Latest / Federal Retirement Advisors | FedLegacy / How Federal Employees Should Manage Risk
Transcript
- William Smith: All right, there I was Dallas airport in line, frustrated, because I'm thinking I might miss my flight. There's a lady behind me. She's just worried because she might miss her grandson's wedding in Aruba. And she doesn't have the answers. She's trying to get there, but she doesn't have the answers. There's a couple in front of me complaining and angry. because they might miss their first anniversary wedding celebration. And then there's me, just as frustrated because I was at this airport a week earlier and none of this confusion existed. for me, my daughter's in a volleyball program her first season ⁓ she expects me to be there. Now know that this line is not normal because again, I was there a week earlier. So I have a decision to make. I can either stand in this line and risk missing the game. And it's pretty, pretty high because there's a lot of people in front of me and a lot of angry people in front of me. I could take a risk. And the risk I could take is getting out of line, finding a United agent, and seeing if there's another line. Cause there just has to be another option. So I take that risk. Now mind you, if my risk is off, I'm 100 % missing the game because the line is over an hour long. to check your bag. So I take that risk, I find a United agent and I walk up to her and I say, hey, excuse me, ma'am, there has to be another option. And she then proceeds to point, to touch my lower back, point me in another direction that's around the corner. Now I can't see what's around the corner, but she says there's another option around the corner. And so I go walk around the corner and when I get around that corner, I see a whole new... empty line is like not technically a line because nobody there. I walk right up to the gate to not to the gate agent, but to the bag check lady I hand her my ID still in disbelief because this is there much right around the corner. No, nobody can see this line. There's a line of frustrated people. That's over an hour long. But in this line, there's nobody in that line. I hand her my ⁓ She checks my bag. And then off I am to my gate. And as I'm walking to my gate, I see other people. talking to the same lady I talked to and then she's beginning to tell others and those people are hurrying over all because I took that risk. Now, what does that have to do with you? Today in the news cycle, there's tons and tons of negativity, people frustrated, people trying to make their point. And at the same time, there's a lot ⁓ afraid to take risks. And so, What made me start Fed Legacy 17 years ago was we were in assembled places of country. I was watching my parents afraid to make risks. And because of that, they made some mistakes, right? And that was the foundation that allowed me to start Fed Legacy. Because my parents just didn't have the answers. didn't have, they didn't take the risk to go talk to someone and get new information. They just didn't know. And there's tons of folk who stand in line in for... standing places and lines and things like that, frustrated because they just don't want it to get out of line and take the risk or they don't want to stand out for whatever the reason. And so tonight we're going to talk about some of the risks that you as a federal employee have your disposal and how to manage that. Right. So that you and your family could get to the destination that you desire, which because you're on a Fed legacy call is a strong financial legacy. for your family, because that's what we deliver at Fair Legacy. the next 30 minutes, what we're gonna talk about is the real definition of risk, what that means, the advantage that you as federal employees have and how to activate that and the 18 month ⁓ danger right? ⁓ And the market care about your retirement date. I'm gonna say that again. The market does not care about your retirement date. I remember when I first started ⁓ with Fed and we were in Rockville, Maryland at the HRSA. building 5,600 Fisher Lane. I'll never forget it. Like it was yesterday. I was brand new. I was brand spanking new. This was right after the financial crisis of 2008. a lady was telling me, ⁓ was in her late fifties and she was just telling me the story. She was like, well, I was getting ready to retire, but I lost half of my TSP. The reality was she lost about 39 % of her TSP at that point at the conversation. And so she was like, I had plans. Now my income just doesn't, it doesn't make sense for me to retire. because of which has happened. That's all about timing. She had, she was, she was getting ready to retire. Now we now future them. When we look now backwards the next year and a year after that, she would have made some of that money back. But in that very moment, as we were talking, her account was down 39%. And so in her mind, she couldn't, she couldn't, she couldn't retire. Again, the market does not care about your retirement date. You have to have a plan that optimizes your retirement no matter what the market does. And so that's what we talk a lot about at FedLegacy. So right now you might see geopolitical stuff that's going on. You see the energy volatility. All these things are real factors. If you're getting ready to retire, those things matter. If you're not getting ready to retire, they don't matter as much. And we'll go back into that later. So one of the things that I noticed that causes a lot of federal employees not to have a plan is you just got your good government job. I should have spelled that G-U-B-E-N-T, government job, and you're set. Yes, that is a good thing. And we'll talk about that later. But even with that, especially as you get closer to retirement, you want to make sure you have a plan for your TSP because you cannot just coast. That lady that I talked about earlier, she was coasting and then she got shot by the fact that she was getting ready to retire and boom, her TSP is down all that money. Right. And so again, Your pension as a foundation is not just a finish line. And so the word risk, I say this all the