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Is Your House Built Right? · Federal Retirement Advisors | FedLegacy

• William Smith: So there I was, I pull up in my parents driveway. I'm happy to be home from school. it was my first time home in a couple of months. ⁓ as I pull up, I look to my left and I see the sign in the yard. And, know, I couldn't really see what ⁓ it said, but it looked like a for sale sign. And then I go up the steps. Cause if you go to, if have my parents house, there's two levels of steps that you go up and I to the top of the stairs and I open the screen door and I see this huge lock box and I had never seen a lock box in my life up until that point. I mean, I didn't, I didn't sell real estate or anything like that. But when I see this lock box, I panic because I'm like, it's just a monstrosity over around the doorknob. And so I'm like, are we locked out of this house? I see this, this, this, this, this, this real estate sign in the yard. so at that point, my heart beats fast. And so as I'm getting ready to put the key, my key in the door, my mom opens the door. And when I catch eye contact with my mom, her eyes are red. She's she and my mom's a lot of crime. But in this moment, she's she's she's she's just completely wrecked. in the way my mom is, she's she's a person that loves to protect. ⁓ so she's crying. She doesn't know what to say. She's embarrassed. And so I walk as I walk down the hallway of the house, I'm looking and she's just she's just she's just she's just a mess. And so she didn't even have anything to say. And then I go. in the living room and I see my dad and my dad is the type of person when he meets you, he meets you with a whole lot of energy. And in this day, he did meet me and they seen me in a couple of months. when I go into the living room, my dad is sitting in the complete dark, not saying much. And like, I look at my mom, I look at my dad, I'm like, what the heck is going on? And again, hadn't seen them in months, not sure what's going on. the energy's off, there's a for sale sign in the front yard, there's a lock box on the door. And my dad the silence and said, son, you know, I tried to do my best raising you and your brother. We came up out of Baltimore city. We moved to Prince George's County for Washington. And all I wanted to do was provide for you and your brother and give you all the best, the life. And I'm like, dad, what are you talking about? And he was like, well, we're forced to sell the house because the house is going to foreclose. And in that moment, that completely changed the way I one, looked at my parents, cause I thought we were doing well, you know? And I thought, you know, they had everything under control. And at that point is when for me, I realized of the thing my dad said next, that it would change the course of how I lived. And so my dad said this to me next. He said, well, nobody ever taught me about personal finance. I went to seminary school. I my best there. I put you and your brother through private school, but nobody ever set me down and taught me how to manage this money. And so from that point on, that became a huge miss in a month. And I realized that there's people like my parents who are good people. My mom worked for the church school. My dad is a pastor in seventh day of Adventist church. Good people dedicated their life to God, did the best they could, put me and my brother through school. If they could get in the situation, because they got it to fast forward, they got into a mortgage that was a scam mortgage. And the person, you know, they ended up, we ended up, you know, fixing the house and saving the house and everything like that. But in that moment, there was a lot of shame. There was a lot of guilt that they felt. There was a lot of fear. it was all due to lack of education. And we put our heads together. We figured it out. But what I've noticed in my years and years and years of running Fed Legacy and talking to many clients is there's a lot of people that I talk to. who have the same level of fear and shame around their retirement, because they're not quite sure if they have enough money. My parents didn't know they had other options. There's a lot of folk that don't know that they have different options and they allow fear, shame, guilt in some cases to dictate their retirement and ultimately wreck their retirement when you should be in a position where you're living life from a carefree moment. So what we're gonna talk about today is we're gonna talk about the financial. And the financial house, we've built the financial house because we've been doing this now 17 years. We have a lot of clients that we've helped. And we realized when clients have these three pillars in their retirement, there's no fear of going back to work or things like that because our job is to take away that shame, that fear, that guilt in a lot of ways and turn that into empowerment. today, share my screen here. We're going to talk about is your house built right? And as we talked about many times, now we're going to more so move into client examples instead of talking to you all about the concepts, Now we want to get into a space of where we talk about how we build those concepts out so that you can look at your own retirement situation