Federal retirement expert, Chris Kowalik, reveals common “rules of thumb” and why federal employees are persuaded to follow them – and what to do instead.
- What are some common rules of thumb
- Where these rules of thumb come from
- Why federal employees feel persuaded to follow them
- What filters we should apply when considering these rules of thumb
- Local workshop locations and dates: FedImpact.com/attend
Subscribe to the podcast on iTunes so you’re sure never to miss an episode. To receive alerts by email when new episodes are available, click here.
For anyone trying to get their arms wrapped around retirement, you’ve probably heard several rules of thumb that might sound pretty darn convenient to follow. But today’s episode will highlight some of those rules of thumb to show you just how dangerous and shortsighted following them can be for many of you.
Hi, Chris Kowalik of ProFeds here and welcome to the FedImpact Podcast, where we offer candid insights on your federal retirement. Now, you guys know this show is all about helping you to get clearer on what you want retirement to look like and taking action to make it happen. With the complexity of something as big and as important as retirement, it can be hard to know what to do to get the retirement that you want.
Maybe you’ve got a friendly coworker who loves to give advice or a favorite financial podcast that seems full of juicy ideas, or maybe you’re more of a traditional book reader, and you think your best selling author always seems to have the right things to say. This episode is for you.
Today’s topic is going to be all about the broad brush advice that you hear out there and why following it blindly can be so very dangerous to your plans to retire and stay retired, right? It’s not just a matter of retiring, it’s staying retired and we have to do that by making sure we have our ducks in a row. The irony here is that the reason you’re probably seeking out some direction from all of these different places is because the financial aspects of retiring can be overwhelming and they can be complicated.
And that’s the very reason why you shouldn’t follow the broad brush advice from the people who don’t know you and who bear no responsibility for the outcome of your decisions. Let me say that again. You should not follow the broad brush advice from people who don’t know you and who bear no responsibility for the outcome of your decisions. This is a good filter to have when you hear a great idea, instead of following it blindly, how do we think through whether this serves you well, whether this aids in the outcome that you want in retirement.
Let’s talk about kind of the high level overview of the points we’re going to talk about today. The first is what are some of these common rules of thumb? Where do they come from? Why do we feel so persuaded to follow them? And then what filter should we apply when considering these rules of thumb? If we don’t just follow them blindly, what should we do with this information?
All right. So as a company who delivers retirement training to feds, we hear our fair share of plans that feds have concocted over the years. They’ve taken a little bit from a book, a little bit from friends and family, a little bit from a TV commercial they heard or a talk radio program that they listen to, and they think that by doing all of those things, that it means that they have a financial plan when in fact what they have is a financial mess.
It’s a series of disjointed ideas that may not even be executed properly and it’s certainly not built with any kind of specificity to your situation, and that is where the house of cards comes crashing down. That’s not what you want retirement to look like, but unfortunately that’s the direction that many go because they don’t know any better.
You might ask yourself like, “Well, why does someone do this in the first place?” And I promise we’re going to get to that later in the episode as far as the why behind all of this. But let’s talk a little bit about those rules of thumb. Some of the common ones that we hear and how that really will work for you.
#1: You don’t need all of your current income in retirement
So one that you might have heard is you don’t need to worry about protecting all of your current income in retirement. You’re not going to need as much. Well, says who? Says who? I’d say most people don’t want to decrease their standard of living in retirement and I don’t know if you realize this, but you’re going to have an extra eight hours a day to spend money.
If you need that money to live the retirement that you want, not just paying your bills, but doing the things in retirement that you’ve been looking forward to, all of that takes money. And why plan to have less than you need? Now, it’s very possible when you sit down and you look at your retirement budget and you’re thinking about what it’s going to take to pay the bills and what it’s going to take to be able to go do those activities that you want, perhaps your number is lower than what you’re bringing in now. At least your top line, maybe not your bottom line.
