Top 10 Mistakes Made by Federal Employees — Part 4: Not Understanding all Your TSP Options

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2.6.26: 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, really appreciate you taking the time out of your busy schedule to view our content. That's what it's here for. It's for you, the federal employee that's looking for accurate information when it comes to your benefits and retirement situation. And the feedback we're getting is great. We're having federal employees from all over the world tune in to the federal retirement show. So we're extremely grateful and thankful that we've been able to do this for as long as we have, and we look forward to continuing to do it because it appears you all need this information more than ever. And that's why we do what we do. And I'm going to ask you for a favor now, and I'll remind you at the end, share this with a friend. If you like this episode or any of the other episodes that we have, and there's over 160 of them now share the federal retirement show with a colleague or multiple colleagues. Pass it to as many people as you can. If it's helped you. Chances are it's going to help somebody else that just hasn't heard about us yet. So I'll remind you at the end again, but write it down. Remind yourself. Share this with a friend. We're in the middle of a series where we are going over the top ten mistakes made by federal employees, and there's a pamphlet that I created years ago called Exactly that.

Speaker1:
And we did an initial series, uh, long ago, early on the federal retirement show. And I want to bring it back up and revitalize it to give you a fresh new perspective on these mistakes. Now, by no means are there only ten mistakes that I've seen federal employees make. I hope that you're not making any of these, by the way, but these are the the top ten. At the time that I wrote this pamphlet that I saw federal employees making. And in the end, not only are we going to go over the top ten, we will throw in a bonus 1 or 2 after that. But we're on mistake number four. So let's dive into today's content and talk about mistake number four in the top ten mistakes that federal employees make. Now obviously, this is the pamphlet. Here's the cover of it. If you want to copy, reach out to us. Go to Federal retirement Show.com. Uh, fill out the form. One of our experts will be reaching out to you. If it's not me personally, to go over your benefits and retirement information, get your questions answered. But if you want a copy of this, reach out to us. We can send it. It's an easy read.

Speaker1:
It's a quick read. Uh, it just goes over those top ten mistakes. But as I mentioned today, we're talking about mistake number four. And that is not understanding all of the distribution options with your TSB. And there's a number of reasons why, um, this is the case. But we talked about this with all benefits and retirement. It's important that you educate yourself when it comes to all the options that the government gives you, all the options that are outside the government just so you can optimize and maximize your situation. The idea is with your benefits and retirement situation to be set up properly for retirement. That's the goal. I hope it's a goal for each and every one of you. You put your time in with the government, you want to retire and you want to retire when you want, how you want with the lifestyle that you want. So to make sure that you're optimized, you're set up properly to maximize everything the government gives you to reduce costs as much as possible, um, to limit your costs over time. And then when it comes to TSP, specifically to set yourself up so you know how to distribute your TSP when that time is right. So why is this important? Because there's not a one size fits all solution when it comes to a TSP distribution. There's not one thing that everybody's going to do and that's it.

Speaker1:
This is what every federal employee does. And it's set up that way. And this is what you do. There's not a one size fits all situation or solution. So you need to educate yourself on all the options that are available in order to determine which one is right for you. It doesn't matter what TSP advertises, it doesn't matter what TSP says. It doesn't matter. You know what your friend is doing, your colleague or somebody that recently retired, you have to figure out which option is best for you and your family. There are a lot of things to consider. There are a lot of solutions that you need to review, and there's questions that you need to have answered, your personal questions that you need to have answered, like, what do you want your PSP to do for you in retirement? That could help determine what distribution option you choose and what overall function purpose. What is your risk tolerance? Um, you know, what do you want to leave a legacy? What are the things that you want to do with your PSP? That's a question you have to answer. And that's a factor that you have to consider when determining the best distribution option for you. Also, if you only read what PSP tells you or what's on TSP e-gov, you'll miss the last point, which is there are distribution options outside of PSP that you can consider.

