Latest / Federal Retirement Advisors | FedLegacy / The Retirement Paycheck Stack
Transcript
- William Smith: what's going on everybody? Tonight gonna talk about the paycheck stack, right? As federal employees, the paycheck stack is super important. And the why it's super important is because it's unique to you. Now, ⁓ when you the news, when you watch CNBC, when you listen to your local news and they're talking about talking to financial experts, a lot of times they're talking to the majority of people, right? The majority of people. They have their social security, then they have their 401k. And those are the two incomes that they live off of for the rest of their life. Now I talk about that a lot in a lot of these webinars, but tonight I really want to focus in on it because it's one of those things that has been talked about a lot recently, especially with inflation going up and you've seen everything that's going on with the Iran war. You're starting to see a lot of folks retire and then there's a big delay. And when that first paycheck comes, And so people will draw more in their TSP earlier on in the process. And so those are a couple of reasons, but here's the thing. As federal employees, you're going to get three checks. Now the order in which you take those checks, well, it's outside of the pension being the first one, whether you take social security, whether you turn TSP, it doesn't necessarily, it's no one way fits all. It's definitely unique to your personal situation. And so when somebody, hear somebody say you must do it this way. That's not that that's that's not accurate. There is a way to do it that's unique to you, but there's no one size fits all when it comes to this. And the reason why I say this is because I meet folks all the time. They're married. They have two pension checks coming in. One has a big TSP balance. One doesn't have one that one spouse has a big TSP balance. One doesn't. but they both have large social security. And those that don't, have, they have a large associated, they don't necessarily need right away because they have two joint pensions So might make sense to start drawing down on the TSP because you're paying the taxes when you draw it down early. And then it saves you when it comes to RMDs, right? So you could do Roth conversions is one way. Taking income from your TSP is another way early on. And then allows you later on to start taking social security and you have social security at a bigger amount. Some folks don't have big TSP balances. and they want their TSP to grow over time or they might have situation where they want to leave a lot of money to their family. Then it's like, OK, the asset that you can leave to your family is your TSP. can't leave your social. You can't leave your social security to your family. And so in those cases is different. Right. And so I say that to say it's a hundred other scenarios that we could play around with. So when you hear someone say you must do it this way, that's not always accurate. What you must have, though, is a plan. And so we'll dig deeper into that. we're going to talk about the stack during this call, but I want to address a couple of headlines real quick that are going on in the news right now that directly impact that. So one of the things is OPM's backlog now, they update the wait list every week. And so now the wait list is at 96 days, which is The longest has been in a while, but the number of people on the wait list has dropped right now. That can be because of the online, the, the online application process. Now is fully in effect, the paperwork, the last paper application they say was shredded on July 9th or something like that. And so that's done. So maybe just transitioned into the new technology is causing the wait list to jump. And that has impact on when you draw the TSP, but just wanted to update that that now is at 96 days. But one thing that is important when it comes to retirement planning is the cost of cost of living, the COLA increase will be for those that are retired. So if you're on the call right now and you're retired, this, what I'm about to talk about will impact you. If you're working, your cost of living is totally up Congress and the president, right? So if inflation is up, if inflation is up, like it's around 4 % right now, that doesn't impact you. in any way. It's all about Congress and how they operate. Now, if you're retired though, there's a formula today to use when it comes to your cost of living increase. And this is something that you can think about when it comes to your retirement planning. When it comes to your first pension, the cost of living increase right now is expected to be at 3.1%. The reason why... is because, and this is how you calculate it, and this is you can know if you're retired, what your raise is gonna be. They take the inflation report that comes out, but on the third quarter of the year, they take that inflation report. Now, if the number is at 2%, then you're gonna get the full 2 % as a on your FERS pension in retirement, and civil service for pension in retirement, so you'll get that. Now, If the inflation report goes above 2%, if it goes to three, you still get the two. and to mind you, inflation is what the cost of goods are. They write a report and they say, all right, Americans are spending an extra 3 % this year. Now, the cost of living increase for a federal employee, if it goes to three, you only get two. Now, if it goes above three, then you'll get an extra