How to ensure your financial and physical health in uncertain times

Tom Temin: And you serve federal employees as a specialty and you’re hearing these questions over and over about what comes next. And so let’s start with cash flow, which you list as the primary thing to start thinking about.

Thiago Glieger: That’s right. In the medical field, doctors are very focused on heart health. The problems that are in the heart are usually leading to other health problems. And so when you think about your money, the way I like to explain this to clients is for them to think about their cash flow as the heartbeat of their financial plan, right? Cash flow is what comes in, in terms of income, what you’re able to spend, to be able to use toward expenses and things like that. And so obviously cash flow primarily comes from a salary. But what happens of course if that goes away, right? So now we’re looking at a situation where we have a potential heartbeat stop. And so the best way to start thinking about how to protect against this financial uncertainty is to really think about your money being split in these different buckets, if you will, right? You have this long-term bucket, you have one that’s more intermediate, and then the short-term bucket. The short-term bucket is the really important one. This is the one that’s designed to take care of you anywhere from the next year or two, or if you’re already approaching retirement, sometimes as much as five or six years, because that’s the ability that allows you to still keep living your life.

Tom Temin: All right. So if you are let go or you lose your federal job before your retirement eligibility and therefore by definition before you can withdraw your TSP without horrible penalties, what are some cash flow strategies?

Thiago Glieger: That’s a really good point, Tom, because a lot of federal employees don’t realize that there are some specific rules around TSP withdrawals. If we’re looking at a VERA, or Voluntary Early Retirement Authority, depending on how old you are, when you’re taking that, you may actually be penalized when taking TSP withdrawals. So one thing that we have encouraged people to consider is to think about these different asset classes inside the short-term bucket. So we’re talking about straight-up hard cold cash in the bank. There’s other places that you can put money like high-yield money markets or savings accounts. CDs could be also a potential place for this and then you could even look to bonds. They’re short-term bonds There’s Treasury bonds, but the reality is you want liquidity, low volatility and the ability to access that cash if you need it.

Tom Temin: And therefore, that reinforces the long-standing idea that you have to have that rainy day liquid savings in addition to your long-term retirement savings, what people used to call the oh-my-god money.

Thiago Glieger: That’s right. The problem with the markets and investing for growth is that volatility is a part of that. In volatility to a person in the short term is risk. In the long term, it can be opportunity, right? But short term, we don’t know what the markets are going to do. So if you potentially lose your job, and that begins the nosedive of the markets, you don’t want to be selling your investments at a loss and that’s where the emergency funds come in, right? And there’s some general guidelines that we have for people to be looking at their emergency funds to be able to take care of themselves.

Tom Temin: All right, and what are some of the parameters or metrics by measure how much you should have?

Thiago Glieger: In general, if you’re on a single income, if you are by yourself or if your spouse does not earn an income, you really want to be thinking about having somewhere between six to eight months of your expenses in cash. OK, you don’t want to lock this up in a CD or anything similar to that. If you are on two incomes or perhaps you have two incomes yourself, you can consider reducing this down to something like three or four months of your monthly expenses. But this is where you really need to be careful because there’s a lot of dual-fed families here in the area. And in particular, if maybe one is a fed and the other is a federal contractor of sorts, you want to operate as if you’re on a single income because the risk to your job could be for both of you.

Tom Temin: Right. Everybody says that when they reach that two-income state, they want to say, ‘Well, let’s live on the one and save the other.’ But the fact is, in times when you’re not feeling stressed, the expenditures tend to expand until they fill up both incomes.

Thiago Glieger: That’s right. There’s this concept of lifestyle creep that happens as you begin to have greater salaries, cash flow becomes easier and you don’t have to be as diligent about your budgeting. And this is especially true once the kids are out of the house, right? And you’ve got some lesser expenses unless you’re paying for college and things go up. But the idea is that you don’t really think too hard about this, especially in a former federal service career where you didn’t have to worry about losing your job very much unless you’re committing treason or doing egregious things. And so this concept of having the emergency fund has made it to the No. 1 top priority for federal employees simply because of the new environment they’re in.

Tom Temin: Yeah, I always felt that automobiles crystallize all of that. The base model of a car seems great until you see what you can add on, and by the time you add on, you can double the price of it, and you figure, why are they offering that junkie base model in the first place? Financial creep just comes into a lot of areas of life, refrigerators.