When we’re thinking of and things you’re paying into like TSP and social security and those types of things that aren’t going to be present when you retire, it’s okay to look at that. But to blindly think that you don’t need to worry about protecting all of your current income and retirement, that is so shortsighted. And there’s a lot of things that can get in the way of you living the retirement that you want, but don’t let it be because you didn’t realize how important it was to make sure that you had the income that you believe you need to live the retirement that you want.
The rules of thumb, there’s always some sort of legitimacy to these questions, but to blindly follow them without really sitting down and understanding how it applies to you, that’s where the fallacy comes into play. That’s where the danger becomes present because we’re not really thinking about how does this piece of advice affect me and does this fit with me? And then we make bad decisions.
That’s the first rule of thumb.
#2: You should always (or never) pay off your mortgage
The second is, we see kind of the polar sides of this, you should always or never pay off your mortgage before you retire. Again, we see both sides of this, the experts that say, “You should always get it paid down as fast as you can and then others say, “Hey, listen, there’s still a tax advantage possible. It depends on the value of your home and all that. Or really the value of your mortgage. But a couple of things that I want to share, many of you have listened to some financial experts over the years kind of tout a lot of these broad brush concepts.
When I think of mortgages and paying those off, something that immediately comes to mind is Dave Ramsey. And listen, I agree with about 90% of what Dave Ramsey spouts because I think it does help a lot of people especially when we’re talking about bad debt and those types of things, and regaining control of your financial situation.
But Dave would recommend that you only take a 15-year mortgage. He does not like the idea of 30-year mortgages. And I get it from an interest standpoint and all of that. But it’s without taking into account, well, if you weren’t paying this extra money to the 15-year mortgage each month, what would you be doing with that money?
Now, if you’re going to go out and blow it, then it probably makes more sense to just double down on your mortgage, get that thing paid in a lesser period of time and be done with it, because that would be better use of your money than blowing it. But if you’re a disciplined financial person and you say, “Well, instead of taking a 15-year mortgage, I’m going to take a 30 and I’m going to be disciplined in investing that money.”
Perhaps financially, you’re going to be better off taking that 30-year mortgage, And I’m not here to tell you whether that’s true or not for you, but there’s another layer of thought that has to go into this idea that Dave shares with his audience of like, “Well, why? Why is that true? Why does he believe that? And does that actually apply to you, and the way that you’re wired, as far as your discipline for making good financial decisions?”
Same thing. Suze Orman says, “Hey, pay it off as soon as possible.” Yeah, I get it. But we have to answer the follow-on question so that. If we say you want to take a 15-year mortgage and not a 30, it is so that X, Y, Z can happen. Whatever that might be. We also have to look at the other side. Well, I’m going to take a longer mortgage so that I can responsibly invest and put myself in a better financial situation along the way versus having a house that’s paid off, but no more money, right?
We call that being house poor, meaning your house is paid off. You have a lot of equity in your house, but you have no cash flow. You have no cash to be able to pay for anything else. I don’t know about you, but retirees need cash. They need to pay for things. And if it’s all tied up in your home, especially if we’re not in a good economic situation where perhaps your home value dips for a while, and maybe there’s not an opportunity for a HELOC or things like that, then you’re really strapped.
Sure, you have a house that’s paid off, but if you had a house that still had a mortgage on it, guess what? You still have a place to live and you still have cash. It’s really a matter of looking at the entire situation to know whether this is a good statement for you to always or never pay off your mortgage before you retire.
In theory, I love the idea, right? It’s part of that American dream, but I think what most people want from a comfort level is not necessarily for the house to be paid off, but knowing that at any moment in time, they could pay it off if they wanted. Right? But meanwhile, they have that money to be able to use in other ways that are valuable to them in retirement.
#3: Certain products in the private sector are always bad (or always good)
All right. Next rule of thumb is that certain products in the private sector are always bad or always good. This is nonsense. Let’s talk about a couple of these that are easy for everybody to conceptualize. The first one is life insurance. There are some financial experts, and I say that in air quotes. The experts that say term insurance is the way to go.
