Retiring after a career of federal service can be a relaxing and enjoyable chapter in one’s life. The experience can be even more gratifying if the finances are suitable and needless wealth managing hazards have been avoided.
Many loyal FedSmith readers are confident, perceptive, and inquisitive when it comes to retirement preparations. They are cautiously optimistic they will avoid common hazards others before them have suffered, first by identifying how the F’s happened in the past, then discovering potential steps they can take to avert them.
They understand some predecessors may have inadvertently created their own “flubs” (blunders). While other past feds were virtually paralyzed by fear of constructing a comprehensive retirement plan, that may fail them. And yet another group befell unfortunate influence by listening to the wrong voices (both friends and frauds).
Individually relevant snags and risks will understandably differentiate from person to person. The following is not designed to be a full list of every possible hitch, yet it will represent a list of common hazards federal employees should be aware of.
Don’t start saving for retirement until later in life
This is not a problem exclusively among federal employees. Most individuals don’t start saving early in their work lives.
According to a Motley Fool article dated 12/17/18, the average American starts saving for retirement at 31 years old. Starting to save this late can be costly, if not understandable. Life often hits younger folks fast and hard. Paying off college debt and getting their adult financial footing can often be tremendous impediments.
Not calculating what will be needed; instead, focusing on what will be available
This is, in my opinion, a backwards approach that could overburden an otherwise sound retirement plan by relying on unsubstantiated needs estimates.
Some federal employees will set up automatic contributions to their TSP every pay period, but ignore their future financial retirement health. Imagine ignoring a car’s mechanical health, such as belts, hoses, filters, and oil changes. How well would a vehicle run after 30 to 40 years of that?
Not enough financial education / Not understanding personal risk tolerance
This is a systemic dilemma, again, not just for feds, but for all Americans. There just isn’t enough education in high schools or college on personal finance or retirement planning which leaves many confused federal employees trying to perform intricate financial health care procedures without even knowing how to take their own economic temperature.
Keys to Avoiding Future Financial Flubs
It’s never too late, however, it is also never too early to start saving. Regardless of age, feds should, at a minimum, strive to equal the federal employer match (5%) in their TSP retirement accounts. Money saved early in life has the potential to compound several times prior to retirement. Even small amounts could add up over time.
Set a Goal
Federal employees can help their causes by determining, in today’s dollars, what they will “need” to retire comfortably. Waiting until the last minute and making their retirement incomes fit their assets is not advisable.
A rather simple step would be to add up the previous 12 months of expenses (usually already figured for you on your bank statement) then divide by 12. This would provide a good idea of what is spent monthly today.
From there, add any known additional expenses that will be included at retirement and subtract things that will no longer be paid for. It’s a start.
Minimal effort (i.e. hoping for the best) could work out just fine, but I honestly wouldn’t suggest it.
I had an old gas guzzler with a lousy gas gage in high school, so many times, I would hope for the best when I wasn’t sure how much gas was actually in the tank. Not surprisingly, I frequently ran out of gas and had to get out and push.
Monitoring retirement balances and reassessing risk tolerance for both the individual and his or her retirement accounts on at least an annual basis would be prudent.
Seek Out Information
Well-respected sites, like FedSmith, can be a good source of information. So can the Office of Personnel Management (OPM). You can also potentially improve your chances of success by working with a planning professional that is TRULY knowledgeable about federal retirement income benefits.
Fear can be debilitating to someone concerned about managing their retirement. Common concerns:
- Analysis Paralysis – Too much unfamiliar and uncomfortable information can cause some to freeze up and do absolutely nothing. Remember the immortal words from the iconic band, Rush: “If you choose not to decide, you still have made a choice.”
- Investing with too much risk –Taking excessive risk may cause unnecessary anxiety, especially in a bear market.
- Not taking enough risk to provide a reasonable rate of return – As a rule of thumb, it is anticipated that Risk = Reward. Not enough risk may lead to retirement savings insufficient to fund a desired retirement lifestyle.
Keys to Overcoming Financial Fears
Knowledge breeds confidence
Start with a little research on federal retirement to take away some of the uncertainty. I hate to keep ringing the same bell, but OPM.gov has amassed a trove of info to plow through, although if you have neither the time or inclination to wade through their massive amount of material, you should consider finding a reliable advisor that already possesses the information you require.
Since we are all different with different needs and apatite for risk, measuring risk tolerance can be a valuable tool for investing correctly.
There are numerous risk tolerance calculators on the web such as CalcXML and the University of Missouri, however, I personally prefer the calculator created by Riskalyze. It provides a potentially more accurate individual risk assessment as it uses a distinctive numerical score to characterize someone’s risk tolerance. I am able to offer this unique calculator (also free) as part of our Federal Retirement Readiness Review.
The movie The Sting was a lighthearted, Oscar Winning comedy Starring Robert Redford and Paul Newman. These two “Grifters” were likable characters because their hustle was designed to usurp money from a notorious gangster.
Alas, this is real life. Real grifters are not at all likable, as they use various underhanded tricks designed to steal from good honest people:
- We have all heard horror stories, particularly involving elder folks, that have had their life savings literally filched from them via email or phone scams.
- Ponzi schemes were originated by Charles Ponzi in 1919 but were reintroduced to the public by Bernie Madoff when he was caught in 2008. It’s a kind of pyramid scheme; take money coming in from new investors to pay high promised returns to existing clients. Wash, rinse, repeat…until the pyramid collapses.
- Internet Investment fraud is becoming more and more prevalent, but since most of these schemes are initiated outside the US, they are hard to police.
- Some fraudsters will ignore an investor’s true risk tolerance and placing a relatively conservative investor into commission generating penny stocks, options, and futures and then continuing to create those commissions by constantly moving from one high-risk investment to another.
Keys to Protecting from Financial Frauds
Caution is your catchword when avoiding financial frauds. Be alert and inquisitive when it comes to your money! Someone told me once, “If you are sitting at a poker table and figure out who the sucker is…the sucker is you?” Don’t make it easy for anyone to con you.
Greed is not always bad, but too much greed can be an opening to those that would happily relieve you of your life’s savings. Remember, when handing over your money to someone, if an opportunity sounds too good to be true, it very well could be. Example: It surprised and alarmed me the first time I heard of a church group duped by one of their own, but it does happen.
Invest for the long-term as much as possible. Remain slow and steady, and don’t expect or even seek unreasonable returns. Even if the advisor isn’t crooked, you will likely be disappointed or end up investing in a manner opposed to your true risk tolerance. This could lead to potentially uncomfortable retirement altering consequences.
As a friend or co-worker, the familiar voices giving advice certainly mean no harm. However, as helpful as they would like to be, there is a single and undeniable truth that likely will get overlooked by these favored chums. It is not rocket science, but it is often not considered.
What is this undeniable truth? We are all different!!!
What works for someone else may NOT work for others. Many of these personal, trusted authorities may know a great deal about investing. They could even have an extraordinary amount of information compiled. Thus, they are often considered reliable because they sound knowledgeable and have no reason to lead anyone astray. Unfortunately, since this is a part-time gig for them, most could be completely unaware that they don’t know what they don’t know.
There are some obvious and some not so obvious hurdles facing feds preparing for or currently living in retirement, but a little effort, some exercise in patience, research, and some good old fashion horse sense could help avoid falling prey to any of the 4 F’s of federal retirement.
Infinity Financial Services is a Registered Investment Advisor and a member of both the Financial Industry Regulatory Authority (FINRA®) and the Securities Investor Protection Corporation (SIPC).
Any opinions expressed in the article are those of the author alone. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risks, including the loss of principal. No strategy assures 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 on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com.