and start to take away some of that shame, some of that fear, some of that guilt that you might fear because you just don't know what you don't know. And that's what happened with my parents. They just didn't know what they did not. And so when it comes to retirement, You want to make sure it's solid. You want to make sure that there's cracks, that you can see them. Because the thing that keeps people in fear a lot of times, and you can probably ask yourself this, are just the fear that there might be a hole in the situation that you just don't know about. And so our job at FedLegacy is to make sure that you have it. Because none of the 10 people that we talk to don't have a plan at all, never had one. ⁓ And so... In this example, I'm going to talk about a lady. had 318,000 in her TSP. And one of the fears that one medical emergency was her biggest fear. And it just kept her up at night. She felt a lot of shame around that because she felt like she needed to have a long-term care policy in place, And she felt like she didn't have it. And she was very nervous and had a lot of fear. Right? So this lady, we're going to call her Donna for this example. Donna had 318,000 in our TSP. she felt like she had a late start and she was getting ready to retire in two years. And she just, again, had no plan, felt like she was behind and we took her from one place to the next. Right. So where Donna was, she had all her money in the G fund and the G fund in our, from what we talk about does not build a house, right? We talk about the walls and we talk about the roof. In her situation, she had no foundation, she had no walls and she had no roof. so, and so what, let me explain to you which each one of these things are. So when we come to the foundation, the foundation is protected money. It could be money that you put into the G fund. The G fund is protected, but it's only going to give you 2%. Some people put that money into. ⁓ different IRAs, know, some from six and that's annuities is what some people put it in a long-term care policy is something you could put it in. But the thing about the foundation is the foundation, you're protected from any level of loss because you want to have the money that you need for the important things. You want that set aside and so that you don't make emotional decisions. I see people all the time make emotional decisions because they're afraid of loss, especially like right now. was so much going on with the, with Iran and Trump and all this other stuff. There's a lot of fear in the market. The market changes based on those things. Like we saw the market swing up Monday. The market was bad last week. It swing up Monday. And if you're trying to chase that is almost impossible, right? So you want to have money that's in a foundational place. So no matter what this, no matter what happens outside, you're good. Then we have what we call the walls. The walls protect you from the outside. the outside, the outside factor, just like the walls of your house protect you from the cold and and the heat. You have the insulation and the insulation in between the two things you want to protect yourself from when it comes to your retirement that you can't control is taxes and inflation. And there's a bunch of strategies on that. always, we always talk about the Roth conversion. We always talk about the investment strategies to outpace inflation, because if you, if you don't outpace inflation, inflation will eat you up. And so you want to make sure you have those strategies in place. And then we talk about the roof. The roof is the highest point of the house, obviously, but it takes on the most damage. Wind, hail, snow, rain, that impact the roof. That's the first layer of defense in your house. And so when it comes to your retirement, you want to have some level of risk. You want to take on some level of risk, but you have to note and understand how much that is. People get in a lot of trouble when they take no risks. A lot of folks say, well, I won't take any, but then what ends up happening is inflation eats you up. And so you want to make sure you have all three of those. So ⁓ here's our software. We call it our retirement analyzer software. Here's where, and this is a real client story. We changed the name up to make it so that we can show it for confidential reasons. So ⁓ Donna worked for the Department of Labor, and this was her scenario that she bought to us when we first meeting with her. She was making 112. She planned to retire at 64 and her expected Social Security is at 1751. Her first pension was at 2433. And then what we do, we went to, we take out the income information and then we looked at her assets. And so her TSP, she had a hundred percent of her money in the G fund and she had, she had $318,000 in her, in her, in her, in her TSP. And because she had, she had it all in the G fund, what our system did, we already put the 2.7, cause that's what the G fund averages over a 10 year period. It allows us to project out. what that will look like in the long run, because what we want to do is we want to make sure that we're doing income planning. We can see how long that money lasts. And so what we also did was Donna told us how much extra income she needed. Right. And we, and then we also looked at the