Others would say permanent insurance is the way to go because it’s designed to be there for when you die, so the money is not being used for a long period of time without any payoff, right? And term insurance, of course, is there only for a temporary period of time. And sometimes those experts would say, “Buy term and invest the rest.” Right? That’s a very common thing, little rule of thumb that you’ll hear out there. And that’s all great if your needs are temporary.
But if your needs are permanent, that will always be there no matter how old you are when you die. Term insurance doesn’t serve you well. And likewise, if you have temporary needs, that could be covered by temporary insurance, but you put permitted insurance in place instead, it becomes too expensive for no good reason.
The next thing would be if we’re looking at the stock market. So we’re talking about equity funds. In the thrift savings plan, we would be referring specifically to the CS&I funds. Of course, out in the private sector, those are indexed funds and then lots of different mutual funds and that type of thing that are obviously in the market.
Some people would say, “Oh, equities are way too risky. You should never do that.” And then others are like, “Hey, I’m all in. I’m going to write it. I believe in the market and long-term and all of that.” And both of those statements might be true for those people, but they’re not true for everybody. When we think of the market crashing and what that does to retirees that’s assuming that all of the money that you have is invested the same way.
And that’s of course not a diversified portfolio. Equities are typically recommended to be a portion of your portfolio especially the older that you get to make sure that balance is right. But to blindly accept that being in the market is bad as a retiree or that you should have all of your money risky when you’re younger or even when you’re approaching retirement, to dismiss each of those ideas, I think is faulty.
But understanding is there an opportunity to see both sides. And when we can help people to see that there’s value in both perspectives, and how do you take a little bit from each one that fits you, not only in your mind and your gut, but from a financial standpoint of what it does to help you to reach your goals, that’s where the thought comes into taking this advice that you’re hearing from so many different people. And sometimes it is polar opposite advice, which makes it all the more confusing.
All right. Next step. We’re going to talk about a commercial that I hear on TV that drives me absolutely bonkers. And it’s Ken Fisher’s commercial about, I hate annuities and you should too. And I’m just going to call BS on this right out of the gate, because we are broad brushing an entire class of financial products that serve a lot of people very well in the right circumstances.
I always find it funny when federal employees spout that they hate annuities because you have an annuity which is your SERS or first pension. And you have another annuity too, which is your social security benefit. It’s paid just like an annuity. And that predictable expected payment that is guaranteed to you is the very lifeblood of what an annuity product is.
It’s not where you make boatloads of money like you do in the market, those equity funds that we talked about before. But there is value in recognizing that you have predictable income that is not going away in retirement. Now, I’m not suggesting that annuities are right for everyone. Or that all of your money should be in an annuity. I don’t believe that either, but looking at the components of each of these types of products, life insurance, equities, stock, market funds, annuities, all of those have a place.
Every single product has its place. Where we find that a product is amazing or what I call magical is when we have the combination of the right person, the right situation and the right product. And when all of those things are aligned, the product works exactly like they need it to. The question is how do you know what product is appropriate? It’s really hard to know.
That’s why, of course, working with a professional would help you to be able to pull all that together. But to blindly say, “Hey, annuities are always bad,” I want to slap Ken Fisher because I think this is so shortsighted and allowing people to place a bias on a financial vehicle that can serve them very well. Those who are bigger on the annuity side and that guaranteed income could say the exact same thing about equities like, “You don’t ever want to lose your money.”
Well, that’s not true either. Right? I mean, of course we don’t like to lose money at least permanently, but equities we know are designed to go up and down over a long period of time. But hopefully when we need them that they’re high or at least higher than where we bought them and that we’re making a financial gain. Right? So there’s value in both sides. Now, when it comes to these products, I want to talk about something.
Each of these carries some sort of cost whether it’s an obvious cost or something that’s just baked into the product itself. And oftentimes we’ll hear people say, “Well, I don’t want to buy that because it costs too much. That life insurance, that’s really expensive. Ooh, my gosh, I’m going to pay all this money to invest in these equity funds or these annuities, I can’t believe you know that this is how this works. It just costs too much. Right?
