Why retirement investing is a three-legged stool

Tom Temin
Is it possible to overdo your TSP savings and get in the way of other things you need to do to prepare for retirement?

Art Stein
Yes, Tom. That’s the key point. I would never say you’re putting too much money into your TSP when you’re taking care of other financial needs. But other financial needs are often ignored or not prioritized enough for many people: life insurance, real estate, auto, homeowners insurance, health insurance, etc. For example, I once met a federal employee in his 30s. He had three kids and his wife had quit her job to take care of the kids. He had life insurance worth a year’s salary. So I told him that he needed more life insurance. And he said, “Well, we can’t afford that.” So I had to say, “You should put at least a 5% contribution into your TSP because you get a great government match.” But I said, if you need to reduce your TSP contribution to, say, 5% to buy the life insurance you need to protect your family, then do so. And that makes perfect sense.

Many people hate insurance companies, and that’s understandable. Insurance companies are not our friends, they’re a business. But life insurance is important. Unfortunately, not many people die while working, but it’s not uncommon. But for those who are working, not having enough life insurance can be disastrous. If you have a family, just the example I gave, if an employee’s spouse dies, it could take a year for the wife to be able to return to work. Emotionally, the kids would be devastated. And because she’s out of the labor market, she’s not making the income she should because it could be hard to find work. Financially, she’ll be in trouble. Same with disability insurance. Of course, the federal government offers good free disability insurance, but it’s not good disability insurance. It’s good because it’s free, but it pays 60% of the maximum amount for the first three years that you’re disabled and can’t work. But after that, it only pays 40% for the first three years, and it’s adjusted for inflation up to 2%. That’s why many insurance companies offer disability coverage. This supplements the federal compensation and brings the compensation up to about 80%, which may be worthwhile. And the other situation I see is a lot of people don’t have enough. [Employee Retirement Income Security Act of 1974 (ERISA)] What’s not covered enough is auto insurance and home insurance, and that’s liability insurance. So I’m not talking about auto insurance, where you have to fix your car when you have an accident. It’s liability insurance that really matters. Let’s say you have a nice day and you open your window and a bee comes flying in and you panic, and it stings you, and you run a red light and you hit somebody. If you find out that person is an orthopedic surgeon, then obviously you’re at fault. Maybe that person makes $500,000 a year and has a bad accent and can’t work. That person could sue you and easily win millions of dollars in lost income. And your insurance company will say, “We definitely cover you. We have $250,000 of liability insurance. We pay it, and you pay the rest.” In my example, hypothetically, they’ll pay $1.7 million in additional settlement money, and people will go bankrupt. The good news is that it’s very cheap to cover this risk. You can get what’s called umbrella liability insurance, which can raise your total liability coverage for car accidents and accidents at home to over $1 million. And it’s very cheap. $500 a year, $600 gets you $1 million in coverage, $9 million gets you $5 million in coverage, you probably won’t need it, but it could be a lifesaver if you do.

Tom Temin
Yes, that will help you cut back on your weekly Starbucks spending. You might not even need to cut your TSP payments if you can cut your Starbucks payments.

Art Stein
People may wonder why that is not considered a big risk. But what if you have small children and your friends come over and you’re running around and your little 6-year-old friend falls down the stairs or gets pushed down the stairs in a fight? If that person never walks again because of a back injury, the settlement could be millions of dollars. So I would urge you to ask your insurance agent about comprehensive coverage and get great coverage for a little money.

Tom Temin
We’re talking with Art Stein, a certified financial planner with Arthur Stein Financial, who says, “This is not covered by TSP insurance. And it takes many forms that you have to cover. What about the idea of ​​saving outside of a Roth or a regular TSP, like retirement savings or tax-advantaged savings, and saving for a rainy day for other purposes so that when you need a loan to yourself, you don’t have to reach into your TSP?”

Art Stein
That’s absolutely true. Tom, we always recommend that our clients have at least three months of emergency funds. Many of our clients have six to 12 months of living expenses. If you can have 12 months of living expenses, especially for federal employees or retirees, that’s a good emergency fund. And remember, an emergency isn’t always a bad thing. Like, your kid gets married and you want to pay for a nice wedding or a family vacation. One thing that an emergency fund can do is keep you from having to sell investments to pay for a big expense that you want to pay. And like in 2022, when the stock market and the bond market both went down and all the TSP funds except the G fund went down, it would have been a bad time to sell investments to pay for something. If you have a good emergency fund, you can use it.

Tom Temin
Now, the other factor to consider when it comes to insurance – rainy day funds. Auto expenses can add up to a ridiculous amount if you let them.

Art Stein
Absolutely. Everything is getting more expensive right now. Car insurance has gone up a lot, because car repairs have gone up a lot. My wife had to replace the bumper on her car. We didn’t think it was a big deal. But now we find out there’s a ton of electronics in the bumper. Even just replacing a side mirror is expensive because of the electronics. And then, of course, home insurance has gone up. This varies by country, but the cost of home insurance has gone up a lot across the board, especially on the East Coast and the Southeast where we’re being affected by what I call global warming. A lot of people don’t like to use that term, but I think it’s clearly happening. And the cost of home insurance has gone up. And some people are cheaping out on home insurance and don’t get flood insurance even though they’re in Florida. They don’t get wind insurance even though they’re in Florida, because it’s just so expensive. The reason the premiums are so high is because the risk is so high. Insurance companies are actually pretty competitive with each other. It’s much more likely that the premiums are going up because the number of claims has gone up dramatically, not because they’re ripping off customers. And the cost of those claims has increased substantially. People tend to judge insurance based on the premiums, but that’s a mistake. It’s a cost-benefit analysis. Those who offer the cheapest premiums are cutting their insurance benefits so they can do so with insurance. You may not notice it, and it may not be easy to judge. Don’t be fooled by it. You need to fully insure your home, and you’ll want to have more liability insurance. Most people have millions of dollars on them. And in some situations, life insurance can be very important. If you’re single, you probably don’t need life insurance, but if you have dependents and kids, you need lots of life insurance.

Tom Temin
And when it comes to that home insurance, I think the term you want to look for is replacement value.

Art Stein
Replacement cost coverage. There are many different types and a set of definitions. With homeowners insurance, you want them to guarantee that they will pay to rebuild your house no matter what the cost is, and the insurance company can’t come back to you and say, “We depreciated the age of your house and made it less valuable,” or “We guaranteed that we would only pay X amount because a lot of people in your neighborhood need coverage.” You need full replacement cost coverage. For a lot of people, you don’t need that much coverage. I’m not saying you don’t need hundreds of thousands, but that’s not where the expensive part of the insurance is. In fact, I changed insurance companies when I renewed my insurance. My only complaint with the new company is that they had a minimum amount of coverage for everything in the house that was way more than I needed.

Tom Temin
Or you could go out and buy more stuff so you have it covered.

Art Stein
I bought more stuff to stick together.

Tom Temin
We all need more things in our lives, but we don’t have enough in our homes. And finally, it’s worth pointing out that if you lose your home or your house, you’re not going to get a check the next morning, you’re not going to get a new house the next morning. So while all of this is going on, there are a few delayed expenses.

Art Stein
Another variable, homeowner’s compensation, is how long will they cover your living expenses if you have to leave your home. As Tom said, it may be a year, two years before you’re able to move back in. So you want those living expenses covered.