The RIGHT Way to Use the TSP

knowing how to use the tsp properly is incredibly important not just when you're working but also when you're retired most of you watching are probably late career feds but even if you're not there's some really important principles you need to keep in mind and doing these things correctly could mean the difference between having a successful retirement plan or having one that may have failed you might think that when you're retired all you need to do is just take money out of your tsp but our clients know that it's not that simple and they know that by thinking in this way that we're going to talk about it'll give them the best chance of having a successful retirement and so we're going to talk about what the right way is to use your money when it's time for it to start supporting you and the first thing you really need to come to terms with and understand is what are your monthly cash flows most people don't really know exactly how much they spend each month they have a rough idea about what their mortgage is or what their General grocery bills are things that are more normal on a day-to-day basis but you also have to think about how often do you buy cars right and do you pay cash for these or do you finance them but there's other things too right like what about your internet or cell phones or technology or clothes or various other parts of your lives that just make up that monthly cash flow so unless you're tracking all of your expenses with Quicken or Excel or you're doing some serious budgeting here's a quick way that you can get pretty accurate on this number first you want to start off with your paycheck how much did you make on a bi-weekly basis then you're going to want to take out fehb contributions tsp contributions taxes if you have fegly all of the different parts that get pulled out of your paycheck before it hits your bank account and what we get at the bottom of that that's your net payment that goes into your bank account right now when you look at your Banks so your checking or savings accounts what's happening in those accounts on a year-over-year basis are they going up over time or are they going down here's what happens for most people they go up for a little bit and then they go back down when there's a big vacation during the summer and then they go back up again after the summer is over then goes back down again once the holiday season comes around and so for most people when we look at year over year while it fluctuates a lot during the year they don't generally end the year with more money in their savings than they did in the beginning of the year and so what that means is that basically all of your net cash flow after your tsp contributions and taxes and insurance all of that is essentially being spent so that's how you figure out your cash flow so on an annual basis you have 26 pay periods right so you multiply that number your net pay by 26 and then if you want to know the monthly figure you divide that by 12 and that's essentially a close enough cash flow budget for your month-to-month expenses now if you're actually doing more Savings in year upon year your savings accounts keeps getting bigger or maybe you're actually sending money to an investment account or maybe a savings somewhere else that you don't really use then that's obviously an amount that you can reduce from your monthly cash flows as your expenses so now that you have your monthly cash flow we can work backwards and figure out how much of your first pension and social security is going to cover that need so let's say for example that your monthly expenses are about nine thousand dollars per month now depending on how long you have until retirement you're going to want to adjust that number for inflation on an annual basis but for the sake of this example we'll just assume you're retiring today now let's say that your first pension is going to be three thousand dollars a month and your Social Security will be two and a half thousand each month as well so that means that between the two of them you have five thousand five hundred dollars a month out of the nine thousand dollars that you need each month right well not quite remember that your first pension is one hundred percent fully taxable at ordinary income rates so that's federal income tax and depending on where you live state income taxes as well now what else could actually come out of that pension as well remember fehb premiums are going to come out of your first pension in retirement and there's also something else your Survivor benefit pension remember that's a 10 cost that comes out of your first pension for you to leave your pension to your spouse in case you die before that and remember part of your Social Security is also going to be taxed now this range is depending on your tax bracket but for most people some of their social security is also taxed so suddenly this 5 500 a month is now actually probably going to be closer to four thousand dollars a month or maybe even less depending on where your tax bracket is and folks just as a side note this is one of the reasons we focus so heavily on tax planning with our clients if you are not careful about how you're generating your retirement income there could be even more of your pension and social security that has to come out and go towards taxes and less money for you all right so in our example we said there's nine thousand dollars a month after taxes that you need for monthly expenses so remember that's a net amount after taxes and we just talked about how Furs and Social Security will be somewhere around four thousand dollars a month after taxes and deductions so what this means is that we have a five thousand dollar a month retirement income gap if I could spell and that amount has to come out of your tsp or other portfolio accounts so now that you know how much money you need every month how do you go about creating a system that's going to get you that cash flow each month now this is where most retirement plans start to head in the wrong direction and where a lot of people begin to get themselves into trouble so let's say that this is your tsp account and let's call it a nice round one million dollars and let's say that you've got some C Fund in here some s funds some ifun some G fund and F fund or if you have