percent minus one, right? So you'll get, if it's 4%, then you'll get 3%, if that makes sense. They always minus it by whatever the number is, minus one, right? If it's 5%, you'll get a 4 % raise. But if it's three, you still get two, right? So that's how that works. And so why does that matter to you? The reason why that matters to you is this is the reason why I'm always talking about making sure you're increasing, investing your TSP in a way that offsets inflation. And when we talk about our financial house, we talk about making sure your foundation is right. And that foundation is the money that you want safe. Most people, when they think about safety, they think about putting all their money in the G fund. imagine you have all your money in the G fund. In the G fund, if you look at the G fund right now, the average return over a 10 year period is at 2.8%. Despite the G fund having two really good, decent years in the last two, the last 10 year average is still at 2.8%. And so imagine you have all your money in the G fund getting 2.8%, inflation is up five, for example, like it is now, around 5 % on the cost of things. Four, sorry, is that four right now on the cost of things. You're getting 2.8 % on the G fund. then your cost of living increase on your pension is also now on a 4 % years down to three. So you're losing on both sides. You're not losing money per se, but you're buying power, the cost of things are going up. Now you compound that over a 10 year period. This is how when people get older and they're just feeling like things are tight and they're not like, I don't know why things feel tight. It's because They've been leaking on the buying power aspect. They haven't seen the drop in their money, but the cost of things are costing a lot more. like, well, I can't afford to take that trip or medical costs come in and it's like, well, dang, that was expensive or they're trying to help their family members with things. You know, I was talking to a person today and you know, one of their kids lost their job and they just got married and all this stuff in there. They're helping them out and it's tough and they want to do it, but it's tough because they're feeling squeezed by everything that they have. And that's just the reality of what it feels like in a high inflation world. And so while we talk about that financial house so much, especially when it comes to stacking the paycheck is because your FERS pension is going to lose to inflation pretty much most years, right? It's just going to lose to inflation. And so you have to offset that by making sure you have the right investment structure within your TSP. The good thing, good thing is Social security when you retire, that increase the inflation report. So as the inflation report goes up, so does your social security income. Now, one thing like I talked about last week, when they're doing these inflation reports, obviously a lot of it sometimes is political, right? So this year it says the inflation report's at 4%, but we all know the cost of things have gone up more than 4%, but you gotta rely on who's in office to tell the truth. And so... ⁓ And another thing is when it comes to that, they take the goods everywhere and they calculate, they use a formula to create that. But we all know health insurance costs has gone up more than 4 % in this last year. Right. And that's the biggest cost you're going to pay in retirement if you're not military. And so when it comes to these things, you must plan, especially with your TSP as federal employees to offset that difference because otherwise, the things that are fixed income like your social security and your pension, you're going to lose to inflation with those over time. There's just nowhere around it. If you're working and you're planning for retirement because you know, federal employees haven't gotten really big raises over the last couple of years. That's another reason why you're going to lose to inflation, especially when you throw in the health insurance and things like that. So that's something that's the reason why we have our financial house. We have our financial house where we create the foundation. making sure the money that you need as far as income and things like that is there, making sure that grows at the bare minimum above the inflation, above the inflation, keep it safe, but above inflation. And this is where fixed index annuities come in, diversifying the investments within the G Fund, C, S, and I a whole host of things go there, making sure your income or long-term care, future long-term care issues. which you want to leave to your, your, your, your wife and kids or your husband and your kids or whoever that money is there. We make sure it grows above inflation. That's what you want to make sure. Then you have your walls, which is your insulation there. You also want to be focused on inflation. and the risk there can, can vary just a little bit, but mainly in the walls, you want to insulate yourself from taxes because as a federal employees, you're going to be subject to more taxes. than private industry people. And the reason being is private industry people their 401k as their main income source. So they're drawing down on a yearly basis, which means they're paying taxes on it on a yearly basis and it's drawing down. Whereas you, as a federal employee, you're not necessarily using your TSP as full income source. You're using it for maybe 10, 20 % of your income or not at for some people. And so your TSP is