base based on our expenses and we realized she was going to need an extra $1,800 a month to be able to live comfortably. Now, mind you, she's taking $1,800 a month from her TSP when she retires. She, she, she has all of it in the G fund. and she needs that money to grow. And so when we go to her retirement tab, and this is some of the things that we take, we always take this stuff into account when we're doing the planning. Right. And so in her case, we have her pension at the time of retirement, her social security, and then the extra income that we have coming from the TSP as a monthly cashflow. And it puts her income at around $573. Now, if we were to take this $1,800 off, she'll be in a negative situation. But she has the 1800, that's what the TSP is for. The problem with this is if you look here at age 85, Donna will be down to $96,000 in cash left in her retirement. So any emergency can completely wreck Donna's retirement plan. Everything has to go smoothly in this situation. She's working with razor thin. margins. And this is something that we see a lot of times with, with people who come to us and they're retiring and they're taking money, but they have no system around their money. All of our money's in one place. All of it's traditional TSP. The traditional TSP is paying this, this right here, this income. And, ⁓ and we, you know, our system helps run that. And so, you know, we have it here. Money comes out of her TSP pays the expenses. And that's how we do it. But what Donna noticed, and we also noticed it as well, is again, any emergency and she's out of money and this whole plan collapses. And so this is an example of not having a plan. So we met, took a couple of days, got together as a team. And what we did was we took it through our financial house process, right? Our financial house is we always want to make sure we're hitting, we have a plan for each of these levels, the foundation. the walls, outpatient inflation in her case, because her TSP, the reason why it wasn't her, her, her, balances were dropping, dropping, dropping is because the G fund wasn't giving her enough income. I mean, enough, enough growth to offset the inflation. And so that money was just dropping, dropping, dropping in one emergency would have completely wrecked her entire plan. And so what we did, we got together, we looked at it. We need some foundation money. We need to, we need to find it. need a inflation plan. And we need a growth plan. And so what we did was we took the same money. We just put it in two different buckets. We put it in an IRA. We call it a protected IRA. Her reasoning for putting in the G fund because she was just afraid of the market. And so what we told Donna is this. Look, we get it. The market can be scary, but the market has been relatively good over the last last 10 years or so. We've had a couple of down years. I get it. You don't want to put 100 percent of your money in the market, but let's have a strategy again. Walk her through our financial. our financial house strategy. And then we figured out ⁓ that 135,000 was a good amount of money. They put in a separate hour rate because it will allow us to give our income. And then the remaining money, we put that into what we call a growth bucket. And that's the TSP fund. And so what that allowed us to do, we were able to project that higher rates of returns again, based on historical rates of returns. the TSP. Historical rate of return. over the last 10 years is at 15%. As of today, right? That can change in any day, but it's been 15 % consistently over the last couple of months, right? But we always go conservative. So we put eight and a half percent here. Then the IRA, can go anywhere between seven and nine. We just put six and a half percent here. Again, we like to go conservative on everything we do, but this would be the bucket that she takes the money from. And so when we split this money up, it's the same money that she was already had. since you already had, we just structured it in a different way using our financial house framework. set same income, same expenses, all that same income coming out. But the difference here, remember that was down in the 70,000s. Now at age 85, she has a million. The reason why, simple tweaks. We left some money in the market to grow. And again, I'll tell you like I tell Donna, once you have that growth bucket set aside and you have that protective bucket set aside, reacting to what the market does, you just can't do that anymore, right? The market was down last week. Monday, the market shot up. Most people would have tried to move the market, move their money back to the market by then, because you couldn't have predicted Monday. But then the last couple of days has just been steady. It hasn't had those big fluctuations. But if you would have missed out on that one day, then you're pretty much screwed. I always talk about over a given period of time, we can say over a five year period of time, there's 10 days in that five year period of time that ultimately has your account. grow or not, meaning most days in the market, there's a negative one, negative two, negative one, positive two. Like there's very, there's small bleeps in the market, but then there's days where the market goes down and there's marks where the