Music reflects and expresses life in ways that are often failed by words. This may even be true for retirement planning.
Two famous old songs may convey music’s ability to communicate that observation even when planning for a financially successful retirement. While quite dissimilar in their messaging, they are unique and lyrically supported approaches that could be attributed to pursuing a desired financial outcome…Two sides of the same record.
Side A – Que Sera Sera
The late actress and singer Doris Day introduced a delightfully melodious phrase to our everyday lexicon in 1956 when she recorded Que Sera Sera. The term loosely translated to, “Whatever, will be, will be,” meaning the future is unknown, unpredictable, up in the air, and whatever is going to happen, is just going to happen. It is what some may refer to as fate.
The song promotes gleefully accepting life as it comes since you cannot predict, let alone control, the future. A charming sentiment to life in general, but perhaps a somewhat listless approach to preparing for one’s future financial fitness.
The “Que Sera Sera” approach to financial planning
Ask yourself if any of this sounds familiar:
- Since I will receive a pension and qualify for Social Security income benefits (for FERS), hopefully, everything will work out on its own.
- I don’t understand the TSP or outside investment choices, IRA vs. Roth, how much to invest, or what investment option(s) are right for me.
- I would rather do nothing and hope for the best rather than make a decision that turns out bad.
- I will live my life today and hope for the best during 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 in making retirement planning or investment decisions.
Fear of making a mistake is a grimace producing sour note indeed, yet an unwelcome tone we all screech from time to time. As Elbert Hubbard said,”The greatest mistake you can make in life is to continually fear you will make one.”
Ms. Day’s harmonic approach to life, while a truly lovely sentiment in general, may be flawed as a harmonious retirement manuscript.
Plan A’s potential unmelodious defects
Lack of attentiveness to retirement assets such as TSP savings
Have you ever listened to an undirected orchestra or seen a beautifully shaped garden flourish without a gardener’s caring hand? The Que Sera Sera approach would have you leave your retirement likewise unattended.
Relying too heavily on federal pensions and Social Security income benefits, both of which are vulnerable to inflation, to MAINTAIN a desired federal retirement lifestyle
Federal pensions and Social Security income benefits may fall short of monthly obligations over the long-term due to the thrumming of inflation, potentially resulting in more month than money for some.
As an example, meet Larry.
Larry’s Inflation Edification
Larry (not his real name) is a recently retired 65-year-old federal employee. He served for 30 years and has anticipated his fixed retirement income (FERS pension and SSA income) to be approximately $7,000 per month, and his monthly retirement outlays to 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 approximately $650,000 in his TSP.
Of note, Larry loves boating and fishing.
Larry admittedly, “Que Sera’d” his way to his retirement date, yet he felt satisfied with his impending departure. He was so pleased with his assumed financial future that he even considered pulling money from his TSP funds to buy:
- A lake boat.
- A ¾ ton truck to tow it.
- And a lake lot from which to drop it into the water.
Larry was excited about and felt confident in this plan, but he also thought it best to get a second opinion by participating in a federal Retirement Readiness Review.
From that meeting, Larry learned taxes alone on such a move would be massive. Larry estimated…
- Boat – $40,000 +
- Used truck – 45,000 +
- Lake front property (just land) – $189,000
- = $274,000
Using the 2021 federal tax bracket, this amounted to $95,900 in taxes. ($274,000 x 35% = $95,900)
Perhaps worse yet, this composition could turn into a long-term flop to his retirement income. $650,000 – ($274,000 + $95,900 = $369,900), = $280,100 left in his retirement savings. This is simple math. The real amount of total federal tax would be higher still since Larry would also have to pay tax on the $95,900, he pulled to pay taxes.
It was also discovered in his review that Larry hadn’t considered the inflationary impact on his plan.
If inflation outpaced cost of living increases in his fixed income by an average of just 3% per year for 5 years, Larry’s cushion would disappear. 3% x 5 = 15% (simple interest, not compounding). $6,000 x 15% = $900. $6,000 + $900 = $6,900. $7,000 – $6,900 = $100. At that point, his soft, comfy cushion would shrink to little more than a thin layer of delicate tissue.
Stretch that assumption out for 10, 15, or 20 years and a grim picture takes form: being unprepared for inflation could be financially ruinous, especially if he devastated his TSP savings as greatly as he had hoped. A wise choice would be to preserve, protect, and (hopefully) grow his retirement savings to serve as an additional income source late in life.
Side B – “I did it MY way” approach
Directing a strong backup chorus of self-controlled savings and investments could have a sweet timbre to it.
In 1969, Frank Sinatra, a distinctively different actor, and noted crooner, helped popularize another great oldie called My Way that promotes taking a significantly different approach to life.
In Frank’s iconic ballad, he was not content to rely on fate. His words instead promoted self-determination, taking his life and his future into his own hands.
Frank’s method has the distinctive quality of focused direction vs. Doris’ method of sublime uncertainty.
The side B approach requires some active participation in one’s financial future.
A few options to preparing for a more self-determined retirement:
A little learning may go a long way
Take a thousand-foot overview of your future financial resonance (estimated retirement expenses, income, and savings). This should start as early as possible and last throughout retirement.
Work with knowledgeable professionals
A professional advisor, fully proficient in federal retirement systems, maybe a welcome accompanist. Just make sure to ask a few questions concerning their experience working directly with federal employees.
Some advisors, while well-meaning, that don’t specialize in federal retirement systems, often simply don’t know what they don’t know. A missed note here may lead to a retirement bomb.
Here’s an idea for a few control questions to ask to determine their federal retirement knowledge and experience:
- Do they know the difference(s) between FERS and CSRS retirements?
- They should be fully aware of the calculation differences in CSRS vs. FERS pensions.
- They should also (at a minimum) be aware that FERS employees may qualify for Social Security income benefits, but CSRS will not.
- How many FEDERAL retirees have they assisted in developing a comprehensive retirement plan?
- You may not want to work with a newbie to federal retirement planning. If they have worked with at least 40 federal retirees, that might be a good starting point. I suggest you let them gain experience and learn their craft on somebody else’s life savings.
- Are they familiar with the funds currently available in the TSP?
- This is a no-brainer for an advisor that specializes in federal retirement planning.
- They should be able to list them (G-fund, F-fund, S-fund, C-fund, and I-fund).
Understand sometimes you just need to flip the record over:
- Take ownership of your financial future.
- Create and stick to a plan. If you feel confident to go it alone, great. If not, again, locate a knowledgeable 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’s right for you. Find a chorus that allows you to harmonize diverse investment instruments performing symbiotically but separately. A short list of things to contemplate in your plan:
- Consider the costs of your wants as well as your needs.
- Give each item a monthly/annual value.
- Total those anticipated expenses, then compare them to your known fixed income.
- Understand your current investment risk tolerance, then estimate that tolerance during your retirement years. You might want to align investment choices to coincide with your risk tolerance.
- Account for inflation in all your expense calculations. Even moderate inflation over an extended period can drastically impact income vs. expenditure 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 a note unsaid.” ― Langston Hughes
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