time, the word risk has been keeping you broke. A lot of times when I talk to folk and they say, and you can tell me if you've ever met someone like this or it might be you, you might say, well, I got all my money in the G fund. That is not a great thing to say if you got 20 years left in the federal government. I had a lady today, she had called me and this lady is a, she's a good real estate investor. owns, I actually featured her over my, well, I won't go there because then you'll be able to identify her, but she's really good with outside investments. But she was just telling me, she's like, well, I'm about to put all my money in the G fund and this, that and the other. already have 50%. I'm about to put the remaining in the G fund and she's 51. She's 51. And I said, That's not good. No matter what's going on right now, she's like, but I don't like to take risk. And I was like, well, that's not the way that people that become TSP millionaires get there. And I've meet a lot of people like that, that they see a little bit of money lost and all of a sudden they run and put everything in the G fund. That's not good advice. If you got years to go in the government, times like this can be good because moments like this, the market can dip, you have money. sitting as you can up your TSP balance or money you have in other funds, you start putting that into the CNS fund and your CSNI fund, and now you're buying stocks at the dip, which is a good thing, but you must have years and years and years to go. And so when you have years and years years to go, you really, really win. And so some of the times when I talk to folk who are TSP millionaires and they're like, You know, I retired, I looked, I put money in my TSP. I never touched it. That's, you know, that's good. Now those people that mind you, those people are having retirement conversations, you know, a year or so out before retirement. And so we're diversifying things a little bit, but if you have time before you retire, saying you don't want to take risks will keep you broke and keep your TSP down low because you just don't gain a lot of money in the G fund. And moments like this is where a lot of folks run to the G fund. And so what I want to also explain to you is when you watch the news and you hear a lot of things about everything is risky and things like that, I get it. But as a federal employee, you all are also playing a different game. And the game that you're playing is the fact that you also have multiple streams of income and retirement so that When you get to retirement, your TSP is not the first place you're going to come for income like most people. And I talk about that all the time. Most people have to play a game of defense at all times for the most part because their TSP, I their 401k is the only income outside of their social security that they will get. As far as federal employees, you all, most of you all at least, especially when you have a plan, your TSP is not your main source of income, because you got your pension, you got your social security. And by the time you have those two incomes hitting your account, your expenses should be, for the most part, paid. When you need your TSP, your TSP then comes in as a supplement to that, but it's not the entire thing, right? So that's the difference that you as a federal employee have, right? And so one of the things that you have to think about as you get close to retirement, is sequence return, tax risk, mean, sequence risk, tax risk, behavioral risk. I won't go deep into those today because it'll take up a lot of time, but when you draw money, how you draw it, super important. Tax risk, we talk about that all the time with the, with, a federal employee, your TSP will continue to grow in retirement. If you're not ⁓ doing Roth convergence to pay less taxes over time, that becomes a significant risk. And then what I'm just mentioning now, the behavioral risk. which is moving money based on emotion because the market might not look good, right? So again, key number two, you have an advantage, which is your first pension, your social security and your TSP. a lot of people call it ⁓ three-legged stool. That's a unique benefit to you. So you can manage risk a little bit differently, right? And so one of the structures that we, and I'm sure you're asking like, okay, Mr. Smith, you're telling us all this stuff about, know, panic. and don't put all your money in the G fund and don't leave all your money in the C fund it seems like until you're getting close to retirement. And so this is for you all that are close to retirement within, you know, we like to say anywhere between 18 to 24 months for sure, right? You folks, you want to make sure that you have what we call the financial house. That means you want to have some money set aside that's protected, you know, and that's different for every person. You know, we meet with folks, we help you define what that is. You want to make sure you have some money set aside for tax planning and making sure some money is outgrown for inflation. Like those are the two. That's the wall, the insulation piece. And then the roof, that's the risk money. Right. And over time, take it on less and less risk. The closer you get to the time at which you're going to withdraw income. Right. And so the thing that caused the most panic in moments is you see a headline, you move money defensively. You wait for stability and then you reenter the market when it's too late. That's a common pattern that we see across the board. And so, and it sounds good, it feels good. It's like, well, I'm gonna wait until the market changes, then I'm gonna get back into the market. it's common Wall Street research that when it comes the market, there's 10 days in person's portfolio. that could make the difference, right? 