Speaker1:
Tsp. If you talk to somebody or you read on their website, they're only going to tell you what TSP can do for you. So as I mentioned in bullet point number two here, there's a lot of questions you need to ask and answer yourself. There's a lot of factors to consider when determining the best distribution option, and you cannot just rely on what TSB says. You have to look at everything, both inside and outside of TSB, to determine what's best for you. So those are the reasons why this is a mistake. And the mistake that I normally see is people just go with the generic option that they heard from, you know, a colleague they didn't explore, they didn't look into all the options. They just heard from somebody that this is what you do. This is what every federal employee does. And that is not true. That is not true. This is a unique and very specific to your situation solution. And you have to be aware of and learn as much about the distribution options within TSB. So let's say you do get to the end. Let's say you you do make it and you're wondering what are those distribution options? What are the choices that are I'm going to have here's the first five, sorry. The first four on my list are things that you can do within TSB.

Speaker1:
So these are the distribution options or even there's one that's a lack thereof a distribution option. But these are the distribution options that we talk about in general. And we can dive into the specifics for each one of these on an individual basis. But just in general, here's a list of options that you're going to have in retirement. And you should prepare as you near retirement. That way you have a plan. So when you do your benefits review and you get your your checkup every so often, hopefully on an annual basis to make sure you're still on the right track, you can review these options and maybe your situation has changed, maybe it's been modified, maybe your your retirement plans have changed or your timelines changed. So the first option is the lack of a distribution. Right. This is leave the money in TSB. So you do not have to distribute all of your TSB when you separate from service. If it's in the traditional account, which everybody will have at least a portion of their TSB in traditional, you will have to start taking RMDs when you hit that age. But leaving the money in TSB is a lack of distribution option. You can manage your money, you can leave it in there and it can ride the market roller coaster.

Speaker1:
You can manage it all you want. You're just not going to contribute to TSP anymore. But you don't have to take it out. Number two is you can take a full withdrawal. And this is probably the worst thing that I've seen that our employees do. And this is a big X on this one if you could. Because if you take out your full account balance, put it into your checking or savings account, you're going to have a big tax bill in the end. Well, it really depends on the amount of balance that you have in your TSP, but chances are it's going to cause a big tax payment that you're going to owe at the end of the year, or you're going to owe a lot of taxes on that amount. You're not going to get as much if they're going to withhold the tax on you. So understand this is probably the worst thing somebody can do because of the tax implications. But it's also an option. You can set up monthly payments. Now there's two types of monthly payments. You can do the one where you designate the amount and you can modify that amount as you go. And they'll pay you that amount each month, every month until the account runs out, then there's a life expectancy amount. And this is calculated based on your projected life expectancy.

Speaker1:
But it's not a guaranteed lifetime payment. It's supposed to kind of act like it, but it's not guaranteed. And in the monthly payments section of this, your money is still invested in TSB. So if you lose money, your payments are going to last less. If you make money in your account, your payments are going to obviously last longer. But this is an option. The the one that TSB generally advertises is called the MetLife annuity. And this is the only one within TSB that allows you to get a guaranteed lifetime payment pension life payment within your TSB. And why is it called the MetLife annuity? Because TSB will go to MetLife, an insurance carrier, and buy for you what's known as a spia, a single premium immediate annuity. And what that is or how that works is you will cash in your money, you will give TSB whatever portion you want to turn into lifetime income. They go to MetLife, say thank you. They own that now. They you cash it in. That's no longer your money. And in return, you will get a check for the rest of your life. Good news is that check will last the rest of your life. Bad news is, you no longer have any ownership. Access control or liquidity to that money that you gave them also. It's an irrevocable choice. Once you turn on that lifetime income, there's no going back.

