn't. She didn't ask me should she do it, should she not. She was still working for ⁓ HHS at the time, took her social security. And so, she thought that was a good thing. She was just, she was super happy. She said, all right, I'm getting this extra money. It's helping me with the divorce, which it probably was, you know, ⁓ ⁓ and she, and she was happy about it. Then we fast forward to two and a half years later when Carla's retiring and she's forced to retire because everything that was going on with Doge and things like that. And as we're going through her numbers, now mind you, only at that time, she only had 23 years of retirement. I 23 years in the government. We're looking at her pension numbers, we're looking at her TSP, we're looking at her social security. Now mind you, her social security, she already took, but her pension had dropped down. Now, I her income had dropped down because her pension had dropped down. And so now she has the social security that she took out early. Her pension is now lowered. which once felt good to her receiving every month, because it looked like it's extra income, extra 2000 a month in income, now is showing a deficit. And so as we had the conversation, she was like, well, I guess I shouldn't have took that Social Security early on. I was like, look, no judgment. We're not going to judge you here, nothing like that. But no. And we ended up having to, again, adjust the three-legged stool in her situation. because she took the social security earlier. So now she had to take more money out of her TSP. And so the reason why we're talking about this tonight is because I want you to understand exactly how to run your income engine. That's what we call it a Fed legacy. We call it your income engine, because that's what it is. The money you're making now as you're working is going to fuel your retirement for the rest of your life. Because here's the deal. Once you retire, there's no new money. There's no new money going into your TSP. Now your social security, your pension, that's money you've already invested, but there's no new money. And so now what you have to do is you have to take the money that you've earned and now make that work for the rest of your life. And so we call it the engine because we want to make sure that when you do it, you do it right so that when you retire, you can have peace of mind. And something we started Fed Legacy with this motto, right? And when I was talking to, and I was getting the company started, I said, you know, ultimately, What is the vision that I have for the people that I sit across? And for years, as I sat across from people and the thing that I said, the thing that came to me was I want people to retire time and with confidence. And by on time, what I mean by that is how many people have you seen work and work and work as soon as they retire, ⁓ either pass away or they get sick because they're older. Right? Well, how many people have you seen that just are in the office? You see it. They're older. It's tougher than to get to work every day. You know, they should have retired five years ago, but they just didn't have a plan. So my thing is I want you to retire on time, on time, at the right time. When do you want to go? And with confidence, you're not looking back. You're not, you're not afraid of if you ever run out of money. You're not afraid of what happens if your spouse gets sick or if you get sick. You're not afraid of any of that stuff. You're not afraid of. the RMDs that are coming your way because you have to pay RMDs once you reach your early seventies. I say early seventies because it's different for everybody based on the year you're born. You're not afraid of that stuff. You're not afraid of what happens if the stock market goes down. We want you to be able to retire on time with confidence. So tonight we're going to talk about the three-legged stool and how that impacts your income as a federal employee, you've probably seen this before. They call it the three legged stool. The three legged stool again is your first pension. It's your first pension, which is made above your high three salary and amount of years you work. This is what makes you very different from the private sector. Most private sector employees, especially in newer jobs, do not have a pension. This is what makes you a This makes the big difference. when watching the news or you're talking to your friends and they're giving you retirement advice, take it with a grain of salt because your retirement is way different than theirs. And the way you plan is different than theirs. ⁓ So you want to make sure understand you having the first pension, it makes a big deal, makes a big difference when it comes to you and your retirement plan, especially when it comes to taxes and things like that. The second leg of the stool is social security. Third leg of the stool is your TSP. ⁓ When we go through it, thing you want to, the misconception that most people think is when you retire, you automatically take your pension, you automatically take your social security and then TSP fills the rest. And it just, it just goes like that. It doesn't necessarily have to have to go that way. You want to make sure you have a strategy in place that benefits you in the long run. For example, some people that have a lot of money in their TSP, like for example, I was talking to a client the other day as a married couple, both of them are federal employees. They both have a bunch of money in their TSP. Okay. But they also have a lot of money in their Roth TSP. We've been working with them for like seven years now, filling up that Roth TSP bucket. So they have a bunch of money in their Roth TSP. They both are federal employees, so their pensions are already high. And the question they asked me is they both have retired at 63. They're saying, hey, should we take social security right now? And we looked at it from a tax perspective and we're like, okay, in your situation, no, because you have a bunch of money in your Roth IRA, your Roth TSP, that you can fill the income gap. and delay your social security. And then we could do different things like Roth convergence to be able to lower your tax, your tax bill in the future in that situation. It made a ton of sense. If they would have just went with the regular pension social security, TSP, they would have paid a lot more in taxes. Right? So you don't just want to go automatically to that plan, even though it seems like it's the right thing to do. You want to make sure you have a strategy in place when you're dealing with your three legged stool. Right. ⁓ And so four questions you want to ask, what income is guaranteed? Okay. Obviously