From the Audience

This month’s article is a compilation of items that receive a lot of interest on my various social media, or some questions I get often via email. I know a lot of you don’t follow me outside of my newsletter so you miss a few things I think might be beneficial. Every so often, I’ll compile a few of those and throw them into an article here to share with the group.

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Those of you that are of a certain age will recognize the “Dear Abby” vibe. You young people not so much. (If you want to know, find someone you overheard talking about something called a colonoscopy and ask them.)

"Dear Chris, another great newsletter! There is a common theme in most of these newsletters regarding retirement preparation and pre-retirement anxiety. I retired in November 2015 and although I had been preparing pretty much during my whole Federal LE career for retirement I started experiencing retirement anxiety about 2 years out. Specifically my anxiety was focused on my anticipated reduction in my monthly take home pay. I decided to determine whether I could live on this reduced take home pay BEFORE I retired. I would like to share with you what I did because I have not read or heard of anyone using this approach. If you find it of any value feel free to share it.

Knowing my retirement was about 2 years out I ran my retirement projections and calculated my retirement take home pay. I determined my retirement take home pay would be about $1,300 less per month. Knowing most of my monthly expenses were going to remain the same I opened a new bank account and set up a new payroll deduction of $1,300 which was deposited into that bank account. I wanted to see how challenging it was going to be to live on my projected retirement take home pay before I actually retired. I quickly found there was no problem living on my projected retirement take home pay amount and 18 months later I retired without that retirement anxiety and I had a bank account with nice balance of $23,400. My transition into retirement went very smoothly and with little to no financial anxiety.

I have been retired for over 6 years now and I have lived very comfortably on just my pension and my supplemental without touching my TSP, which has continued to grow nicely even without any new payroll contributions. When my supplemental ended at 62 I signed up for Social Security and my total monthly income increased by more than $500. Between that and the annual COLA increases my retirement take home pay now exceeds my pre-retirement take home pay. "

Signed,

Comfortable in Colorado

My comment: Love this approach. This is the process I go through with each retiree I consult with. We find that shortage number, which is the key. This guy took it to the next level and that’s awesome. Most people think they can’t retire. Most people can. Most people are much closer than they think—they just have to see the numbers in black and white. Great job!

“Dear Chris: Thanks for being so Selfless ansd Helping a Dummy like me ... comes to Finance and Money I am Dumb as door nail ... and I lost $1M in March of 2020 listening to a Self-proclaimed Market-Timer using TSPCalc ... it is what it is and I can NOT Resurrect it ... but Still on my Mind ... I should have had $2.2M at this time and I am only at $1.3M right now.”

Signed,

Outguessed in Omaha

My comment: I see this time and time and time and time again. For those that have the nerve to see what they have REALLY made, we’ve sat down and run the numbers over the years. People have sworn to me that they were making a killing in the TSP over the years. After all, their balance was growing like crazy!

If I could change something about the TSP, on every statement it would show what you WOULD HAVE MADE had you stayed in the C Fund over the last 10 years. These guys swearing to me they have made a killing generally are making 50-75% of what the C Fund returned. It’s just impossible to tell because you ARE making a lot. You’d just be making more had you not tried someone else’s (or your own) market timing system.

I’ll go out on a limb and say it right now: None of you beat the C Fund over the last 10 years. Change my mind.

I’m going to summarize and paraphrase this one. A FERSonian took out a TSP loan and bought crypto with it. The crypto tanked. Money is tight. He’s repaying a loan to TSP that’s putting some pressure on his finances.

Signed,

Reeling in Reading

My Comment: First of all, let’s not beat this guy up too much. We’ve all done some financial things we’d take back if we could. I know none of us would take a loan out at 20% to go shopping but in effect that’s what many of us have done in our younger days with those credit cards.

That aside, I want to address the virtual currency portion of this as I get asked weekly what I think of virtual currency as an investment. Personally, I’m in the Warren Buffett and Charlie Munger camp—I don’t believe it is an investment. I think it is purely speculating—a form of gambling.

That doesn’t mean I don’t think you can make money on it. I know lots of people that have. I have some good friends that have made money with 6 zeroes on the end. So you CAN make money. Just like you can make money trading baseball cards, fine art, porkbellies, real estate, gold, and a whole lot of other stuff. I am not even necessarily opposed to it. But it should be done with the speculative portion (aka the real small extra portion) of your income/savings.

What is my main issue with it? It’s not an asset I can value. As I write this, Bitcoin is at $43,204. I don’t know if that is a good price or not. Because to know that, I’d have to know what Bitcoin is actually worth. Is it worth $1m or $1? How does someone value it? That’s the only way I know how to invest. Yes, I know people tell me, “I’ve read where Bitcoin will be worth over a million dollars within 2 years.” Well, let’s do this…..Bitcoin will be worth two million dollars within 2 years. Now you can tell everyone that you read that a CPA that specializes in retirement planning say that Bitcoin will be worth $2m.

What good is that? It means nothing to you.

Let me give an example.

