Val puts into focus the three biggest risks you need to be aware of during retirement: market risk, longevity risk and tax risk. He unpacks the complexities of each and explores strategies to mitigate their long-term impact on your retirement as a former federal employee.
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5.10.24: Audio automatically transcribed by Sonix
5.10.24: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.
Speaker1:
Welcome back to the federal retirement show. I'm your host, Val Majewski with American Benefits Exchange. As always, I appreciate you taking the time out of your schedule to view our content. That is what we are here for is for you, the federal employee out there looking for information, guidance when it comes to your benefits and retirement information. This is our area of expertise. Now, am I going to claim that we know everything about everything out there? No. But if you reach out to us, if you have a question that we can't answer, if there's a topic that we have not discussed, go to our website dot Federal Retirement Show.com. Fill out the form. We can get you some great information. You can reach out to us, ask any questions, suggest future topics that you want to hear about. And oh, by the way, you can get a copy of the book that I wrote on federal benefits and retirement called There's No Excuse Your Guide to Maximizing Your Federal Employee Benefits. So what are we going to talk about today? We are going to talk about eliminating retirement risks. Now, we've talked about or touched on some of these things before, but in recent conversations and presentations that we've given with federal employees and federal employee groups, these things have come up. These questions have come up. So I've come up with top risks that you might face in retirement, and we want to help you eliminate those or mitigate them as best as we can.
Speaker1:
So let's dive into today's topic. Eliminating retirement risks. So what are we talking about and what risks are there? Well, there's a number of risks that you can have in retirement. So we're not touching on all of them. I'm going to talk about in my opinion the top three when it comes to retirement. But you may have different risks. Why. Because your situation is different than the person you work with. You may have come in at the exact same time, worked at the exact same position, worked hand in hand with the person sitting next to you. You're the same age, same family dynamic, but your situation and what you need in retirement is probably going to be different. So the questions that your colleague asks and the questions that are important to your colleague are maybe different than the ones that you have. So that's why everybody's situation is unique, different, individualized, which is why we recommend look, go get a personalized benefits and retirement analysis, personalized benefits and retirement review. Get your individual questions answered because your situation, again is different than the person that works next to you. Even if it looks identical on the surface, it is not, generally speaking. So these risks may be important to you. You may have other risks or other questions or other concerns in retirement. But we're going to talk about the top three as I see it.
Speaker1:
So what are we talking about? Why eliminating the risks. Well, you want to have a successful retirement. You want to be happy in retirement. So success when it comes to retirement really depends on your answer to this question. Have you taken the key retirement risks off the table? Have you eliminated them? Have you thought about them? Have you even looked into what risks may come your way when you do retire? It may not be as easy as you know. I'm putting in my 30 years of service as a federal government employee. I'm going to walk out of here, I put my time in, I'm going to get my gold watch. I'm done. And you may not have looked at some of these risks or some of these concerns that federal employees have, and it may not be as nice as cozy. You may not be as happy as you want to be in retirement. So have you taken the key retirement risks off the table? What retirement risks are we talking about? Well, everybody wants to retire happy. I don't know too many people. That said, I look forward to retirement and I want to be grumpy. I want it to be a bad situation. I want it to be worse than when I was working. That's not the case, right? That's not logical. Most people that I'm going to talk to want to retire and enjoy retirement, want to be happy in retirement, want to make sure that they're taken care of in retirement.
Speaker1:
You've worked all this time. It is your turn to now. Relax, be rewarded for your hard work and all the preparation that you did. You want to make sure that you can retire happy, but what are some of the risks that can prevent that from happening? What are some of the risks that are on the table now? We want to take these off the table. We want to eliminate these risks. But we're going to talk about market risk. And where does that come in. Why do we say market risk. Because volatility and risk when it comes to investing in the market. And this is just a general statement. Right? I'm not making it specific to you because I don't know your situation. That's why we need to sit down with you individually. But in general, taking too much risk in the market when it comes to your retirement savings is not ideal for those that are nearing or entering retirement. Why? Because you may need to be relying on the money. We're going to dive in to this here in just a second. But if you're relying on that money and the market takes a nosedive, and now it's worth less than what you had, and you have to now take money out because you're relying on that for income in retirement, that could be a problem. So that's a risk. Market risk number two is longevity risk.
Speaker1:
Longevity risk. You want to make sure that you have enough money. So longevity what does that mean. Living too long right. What is what can happen if you live too long. You could run out of money if you're not prepared for this. So living too long comes with a number of different risks that I can talk about. But a big thing is making sure you have enough money to live on. Some people have said, and I've, I've heard this, um, you know, longevity doesn't run in my family. Most of my family, my parents, siblings, things like that have passed away before the age of 70. So I'm going to live as if that's going to happen. And next thing you know. They don't. They don't pass away early. They live long. They're the anomaly in their family. And they didn't prepare for that. Now that's a drastic example. But you want to make sure that you've got enough money to live on in retirement along with the longevity risk. It's not just income. There's other things that come into play. Taxation risk. Okay, which way do we think taxes are going to go in the future? What if you can provide more tax free, tax advantaged retirement income for yourself? So you may be looking at this and you may be watching this video and I didn't mention it earlier. I'm going to mention it now. You may be thinking, wow, you're talking about retirement.