the income is guaranteed for you all is your first pension. So security also, once you start receiving it, that also is guaranteed. Even though a lot of people are so afraid of social security running out. work with a couple of SESs that are, that are in social security, social security administration, and I always ask it whenever I meet with them, I'm like, how are we looking on that, on that, on that pot of money that we, that we, that I, that I need to have when I retire. And they're like, no, you're good, you know? And so I just wanted to spread it. So social security, social security. is definitely guaranteed for sure, right? But then you're at what income is flexible? Your TSP can be flexible. What income should be delayed, right? Those are the questions you need to be asking. What income gap must be filled? You need to be clear around all those things to make sure you're maximizing your income engine. And so in Fed Legacy, we like to call the pension the based, right? The reason why we call it the base is because it is the foundation. You know, we talk about our financial house and the foundation, the walls. and the roof, right? I won't go through that right now, but in as far as your federal retirement goes, your pension is the base because that is the thing that when you retire is going to be there. And if you retire above 62, you're going to get cost of living increases every year based on the inflation report that comes out every year. You're going to get cost of living increases on that. ⁓ And so your base. That's always going to be there. That's always going to be increasing. Right. So that's the base. Then we look at your TSP. TSP is the bridge. Now you could take TSP income from the TSP if you will need to, you don't have to. Again, it's case by case, but it's flexible. You could take, like I have a client now, she was taking 3000 a month. This year she told me she wants to take $3,500 a month. No problem, right? ⁓ We had a strategy for that, right? So, but TSP is flexible. As inflation goes up, TSP, ⁓ can be the thing that you feel that gap with. TSP, outside IRAs, anything like that can fill that gap and you have that flexibility. That's why we always talk about making sure you have that financial house set up so that your money is always outpacing inflation. That's why the G fund can be dangerous because the G fund feels safe, but it doesn't outpace inflation. So whenever you need to ⁓ increase ⁓ your income, because you work so long to... to have this retirement where you can have income coming in, you should be able to do it. And so you should be able to have your money in an account that is at the bare minimum, increasing beyond inflation. is outside IRAs and things like that you can do that with. And we can talk about that on our finish line call if you have to book one, but you want to make sure that you're always doing that. Cause that gives you the ultimate flexibility. And so your TSP is there for that. Then social security is the lever. We call it the lever. And the reason why we call it the lever is because when you make that decision to turn on your TSP, it's a big chunk of income. And that can really change the trajectory of your retirement based on when you select it, because it's a big chunk, right? And so you want to make sure when you take it, you take it at the right time. And so when it comes to your pension, when you're sitting down and you're thinking about retirement, it's like, okay, what is my monthly amount? Does it cover your expenses? And so when we're sitting down with clients, we look at... We look at social security and we also, we look at pension and we look at social security too. like, for the most part, we look at them together and we're like, dude, these two, if you were to, if you would have requested them, would they cover your monthly space? Would they cover your monthly expenses? We want to know that. And we aim to make sure that whether is your social, is your pension and your TSP for time period covers it, covers your expenses. Because what we want to be using at the beginning is two of the two of the three. because that gives you the ultimate peace of mind because either we are delaying social security and that benefit is growing or we're not taking from the TSP and that benefit is growing. So we want to make sure that at the bare minimum, pension and pension in social security at least cover your expenses. That's what we look at. That's one of the first things we look at. The next thing we call the TSP, the bridge and the TSP has a bunch of different functions. We've identified five. that we've seen TSP be used cases for TSP. It can cover income gaps. Can cover income gaps. Huge deal. If your income is at, let's say 5,000 a month, but between your pension and let's say even, you know, pension and social security or whatever, and you need it to be at 7,000 a month, TSP can fill that gap. Right? Done right, structured right, TSP can fill that gap. And should. And that's why it's important to plan for retirement early. So you know how you're going to utilize TSP in that case, right? And how much you need to have in TSP, how much you need to reduce your expenses by things like that. So income gaps is the first possible solution that TSP can give you early retirement. Now, last year with Doge and everything like that, there's a lot of people that had to be forced into early retirement. The thing that saved a lot of folk is they had a lot of money in their TSP that saved a lot of people. There's a lot of folks. who retired in their early 50s last year, who had a lot of money in their TSP. And we ran the scenarios that saved them. Unfortunately, we ran into a lot of folks who didn't have a lot of money in their TSP and it was hard. We were like, look, I can't sugarcoat this. Like you really gotta go and try to get another job and a job that pays similar to what you're earning because otherwise I don't know how you're gonna be able to make it. In other cases, TSP can be the catalyst that allows you to retire early. have clients who retire at 57 with a million in their TSP and they're not looking back. Or I have a lady I'm working with right now. She's 55 and now she's married, but she's 55 and her husband's a VA disability, that helps, but she's 55 and she has a bunch of money in her TSP. And because of the amount of money she has in her TSP, the income makes sense for her to be able to retire. Without that, she would not have been able to retire. Again, early retirement becomes an option. Tax planning, the thing that we talk a lot about on these webinars, because it's one thing that could save you hundreds of thousands of dollars in retirement, tax