Speaker1:
So just understand, this is the one that you'll see on your annual statement that that's a little more advertised, if you will. Um, it's one that maybe you think everybody does. It doesn't have to be that way. Then the last one, you can roll the money out. And this is where there's options outside of TSB. There's so many different places where you can roll your money to, and that might be in your best interest. And I'm not saying that any of the things that I've mentioned here are not in your best interest. Those are just the ones that are within TSB, the options within the TSB plan. But there are also and there's too many to mention, options outside of TSB. You can roll your money out, Move it to another IRA. Traditional IRA or Roth IRA and have access, control, liquidity, whatever it is. It could be more based on your needs, your risk tolerance, whatever it might be. So understand all those options that are outside if you're not aware of what those are. That's why it's important for us to sit and talk and go to our website. It's federal Retirement Show.com. Fill out the form and we will review with you not only your full situation, but also the distribution options within TSP and outside of TSP so that you can make sure that you're set up properly.

Speaker1:
Because as I mentioned, the why there's not a one size fits all solution. Everything is customized for the individual and the family to maximize or optimize your situation. So look, I know all of the the variables so you can make the best choice. So I really appreciate you tuning in for mistake number four. And it's not understanding all of the TSP distribution options. Hopefully this gave a little bit more insight if you have other questions regarding TSP and distributing that money. As you near or enter retirement, you can reach out to us. It's federal retirement. Show.com I'm going to remind you one more time. If you like this episode, go back and view all of our other episodes. There's so much content out there for you. Chances are your questions or things that you are interested in will be answered there and some episode that we've had in the past. And lastly, re reminder again, share this show with a colleague or multiple colleagues. Let more people know about the Federal Retirement show so they can get their questions answered and ultimately be set up better both now and as they get closer to retirement. So thank you in advance for that. Thank you again for joining us on the Federal retirement Show. My name is Val Majewski, and I look forward to seeing you on a future episode.

Speaker2:
Well, nearly 1 in 4 Americans have no emergency savings at all and would struggle to cover an unexpected expense. That's according to Bankrate. And having an emergency fund is really, really an important thing because we never know what's going to happen in life after all. Joining me now to talk more about that is Rod Griffin. He's senior director of consumer education and advocacy at Experian. Rod, thanks so much for taking some time for me. I really appreciate it, sir. Well, thanks for having me. Well, no problem at all. It really is crucial to have some sort of backup, some sort of safety net, right? I mean, but a lot of people, as we just said, that, that, uh, statistic there from Bankrate, 1 in 4 Americans almost have absolutely no emergency savings. Why is it so difficult for so many of us to save money right now? Yeah, it's life is expensive.

Speaker1:
Uh, and when.

Speaker2:
You look at where inflation was over the last several years, coupled with the holidays just being, you know, just passed and people have what I kind of called the holiday hangover with their debts. They're trying to pay down those credit card bills and debts they may have taken on during the holidays. Mhm. That puts a pinch on on the bank account and can make it hard to set aside savings when it feels like all of your money is consumed in just paying the, the day to day expenses and reducing you the debts you may have. So um, that makes it hard. Uh, and it's, it's difficult to get started, uh, because of that. Yeah. It really is, uh, very difficult these days, as you say there. And, I mean, you know, how much should people save in an emergency fund? I know that I've, I've heard different things from different folks, sort of, you know, general guideline is like 3 to 6 months of expenses. Some people say up to a year. Some people say not quite so much. What would you say is a good kind of goal for people to set for their emergency fund? Yeah, and you're right. The rule of thumb has been for many years, 3 to 6 months of your daily of your monthly living expenses. Really. So things like your utility bills, your rent, your mortgage, food costs, those sorts of things. And that can be a really daunting number if you're trying to, you know, set a number to it and reach that goal.