One, that’s oftentimes not true as far as how much they cost. But the second part is what does it get you in return? Does it actually help you to meet the goals that you’ve established or does it take you off track? And if it takes you off track, of course, this doesn’t make any sense. But we always have to ask the question, how much does it cost? Because I think there’s value in knowing that answer, but then people stop there instead of asking the next question, which is, “What does it get you in return?”
Warren Buffett says, “Price is what you pay, but value is what you get.” So what value do you get out of the different product decisions that you are making? And you can’t figure that out from reading a book or listening to some random person on the radio. Or even this podcast, right? I’m not here to give advice. I’m here to help people to think through what these decisions are so that they have a little bit better of a filter to figure these things out, As they apply to them.
#4: Government benefits are always (or never) better than private sector products
All right. The last rule of thumb that we’re going to talk about is that government benefits are always or never better than what you could get in the private sector. Again, we see both sides of this. The polar opposites always are never better. There’s lots of different government benefits available to federal employees. The Survivor Benefit Plan allows you to protect a portion of the pension. You can only protect about half. You have to give up some of your pension while you’re living, which again is answering the first question, what does it cost you? But what does it get you in return to make sure that your spouse has continued income for the rest of their life? Is there a better way to do that that gives your spouse more flexibility and control? Perhaps out in the private sector? Depends what your health is.
FEGLI, your life insurance. Oh my gosh, amazing program while you’re working. But it wasn’t designed for you to keep in retirement. And so it’s going to get pretty expensive. But does that mean we want everybody to drop FEGLI? No. In fact, there are some amazing parts of the FEGLI program to keep if you know what you’re doing, right? And if you’re thinking about the bigger strategy that you have, you can get very creative in FEGLI to make certain that you’re getting the very best of what FEGLI has to offer and coupling it with the very best of what the private sector has to offer as well.
Now, the long-term care program. This program hasn’t been around as long as the others that you have access to as a federal employee, but a lot of people say, “Oh, that’s too expensive.” Right? Or, “Oh, it must be the greatest program because it’s what the government is giving us.” Right? I mean, there’s fallacy in both of those ideas. So the real question is in the likelihood, the likelihood that you are going to need some sort of long-term care services, how on earth are you going to pay for them?
If it turns out that the federal long-term care program, when you’ve reviewed it, top to bottom and compared to what is available in the private sector to solve that very problem. If you determine that the FLTCIP program is right for you, then great. But we don’t want you to blindly believe that. We want it to be because you’ve thought through the different aspects of what that program can do for you and you’ve open-mindedly look to the private sector to see what else is available and compared them evenly.
Same thing with your health benefits. You have some pretty amazing health benefits. I know because I’m part of it. My husband is a federal employee. And so we’re under FEHB, but some of you might have Tricare the military’s health program. And so which one’s better? Well, if you have a chance to choose between the two of them, a lot of it’s going to be dependent on your situation, right? Are you near military treatment facilities? Do you have to go a long ways? Is it better to be on FEHB with their network of providers? So much of it is dependent on you, where you live and what your situation is going to be in retirement. And certainly your health. Right?
Then the other question is, well, do you take Medicare at 65? I don’t know. Beats me. Right? I don’t know what your health situation is going to look like at that point, but there are some pretty cool factors when it comes to Medicare parts, A and B that may add to the great value that FEHB or Tricare bring to you. Right? And a little known fact, Tricare, you have to enroll in part A and B at 65. So you’re not going to really have a choice there, but how does all that come together?
Oh, then the thrift savings plan. Let’s talk about this one. A royal, royal misstep by the TSP in this conversion over to their new system and their new processes. Unbelievable the nightmare that feds have experienced, not all of them, but many of them, with this new changeover. It’s hard to say that, “Hey, when the government takes control of a program that it always works beautifully, right? I mean, that is just not true.
