Author: Brian Kurrus, CFP®
Financial planning brings many questions on the path to retirement but some questions seem to come up more often than others. Here are some of the most common frequently asked questions and key strategies to keep in mind.
Should I pay off debt or invest?
Debt can come via credit cards, student loans, car loans, home equity loans, and our mortgage among other places. Should we pay the minimum balance and maximize investments into TSP and other savings or prioritize paying down the debt first? 
First, what is the interest rate and how does it compare to the expected rate of return? If your savings account is earning 2% per year and your credit card is costing you 15%, that’s an easy one. Take what you can from savings and immediately pay down the debt as it is costing you more than you are earning. You also want to factor in any tax implications. Is the liability creating a tax deduction and what are the tax implications for the investments?
Finally, you need to think about the risk vs. reward. If the investment returns are not guaranteed, as they often aren’t, we should expect a higher expected rate of return to compensate for the additional risk associated with the investment. The net result: it’s tough to justify investing over paying down high interest rate debt. I generally define this as high single digits. Sure, your TSP might earn more than an 8% debt this year but it could also lose money and you are adding risk without any guarantees for a higher reward. On the other hand, some of us were lucky enough to lock in low-rate mortgages, under 4%, before rates began increasing. With high yield savings, money market funds and CDs paying north of 4%, I would prefer to keep my money more liquid while earning a higher rate rather than paying down a mortgage balance with a lower rate.
Traditional or Roth?
Definitely not a one size fits all answer and there are key things to consider. Do you think you will be in a higher tax bracket now than in retirement? If so, this would favor Traditional and getting the tax break up front. Lower bracket now and we would prefer to get the tax bill out of the way with Roth investments. However, what if I am in a similar bracket in retirement? Our current 22% and 24% Federal brackets span a pretty wide income range and many Federal employees wind up in the same or a similar bracket in retirement with income from their FERS annuity, Social Security and Traditional TSP distributions.
Having some Roth funds can help diversify against the unknown. Tax brackets could change and you may want to keep your income in any given year below certain thresholds to avoid higher tax brackets, higher Medicare premiums, etc. The flexibility of having both Traditional and Roth assets may come in handy down the line. Roth IRAs have a big advantage on the distribution side as Roth IRAs do not have RMDs (Required Minimum Distributions) and employer sponsored Roth accounts will no longer have RMDs beginning next year. That means more flexibility to grow your Roth money tax free in retirement while deciding when you want to withdraw it.
Should I change my investment allocation?
Maybe the market is dropping or retirement is around the corner and you are wondering if you should make investment changes. The two key elements to consider are your time horizon and risk tolerance. I generally advise against trying to time the market. This often leads to emotional decisions where investors add risk at market highs and sell during scary times after big market declines. I recommend letting your time horizon and risk tolerance guide your investment allocation. As I get closer to when I need to withdraw funds, I likely want to reduce risk as my money won’t have as long to recover from a market drop. Risk tolerance focuses on how personally comfortable you are with the potential ups and downs and a risk tolerance questionnaire will generally cover both elements while providing a recommended investment allocation. Stick to your long-term strategy and rebalance as needed to keep your portfolio in line.
How much money will I need to retire?
I’ll often hear, what’s the magic number, how much should everyone have to retire and not run out of money? You cannot just throw out a number that everyone needs. The first thing to consider is how much money you may need each month and year in retirement. From there calculate your secure income sources from your FERS annuity, Social Security and any other income sources. Then the big question becomes, “What is the gap between your income needs and sources?”. This is the amount you will need to withdraw from your assets on an annual basis. Once we know this figure, we can begin calculating how much we may need in assets going into retirement. You can plan for these figures at retirement or plan in today’s dollars and then adjust for inflation. A good starting point is to plan on a 4% annual withdrawal rate with annual inflation increases. You will want to do additional planning and this doesn’t give you any guarantees but 4% has generally been considered a safe withdrawal rate for one entering retirement. More detailed retirement projections and planning can help evaluate risks and potential pitfalls down the line.
Mr. Kurrus is a Financial Advisor with Signature Financial Partners, LLC in Vienna, VA. He specializes in working with families and small business owners; his mission is to provide his clients with a diverse range of wealth management ideas and solutions. His specific areas of focus are estate conservation, business succession strategies, retirement funding, long-term care issues, life insurance, and disability income insurance.
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