March of 2020. The world has been thrown into a dumpster and set on fire. All professional sports have just been cancelled. Schools have been closed. Quarantine curfews have been put in place. CNN is running a death count in the corner of the screen. A small doctor none of us have ever seen before is explaining how we’ll all be dead in 60 days. Financial markets are in a free fall—down 30% in a few weeks.

I was watching this unfold on TV and saw that the cruise industry was grounded. Analysts were predicting the cruise industry is done forever. Now, wait just a minute. I know some cruisers. They are some of the most passionate fans anywhere. They LOVE to cruise. (Personally I’d rather be strapped down and forced to watch Real Housewives.) But the people that love to cruise, REALLY LOVE to cruise. I talked to a few of them and some of them told me they’d go right now even in the middle of the virus. That’s hardcore.

Cruise ship stocks had been hammered. A thought occurred to me— were they hammered TOO much? I started spending some COVID time researching. I first wanted a US-based cruise ship company. Why? Because I know the US Gov will bail companies out with your tax dollars without the first thought of hesitancy. And I wanted that extra cushion. Unfortunately, I learned, cruise ships are based in other, more tax advantageous countries. But Carnival at least had some corporate offices in Florida so I started with them.

Every publicly traded company in the United States is required to have their financial reports for the last few years available to the public. Carnival’s was right there on their website. The stock had been $50 before COVID, just a few months earlier. By mid-March it was less than $9. That seemed ridiculous at face value to me. Either the cruise industry would rebound, or the world would end. I didn’t see any other option.

Digging into their balance sheet, I found something that was very interesting. To my calculations, Carnival had enough ships and cash and other assets that even if they sold everything, distributed all the money, and went home, the stock was worth at least $20 a share. In other words, if it went out of business, everyone would double their money over what the stock was trading at. I had come up with my own personal estimate of Carnival’s worth at $20 a share. It was trading below $9.

On March 18th, I bought Carnival at $8.87 a share. Most people thought this was very risky. And it was. It was risky in the sense that all investing has an element of risk to it, but to me, this was as guaranteed as one was ever going to find in the stock market. I was buying ships worth $20 for $9. Ships that were supposedly worth $50 just a few weeks before. I remember telling people, either the cruise industry recovers and I make a lot of money, or this truly is the end of the world, and then what difference does it make?

The point is I was able to put a definitive (although arguable) price to what one share of Carnival was worth. I cannot do that with Bitcoin. There is nothing underlying that can be assigned a quantitative value that I can see.

It seems the only thing you are investing in is the hope that the next guy is willing to pay more than you.

$43k may be the bargain of a lifetime. Or it may be the most foolish thing ever. I just can’t tell. And no one so far has been able to show me they can do it. So without a comparison price, I don’t know if it’s a good buy. For that reason alone, I have avoided crypto. The only way I am comfortable investing is by determining a value of something and then comparing that to what the public at large has valued that asset at. Only then will I know if I’m getting a bargain or something is too expensive and not worth the investment. This is not me talking you out of it. This is me saying I don’t know how to invest in it. Or probably more accurately, I don’t know WHEN to invest in it.

So whatever happened to my Carnival stock? One year later I sold it at $27.06 a share. Why did I sell it? Because the fundamental reason I had bought it was no longer valid. Carnival had taken on a lot of debt during that year, and as such, it was not worth $20 a share any more. I think it was worth maybe $14 or so in my mind. I assumed it would go back down when the real value was realized by the public. Today it trades at about $18. I would not consider it a buy.

This is not to say I’m some trading wizard. Absolutely any one of you can do this. Unfortunately, people focus on the price not in comparison to anything. That’s why they miss. And that’s what happened in this unfortunate FERSonian’s case—without a value, how do you determine a good price? You can’t really—it’s speculation. And to add insult to injury, they speculated with TSP loans.

Postscript—-I’d like to say this was a one-time occurrence. It was not. More than one individual has shared this tale of regret to me. DON’T TRY TO GET RICH QUICK. You want to be in a hurry to do something? Be in a hurry to get out of debt.

"Dear Chris:

Gotta tell you: Just prior to retiring, my blood pressure peaked at 190/110, yes 190/110. The job was killing me, and the agency didn't care! Within a month of retiring, my BP was back to 120/80. Seriously; BEST decision of my life. Take care, bud, and again, Thank You so much for all you're doing.”

Signed,

Chilled Out in Chillicothe

My comment: Money might be the most important of the unimportant things, but it pales in comparison to your health. Life isn’t just a math problem. What might be financially genius may be lifestyle lunacy.

“Dear Chris: I know you don’t tell people where to put their TSP, but where should I put my TSP?”

Signed,

Obstinate in Oshkosh

My comment: None

“Dear Chris: I know you say most people save money switching from FEGLI but all the quotes I am getting are as expensive or more expensive than FEGLI”

Signed,

Confused in Cleveland

My comment: This is actually a really great question. What Confused is experiencing is normal. Her quotes probably are the same or more than FEGLI…right now. I am assuming she is looking at a term life insurance policy. This is the key to understanding the savings: the term policy cost is the same over the life of the term. Let’s say it’s 20 years. Multiply the annual cost by 20 years and boom, you’re done. That’s the total cost of the private life insurance policy.