planning. TSP is something we use to help you plan for your taxes for when you grow old and you need long-term care. But also, if when you inherited money for your children, like you want to use TSP for proper taxes. The other one, emergencies. People come to us all the time and they're like, well, think I will, Mrs. Smith, need to buy long-term care policy from you because I know you all sell it. And I always tell them like, well, no, wait up. I don't know if you need it just yet because we want to analyze your TSP because there's no point in you paying out of pocket for something like long-term care when you can structure your TSP in a way that encase an emergency, medical emergency, like a long-term care event for it to take place. you have money set aside that could do that for you. There's no point in paying out of pocket. And eight out of 10 times, that's the best route. And then five is this legacy goal, which we always talk about, making sure you're leaving money to your family. That's why we call ourselves Fed Legacy. And then social security, call it the lever. Do I need it at 62? That's a case by case day, right? Do you need it? Can you delay it? You want to make sure you have those questions answered. And a big one, a big one is the survivor benefit, right? So a lot of times, especially federal employees, if you're a federal employee on this call, and I know most of you are, and I would say nine out of 10 times when I meet them with a husband and a wife, and one of the people on the phone, one of the spouses is, a federal employee, or more often than not, you make more money than your spouse. Right? More often than not, not every time, but not out of attendance. I've seen, and I've done a lot of these, the federal employee is the higher income earner. Because the federal employee is the higher income earner, what ends up happening is when you pass on your spouse, they get your survivor benefit and they get your social security because your social security is typically the higher one. Right. And so that also goes into the decision-making when it comes to, you delay or do you take it early? Depending on how much you have in your TSP. So if you don't have a lot of your TSP and you know, okay, and you don't have life insurance and can't get it, then you know, okay, if I pass on my spouse, have to be diligent. I have to be careful how, when I start my social security, because my spouse is going to inherit my social security. And so I need to run numbers to see. how that works and what that looks like. And so that's a huge one. And then also the last is how does it affect your taxes? Now, social security isn't fully taxed, a large portion of it is taxed. And so you have to look at that when it comes to your tax planning too. Going back to the story of the husband and wife, they both had high federal pensions. They both had a bunch of money in their raw of TSP. we realized, okay, but they still had a lot of money in their traditional TSP too. And so we moved money to a traditional IRA and started doing some tax planning. And it made it easier for them to do that because the income gap that was being filled was filled by the Roth tax-free money. So we delayed the social security because the social security would have been taxed. The Roth money wasn't taxed. And so what we did was we were doing a bunch of Roth rollovers for them. you know, in those years leading up, leading up so that now they're paying way less taxes when they turn, when they start their social security. So all those different strategies work when it comes to filling that income gap. Right. So when it comes to filling your income gap, you want to know what your monthly need is. You want to understand what your pension plus social security is, and then put together a process. And so what we do is we create this sequence and it's what income starts first. We look at that through our retirement analysis. What fills the early years is that the TSP is a social security. And then how can we do tax strategy in that? In that process, that's when we realized, okay, do we start social security or not? Are the TSP withdrawals going to be taxed or not? That's where the raw TSP comes into play. And if you're a federal employee and you have more than five years left in your work career, or even less, if you have more than two years left, you need to be putting money in your raw TSP. because it's going to make a huge difference when you retire. And then what money stays invested? You know, what money stays invested and where and why, right? Is the questions you need to be asking when it comes to your income engine. So the common mistakes, people start social security too early without a reason. They just do it to do it. Taking a bunch of TSP withdrawals without a tax plan or even a growth plan. money too safe. Because keeping money in the G fund, you're getting crushed by inflation. was watching the news today and they were saying the cost of consumer goods is up 6.8%. The G fund is at 4%. The 10 year average on the G fund is at 2%. You're getting killed with inflation. Killed. I had a lady call me today and she was 74, she's retired. And she was saying, Mrs. Smith, there anything I can do about these healthcare costs? Why? Because healthcare is becoming a big problem for her. because the costs have gone up. Now she's civil service, didn't have a bunch of money in her TSP, but because she's civil service, her income is only going up by so much, but the cost of things is going up by so much. You ought to have your TSP. You can grow your money more than the 6 % that the consumer goods report ⁓ reported. She can't, but it's the same thing with people that have that money in the G fund. You don't see losses on your statement ever, but... you're losing to inflation, which is like having a hole in your pocket that you just don't know. And so you want to make sure you look at different investment options for that. And that's something we cover definitely on our, TSP finish line process. And if you want to book a call, just put plan in the chat. My team will get to it. Or I'm sure they're putting a link in the chat. can get to that too. ⁓ and the last mistake is, is well, two last not planning properly for, for federal, for FEHB and Medicare costs. That was the lady. That was the lady on the call today, but she civil service is not much she can do because her income is fixed. then ignoring survivor income, like I mentioned earlier, not understanding what your spouse is need, what your spouse needs, how social security impacts them and things like that. I appreciate everybody for participating. We'll be back here again Wednesday and appreciate all of you.