“There is no such thing as luck. There is only adequate or inadequate preparation…”
I believe many Federal Employees are fast approaching major financial instability.
Surprisingly, (if I am right) it will be triggered by something as mundane and (idealistically) anticipated as retirement. However, retirement itself isn’t the culprit. The lack of pre-retirement planning will likely cause this future instability.
Feds are often unaware of and unprepared for retirement obstacles such as:
- Budgeting.
- Inflation.
- Taxes.
- Knowing how much income they will have during retirement.
- Knowing how much income they will need during retirement.
- When to turn on certain retirement income benefits.
- How to plan to ensure income and resources last a lifetime.
I believe most Feds can not only survive, but thrive, if they plan for their financial futures. Not only could they pursue a comfortable retirement income, they may be able to retire well ahead of their current “plan.”
But, here’s the rub. Feds (for the most part) seem to fail to make any real effort to realistically plan for their financial futures. Some are guilty of thinking that they will take care of it later. Others feel overwhelmed by the prospect of figuring out what to do. And yet another group are simply afraid of making a mistake. The result of all three is they do nothing and hope for the best.
Eight years ago I met Jim Enlighten (a Federal Employee) that was determined to buck this unfortunate trend.
Jim and his wife had a retirement dream and pursued it throughout their working years. By the time I met them, they had already done a good job of saving and keeping their eye on the prize. But, they didn’t have a plan, so much as a goal.
Their original strategy called for both of them to retire when Jim turned 60. I’m happy to announce, they retired 2 years earlier, when Jim was 58, just by developing and sticking to a solid financial plan!
Quick Clarification – What is a financial plan? (Get ready for some jargon) I would describe it as being a comprehensive evaluation of a person or couple’s current and future financial state by using known variables such as: current assets, future income needs, current expenses, future anticipated expenses, etc… The idea is to attempt to predict future cash flows, cash flow needs, asset values and an intelligent withdrawal plan. It may include current and future budgets which are designed to organize finances and should include a series of steps or specific goals for spending and saving in the future. Taking into account, inflation, taxes, risk management, estates and retirement.
The following will show some of the course changes the Enlightens were able to make after creating their own personal Financial Plan.
The first step was to complete a Federal “Retirement Readiness Review” (RRR). It does what its name implies. It’s an in-depth review that determines the retirement readiness of a federal employee.
The Enlightens felt they were “Moderate Conservative” investors. Which, by the way, is the most common self-description I see used. Coincidentally, it is also the most commonly misused self-description I see used. They were actually much more aggressive in nature than they thought, yet their retirement accounts reflected a lean towards an ultra-conservative approach.
Investing
The couple quickly completed both at “Retirement Readiness Review” and a risk analyzing test. With this information in hand, Jim was able to make intelligent changes to his TSP and IRA allocations. These course corrections made his portfolio more susceptible to achieving their desired growth rate. Other changes included funneling non-retirement CD’s into investment options that offered greater growth opportunities, also much more in line with the couples risk comfort zone.
Planning for life events
Planning for life events is tough to do off the cuff. This area is something that quality wealth advisors (knowledgeable in federal retirement income benefits) can offer a huge advantage since (due to their daily exposure) they are often able to uncover potential events and solutions that most wouldn’t know how to plan for.
Example
Jim’s father passed away from heart disease when he was only 61. Jim said his mother struggled financially after he passed. She even took on part-time work as a seamstress well into her 70’s. Jim wanted to ensure his wife wouldn’t be subjected to this type of hardship if an early demise was in store for Jim as well.
His initial strategy was to take the smallest payout from both his federal pension and SSA income benefits when he retired. This was a caring approach that would provide his wife with the highest payout from each in case he passed early in retirement. However, during the planning process, we discovered that this would put too much of a strain on their early retirement income needs, ultimately causing the couple to put off their long dreamed about retirement years.
Instead, Jim took the higher payouts but, with extra income, was able to fund a significant life insurance policy…and add to their savings.
This move allowed them to:
- Enjoy a larger income now.
- Let both retire younger.
- Not hurt Mrs. Enlighten, if Jim passes early in their retirement.
Distribution plan
They now have a focused distribution plan that should carry them from Jim’s federal retirement date (at 58 years old) throughout their lives. He will:
- Start taking his federal pension (annuity) and SRS (bridge payment) immediately.
- Take $1,100 dollars per month from his TSP at 62 until he reaches full SSA benefit age of 66 (+).
- Not touch his TSP again until he reaches 70 ½.
- Begin taking Social Security at age 66 (+), and his wife will start hers 6 months later. Their plan estimates that this will give them an excess of $3,100 per month (at 66).
- Take Required Minimum Distributions (RMD) from his TSP and IRA at 70 ½; the extra income will help offset inflation by adding an anticipated $2,200 per month.
They estimated that their monthly expenses in early retirement would be $4,300. They also said they want to take two trips per year, such as a cruise to Australia. This is obviously expensive. But, because they created a plan (not to fail), which included proper retirement distributions, we were able to construct a map that will allow them to achieve their goal to travel.
Thanks to these new plans, they were not only able to retire securely, but two years earlier than they had originally hoped.
Jim’s plan will not work for everybody since each federal employee has his own financial goals, life events, and investment risk tolerance. However, you can create your own retirement plan that meets your needs and puts you on the path towards a prosperous retirement.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Securities offered through LPL Financial, member FINRA/SIPC.