Why retirement investment is a three-legged stool

Tom Temin
Can you overdo the TSP savings to the detriment of other things you should be doing towards retirement?

Art Stein
Yes, Tom. And that’s the key point. I would never say to someone, you’re putting too much money in the TSP, if they’re taking care of their other financial needs. And their other financial needs are frequently though, for a lot of people, either ignored or not given sufficient priority. And that’s things like life insurance, and long property, auto and homeowners insurance, health insurance, maybe. And just, for instance, one time I met a federal employee who was in his 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 salary. And I just said to him, you need more life insurance. And he said, Well, we can’t really afford it. And I had to say, you always want to put at least 5% contribution into the TSP, because you get that great match by the government. But I said, if you need to reduce your TSP contribution down to say, 5%, in order to buy the life insurance that you need to protect your family, you should do it. And it absolutely make sense.

People tend to hate insurance companies, I understand that, they’re not our friend, it’s a business. But life insurance is important. Unfortunately, not many people die while they’re still working, although it’s not an unusual event. But for the people that do, if they don’t have a sufficient amount of life insurance, it can be disastrous, if they have a family, even just in the example I gave, if the employee spouse had died, it could be a year before his wife, in this case, was able to go back to work. Either emotionally, the kids would be devastated. And then she’s not going to make as much as she should, because she’s been out of the workforce and might be hard to find a job. It just would be a financial mess. Same thing with disability insurance, of course the feds have a great free disability insurance coverage, but it’s not great disability insurance coverage. It’s free, so that’s nice, but it pays 60% of their high three, the first year they were disabled and couldn’t work. But after that, it would only pay 40% of their high three, and the maximum inflation adjustment is 2%. So lots of insurance companies offer disability covers. It supplements the federal coverage and gets their coverage up to about 80%. That might be worthwhile. And then another situation that I see so many people do not adequate. [Employee Retirement Income Security Act of 1974 (ERISA)] is not adequately covered is with auto and homeowners insurance, and it’s their liability coverage. So we’re not talking about the auto insurance that you have to repair your car if you’re in an accident. What’s really more important is the liability coverage. Like suppose it’s a nice day, you got the windows down a bee flies and you get flustered, maybe it stings, you go through a light, you hit somebody turns out, she’s a plastic surgeon, it’s clearly your fault. She’s making 500,000 a year, and maybe the accent is severe enough she can never work. Well, she’s going to sue you, and could easily win millions of dollars in lost income. And your insurance company’s gonna say, Hey, we’re definitely going to cover you, you’ve got like 250,000 in liability coverage, we pay that you pay the rest? Well in my example, hypothetical, $1.7 million in additional settlement, people would be wiped out. And the good news about this is, this is a risk that’s very cheap to cover. You can get what’s called umbrella liability insurance, it’s going to raise your total liability coverage for auto accidents and accidents in your house to a million or more. And it is so cheap. You can get a million dollars in coverage for about five, $600 a year. You can get $5 million in coverage for 9 million. You’re not likely to need it. But if you do, it would be a lifesaver.

Tom Temin
Yeah, that’s getting into the weekly Starbucks expenditure that you could forego to do that. You may not even have to reduce your TSP payment. If you could just reduce your Starbuck payment.

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

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

Art Stein
Absolutely. Tom, for our clients, we always recommend that they have an emergency fund, minimum three months 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 is a sufficient emergency fund. And remember, an emergency is not necessarily a bad thing. 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 not having to sell investments to pay for that big expenditure that you want to pay for. And maybe it’s like 2022, when the stock and bond markets were both down, and therefore all the TSP funds except the G fund were down. And that would have been a bad time to sell investments to pay for something. If you have a good emergency fund, you can use that.

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

Art Stein
Absolutely, and everything’s more expensive now. Automobile insurance has gone up a lot, because the cost of repairing autos has gone up a lot. My wife had to replace a bumper on her car. And I didn’t think it would be that big a deal. But it turns out the bumpers got a lot of electronics, now in these days. And even just replacing a side mirror is expensive, again, because of the electronics. And of course, we’re now seeing that homeowners insurance. And this varies across the country. But homeowner insurance costs have gone way up, in general, and especially in areas along the east coast and the Southeast where they’re 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 it’s driving up the cost of homeowners insurance. And some people then decide to go cheap on their homeowners insurance and not get flood insurance, even though they’re in Florida. Not get wind insurance when they’re in Florida, because it’s become very expensive. Well, the reason it’s very expensive is because the risk is very high. And insurance companies are actually quite competitive with each other. And if the insurance costs are going up, it’s not because they’re gouging their customers, it’s much more likely to be because the number of claims has gone way up. And the cost of those claims has gone way up. People tend to judge insurance based upon premium. And that’s a mistake. It’s a cost benefit analysis. Someone offering you the lowest premium often is able to do that in insurance because they’ve lowered the benefits. And you may not even see that or it might not be easy to determine, don’t fall for that. You need to fully insure your house, you want to have a lot more liability insurance, and most people do, millions of dollars. And depending upon your situation, life insurance can be really important. A single person probably doesn’t need life insurance, someone who has dependents, children, they need a lot of life insurance.

Tom Temin
And with respect to that house insurance, then the word you want to look for, I guess is a replacement cost.

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

Tom Temin
Or you could go out and buy more stuff just so it’ll be covered.

Art Stein
I bought more stuff so that I could stick.

Tom Temin
We all need more stuff in our lives, we don’t have enough stuff in our houses. And finally, it’s probably worth pointing out that if you do have a housing loss or house loss, you don’t get that check the next morning, nor do you get that new house the next morning. So you’ve had a little late expenses while all this plays out.

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