a life cycle fund again it's just a combination of these five core funds so in our example we say that you needed five thousand dollars a month to come out of your portfolio so all we have to do is tell the tsp to send us five thousand dollars right again not quite this is just like before when we were talking about how your first pension is reduced by taxes so same idea here everything inside the traditional tsp is pre-tax so how much do you need to take out so that after after taxes you then can still receive five thousand dollars a month and as a side note remember there's only a few states that don't have state income tax and the tsp is not going to do that withholding for you so you might want to take out a little more to save for those taxes as well but for our example let's just say that number is actually six thousand dollars a month because after taxes that'll get you the five thousand well we multiply that by 12 months and that equals seventy two thousand dollars a year that has to come out of your one million dollar tsp account now when we look at this as a percentage in terms of what your withdrawal rate is that's a 7.2 percent withdrawal rate from your portfolio which is rather high in financial planning Theory now a safer number would be lower than that a lot of you have heard about the four percent rule but again that is a huge generalization this number that is safe for someone to withdraw is going to vary greatly on a number of different factors and what your liquid net worth looks like so the next question you need to ask is well now which kinds of Investments are going to help me generate that five thousand dollars a month that I need and the other part of this is that future me is also going to need inflation adjusted five thousand dollars a month and so I also need Investments to be growing for me to keep up with my withdrawal as well as growing for inflation because in the future I'm going to need to make more withdrawals well we know that the G fund doesn't really provide growth it's basically earning similar to money markets and we know that the Cs and I funds do have a lot of growth potential but that also means that they come with a lot of volatility right remember that growth and volatility are two P's in a pod volatility is the price that you pay for the opportunity of growth so what that means practically is if you have five thousand dollars a month that you need you don't really want to be pulling that from the c s and I funds because it's very volatile and chances are at some point you're going to need your money when the accounts values have dropped for those funds and you don't want to sell when they're low and this brings me to one of my biggest challenges with the tsp today in fact tsp board if you're watching this maybe this can go into the suggestion box but when you take money from the tsp you don't get to pick which fund it comes from it comes from all of the tsp funds together and that's what provides you the five thousand dollars that you request so that means that when volatility returns because remember it always comes back at some point there's a high probability that you're gonna have to sell csni Investments after they've lost value and that's quite literally the opposite that you want to be doing and this is where a bucket strategy can become really successful in a retirement plan we talk about that in much more detail in other videos and we'll put the links in the description below this one if you haven't seen those videos clients tell us that it's super helpful to them so make sure you check those videos out too before I go to the next Point can you do me a favor if this has been helpful will you hit the thumbs up for us doing that makes YouTube recommend this video to other federal employees who really need to see this as well our goal is to help 300 000 federal employees by 2030 and we could use your help in sharing these videos or even our free blog on our website so I hope that you can help all right so After figuring out how much you need and which Investments are going to help you get that income the next major factor you want to consider is everyone's favorite taxes we just talked about how major tax planning is in a retirement and how it affects that cash flow that you get each month so when you think about your portfolio it makes a great deal of sense to consider having traditional assets which are pre-tax Roth assets which are tax-free and after tax dollars which are things like those brokerages that we've talked about right the individual accounts the joint accounts anything that you've invested outside of retirement and the reason that you want this kind of variety is because you also want to diversify the taxability of your Investments not just the Investments themselves because when you do have this variety you get to design how you're going to generate this five thousand dollars in a way that generates the least amount of taxes along the way because if all of your money is just traditional pre-tax well guess what that full five thousand dollars is going to be subject to tax and what that's going to do is it's going to begin to increase your tax bracket which could affect number one how much of this amount you're gonna have to pay in taxes but also could take bigger chunks out of your first pension and social security like we looked at before and folks if you're not careful about this we could be talking about thousands if not tens of thousands of extra dollars that have to go towards taxes instead of being in your portfolio for you to either spend in retirement or reinvest for yourself and all of that could have been avoided if you just had good planning along the way and if you haven't thought of somebody who might benefit from this video give it a thought and share it with them and check out the other links in the description for more videos that will help you make better financial decisions and until next time stay wise and stay wealthy foreign [Music]

Channel: The Fed Corner - Federal Retirement Planning

Views: 20,956

Keywords: the fed corner, tsp, FERS, OPM, Federal Retirement Planning, FERS Planning, FERS Retirement, FEHB, plan my federal retirement, plan your federal retirement, my federal retirement, SES

Id: XQrgshRqD2k

Length: 11min 24sec (684 seconds)

Published: Sat Jul 01 2023