Music reflects and expresses life in a way often missed by words. This may even be true for retirement planning.
Two famous old songs can convey the ability of music to communicate this observation even when planning for a financially successful retirement. Although very different in their messages, they are unique and lyrically sustained approaches that could be attributed to the pursuit of a desired financial outcome… Two sides of the same record.
In front of – What will be will be
The late actress and singer Doris Day introduced a delightfully melodious phrase into our everyday lexicon in 1956 when she recorded What will be will be. The term loosely translates to “Whatever will be, will be”, which means the future is unknown, unpredictable, up in the air, and whatever will happen, will happen. This is what some call fate.
The song promotes joyful acceptance of life as it comes, because you cannot predict, let alone control, the future. A charming sense of life in general, but perhaps a somewhat listless approach to preparing for future financial health.
The “Que Sera Sera” approach to financial planning
Ask yourself if any of these sounds familiar:
- Since I will be receiving a pension and will be eligible for Social Security Income Benefits (for FERS), I hope everything will work itself out.
- I don’t understand the TSP or outside investment choices, IRA vs Roth, how much to invest or which investment option(s) are right for me.
- I’d rather do nothing and hope for the best than make a decision that goes wrong.
- I will live my life today and hope for the best in my retirement years.
The popularity of Plan A is easy to understand. Many feds may not have the experience or knowledge that would allow them to feel confident planning for retirement or making investment decisions.
The fear of making a mistake is a grimace producing a sour note indeed, but an unwelcome tone that we all shout from time to time. As Elbert Hubbard said, “The greatest mistake you can make in life is to continually fear making one.”
Mrs. Day’s harmonic approach to life, while a truly lovely sentiment in general, can be flawed as a harmonic retirement script.
Plan A’s potential non-melodious flaws
Lack of attention to retirement assets such as TSP savings
Have you ever listened to an unconducted orchestra or seen a beautifully designed garden bloom without the caring hand of a gardener? the What will be will be approach would have you leaving your retirement home unsupervised as well.
Over-reliance on Federal pensions and Social Security benefits, both of which are vulnerable to inflation, to MAINTAIN a desired Federal retirement lifestyle
Federal pensions and Social Security income benefits may be less than long-term monthly obligations due to soaring inflation, which could mean more months than money for some.
For example, meet Larry.
Larry’s Inflation Building
Larry (pseudonym) is a recently retired 65-year-old federal employee. He served 30 years and projected that his fixed retirement income (FERS pension and SSA income) would be approximately $7,000 per month and his monthly retirement expenses would be $6,000 per month. He was very proud of his $1,000 ($7,000 – $6,000 = $1,000) “cushion” (as he called it).
Larry also has around $650,000 in his TSP.
Of note, Larry enjoys boating and fishing.
Larry admitted it, “Que Sera’d” his way to his retirement date, but he felt content with his impending departure. He was so happy with his supposed financial future that he even considered withdrawing money from his TSP funds to buy:
- A lake boat.
- A ¾ ton truck to tow it.
- And a lake to throw it into the water.
Larry was excited about this plan and had confidence in it, but he also thought it best to get a second opinion by participating in a federal investigation. Retirement readiness exam.
From this meeting, Larry learned that the taxes alone on such a move would be enormous. Larry felt…
- Boat – $40,000+
- Used Truck – 45,000+
- Lakefront property (just land) – $189,000
- = $274,000
Using the 2021 federal tax bracket, that equaled $95,900 in taxes. ($274,000 x 35% = $95,900)
Perhaps even worse, this composition could turn into a long-term flop for his retirement income. $650,000 – ($274,000 + $95,900 = $369,900), = $280,100 remaining in his retirement savings. It’s a simple calculation. The actual total federal tax would be even higher since Larry would also have to pay tax on the $95,900 he drew to pay taxes.
It was also discovered in his review that Larry failed to factor the inflationary impact into his plan.
If inflation outpaced increases in the cost of living on his fixed income by just 3% per year on average for 5 years, Larry’s cushion would disappear. 3% x 5 = 15% (simple, non-compound interest). $6,000 x 15% = $900. $6,000 + $900 = $6,900. $7,000 – $6,900 = $100. At this point, her soft, comfortable cushion would shrink to little more than a thin layer of delicate fabric.
Stretch that assumption out over 10, 15, or 20 years and a bleak picture emerges: not being prepared for inflation could be financially ruinous, especially if he devastated his TSP savings as much as he had hoped. A smart choice would be to preserve, protect and (hopefully) grow your retirement savings to serve as a source of additional income later in life.
B-side – “I did it MY way” approach
Leading a loud chorus of self-controlled savings and investments could have a sweet tone.
In 1969, Frank Sinatra, a distinctly different actor and famous crooner, helped popularize another great classic called My way that promotes a significantly different approach to life.
In Frank’s iconic ballad, he didn’t just rely on fate. His lyrics instead encouraged self-determination, taking his life and future into his own hands.
Frank’s method has the distinctive quality of focused direction compared to Doris’ method of sublime uncertainty.
Side B’s approach requires some active involvement in one’s financial future.
Some options to prepare for a more independent retirement:
A little learning can go a long way
Get a thousand-foot snapshot of your future financial resonance (estimated retirement expenses, income, and savings). This should start as early as possible and last throughout the retreat.
Work with knowledgeable professionals
A professional adviser, perfectly familiar with federal pension plans, may be a welcome guide. Just be sure to ask a few questions about their experience working directly with federal employees.
Some well-meaning advisors who don’t specialize in federal retirement systems often simply don’t know what they don’t know. A missed note here can lead to a retired bomb.
Here is an idea of some screening questions to ask to determine their knowledge and experience of federal retirement:
- Do they know the difference(s) between FERS and CSRS pensions?
- They must be fully aware of the differences in calculation between CSRS and FERS pensions.
- They should also (at a minimum) know that employees of FERS may be eligible for social security benefits, but not the CSRS.
- How many FEDERAL retirees have helped build a comprehensive retirement plan?
- You may not want to work with someone new to federal retirement planning. If they’ve worked with at least 40 federal retirees, that might be a good place to start. I suggest you let them gain experience and learn their trade on someone else’s savings.
- Do they know the funds currently available in the TSP?
- This is obvious to an advisor specializing in federal retirement planning.
- They should be able to list them (G-fund, F-fund, S-fund, C-fund and I-fund).
Understand that sometimes just flipping the disc is enough:
- Take charge of your financial future.
- Create and stick to a plan. If you feel confident going it alone, great. Otherwise, again, find a competent advisor. But stick to it. I generally urge my federal partners to avoid the temptation to “outsmart” (or time) the markets.
- Create a well-thought-out plan that works for you. Find a chorus that allows you to harmonize various investment instruments working in symbiosis but separately. A short list of things to consider in your plan:
- Consider the costs of your wants as well as your needs.
- Give each item a monthly/annual value.
- Total these expected expenses, then compare them to your known fixed income.
- Understand your current investment risk tolerance, then estimate this tolerance during your retirement years. You may want to align your investment choices with your risk tolerance.
- Consider inflation in all your expense calculations. Even moderate inflation over an extended period can have a huge impact on income/expense ratios.
- Consider the costs of your wants as well as your needs.
“Life is for the living. Death is for the dead. Let life be like music. And death an unsaid. -Langston Hughes
The opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations to any individual. Investing involves risk, including loss of principal. No strategy guarantees success or protects against loss. Silverlight Financial, Infinity Financial Services and its affiliates do not provide tax, legal or accounting advice. This material is not intended to provide and should not be relied upon for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before entering into any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com
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