Speaker1:
I'm 30 years from retirement. I just got hired. You know, I don't really need to watch the rest of this video. This doesn't pertain to me. It absolutely does. Absolutely does. Because you can prepare for all of these things the entire time you're working, the entire time you're planning for retirement. Now, if you just got hired yesterday, you're planning for retirement now. If you're retiring tomorrow, you're planning for retirement now. Take advantage of all the things the government gives you. Make sure you're maximizing it, and you can eliminate risk along the way. We are not just eliminating these risks. At the 11th hour as you're leaving and going into retirement. These are things that you can eliminate over time. And the earlier you can eliminate them, the better prepared you're going to be for retirement and the happier you're going to be in retirement, the more successful your retirement is going to be. So let's talk about market risk now while you're working, you may be thinking, well, I've been taking, you know, some risk in the market. I've been putting money in all the different stock funds within TSP, and some may be outside investments that you have. And the market's been doing well. My account's been going up. This has been great. I've seen a great return over time in those accounts. And that's awesome. And that's what that's there for. Take advantage of it. But if you are let's just use TSP as an example.
Speaker1:
If you are utilizing your TSP and you're putting money in every pay period, plus you're getting matching funds, if you're a Fers employee and you're seeing that account grow not just because of your contributions, but along the way you're also earning interest. Awesome. But you are getting while you're working something called dollar cost averaging. You can look at my chart here, this heartbeat of the example of the market. You're putting money in. When the market goes up, you're putting money in. When the market goes down, if it goes back up again, you're putting money in in all these different parts of the market, and you're spreading out your risk and spreading out your opportunity for growth by getting dollar cost averaging right. You're buying high, you're buying low, you're buying when it's up you're buying what it's down again and so forth, along with the free money you're getting with the matching. You're getting that averaging. When it comes to risk in retirement, you are no longer putting money into TSP. It's just sitting there. There's no more contributions. There's no more matching. So the market goes up great. Your account goes up, the market goes down, boom, you've lost some money. It goes up, it goes down. The all that can happen is it can fluctuate. If you're taking too much risk. You might see bigger peaks and valleys in this because you're no longer contributing to it.
Speaker1:
Your money is just sitting there and you are subject to the volatility or whatever's going on with the market. So taking too much risk nearing your entering retirement could have an impact on the amount of money you'll have in retirement. There's a lot of folks that I talk to will need to use their TSP as a retirement income source when it's all said and done. So if that's you and you're saying I'm going to use this money in some way, shape or form when I retire, wouldn't you want to secure and make sure you can't lose money as you're walking out the door? Or once you're retired, right. You want to want to say, hey, I've got 500,000 in my TSP. You know, you're getting ready to use it. You look into your account, you're like, whoa, it's down to 450. What happened? Okay. Without doing anything, you lost $50,000. That's a drastic example. But that could happen, especially if you're going to be taking money out. Now we're talking about sequence of returns risk along with market risk. What that means is if you have to take money out of your TSP or you're taking withdrawals over time, it's great. If the market's going up, you're taking money out, the market goes up. It's kind of like replenishing some of that money you took out. But what happens if the opposite occurs and you're taking money out? If the market goes down now, you've got a bigger hit.
Speaker1:
And if you had to take money out again, the market goes down. Now it's not able to catch up and replenish that, or at least break even when it comes to the money you're taking out. So market risk may not be ideal for you, may not be ideal for those that are nearing or entering retirement. Again, this is my opinion. It's not exact science, but that's generally what I've seen with federal employees is taking too much risk as you near or into retirement is not ideal. You can eliminate that risk. Take that off the table as you near or into retirement. If that's right for you. Again, reach out to us. We can review the situation, see if that's a good fit for you. But market risk number one. Number two longevity risk. Longevity risk. Why? Outliving your money is a problem. By going through retirement and running out of money in some way, shape or form is a problem. Now. You're not going to run out of money when it comes to pension and you shouldn't. Although they're telling us differently, you shouldn't run out of money when it comes to Social Security. You want go back and look at the episode where I talked about Social Security and what the Social Security trustees report said recently in 2023, but those two things should not run out of money. The thing where you can run out of money is with your other income sources, like TSP or other retirement accounts, and have not utilized properly and secure another form of lifetime income.
Speaker1:
You could run out of money and be left with less money in the future. So let's read this quote from time magazine says securing at least a base level of lifetime income should be every retiree's priority, at least if they want to live happily ever after. So in retirement, you want to make sure you have enough guaranteed lifetime income as a base level. What does that mean to cover all of your living expenses and then some? All of your basic needs. Not just paying the bills, but able to survive, right? Groceries. Things like that. Living expenses. Travel. If you want to do that, you should have at least a base level of guaranteed. I'll say it again guaranteed lifetime income, not just hey, I need to withdraw 10,000. I need to withdraw 20,000 guaranteed lifetime income. Just like your pension and social Security if you want to live happily ever after. So providing for that means you have to set enough money aside that that extra lump sum, whatever that is, can generate for you. The gap that you need to fill can fill that gap when it comes to your lifetime income. Don't leave it to chance. Let's take longevity risk off the table. And this is just talking about income. What happens if emergencies occur? Because living longer comes with its other risks.
