Why retirement investing is a three-legged stool

Tom Temin
Could you be overdoing your TSP savings to the detriment of other things you need to do toward retirement?

Art Stein
Yes, Tom. And this is the key point. I would never tell someone, you are putting too much money into TSP, if they are taking care of their other financial needs. And their other financial needs are often, for many, either ignored or not given enough priority. And those are things like life insurance, and longevity, auto and homeowners insurance, health insurance, maybe. And just, for example, I once met a federal employee who was in his mid-30s, he had three kids at home, his wife had left the workforce to take care of the kids, and he had life insurance equal to one year’s salary. And I just said, you need more life insurance. And he said, Well, we can’t afford it. And I had to say, you always want to put at least a 5% contribution into the TSP because you get that big match from the government. But I said, if you have to lower your TSP contribution to say, 5%, in order to buy the life insurance you need to protect your family, you should do it. And it makes absolute sense.

People tend to hate insurance companies, I get it, they are not our friends, it’s a business. But life insurance is important. Unfortunately, not many people die while still working, although it is not an uncommon occurrence. But for people who have, if they don’t have a sufficient amount of life insurance, it can be catastrophic, if they have a family, even just in the example I gave, if the employee’s spouse had died, it could be a year before his wife, in this case, could return to work. Or emotionally, the children would be devastated. And then she won’t earn as much as she should because she’s been out of the workforce and it might be hard to find a job. It would just be a financial mess. Same thing with disability insurance, sure the feds have great free disability insurance coverage, but it’s not great disability insurance coverage. It’s free, so that’s good, but it pays 60% of their senior three, the first year they were disabled and couldn’t work. But after that, it would only pay 40% of their top three, and the maximum inflation adjustment is 2%. So many insurance companies offer disability coverage. It supplements federal coverage and takes their coverage up to about 80%. This can be valuable. And then another situation that I see so many people don’t get right. [Employee Retirement Income Security Act of 1974 (ERISA)] is not adequately covered is with auto and homeowners insurance, and is their liability coverage. So we are not talking about auto insurance that you have to repair your car if you are in an accident. What is really more important is liability coverage. Let’s say it’s a beautiful day, you lower the windows a bee and you get shocked, maybe you get stung, you go through a light, you hit someone, she’s a plastic surgeon, it’s clearly your fault. She’s making 500,000 a year, and maybe the accent is strong enough that she can never work. Well, she will sue you and could easily make millions of dollars in lost revenue. And your insurance company is going to say, Hey, we’ll definitely cover you, you have about 250,000 in liability coverage, we pay for you to pay the rest? Well, in my hypothetical example, $1.7 million in additional solutions, people would disappear. And the good news about this is that this is a risk that is very cheap to cover. You can get what is called umbrella liability insurance, it will increase your total liability coverage for auto accidents and accidents in your home to a million or more. And it’s so cheap. You can get a million dollars of coverage for about five, 600 dollars a year. You can get $5 million in coverage for $9 million. You are unlikely to need it. But if you do, it would be a lifesaver.

Tom Temin
Yes, that’s going into your weekly Starbucks spending that you can forget about doing that. You may not even need to reduce your TSP payment. If you could just lower your Starbucks payment.

Art Stein
And people may wonder why they don’t see this as a big risk. But think about people having little kids, and they have friends and they’re running around, and maybe their little six-year-old friend falls down the stairs, or maybe their little six-year-old friend gets pushed down the stairs because there’s a housing development going on. If that person can never walk again from a back injury, and again, millions of dollars in a settlement. So I would definitely recommend that everyone ask their insurance agent about umbrella coverage and just spend that small amount of money for a large amount of coverage.

Tom Temin
We are talking to Art Stein Certified Financial Planner with Arthur Stein Financial. So this is outside of your TSP insurance. And that takes many forms that you have to cover. What about the idea of ​​saving outside of your retirement and tax benefits or whatever that regular Roth or TSP, and just having rainy day savings for other purposes, so you don’t have to raid that TSP , if you need a loan for yourself?

Art Stein
Absolutely. Tom, for our clients, we always recommend that they have an emergency fund, at least three months worth of expenses. Many of our clients have six to 12 months of expenses. Once you get up to 12 months of expenses, especially for federal employees and retirees, that’s a sufficient emergency fund. And remember, an emergency is not necessarily a bad thing. It could be a child getting married and you want to pay for a nice wedding or a big family trip. One of the things you can then use the emergency fund for is to avoid having to sell investments to pay for that big expense you want to pay off. And maybe it’s like 2022, when the stock and bond markets were down, and therefore all TSP funds except the G fund were down. And that would have been a bad time to sell investments to pay something. If you have a good emergency fund, you can use it.

Tom Temin
Okay, and other elements to think about insurance, that rainy day fund. Automobile expenses can be crazy if you let them.

Art Stein
Absolutely, and everything is more expensive now. Auto insurance has gone up a lot because the cost of repairing cars has gone up a lot. My wife had to replace a bumper on her car. And I didn’t think it would be such a big deal. But it turns out bumpers had a lot of electronics, now a days. And even just replacing a side mirror is expensive, again, because of the electronics. And of course, we’re now looking at homeowners insurance. And it varies across the country. But homeowners insurance costs have gone up a lot, in general, and especially in areas along the East and Southeast coasts, where they are subject to what I call global warming. A lot of people don’t like to use that term, but I think it’s clearly happening. And that’s driving up the cost of homeowners insurance. And some people decide to forgo their homeowners insurance and not get flood insurance, even though they’re in Florida. Don’t get wind insurance when they are in Florida because it has become too expensive. Well, the reason it’s so expensive is because the risk is so high. And insurance companies are actually quite competitive with each other. And if insurance costs are going up, it’s not because they’re cheating their customers, it’s much more likely because the number of claims has gone way up. And the cost of these claims has skyrocketed. People tend to judge insurance based on the premium. And this is a mistake. It is a cost benefit analysis. Someone who offers you the lowest premium is often able to do so in insurance because they have reduced benefits. And you may not see this either or it may not be easy to determine, don’t fall for it. You should fully insure your home, you want to have a lot more liability insurance, and most people do, millions of dollars. And depending on your situation, life insurance can be really important. A single person probably doesn’t need life insurance, someone who has dependents, children, they need multiple life insurances.

Tom Temin
And in regards to home insurance, then the word you want to look for, I think is a replacement cost.

Art Stein
Guarantee replacement costs. There are different types of you that fall into a whole series of definitions and want your homeowners insurance to guarantee that they will pay you the cost of rebuilding your home no matter what it costs, and they won’t. be able to come back to you and say, well, we’ve depreciated the home and depreciated it or we only guaranteed to pay you X amount, now because a lot of people in your neighborhood need coverage that’s gone up a lot. You want full replacement cost. For many people, you don’t need much coverage there. I’m not saying you don’t need a few 100,000, but that’s not the expensive part of insurance. And actually when I just renewed my insurance, I switched companies. My only complaint with the new company is that they had a minimum for everything inside the house, which was way more than I needed.

Tom Temin
Or you can go out and buy more stuff just to cover it.

Art Stein
I bought more things so I could hang out.

Tom Temin
We all need more things in our lives, we don’t have enough things in our homes. And finally, it’s probably worth noting that if you have a housing loss or home loss, you don’t get that check the next morning, nor do you get that new house the next morning. So you’ve got a little bit of a delayed expense while this all plays out.

Art Stein
Which is another variable and homeowners coverage, is how long they will pay you living expenses if you have to leave home. And as you say, Tom, it could be a year, two years, before you’re able to go back. And so you want those living expenses covered.