In contrast, FEGLI continues to go up constantly. Remember FEGLI is based on how old you are, and how much money you make. So every time you get a Within Grade Increase, your FEGLI goes up. Every time we get a raise, your FEGLI goes up. Move to a higher cost of living area, and your FEGLI goes up. In addition to that, every 5 years, you get bumped up into a higher bracket with a higher FEGLI premium. And those brackets in the 50’s and 60’s start to double every 5 years. The bottom line: do your best to figure out what FEGLI will cost over the 20 years. Then compare the two.

In almost all cases, the private insurance policy will be cheaper. Great question.

“Dear Chris: Is it true TSP taxes my withdrawals at 20%? That seems high. Can I change that?”

Signed,

Overtaxed in Oak Park

My comment: First of all, the TSP doesn’t actually tax your withdrawal. They withhold money per IRS rules to send to the IRS on your behalf. Think of it like a down payment towards how much in tax you owe for the year. It’s identical to what happens with a paycheck. You chose Married 3 or Single 0 or whatever. That told your employer to withhold a certain amount from your paycheck and to send to the IRS to apply to your account. That may be more than enough (in which case you paid too much and you get a refund when you do your taxes), or it may not be enough (in which case you have to write a check when you do your taxes).

The TSP process is identical. 20% may be more than you have to have withheld, or it may not be enough.

Can you change it? Depending on the type, quantity, and amount of the payment, yes. The best resource for this is the chart on the last page of this TSP booklet that explains your options in detail.

Remember TSP NEVER withholds any taxes for state or local authorities. So if you live in a state that taxes your TSP withdrawals, you’ll have to set that money aside yourself out of each payment. Or pay it all at one time in April. That might not be the best way.

“Dear Chris: Please settle this debate at the office…” (90% of the time I see this, I already know. This is going to be about the age someone can retire and/or pull from their TSP penalty free. For some reason, this is one of the most argued about point in the FERS universe.)

Signed,

Debating in Dubuque

My Comment: There are two primary rules here that are constantly getting mixed up. One applies to retirement eligibility. The other applies to the 10% early withdrawal penalty for TSP. They are distinct and separate. Don’t confuse the two.

Retirement. You have to actually REACH your birthday age that allows you to retire. If you’re SCE and you can retire at age 50, you have to actually get to age 50. There is no provision for only having to work one day into the month you turn 50 or the year you turn 50 or whatever. You have to be 50. If your retirement age is 57, you have to turn 57. You can’t leave any day in the month you turn 57 if you aren’t 57 yet.

According to OPM, you turn your new age at COB the day before your birthday. Example: Birthday is June 9th. At COB on June 8th, you go from 49 years of age to 50 years of age. (OPM uses COB clock, not the actual clock where we normally think we turn 50 at midnight).

TSP. There are only 3 ages that matter here: 50, 55, and 59.5. If you are SCE and separate in the year you turn 50 or later, you can get your TSP without paying the early withdrawal penalty. If you are Regular FERS and separate in the year you turn 55 or later, you can get your TSP without paying the early withdrawal penalty.

Fail to meet these thresholds and you have to wait until 59.5. For example, if you are SCE and you retire after 25 years at age 48, you have to wait until 59.5. If you are Regular FERS and you quit at 53, you have to wait until 59.5.

Retirement and TSP eligibility have nothing to do with each other as far as ages. They are separate.

“Dear Chris: I’m a fan of the barbell strategy but I have a question. What do you do when the market is really high one year, so you want to pull from that side in the upcoming year, but the market goes down the next year more than the gain it made the year before?”

Signed,

Volatile in Vegas

My Comment: This is another excellent question. So what the writer is asking to clarify is this. Say you are pulling out $24k a year from TSP. Also say that in 2021, the market portion of your barbell went up $30k, so you were planning on pulling your $24k in 2022 from the market gains of $30k. However, by April 2022 the market starts to go down and goes down so far that your gains from 2021 are erased, either partially or fully. Now where do you draw from for the rest of the year?

Here’s what I believe would be the best thing to do first of all to avoid this. During the first week of January, when you are checking out the performance of your investments last year, you will know which side you will pull from this year. Let’s say you are going to pull from the SP 500 side. Ideally, you would move the year’s worth of withdrawals from the SP 500 into the G Fund, and then your gains are locked in. From the rest of the year, you just pull from the G Fund side.

In essence, you are locking in your gains so that even if the market does go down like it has in 2022, your withdrawals aren’t touched because they were moved into G Fund in the beginning of January. Hopefully this makes sense.

If you’re already passed this point, and your planned withdrawal amounts are still in the market and have lost money, you basically have a choice of doing what you think is best. Continue to pull from the market side, or transfer whatever gains are left from 2021 (if any) over to the G Fund and pull from the G Fund for the rest of 2022.

Probably enough for now. Feel free to post your questions/comments below to start any other conversations that might help others.