market goes up and then random. But if you miss those days and you're stuck in this little pattern of negative one, negative two, like then you miss out on the growth over a longer period of time. And none of us can time that mark time that. And so the reason why you want to have your money in a financial house type of structure or whatever structure you choose, but the financial house is the structure that we've been using for a while is you can make long-term bets based on that and you're not making short-term bets. So we did this with Donna, as you can see here, when she goes to retire, it's a million dollars there. And the reason why we're not retired as she gets to age 85, she's taking her income. She's taking her income. There's a protective bucket sitting on the side. And because we have a protected bucket, that TSP bucket just continues to grow. The IRA bucket is paying out our income, but that TSP bucket is continuing to grow because she doesn't have to touch it. And so this is an example of having somebody having a financial plan and somebody not having a financial plan. And so when it comes to your retirement, you want to make sure you have some level of structure, because when you have a level of structure, it makes a huge difference. We're not going to get into it today because just we just want to be respectful time. got only 30 minutes. We'd like to keep these short. When we get into the tax planning in this, the long term care planning in this, it gets a lot deeper. But you want to make sure that at some as you go into your retirement, you have some level of structure because it makes a huge difference in what you're doing. All right, what is your suggestion for the breakdown of TSP funds? So Edna, it's hard to, I can't tell you what the suggested breakdown is, because I don't know your situation, but there's some rule of thumbs that you can go by. And so one of them is called the rule of 100. The rule of 100 states this, you take the number 100, you minus it by your age, and then that's the amount of money that you want to have at risk. I always tell federal employees. let me, for example, so say, say you're 60. If you take minus 60 by, if you take a hundred minus 60, you get 40. And so if you're, if you're a person that's, you're more, you're more aggressive, then you would say, okay, I'm going to put, I'm going to put 60 % of my money. And I tell federal employees this all the time, right? We, we flip it with federal employees. I'm going to put 60 % of my money in the market. And for you, that would be the CSNI. and I'm going put 40 % of my money in the G. If you're a more conservative person, you go, I'm going to put 40 % of my money in CSNI. I'm going put 60 % of my money in the G fund. Right. So that's a, that's a rule of thumb that has worked in, in a personal finance for a long time. When, when it just comes to just principle based stuff. Cause I can't tell you, Hey, do this and put this percentage. But if you want to just manage it yourself and you want to think about a rule of thumb that typically works over time. That rule of 100 is a good one because what it forces you to do is the older you get, you're getting more and more and more conservative because your number, if you're 70 now, you only want 30%, that type of thing. Any other questions? Would you advise moving some TSP money to a brokerage IRA because IRAs are more flexible? So yeah, so with the TSP, don't really have much options. You have five individual funds and you have a bunch of life cycle funds, but with those life cycle funds, it's comprised of those five individual funds. And so you have ⁓ be careful with that. Now, when you go to a brokerage IRA, you have a lot more options. Yeah, you have a lot more options, but with the brokerage IRA, when you're talking to someone about that, you got to be mindful of what their fees are, when it comes to a IRA, you got to be really careful with fees because with your TSP, there's minimal fees. You know, there's some broke, there's some firms that charge in 2 % to two and a half percent, especially if somebody's pushing mutual funds that mutual funds, actually, you got to be very careful with mutual funds because some mutual funds, they'll tell you they're no fee mutual funds. But then there's all types of fees built into the actual mutual funds. If you're going to go with a broker's IRA and you really want manage money and want to take your money completely out of TSP, I would tell you this. Make sure you talk to folk that are offering you different types of ETFs. ETFs have have no commissions on the actual funds that you're investing in. Somebody push you towards mutual funds. Those tend to be fee heavy. And then you also want to make sure that if you're going with somebody that does a brokerage account, that they're charging you one and a half percent max. And then there's ways in which to collapse those fees even more. And so you really want to push them on their fees. But if somebody's offering you 2 % fees and things like that, that's a lot. And so you got to be very careful with it when it comes to. to brokerage accounts, but it is more options though. But just, you know, some of these, some of these advisors out here can be predatory. And you just want to make sure you're getting with