Thiago Glieger: Yeah, dining out is a big one, right? We get used to not cooking as much as we have normally done. So you slap inflation of what the real inflation for food costs have been and all of a sudden you have some new or higher expenses you didn’t plan for.

Tom Temin: All right, and so that takes care of the cash flow idea. That means you should have been planning for this possible job loss all along, which if you’re a working person, then you gotta plan for losing a job, I guess, at some point in your life. I guess it happens to the best of people. And health care coverage then becomes the secondary worry. Again, you’re OK now, I feel great, but until you don’t, then you’ll need that health care. What’s a good strategy for feds that are worried about that coverage?

Thiago Glieger: Yeah, and to think about to the ability to pick up or maintain health insurance, you have to have some cash. If you no longer have health insurance at all, and you have to go to the marketplace to be able to bridge that or worse, you’re going to use what the government’s COBRA is, which is TCC, Temporary Continuation of Coverage. You get to keep your exact same health insurance plan that you have now, but you’re currently paying or federal employees are currently paying 28% roughly of that premium. And under the TCC, the cost is 102% of that premium. So going back to your point, Tom, having that cash just becomes super important. And so if somebody’s not quite ready or really hasn’t really thought about that cash bucket for a very long time, one thing they might consider doing is just reducing their TSP contributions down to the matching, OK? You don’t want to not get the match. And so that’s 5% for most people. What that’s going to do is it’s effectively going to increase your take-home pay and every two weeks while you still have a job, you now have more money coming to you that you can squirrel away into a savings and start building that because that’s going to be that cushion for you if you lose a job, especially if you now have to go out and get health insurance. The big consideration on how you lose your job is going to influence that. So depending on whether you’re RIF or whether there’s a VERA will have an effect on FEHB.

Tom Temin: And there’s a little twist here for federal employees that if you are eligible for Voluntary Early Retirement Authority, and if that is offered by agencies, and I guess it’s a mixed bag so far what we’re seeing. It’s not widely offered, but it comes up from time to time. If you retire under that basis, then it is if you retired, correct me if I’m wrong, at regular retirement age, and therefore you still have access to the well-priced Federal Employee Health Benefit plans.

Thiago Glieger: That’s exactly right. And in my view, if you are close to retirement, and you’re fearing that this is a job loss, a VERA is really a best-case scenario here for you because they’re accelerating the moment in which you no longer have penalties for taking an early retirement. So those parameters are with 25 years at any age, and if you have 20 years, you can be 50 and up. But there’s some things to think about that, right? You do get to keep your health insurance, but if you’re not 55 yet, then the rule of 55 for TSP distributions means that you don’t get to tap into TSP except for in some very clear exclusions, OK? And so the other scenarios could be that if you don’t have a VERA, which is very possible, there’s been a lot of differing information from agencies, as you said, that you are simply separating under the MRA+10 rule. This allows you if you have minimum retirement age, for most people is 57 or so, and you have at least 10 years of service, you can leave service, but postpone taking your retirement benefits. That ensures that you’ll be able to keep health insurance later on in retirement. But between now and retirement, when you actually get your benefits, you gotta be thinking about what are you gonna do for health insurance because there’s a postponement of those benefits. If you’re going to the marketplace, that can be hundreds of dollars a month. If you’re paying for a TCC, that can sometimes be thousands of dollars a month depending on what plan you have currently.

Tom Temin: Right. So therefore, again, the idea of having a plan is really important because if you have that VERA and you have that gap because of the minimum retirement age, it’s almost like a doughnut hole or something or some kind of a gap between what you can have when you reach the retirement age and now when you’re still a federal employee.

Thiago Glieger: That’s exactly right. It is very much like a doughnut hole where you have coverage because you’re still employed, then you don’t because you’re postponing it and you get to restart it later. And so those key periods in the middle where there’s that gap, you have to be thinking about how will I bridge myself? I am losing health insurance. I’m losing an income. How long will it take before I can find another job? Are my skills easily transferable? All of these things influence how much cash you want to be holding on the side right now. And in some cases, you really want to maybe even push longer if you’re thinking about a retirement simply because it came a couple of years sooner.