In fact, many would argue that the opposite would be true. But even that aside, the thrift savings plan and the opportunities that are available in it while you’re working are quite amazing. But in retirement, you don’t have quite the flexibility that we would want you to have when you’re taking your money out. Does that mean everybody should move their money from TSP? No, but shouldn’t we ask the questions. Does this serve me well in retirement? Where are the parts where it gets sticky, that it’s going to give me some problems later and am I okay with that?
And if you are, cool. If you’re not, do something about it. But don’t just blindly believe that the TSP is going to be this amazing product for you in retirement. That’s simply not fair and not true. Same thing with social security. You should always take it early. You should always wait until 70. Well, good Lord. I mean, it has so much to do with the family situation and maximizing the benefits that are available to all members of the family who are entitled to benefits off a worker’s record to make sure that you’re getting the very most out of that program.
The best rule of thumb
So it will depend for everybody. And that’s where the best rule of thumb comes to light. And that is, it always depends. And oftentimes people kind of roll their eyes when they hear that like, “Oh yeah, that’s the easy thing to say, is it just depends.” But it does. It depends on the factors that are present in your financial life, how you feel about all of these different opportunities that you have in retirement and the solutions available to you to solve the problems that you might experience.
And if we don’t ask the question or at least pause and say, “Well, I don’t know. It depends.” And get through why it depends and how it applies to you, you won’t make the progress that you want. ” So why do we do this? Why do we take all these random things from all these different places and blindly believe it?
Why do we follow “rules of thumb” in the first place?
Well, I’ve got to believe that many people are scared of making a decision. They’re worried about making a mistake. When they hear someone tell them, well, this is how you should think about this, it’s easy just to say, “Oh yeah, that makes sense. Let’s do that.”
Oftentimes people are scared of asking for help. You might think like, “Oh gosh, I’m embarrassed on my situation. I don’t want to look foolish. I really thought I would be a little further along than I am, and so I just don’t really want to tell someone my problems. And I get it. From an ego standpoint, that’s what all of that is about is just ego. We all suffer from that to a degree. But knowing that there’s help out there and you’re simply not asking for it because you don’t want to feel silly that we know doesn’t make sense, right? If we’re really being honest with ourself.
The next thing that I think is part of why we do this is that we’re scared of paying for help. But do you really think you can handle all of this on your own? I mean, let’s be honest. We’re dealing with complex financial situations, a tax situation that you’re probably not prepared to really deal with in retirement. Are you really going to try to shoulder all of that burden on your own?
A lot of people would say, “Oh, but there’s commissions. These people are going to make money off what they sell me. There’s fees to get their advice.” Well, no kidding. No kidding, there’s fees. You don’t work for free. I don’t work for free and neither do financial professionals. I find it so ironic that we’re willing to spend a thousand dollars on a phone, but not a thousand dollars on advice. Let’s put that into perspective a little bit.
We’re going to carry around that phone for a couple of years. Maybe you get a deal on it, but man, it’s going to be around for a few years before it’s outdated and you have to upgrade. You’re going to be in retirement, hopefully for several decades of your life. If you don’t get this right, the amount that it will cost you, not only financially, but your quality of life and the standard of living that you’ve imagined in retirement will be compromised. And it can be compromised greatly. Get past this idea of you don’t want to pay anybody for help. That’s nonsense. It’s absolute nonsense. Let’s get beyond that and get to the real heart of why we’re not asking for help.
What to consider instead
What to consider instead. If we’re not going to take the rules of thumb, that we’ve talked about today, and I’ve just kind of hit the wavetops on the rules of thumb that we hear out there. You’ve probably heard lots more. But if we’re not going to do that and have some disjointed thing that we call a plan, when what we really have is a mess, what do we do instead?
We work with a network of financial professionals that work with federal employees for a living. They understand the odd complexities of these government programs and how they fit into the bigger financial world that you live in. And here’s the deal. And this is something that I hope that everyone takes out of this podcast and that is that financial professionals should help you know how to decide and not what to decide.
