Eric White A lot of people are thinking that retirement just starts the day after you get that last paycheck or after you clock out for the last time. But there is more of a transition period. What does that mean for many people?
Thiago Glieger Eric, a lot of people think that retirement and leaving service is going to be like a light switch. You’re either on or you’re off. But the truth is, there’s a lot different moving pieces. We know that the pension has to get finalized between your agency and OPM. It’s going to take a minute to start. The investments are now going to have to start working for you. Most people are drawing from the TSP and other accounts so that they can live their life, so there’s a plan that has to go around there. And you start to recognize that your money is beginning to be managed in reverse, where now instead of you working for your money, now your money is working for you. So the adjustments that come with that can be kind of tough. Your income changes, routine changes, and honestly for a lot of federal employees too, Eric, we see identity challenges right where we leave this incredible mission to now go sit on the couch and go do other fun things. So getting around a process very early and ahead of time can help you to smooth that transition out.
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Eric White Well, and the tough part can also be you’re used to doing a job getting paid. And now your money is coming from this ubiquitous agency that you don’t really interact with too much, hopefully, if you’re a longtime federal employee. So you know what happens between getting that final paycheck and then the pension now is fully up and running and you’re starting to see that money come in?
Thiago Glieger It is very ambiguous. You’ve got a pile of money that you’ve saved, and then there’s a stream of income somewhere that’s going to show up one day. And we know that there is often this gap between when you get your final paycheck and when the annuity payments really begin. It’s usually a few months in most cases, although this year has been a little bit slower given how many feds retired at the end of the year. Now, you start to get these little interim pension payments, which are much smaller than what your final amount is going to be. But they are still not consistent. And so one important factor is to know, you know what? We’re going to need to have some cash on the side to take care of ourselves because that window of time — we’re not having a paycheck and we’re not going to have our full pension either. So the portfolio can be set up in such a way that you’ve got these different buckets, each designed to give you the money that you need for different phases of your retirement.
Eric White The bucket strategy, what does that look like in the first few months? Is it just what it sounds like — just trying to have as much water-slash-money as you can draw from in those times of need?
Thiago Glieger Absolutely. And you want to try and think about your buckets as a season of life. Usually the very first bucket is your very conservative bucket. I like to tell retirees to think anywhere between one to as many as two years of all of your expenses that you’re going to need inside that bucket. So you put the money in the bucket and then what? Well, if it’s going to be short-term and conservative, what do we know about the markets that is challenging? We know that in the short-term volatility that comes with stocks, that’s risk to us as a short-term retiree. It’s opportunity in the long-term, but we got to be careful in the short term. So what do protect ourselves, and how do we protect themselves, against short-term volatility? Cash, money markets, you can use things like CDs. So those are the things that go inside that short-term bucket. You think about 12 to 24 months of how much money you’re going to need, and then figure out how to split that between cash, CDs and other conservative buckets. As you get to bucket two and three, that’s a little beyond the two years, maybe three to six, seven years, and then the longer buckets, seven to 10, 12, so on and so forth. And the longer you have to leave that money untouched, what do we know about leaving untouched money in the TSP? If you invest aggressively and you leave it a long time, that gives you the chance of growing that money. So the same is true for those aggressive buckets. If you put stocks in those long-term buckets and you just leave them, the markets over time are really likely to give you the growth that you want. So some money is for short, some is intermediate, and then some is long-term, and that prevents you from taking money when the markets have fallen, because your short-term bucket is safe and sound.
Eric White Once you do reach that point that we’re all striving for, where your income and benefits are all set and in motion and you’ve got that plan laid out, what are the other things that retirees are going to want to review and keep an eye on, even as you have that stability in money coming in?
Thiago Glieger You know, Eric, people think that leading up to this point is the hardest part, coming up with that whole plan. But in truth is that is one of the easier parts implementing the plan correctly. Long-term is the part where a lot of people struggle. The biggest thing, Eric is when you have these buckets, it’s more important that you focus on when you’re taking the money out and how you’re actually distributing those funds. Because you’re now factoring taxes, you’re factoring volatility and a whole bunch of other elements that either help you keep moving in the direction you want to be moving in, or start to deviate your retirement plan, even that early in retirement. You don’t want to do random transfers from the accounts. You need to be strategic about how you’re pulling the money out. The other thing that’s really important is thinking about your pension that’s going to start. That’s 100% taxable. Social Security decisions are going to come up at some point. You can take it as soon as 62, although full retirement is 67. A lot of people like to wait until 70, so which one is the right choice for that? And thinking around what’s probably going to be your biggest expense in retirement right now, which is a three-letter word: tax. A lot people think it’s health care, but your taxes are typically, for most people — of course unless you have a gigantic $1 million health bill one day — but for most normal retirements, taxes are going to your biggest expenses and you have total control over that in retirement.
Eric White Are there any other pointers that you can give federal retirees who are new to this and are hoping to have a long and successful retirement without having too much anxiety?
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Thiago Glieger I think the big thing that people tend to neglect longer term in retirement — and this is very normal, they’re excited about early retirement — is they’re not thinking about taking care of their health 20, 25 years from now. They’re in their mid-50s, early 60s, they’re very healthy in most cases. But what about long-term care? We know that taking care of ourselves is only going to get more and more expensive as we age, and of course as time goes on, health care rises very fast in terms of expenses. So we want to make sure that we’re doing some planning right now to think about, what if we have a long-term care event down the line? Can we protect ourselves? Can we still use our money? Do we have enough at that point? Can we maintain our independence? Or are we going to be a burden to our family and friends at that point? So some planning around this — and there’s ways to solve for it; maybe you invest a particular way to take care of that. Maybe you allocate a part of your money that you just put aside to be able to be used for that. Or there’s insurance companies, too, that will offer long-term care insurance. There’s the federal long-term care program if you used to be in it, they don’t offer anybody new. But there’s a lot of ways to solve for that. So just remember that if there’s any parting words, there’s lot more than just investments and how to take the money out. You want to make sure you’re looking at everything so that you live a retirement you’re proud of.
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