going to continue to increase. And if you have a lot of your money in the traditional TSP, when it's happening, let's say you have 400,000 in your TSP. And at that time, 170,000 of that is the IRS's money. Now you're at 600,000. Now the IRS is 250. And then so on and so on and so on. That portion just keeps growing and growing and growing. And then when it transfers over to your kids or to your spouse and they're in file, a single bracket after you pass, there's more taxes. Right. And there's a whole we talk about that a whole lot. But all that stuff, all that stuff really, really matters. Right. And so when it comes to being a federal employee, one of the questions we always get is, well, should I take my Social Security at 62 period? Right. That's the question we always get. Now, should you, you don't have a whole lot in your TSP, you need income, absolutely. One of the things, and again, this case by case, I'm just giving you a general point, because sometimes people say, well, should I always delay it? There's not a rule of thumb whether you should always take it or always delay it, but I'm gonna give you a simple scenario that you can understand if... You need to or not. Not saying that what you need to do, but I'm just giving you a general scenario. Again, if you want to talk more specifically about your situation, it's best to book a call. My team will put that link in the chat any of these questions. I'm just, my job is just provide as much value as I can in the best way I can so that you can have things to think about and you're more educated than you were before you got here. That's what all of our content, all of our content is not one size fits all because nothing is that, but When it comes to the question of 62 or wait here's what you have to think about. Just from a pure practical Cause people say, well, Mr. Smith, I want to retire 62. My FERS pension is this and my social security is 62 is this. That, let's say that nets out to $7,000 a month between the two. But, know, I really, you know, my bills are about 6,500. You know, so what I would do is I'm just going to wait. I'm going to take some from my TSP. And I might have to TSP is not a whole lot. And so, you know, I'll just do that. And I live below my means until I'm 67, where I can get my full social security. From my experience. Just don't do that or just think about a better way. Here's why I say that. Because you work 30 years, 35, 25, whatever it is, you don't want to go into a place of forced poverty. If you take your Social Security and your income is good and you can live comfortably, take it. Don't force yourself to work another five years where you're hating your job or stressing you out or you're retired, but you feel poor because you're waiting for this magic day of 67 to come. And people do it all the time. And they're looking at it and they feel like they're like smart. Like, yeah, this is a smart thing. I'm waiting to 67. And I'll figure it out. I'll just live below my means. can move my kids and I can move in with them or I'll just, I won't take any trips. I'll just, maybe I'll start this part-time thing or whatever. But then, but then when we run the numbers, I'm like, but if you take it at 62, you're feeling way more comfortable. Yes, it's not as much as it is at 67, but you're not feeling stressed at the end of the month. Cause you work all these years not to feel broke in retirement You worked all these years so that you can enjoy life. And so this is why it's important to have a plan, because once that plan is laid out and nine times out of 10, when that person comes to me and they say, well, I'm going to do 67, I'm either going to just not take it and just live below my means or I'm going to work to 67. When we put the income stack together, they're like, well, dang, what you saying makes a whole lot of sense. And you're right. Cause as federal employees, don't, you don't have to feel the same pressure that non-federal employees feel around retirement because you got three different places you can take income from, which is significant. And I've seen federal employees who started in the government late, didn't think they could be able to retire, but that pension along with social security and whatever they have in their TSP goes a very, very, very long way. And so when it comes to taking it at 62 away, Again, it's case by case. But if you're somebody that thinks you want to wait to 67 and you want to retire at 62 and you say these things like, well, I'll just live below my means until then. Or you know you could retire at 62 if you take social security, but you feel like you want to wait to 67 and you hate your job. And you're like, well, I'll just make the sacrifice until I turn 67 because I want my full security No, create a plan. Look at the plan. and then make a decision based on having access to all of the information, because that makes a huge difference. And we run these reports all the time and we do our TSP finish line process where we'll take you through our discovery call, our readiness call, our strategy calls, through all of that, we're helping you dig through the weeds and through the thoughts of retirement looks like. And it's our job to make sure we put all these different scenarios in place. so that you can see clearly and not just assume. And so one of the big ones that 62 or weight is a bigger one when comes to your income stack. Now it could work for you obviously, but know, but you want to make sure that you have your