Again, financial professionals should help you know how to decide and not what to decide. And what I mean by that is I don’t want to tell you what to do, I want to be able to help you on this podcast to know how to think about what you’re doing so that you can make the right decision for yourself. And financial professionals should be looking at that same concept of helping clients or prospective clients know how to filter all of these ideas and all of these strategies to help you get what you want.
It’s not one product fits every person, it’s helping you to know how to decide instead of what to decide. To get started on that, of course, you need to identify your goals. Be honest with yourself about where you’re at on that journey, right? Are you pretty far away? Are you pretty darn close, right? And then get help from that financial professional to see what strategies exist to get you to your goals. Right?
Is it a budget or what we tend to like to call a spending strategy in retirement? What’s the income plan look like to generate that income that you’re going to need to have your spending strategy in place? Are you tax efficient? Are you leveraging different tax strategies in retirement. At the end of the day, what’s the legacy planning look like? Do you care to leave additional money to family members at church or a charity or a cause that you care about? Right? All of those are part of your journey.
And if you’re not saying those things out loud and articulating what it is that you want, it becomes very difficult to know how close you are. And if you’re going to get there. But trying to do all this on your own or thinking that the “free advice” that you’re getting out there that isn’t tailored to you will serve you well is incredibly shortsighted.
So to have a professional who you can call and say, “You know what I’m thinking about this strategy. I heard about this and I want to know what you think. Does this fit me? Is this something I should think about? Or maybe implement?” Instead of, “Hey, honey. Guess what I did today?” Right? And you’re sharing a strategy that you just did with your spouse, that they’re like, “What are you doing? That’s not what I wanted you to do. That’s not what we talked about.” That doesn’t feel good.
So having someone that you can go to, that’s looking at the entire financial strategy that you have is so worth that money. And I implore you to consider getting tailored help for your situation and not blindly following rules of thumb or broad brush advice. With this topic, of course, I always run the risk of feds like, “Well, I love Dave Ramsey and Suze Orman’s been my savior. I love that Ken Fisher guy.” I get all of that. There’s always a little grain of truth in the things that these people are saying. But why not take the extra step to know how it applies to you?
This is such a huge part that we really try to drive home in our workshops of the tailored nature of the decisions that you are making and how they impact you and your family. If you have not been to one of our workshops, please, good grief, get to one of these. They’re free to attend. We send out speakers that love, love, love what they do. And they bring a really candid perspective just like I try to do here on the podcast, but bringing some of that to life so that you can feel good about how you’re thinking about these decisions. Not what to think, but how to think so that you make the right decision for you and your family.
And at the conclusion of that workshop, if you want that tailored one on one help with a financial professional, you can simply ask for it. We’re happy to create that introduction and make that work. So if you are listening on a traditional podcast platform like iTunes or Spotify, Audible, whatever that might be, if you’re not looking right at our website right now, you can text the word, PODCAST to 224-444-6144 and we will give you the link so that you can find a workshop in your area.
Again, if you’re listening from our website, all of that will be right here on the screen for you. But again, if you’re listening through a regular podcast platform, you can simply pull out your phone, text the word, PODCAST to 224-444-6144 and we will send that right away. So just to wrap up, rules of thumb are the easy way out and they often don’t serve you well. So please put a filter on that and make certain that while it’s okay to listen that you filter that through, does this apply to me? And does this serve me well? Before you take action on it.
Please get the help of someone who can help how to decide instead of what to decide, and that is a financial professional who is licensed to provide this advice and is responsible for the outcome of the decisions that you are making to make certain that you have the information that you need to make the decision that you feel is best for you.
So very, very important that you have somebody like that in your corner to make this work for you. I hope our talk about all these rules of thumb has been helpful to you as you’re thinking about all the different parts of retirement. Again, we’ve only just touched the wavetops of the different rules of thumb that we hear out there, but hopefully this idea of filtering that information before you apply it is helpful. We do hope that you’ll stay tuned to the FedImpact Podcast to get straight answers and candid insights on your federal retirement. And if you haven’t already, please subscribe today so that you’re sure not to miss an episode.