By Mike Miles
How to be a good pension fund manager
May 20th, 2013 | Uncategorized
If you own a Thrift Savings Plan account and plan to use it to fund your standard of living in retirement, you are a pension fund manager. As a pension fund manager, you are responsible for the standard of living your TSP account produces. This standard of living will depend heavily on the decisions you make in the course of managing your account.
It is critical to recognize that a single stumble along the way — one bad outcome from one bad or overlooked decision — can cost you dearly later in life. The margin for error is razor thin, and the penalty you pay for mistakes can be incredibly high. If you knew today that your asset allocation choice, while protecting you against the risk of a market crash tomorrow, were going to reduce your income 30 years from now by half of what it could be, would you reconsider? To give yourself the best chance of realizing the best results, you need to make sure that all of your management decisions consider all of the risks and rewards and are the best they can be.
You must start with a good understanding of the rules of the game before you can apply more sophisticated analytic techniques. You must understand the basics, having separated fact from fiction.
Here are five myths I hear TSP participants repeat far too frequently:
Myth: You must withdraw your TSP balance when you separate from service.
Not true. You may leave your money in the TSP, and continue to manage it there, as you see fit, for life. Under Internal Revenue Service rules, you may have to take distributions from your account beginning as early as age 71, but this may not apply to you, and in no case will you be required to empty your account while you’re still alive.
Myth: There is a penalty for leaving your money in the TSP after you leave government employment.
This one is so common, and so wrong, that I suspect it is propagated by sales people trying to convince unsuspecting TSP participants to roll over their balances to IRA accounts. There is no additional cost, or penalty, for leaving your money in the TSP after you leave federal service. The IRS may impose a penalty if you fail to take required minimum distributions later in life, but this is also true for IRA and 401(k) accounts.
Myth: The IRS early withdrawal penalty is waived for certain categories of employment.
Certain public safety employees may take distributions from their defined benefit pension plans without being subject to the early withdrawal penalty. There is confusion about whether this exemption also applies to TSP distributions made before the participant reaches age 59½. It does not.
Myth: The early withdrawal penalty is waived for early retirement.
Fact: Whether your early retirement is voluntary or involuntary, with incentive or without, has no bearing on the early withdrawal penalty and your TSP distributions. There are a number of exceptions to the penalty, but this isn’t one of them.
Myth: Better investment performance is available outside TSP.
Fact: The TSP offers everything you need to produce superior investment performance: access to markets, adequate diversification and low cost. If someone else claims that they can deliver better results than what can be produced by good management applied to a TSP account, you shouldn’t bet on it.
Good results come from good management. Good management is built from good decisions. Good decisions require knowledge and understanding. Knowledge and understanding are based on facts. Separating fact from fiction is your first job as a pension fund manager.
Timing the market
May 13th, 2013 | Uncategorized
Q. As precaution for what I thought was going to be a market decline, in December, I moved $350,000 out of my Thrift Savings Plan accounts from the C, S, and I fund (60 percent, 20 percent, 20 percent) to the G Fund. The end of the year came and went with no crash. The government had several “doomsday” dates that kept me guessing on market reactions. All have come and gone and the market is still going strong.
I didn’t change my paycheck allocations, so I’ve continued to put money into the above funds in the percentages shown, so at least those funds are dollar cost averaging.
I don’t want to “buy high,” so what do I do? Keep the bulk of my funds in G until the market dips enough for me to get back in? Or take my spanking (I’ve “lost” $50,000 during this time) and get back in now?
A. You’ve just provided a textbook example of the problem with timing the market. If you’d studied the pros and cons of what you were doing before you did it, you would have known better. On one hand, the market could keep right on going without you, and the odds are that it will be higher tomorrow than it is today. On the other hand, if you didn’t like the price of the market in December, I can’t imagine why you would like it any better today. Selling low and buying high certainly isn’t a winning formula.
Furlough and TSP hardship withdrawal
May 13th, 2013 | Uncategorized
Q. I am facing furlough soon. I already have one Thrift Savings Plan loan. Can I withdraw money from my TSP on a hardship withdrawal basis because of the furlough? I realize, if I did, I would have to pay taxes on it, etc.
A. The furlough alone does not qualify you for a hardship withdrawal. To qualify for a financial hardship withdrawal, you must have a financial need for at least one of the following reasons:
* Negative monthly cash flow.
* Medical expenses (including household improvements needed for medical care) that you have not paid and that are not covered by insurance.
* Personal casualty loss(es) that you have not paid and that are not covered by insurance.
* Legal expenses (that you have not yet paid) for separation from your spouse or divorce.
Read the booklet at https://www.tsp.gov/PDF/formspubs/tspbk12.pdf for more details.
Tags: furloughs, TSP, withdrawal
TSP and annuities
May 13th, 2013 | Uncategorized
Q. I have been a federal employee for 27 years, just long enough to have been one of the first forced into FERS. About seven years ago, I looked at my Thrift Savings Plan statement and learned that the prediction was that if I retired at age 62 and bought an annuity, I would have a pretty good monthly salary. Now, I notice that the prediction is that if I use my TSP savings, with about the same amount predicted for me at age 62, to buy a monthly annuity, that annuity will be about one-third of what was predicted seven years ago. Not a very good deal now.
