Ask The Experts: Money Matters

By Mike Miles

Don’t let rational fear lead to irrational action

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If you have any of your Thrift Savings Plan account invested in the C, S or I Funds, you should be nervous. Why? Not because of the Ebola virus, turmoil in the Middle East, the national debt or legislative gridlock. Sure, those are all significant threats to various interests in various ways, but, whether you realize it or not, the threat those pose to stock values are already reflected in the share prices of the various TSP funds. Professional investment managers are not paid to wait for bad things to happen before responding. They are paid to predict the probabilities of future events and respond to opportunities and threats in advance — which they do.

The reason to be nervous about stock prices, here, is simple: Stock prices are near their all-time highs and have advanced ahead of expectation for the better part of five years. As prices rise, the risk of loss increases. Declines in stock prices are inevitable. Unfortunately, the timing and magnitude of those losses is impossible to reliably predict.

The fact that you’re invested in any of the TSP’s three stock funds should indicate that you expect to need the returns they can produce to meet your lifetime financial goals. If you can achieve your goals with less risk, then why wouldn’t you take the safer route? But needing the greater return means that the “right” portfolio will include exposure to stocks and the risk of loss they bring. If this is the case, then any portfolio allocation that does not include stocks is “wrong” for you.

Going back to the basic nature of stock losses; their inevitability and unpredictability mean that if you’re in the right portfolio, and that portfolio includes stocks, you will suffer losses from time to time. As an investment manager, you must accept this fact. Unfortunately, many do not and they futilely attempt to avoid losses by abandoning the right allocation in favor of a wrong one. This is an example of a rational fear leading to an irrational action: Exchanging the right portfolio allocation for a wrong one. The move is irrational, because it is made in an attempt to avoid the unavoidable.

Let’s look at this from a logical perspective. If you’re in the wrong portfolio, your financial plan will fail. If you’re in the right portfolio and it includes stocks, you will lose money from time to time. But, does losing money equal failure? This depends upon how you define failure. If your only objective is to avoid losses, then losing money equals failure. But, if you define failure as failing to meet your lifetime spending and wealth objectives, then the two are not necessarily synonymous. If your financial plan relies on never losing money to succeed, and you must also invest in stocks to succeed, then you have a serious problem. You can’t invest in stocks and reliably avoid losses, the two are mutually exclusive.

The solution to this problem is to first minimize the risk of loss by limiting your exposure to risky assets to only that which is necessary to support your lifetime financial goals. Then minimize the risk posed by these assets by properly diversifying them, and develop and manage a spending plan that will tolerate the inevitable losses without failing. Maintain the properly diversified portfolio asset allocation at all times.

This means never moving to the “wrong” allocation to avoid losses, which is an inherently irrational tactic. Consider the risks that you take on when you make such a move. Without a solid plan for subsequent action, moving to the wrong allocation isn’t part of a strategy at all. It’s like jumping out of an airplane without a parachute in response to a sudden loss of altitude. The questions you’ll have to answer after you jump out are probably tougher than the ones you’d have faced if you stayed aboard. Fear in this situation is reasonable. It’s what you do in response that deserves careful consideration.

Mike Miles is a Certified Financial Planner licensee and principal adviser for Variplan LLC, an independent fiduciary in Ashburn, Virginia. Email your financial questions to fedexperts@federaltimes.com and view his blog at blogs.federaltimes.com/federal-money.

TSP contributions

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Q. I will retire Jan. 2 in CSRS. I believe the paydays on Jan. 2 and Jan. 16 will be part of the 2015 TSP contribution year. Also, I believe that I can contribute up to 100 percent of my basic pay to TSP (which is what I would like to do for these last two pays). Would the 100 percent be whatever is left after all other deductions (taxes, FEHB, etc.) have already been deducted? Essentially, when does the 100 percent get applied?

A. The 100 percent is applied after all required deductions have been subtracted.

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Finding an advisor

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Q. My husband and I are 51. We will retire in about 10 years. How do we find the right financial advisor that will help us understand what we need for retirement, and  what we need to do if we won’t have enough to meet our needs? Read the rest of this entry »

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Lump-sum rollover

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Q. In the event I choose a lump-sum payout at my departure, can this payout be rolled into my TSP account?

A. No.

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TSP distributions

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Q. I’m in the FERS retirement plan and will retire March 31 from the Defense Department. At the time of retirement, I will have more than $300,000 in my 401k. I have two multiple-part questions:  1. Can I decide how much I want to take in monthly withdrawals and, if so, do I pay the 20 percent penalty monthly or do they take the 20 percent off the $300,000 before I even start getting my monthly payments? 2. If I leave my money in the TSP, do they continue to invest my money, and will I continue to earn interest off of my money and can I move the money around if I so choose? Read the rest of this entry »

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72t payments

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Q. If I take 5 percent or the maximum interest my retirement plan provides, does this violate the 72t definition of reasonable interest rate, and would I end up paying the 10 percent penalty?

A. 72t distributions must be computed using one of three specific formulas, and the rules are strict. Anything else will not qualify for the exemption. You should work with a qualified tax adviser before initiating any payments.

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TSP withdrawals

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Q. I retired September 2013 in CSRS after 40-1/2 years. I want to take out a one-time distribution equal to about 25 percent of my TSP account. Is is true I can only take out a one-time distribution or payout? I am over 59-1/2.

A. You are limited to one partial lump-sum withdrawal and a full withdrawal, which may be taken in the form of monthly payments. You must take the partial lump-sum withdrawal before beginning monthly payments.

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Lump-sum withdrawal

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Q. Upon retirement, can I elect to take a full withdrawal in the form of monthly payments, and then at some later date choose to take a one-time lump-sum withdrawal? For instance, three years after retiring, can I choose to remove $50,000 if I have never taken a lump-sum amount.

A. Only if the lump-sum is the entire balance remaining in your account.

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Girlfriend on annuity

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Q. I am 63 and will be retiring under FERS probably within the next two years. Am I allowed to have my long-term girlfriend on my TSP annuity?

A. Maybe:

“If you chose a TSP annuity that provides for a joint annuitant other than your spouse, the joint annuitant must be either a former spouse or someone with an insurable interest in you. This means that the person is financially dependent on you and could reasonably expect to derive financial benefit from your continued life.

Blood relatives or adopted relatives (but not relatives by marriage) who are closer than first cousins are presumed to have an insurable interest in you. If you name such a joint annuitant (i.e., a former spouse or someone with an insurable interest) who is more than 10 years younger than you, you must choose a joint life annuity with the 50% survivor benefit. The only exception is for a former spouse to whom all or a portion of your TSP account is payable pursuant to a retirement benefits court order.

If the person named as your joint annuitant is not presumed to have an insurable interest in you, you must submit an affidavit (i.e., a certification signed before a notary public) from someone with personal knowledge that the named person has an insurable interest in you.
The certifier must know the relationship between you and the joint annuitant and must state why he or she believes that the named joint annuitant might reasonably expect to benefit financially from your continued life.”

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TSP transfer

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Q. I have been retired from the federal government for eight years and have worked for a private firm. I have a 401k that I have been contributing to since I started working for this firm. Can I transfer my existing 401k to the TSP when I stop working.

A. Yes, as long as it doesn’t contain any after-tax money. Use Form TSP-60.

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