people that give you fair fees and are not loading you into mutual funds. So there's like a couple of companies out there. I don't want to, this is shared live on, on YouTube. So I don't want to get in the company bashing, but there are companies out there that mutual funds, right? And so when they sell these mutual and they're, they're like, they're made to order mutual funds. have 10 mutual funds that this particular company can sell, right? And they sell, and there's a lot of them like that. And what they do is they pre-package them, but they're fee heavy on top of their management fee. So when you are going with a brokerage firm, make sure you're buying ETFs from them, because they perform very similar to mutual funds. They're in their index traded funds, and they're supposed to match the exchange. I mean, sorry, the index that you like, the NASDAQ index, the S &P index, there's different Barclays indexes, international fund indexes. Those funds, those accounts tend to, they charge minimal fees and they give you the same level of return. So I know I said a whole lot about that, but that's a question that we run into a lot on one-on-one conversations, especially now in this market where people are just trying to get people to ⁓ all their money out of TSP. And what we're seeing is people are just getting ⁓ real predatory. charging these high 2 % fees, putting you in these high fee products the TSP is low fee and you can manage it right. You can manage it well. All ⁓ right. Should take anything out of TSP? So ⁓ Val, that's a, mean, it's hard for me to, again, you have to meet with somebody one-on-one to know, but a lot of people do. And I would say don't take everything out of TSP, but. If you want to create structure, as far as even like that protected bucket, it's hard to do that in TSP because the only two places you can go are the G and the F fund. And the G and the F fund just don't give great returns. So, you know, there's options there. So yes, you should. Should you do all of it? That's case by case. You just got to be careful. Cause again, like I mentioned, the TSP is really good with the funds as far as the But, But the TSP C fund is really well, really good, there are other options out there. And then the TSP also has limitations around Roth conversions. Like they just started the end service Roth ⁓ IRA transfers and things like that. But the system in which they're doing it is so antiquated because they don't withhold any of the taxes. You have to come out of pocket and pay cash on the which a lot of folks just don't have. And so there are other IRAs out there. If you want to do a Roth conversion strategy where they will withhold the taxes and not only will they withhold the taxes, they allow you to pay the tax rate at your current tax rate and allow you to pay the state taxes as well. Whereas TSP just has limitations around that and really can really screw you up around tax time. And I've seen that not not so much on the Roth conversion yet, because that's just so new. But when it comes to state taxes for other things, for other folks. because TSP forces you to do that 20%. All right, Marcia, if you find out you do not need the RMD from your TSP, what's the best way to handle these funds? I don't understand the question. If you find out you do not need the RMD after retirement, I mean, if you're at RMD age, you have to take that RMD out because if you don't take the RMD out, there's penalties for not paying that RMD. So you wanna make sure that you and whoever's doing your taxes, y'all are ahead of that. Because if you don't pay your RMD, it doesn't just go away. You end up having to pay a penalty on that. So you wanna make sure that you wanna know what your RMD is and your tax person should when they're doing your taxes. And then you just wanna take that RMD and pay it. Did that answer your question, Marcia? mean, when it comes to RMD, you just have to make sure you have a strategy for that. Because if you don't do it, they will come after it with the penalty. I don't understand why, but it's just what they do. And so when you're in RMD, when you're at RMD age, you want to make sure whoever's doing your taxes, you have a plan with them. OK, you said you retired, Marcia. So eat yet. You can only you can only pay RMDs when you're retired. If you're working like I have a lady that she's 80, she's 81. She's still working for the Department Energy and she hasn't paid RMD yet. She's her spirit is young as ever. But she's 81. She's still working and she does have to pay RMDs because she just she hasn't she she's still working. So as long as you're still working, you don't have to pay RMDs. Should you ever retire before minimum retirement age? Shannon, so I think Shannon, is this the Shannon I think I know? Just give me a thumbs up, because I can answer you directly if it is the Shannon. I won't say where you work, if it's Shannon, Shannon, just give me a thumbs up. But to answer your question, okay, it's you, okay. So yeah, so Shannon, knowing you, knowing, like, I've seen a lot of clients retire at 55 and 30 years, because I think that's what you're asking. And so, like I have a client, you know, he was the CTO of the Department of Education. saved pretty well he retired at 55 and he's loving his life. Like he