Speaker1:
So longevity risk is a multiplier of other risks. What happens if the longer you live, the more chance you have of running out of money. The longer you live, the more chance you have of getting sick or have something that's going to cost more money. When it comes to your health care, the longer you live, the more likely you're probably going to see the next risk occur that taxes could go up. The longer you live, the bigger chance you might have to be in a long term care type situation. The longer you live, you fill in the blank there, the better chance you might run into something else. So longevity risk is not just about income. It can be about preparing for these other things of what if happens. But the big thing is the big concern with retirees is outliving their money, living too long and not having enough money. So you can take longevity risk off the table by preparing for it, making sure you're setting enough money aside that it's going to be used for income, making sure you utilize that lump sum when it comes to retirement in the proper way so you can turn it into lifetime income money that you cannot outlive. And we can take longevity risk as much off the table as possible. All right. Let's talk about the third one in our top three taxation risk. Taxation risk. Why is this. Because we don't know which way taxes are going to go.
Speaker1:
And we already do know that they're set to expire soon. Our current tax rate. So which way do you think taxes are going to go up which is obviously a negative. We got our red arrow going up down our green arrow. That would be a good thing or stay the same. Which way do you think taxes are going to go. The majority of you that I talked to think taxes are going to go up. Very few say stay the same. And nobody has told me that taxes, they think taxes in the future are going to go down. So what does that mean? If we have taxation risk in the future, that means less of our money is going to be our own. Taxes are going to go up in the future. Less of the money that we get paid is going to be ours. More of it is going to be taken by the government, right? That could be not just, uh, income tax. We could talk about property taxes. We could talk about sales taxes going up. So there's other taxes that you pay besides just income tax. Federal and state. We could talk about property tax going up. We can talk about uh sales tax going up and other taxes that may be implemented that could reduce the amount of money that you're going to be paying. Interest rates can go up. That's not really a tax, but that's something that we're paying a percentage on where less of our money is going to be ours.
Speaker1:
So we can prepare for this from an income tax perspective, income tax perspective, by providing ourselves more tax advantage or tax free dollars in the future. There are ways you can do that. There's your Roth bucket of your TSP. There are outside Roth IRAs. There are other vehicles out there that you can utilize to put money aside, where you can provide yourself future tax free retirement income. Okay, again, no matter how high taxes go with that bucket of money. You don't care. Why? Because it's tax free. Taxes go up to 40% 50%. You don't care because you've provided yourself, at least with these additional funds, a way to provide tax free income. So you're taking that risk off the table when it comes to these other areas of your finances, of your future retirement income. So taking tax risk off the table, we don't know. The government with a stroke of a pen could raise the tax rates with or without our say okay. So. To understand the tax risk is real, because the majority of us are thinking taxes are going to go up. Okay. I believe that they're going to be going up as well. So just understand, if we can eliminate the tax risk as much as possible, we'd be in a better situation, a more confident situation, and we're not going to be subject to as much of government regulation or government decisions as other people will if they didn't prepare.
Speaker1:
So prepare to eliminate tax risk. So those three, right. What were the three main risks we talked about today? Those are not all the retirement risks. We're talking about eliminating at least my top three for today, which are um, making sure that we look at market risk as we near to retirement, looking at longevity risk. That's something that we can be preparing for today. And even taxation risk is something we can prepare for. Uh, when you first get hired, those that are near entering retirement with the taxation risk, we can look to take money that could be subject to tax and turn it into tax free dollars through different conversions and other ways that you can do that. So just understand all of the risks we talked about today are, uh, able to be mitigated. They're able to be eliminated. We can plan properly. You can plan properly as long as you recognize what the risk is and the fact that it's going to hurt you or could hurt you in the future. I know that there's if there's something that I'm going to be doing down the road that's risky. Whether it's risky to my health, risky to my physical health, risky to anything, I want to make sure that I mitigate it as much as possible. I learn as much as I can, and I prepare as much as I can to eliminate that kind of risk.
Speaker1:
Same is with your retirement. Don't just go and say that everybody deals with that in retirement. So what? That's not the case. We can take these risks off the table. You don't have to follow the norm. You don't have to follow the crowd. You can do things a little differently and go into retirement with as little risk as possible in any of these areas. So if you're looking to say, what are all the retirement risks, what are some of the things we didn't have a chance to talk about today? Reach out to US federal retirement Show.com fill out a form. We'll get you a full benefits and retirement review. Get you a copy of the book. There's no excuse. You have all the information you need, so there is really no excuse to, uh, not avoid these risks as you near an end to retirement. So thank you for taking the time out of your schedule. I really do appreciate your attendance or your viewership. Um, look forward to seeing you on a future episode, but make sure you do me a favor. Go back and watch all the rest of the content. If you've liked this episode, share it with your friends. Don't keep us a secret. You know we want to make sure that we're getting this to as many federal employees as possible. Again, thank you for your time. Look forward to seeing you on a future session.
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