10 days, it's 10 days that you'll see, you know, it's just 10 days in a given timeframe that could make a big difference when it comes to somebody's portfolio. So if we look at the last 10, last 20 years, sorry, and a person that started off with $250,000 invested, if they missed, if they kept their money in the market for 20 years, just let it sit based on the average S &P growth, they will be at $816,000. They just let the money sit. But If they put 250,000 in and they just missed the 10 best days over the last 20 years, just 10, just those 10 best days, they will be in a portfolio balance of 362,000. The reason why that is is because if you see, when you're looking at a person, when you're looking at a portfolio, most days the market's going up 1%, negative one, one, negative one, two, negative one, like. And it's just, you just, you just see that steady fluctuation, but then there's some days where it's like five, six, then there's one, two, one, two, one, two, one, two, one, two. But then that five and six is what makes the difference. And so that's what makes timing the market incredibly, incredibly hard. And that's why you want to make sure you have a plan, especially in times like this, when you see so much in the market. Right. And so what we'd like to say is again, Here's that 18 month window. Reason why that 18 month window was so important is because once you get to that point, it's going back to that lady who we talked about, who had her TSP drop by 39 % in 2008. She had plans to use her income right away, right? What she should have done if she had an advisor working with her, she would have put a certain percentage of her money into a protected status. at least 18 months before her expected retirement date, because that would have been her income money where she wouldn't have to draw down on the lost money that she lost in the market. Because once you get to that place, and so one of the things we do when clients are approaching retirement, we take you through the whole retirement analyzer process. And what we do is we identify, when will this person probably need income if they're going to need it? Does this person have a long-term cash strategy set up? How much money do we need to have earmarked for that? Does this person have bills that they need to be paid off they retire? We make sure we earmark that. Does this person have a tax plan? And once we do that, that helps us set that foundation. Once we identify that, we want to put that money into some sort of protected status so that if does hit, that person's not panicking as a to what's going on in the market. Right. And so if that lady would have done that, she wouldn't have had as much panic because she was so, okay, the things I need, I need when I retire already taken care of. I can wait it out another year or two years with the money that's in a growth status because everything I'm gonna need as soon as I retire is set away. you want to make sure you have in your plan because that will give you that peace of mind. The thing that we see often. that mess people up in retirement when catastrophe hit, it could be a family emergency, it could be a health emergency, it could be a market type of emergency, any of those type of emergencies, when you act emotional, it can disrupt your retirement. And we've seen that over and over and over again. But those folks that have those big emergencies happening in life, and they will happen, they know exactly where that money is coming from, right? And so that helps you mitigate that risk. Right? So when you retire, you want to have some now money, some soon money and some later money. Right. And that's one of things we talk about now, money, soon money, later money. And then now money, you want that protected. That soon money can make medium level of risk. That later money you could take risk. And that's the later money is where you really, really, exponentially grow well. And this is something we don't talk enough about in our community. It's something that we talk a lot about on our calls, but we want that later money to continue to grow and continue to compound. I love stories. Well, I'm talking to clients and they're telling me, oh, I'm retired and I'm enjoying this. I'm enjoying my money is just growing so and they just can't believe it because of power of compound interest because they've believed in the the, the, the, the mindset of different types of money have different goals. Right. So you always want to have money that's in the growth mode. Right. And according to, mean, according to your situation, but if you can make sure you have that money set aside in that way. So What we do, we call it our TSP finish line process. We help you create that financial income plan. Super, super important because that's what gives you peace of mind. I always talk about a lady who retired a couple of years ago and we helped her create an income plan where she didn't think she needed it. But when she retired, she realized, hey, I'm spoiling my grandkids. I like to travel I want to spend more money. We started giving her, we had already talked about it in advance of her retiring, but she didn't think she was gonna need the money right away. She didn't need it right away. She needed a year later. She started taking $3,000 a month. Because we had a plan, she took the $3,000 a month. Now she's taking $3,500 a month. And here's the cool part. Despite her drawing down on that like that, because we have her money in two different buckets, and the one protected bucket has given her a decent return, even though she's drawn down on income, her accounts are still growing. even though she's drawing down an income because we strategize on how we did it. Right. And so you want to have that income plan. You want to have that next net net tax optimization done. That's, that's the, well, that's the end. skipped over the I that's super important, especially because of the secure act rules that changed in 2019. You want to have your proper investment allocations that helps you mitigate that risk part. You want to make sure you understand your social security timing. I know Raphael did a webinar on that a couple of weeks ago. And we talked a lot about that there. And then your income sequencing, where you take income from, from what account, when, super important. And then making sure you have health care and a legacy plan set up that benefits your family.