Speaker2:
The problem with a goal that's large like that can be that it becomes discouraging. And so you emotionally kind of check out and give up. And that defeats the purpose. So my recommendation is start small and you maybe don't put a large number on it. Maybe it's I'm going to save $10 a month or $20 a month, whatever you have sort of cushion to do and start setting that aside. And over time it will build toward that larger amount. Uh, the key is to be able to stay motivated to build that habit of savings so that you are just kind of naturally putting savings aside over time. Um, the other thing that is important to focus on is finding ways to reduce your expenses, because that gets in the way of saving. And you know, that means tracking your expenses, knowing where your money is going, where it's coming from. You know, I kind of think about, you know, you should be in control of your money. It shouldn't be in control of you. But that's the way it often feels. Uh, and so if you track your expenses and know where they are and then look at ways you can reduce those expenses and not just the don't buy coffee once a week, which is kind of the common one. Um, but think about just the regular bills you have every month. When people think of Experian as a credit bureau, which we are, but we're much more than that today. And one of the things that we kind of think about and aspire to be is to be a person's big financial friend.

Speaker2:
Meaning we want to help them take control of their finances and to reduce the costs of everyday life. So we have, for example, a service that can help you reduce your auto insurance payments each month. We have a service that can help you identify streaming services that perhaps you've forgotten about, or other subscription services and signed up for for a sporting event or a movie that you wanted to watch and then just didn't use it again. But it's still, uh, you know, being deducted every month, and it's an expense. We can help you find those and cancel them. We have a service that can help you negotiate regular monthly bills, things like utilities for many people to reduce those monthly costs. We have a credit card marketplace that can help you find credit cards that would be at a lower interest rate or lower fees that perhaps you could transfer balances to and pay them off faster. So, you know, think of Experian as more than just a credit bureau. It's really about your overall financial health. And saving means having money to set aside to save. And that requires reducing your your monthly expenses? Yeah. Absolutely. Right. And I sort of always think of it as, you know, pay yourself first. Right. It's like your future. You will. Thank you. If if you do that. And an emergency fund is a big part of that. And of course, one of the ways too, that I often hear about, you know, sort of makes makes things easier.

Speaker2:
You were just talking about, um, the subscription services and things like that that we all sign up for, and then maybe we forget about, uh, you know, after a certain amount of time, the same thing could be true in a positive way, though, if you kind of automate some savings. Right? Just have a certain amount go into a savings account or whatever it might be. Um, and just really, you know, set that up to just automatically happen. Maybe you forget about that. And then before you know it, you've got enough saved up for your emergency fund. Right, right. It's that the old out of sight, out of mind thing. Uh. And out of sight, out of mind can be good if you're automating those deposits and they're automatically going into a savings account. You don't think about it and it just becomes habit and you work with then living within the means that you have the funds that are left over. Uh, and but it could also be bad if it's out of sight, out of mind. And I'm just not going to think about the bill I have to pay. Forgot about it, and then I didn't pay it. Um, that's exactly the opposite. Now, you you damaging your credit history? Potentially, uh, you're reducing your access or making access to financial services more expensive. So, um, automating payments, uh, and automating savings can be a great tool for building that, that habit that sort of becomes natural over time.

Speaker2:
Yeah. Absolutely. Right. Well, just about time for us to wrap things up, but, uh, anything else that you wanted to mention, rod, that we haven't touched on that comes to mind? Yeah. Well, I mean, being, uh, you know, the retirement radio network. Think about saving for retirement. If you work for a company that offers a 401 K, for example, and they have a match, Never forego that match. Make sure you take advantage of that. If it's pre-tax, you can save potentially tens of thousands of dollars over your career. If you're taking that match and putting money in the 401 K, and if it's pre-tax, it likely won't affect your take home pay or will have very minimal effect. So if you are not doing that, it could cost you a lot of money over, over the 20 or 30 years. So, you know, make sure you're taking advantage of every savings opportunity you have, not just what we think of as an emergency savings, but also retirement savings as well, because they play a part in that, too. Yeah, 100%. I always tell people if you're not taking the the match with your employer, if it's offered, you're telling me you don't like free money. And I don't believe that for a minute. So there we go with you on that one. Rod Griffin, senior director of consumer education and advocacy at Experian. Thank you so much, rod, for spending some time with me. I really do appreciate it. Great. Thank you. Glad to be here.

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