hasn't looked back. And then there's plenty of people who ⁓ forced to retire last year, plenty, plenty of people who were forced to retire last year because of the DRP and retired early. The key though to a Shannon is you have to have a decent amount of money. But one, have to camp crazy expenses. You know, and I wouldn't do it before 55 though, because you want to have at least you want to be 55 and 30 years of service because you can then access your TSP. Because if you, if you do it at like 53 or something like that, you can't access your TSP until 59 and a half. But if you're 55 and 30 years of service, you can access your TSP, which is important. So the earliest ops I would recommend is 55. If you're going to do it and you still have a piece of mind, but you've got to have a decent amount of your TSP. You can't have any. You can't have crazy debt. But I've seen it done and I've seen it done well. But that's the way you want to do it. Especially if it's just you when you're not married. And Kathy, yeah, you can reinvest your RMD money. People do it all the time. So people, what a lot of folks do is they take their RMD money, they throw it into a, you can throw it into a brokerage account and just let that money grow. You could put it into a Roth IRA, let that money grow. If you wanted to grow, if you wanted to grow tax-free for the rest of your life and not have to pay those 1099 brokerage fees. But yeah, you could absolutely reinvest it to Roth. RMD money. A lot of people do it. Most people do it, especially if they're working with a financial advisor. The financial advisor will just take the RMDs reinvested into a free account. And that's done all the time, especially if just want to create legacy for your kids and things like that. You can do that. What other people do is they just put it into an account and just let it just, ⁓ they just counted his income. Like, all right, like I have a guy now he's retired and he's just taking RMD. And he's like, they're to send me this check anyway. I got to have, I got to have this check anyway. So he's just using his income for the year. So this, could either reinvest it or take it as income. It's either way. So the rule of 100. So the rule of 100 is this, this is the standard rule. I do it differently for federal employees, but the standard rule is take 100 minus it by your age. And then let's say you're 60 minus 60 by your age. 40 is the number that you get. So 40 % of your money you keep at risk. 60 % of your money you get conservative and you save with. That's the age of 100. If you just, if you type it in Investopedia, or you talking to a financial advisor that's not talking to federal employees. What I always say for my federal employees people though, because you all, and I've said this many times on these calls, your retirement is way different than the Most folk, they're searching for income, for income, cause they have income scarcity. And so their 401k is everything they have. So they have to invest that in a, in a very, very conservative way because it has to last them for the rest of their life. Whereas you all, might take a thousand, 2000 from your TSP, but you don't really need it as do or die income. It's just extra income. And so lot of your money is still sitting in your TSP, just growing and you're not using it because you need it right now. Whereas other folk, have, say, 500,000 in their TSP, they're taking 4,000 a month off of that because they need it to live on top of their social security. So they need that money to stretch for long periods of time. So they could be more conservative where you all are different. Okay. And Val says it's a good idea to take a TSP loan to pay debt. That's a tricky one. You know, it's again, that's a case by case one. I mean, if you're and you can just think about it, if you got if you got 20 % credit card debt and the TSP G fund loan amount is 4 % and you're getting ready to retire and you don't need the money right away as income, that's a way better deal than to continue to pay 20 % on a credit card that you might not ever be able to pay off. just pay it off, pay yourself back at 4%. That's a way better deal. But again, that's case by case in the majority of cases it works. But just to answer you on a broad score, I'm not saying for you to do this. I'm just saying that's the math when you look at it in the long run. It's like, pay Chase 17 to 20 % on a big credit card note that is consumer. your expense sheet. So what we do when we're doing when we're going through, if I were to meet with you, Val, though, we will create an expense sheet. We will look at it. We'll look at your credit card statement. I we look at your credit card expenses. And for most people that have very high credit card bills, you know, they're paying 800 to 1000 dollars a month on a credit card. That's huge. Right. And if you have, say, 70000 in your TSP and your credit card bill is 60000. and that frees up 11,000 a month, mean, $1,000 a month, $800 a month, why not do that? But some people might have a hundred thousand and now you can't afford to take 60,000 out of your TSP. So it's case by case and it has to make sense. But when you look at the pure math of it, pay 4 % versus 20 % or 17%. All right, y'all I'll see y'all next week. Talk to y'all later.