My belief is that the years of low interest rates are responsible for the change in what the same amount of money will buy now. I wonder if that is true. I also wonder if these annuity companies that agreed to pay the larger amounts when they signed people up seven or more years ago are going to have to have massive bailouts by the federal government if interest rates continue to remain where they are. Finally, if I retire soon, I will not want to buy an annuity at that time, but if interest rates go up in five years, how much more attractive are monthly annuities going to be? If the interest rates go back to where they were 10 years ago, will the price of annuities go back to where they were, or have annuity companies learned a lesson and are likely to be more conservative in pricing?
This also might be a good topic for one of your columns for other FERS feds who have to decide about using some of their savings to buy annuities.
A. I have written columns about the pros and cons of using your savings to buy an annuity, and about the dangers of using the calculators provided by the TSP. You’re a witness to the problems. There was never a promise by the insurance company to provide a certain payout for a future annuity purchase. The payout is always calculated at the time of purchase. Annuity payouts are dependent upon the prevailing interest rates at the time of purchase, and those rates are now at historic lows. Same with the payout rate. If interest rates increase in the future, the payout you will be offered should also increase. In addition, as you age, the payout will go up since the number of payments the insurer expects to make will decrease.
Tags: annuity, FERS, interest, retirement, TSP
TSP loan repayment and taxes
May 13th, 2013 | Uncategorized
Q. I borrowed $50,000 from my Thrift Savings Plan two years ago and have been paying it back biweekly. Will I be taxed on the money I borrowed? If so, when and how much?
Also, I’m looking at retiring in three years. I will be 59 and have 33 years on the job. How much risk should I take in my TSP account?
A. A loan is not taxable unless you fail to repay it on time. The amount of risk you take with your TSP assets should be matched to your specific financial goals and life circumstances. The right risk level can’t possibly be determined using only your age and years of service. In fact, your years of service have nothing directly to do with it.
Tags: loan repayment, taxes, TSP
TSP
May 13th, 2013 | Uncategorized
Q. I am a fully vested CSRS employee with the Environmental Protection Agency for 33 years at age 55. I have received my numbers, but I missed my first date to retire. How long does it take to receive my first full check? Should I take all of my Thrift Savings Plan out at once; leave about $10,000 in and roll it over to a Roth IRA; or leave it in the TSP? Is there a counselor at TSP to speak with about taxes and IRAs.
A. You should leave your money in the TSP for as long as possible and consult your tax preparer or a financial planner with your tax questions.
Tags: CSRS, retirement, rollover, Roth IRA, taxes, TSP, vested
TSP allocation
May 13th, 2013 | Uncategorized
Q. I’m 25 years old, series 1811 and have been contributing 5 percent into the Thrift Savings Plan (FERS) for three years. Until last week, I was contributing 100 percent into the L2040 fund, but now I’m doing 65 percent into the S Fund and 35 percent into the I Fund. Since I still have about 32 years until mandatory retirement, do you think I am making the right TSP choices now, and do you have any recommendations?
A. Your allocation is risk-inefficient. You could reconfigure it to deliver similar expected growth with much less volatility. If you don’t know how to do that, then I suggest that you go back to using the L funds.
Tags: allocation, FERS, I Fund, L Fund, mandatory retirement, S Fund, TSP
Survivor benefit vs. life insurance
May 9th, 2013 | Uncategorized
Q. I will be retiring at the end of this year with 37 years and 10 months of service. I am a CSRS employee and will be 57 years old in September. My annual annuity would be $81,958. I will have a little over $200,000 in my Thrift Savings Plan account.
Is it smartest to take the spousal annuity or take out a life insurance policy on myself to sustain my wife once I pass away? My annual annuity will be reduced by around $7,900 a year if I chose the spousal annuity. Which would be the wisest?
A. This isn’t your choice to make. It’s your spouse’s choice. If I were your spouse, I’d favor the full survivor benefit.
Tags: annuity, CSRS, life insurance, retirement, survivor benefit
Required minimum distribution
May 9th, 2013 | Uncategorized
Q. I have a 401(k), several CD IRAs and several mutual fund IRAs. I will turn 70 the end of November. Do I have to withdraw a minimum amount from each account, or can I withdraw the required minimum amount from one of the accounts as long as it totals the amount I must withdraw next year?
Tags: 401(k), IRA, Required Minimum Distribution
Terminal cancer and TSP early withdrawal
May 9th, 2013 | Uncategorized
Q. I will most likely be medically separated from the military next year after 25 years of service. I have bone cancer that is incurable but manageable — 50 percent life expectancy is 10 years. I am 47, so if I live 10 years, I would be 57 and still ineligible to withdrawal my Thrift Savings Plan. Are there exceptions for terminal disease that allow you to withdraw early without penalty?
A. The list of available exemptions appears on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.
Tags: early withdrawal penalty, life expectancy, medical, military, separating, TSP