TSP cause your TSP can fill that gap pretty easily. But if it can for you, there's still not an excuse not to retire. You just got to make sure you have. And so, you know, another thing when it comes to this is like, what role does your TSP play the pension stack? Here's ⁓ the the TSP plays. The TSP is like, that it's that extra thing you bring out, right? It's like that extra gift you bring out at ⁓ Thanksgiving or at or whatever. Like the one you just like, all right, if this is enough, we gonna add this on top. And it just creates the whole buzz. ⁓ And so when it comes to your TSP, most federal employees, when they get to retirement, especially if you work over 20 years, if you work over 20 years from my experience, and I've been doing this now 18 years, most federal employees who've worked a while in the government. they have enough income. They have enough income between their first pension and their social security to cover the majority of their bills. The majority. Now the TSP comes in as the extra that you could put on top of that to create the lifestyle that you want. So for example, I was meeting with a client yesterday and they, I mean, they have a lot in the TSP. She started late in the government. but she had 1.4 million in her TSP. so she's like, well, what do I do with this? And I said, well, what's your income now? Her income now was at like 190. She was very high up. And so she's like, well, I'm bringing in, and I don't know the exact number off top of my head, but let's just say she was bringing in 10,000 a month between and her husband, Ned, right? she's like, all right, I'm bringing in 10,000 a month. Her FERS pension in social security would have gotten her to about 7,000. I said, well, what type of life do you want to live? And so she said, well, I want to bring in at minimum what I'm taking home right now. And so we ran the scenario, put a couple of things together and the TSP, we just decided, okay, we're going to take 4,000 a month from that. And we mapped out a plan and it just pushed her over the finish line. And she was stressed about retirement because she just didn't know. She's like, I don't know if I'll be able to retire or what. TSP added to extra. There's also people who have a lot less than TSP. And they're like, okay, well, I want my TSP to continue to grow because I'm not satisfied with where it is right now. You know, I had another client, she had around 150 in her TSP. And she's like, I started, I was trying to pay for my kids college. I was just trying to be a single mom. We're not trying, I was a single mom. I was trying my best as a single mom to create the lifestyle for these kids. So I wasn't able to put. a lot of money away for myself. Now I'm at retirement and I got 150K there. I this to continue to grow because I want to do more for my grandkids, right? Cause she had enough income. Thank God. And so we a plan to make sure she has a bucket and protected bucket so that she can grow her money in a safe fashion and not think about it and also do some tax planning. in her case, and she couldn't life insurance cause of health issues. So we use her TSP as a legacy play. Then we have other folks who they say, okay, they want to their TSP an opportunity to ⁓ use for long-term care. to answer the what is your TSP actually for? It could be for a variety of things. It could be for long-term care. I don't believe, and again, this is personal based on my experience. It's not necessarily your situation. And if you want to talk about situation again, we could talk about it one-on-one, but when it comes to long-term care, I don't think it's a thing that most federal employees need. And the reason being is because I don't see a whole lot of in retirement drawing their TSP all the way down. Most people we meet with, especially when we structure the FERS pension and the social security correctly, most people's TSP continues to grow, even if they're taking income off of it. Especially when we put them in the growth bucket and the protective bucket. and we build out that financial house, because we take all that into account, most federal employees can use their TSP as a solution for long-term care. long-term care could be a reason for your TSP. Tax strategy could be a reason for your TSP. Income, income. Legacy for your kids. Vacations, like amazing vacations. have some clients who they just, they don't have any intention of leaving a whole lot. They want to make sure that they live their best personal life. They're traveling overseas for extended period of time. It could be for a variety of things. There's no fixed path that your TSP needs to be on because it's yours. And so one of the things I want you to walk away with on this call is when you retire, get curious about what you want to experience in the life that you want to live. Don't think that you're in this place of like, now I'm retired. I must live below my means and things like this. You worked 20, 25, 30, 35, 40 years, some of you, create a plan. And then in that plan, be, and I say this on the call, be selfish, right? You were the one that hopped on a train, set in traffic. dealt with bosses you didn't like, navigated the government system, up late working these things. Yes, take care of your family, but be selfish. Let part of your life be a different part where you choose you first. You've built this up. That TSP money is gonna be here when you're gone. Use it. You're one that made the sacrifice. You're the one that deserves to enjoy it. ⁓