Ask The Experts: Money Matters

By Mike Miles

Investment strategy

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Q. My TSP investments are all in the 2020 Life Cycle Fund. I have $470,000 as a balance (I am a FERS employee). I am 57 and plan to retire at the end of 2017. The calculator estimates I will have around $630,000 balance at retirement. I am thinking of keeping my money in TSP and pay myself a monthly amount after retirement. The calculator says the money will last until I am approximately 95 years old if I pay myself $2,300 per month. Should I move my balance of TSP into the Life Cycle Income fund sometime in the next three years so it will be a little less risky?  Read the rest of this entry »

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RMD calculation

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Q. I know RMD is based on account balance and age, but I’d like to get some idea of an approximate dollar figure. Please let me know how I calculate that figure. I will be 66 in December 2014, but may continue to work until my RMD age of 70-1/2.

A. You’ll find what you need to know in the notice at https://www.tsp.gov/PDF/formspubs/tsp-776.pdf.

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TSP deposits

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Q. I noticed that my TSP quarterly statements show the money deposited near the beginning of each month, but isn’t that money from the previous month worked? For instance, for January my TSP deposit posted Jan. 3, but that money was earned from December. Or is it December’s money going toward January’s TSP?

A. The money credited to your TSP account is the money your agency has most recently deducted from your pay and sent to the TSP. It is sent in arrears, not in advance.

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One-time withdrawal

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Q. I have recently retired from active-duty military. I am also a federal employee and upon retirement from the military I returned to my federal job. I transferred my military TSP to my federal TSP. I am 53 and I had planned to continue working until age 56, at which time I would retire from federal service as well. I am considering leaving my federal position due to health issues. Can I take a one-time withdrawal from my TSP without penalty or do I have to retire from my federal job as well? Read the rest of this entry »

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Moving savings

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Q. Can I move my savings into Roth TSP?

A. Only if it’s coming from a qualified Roth retirement plan account.

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Full TSP withdrawal

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Q. I will take a discontinued service retirement in September and I am going to take a full withdrawal of my TSP ($40,500) as soon as I can. Will I be charged the penalty and what percentage will they take out? I am 56 with 27 years of service.

A. If you separate from federal service during or after the calendar year in which you reached age 55 there will be no early withdrawal penalty assessed. Twenty percent of your payment will be withheld as a deposit against your federal tax liability for the year, unless you request a larger amount.

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TSP loan

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Q. If I retire and still owe on a TSP loan and am going to let it just roll over to be counted as income earned,  can I make monthly withdrawals while waiting for them to close the loan?

A. Yes. Submit form TSP-70.

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Permanently disabled

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Q. I am totally and permanently disabled by the VA due to service-connected disabilities. Can I withdraw some of my TSP without the 10 percent penalty? I’ve done some research and all I can find is the 10 percent penalty does not apply to people with total and permanent disabilities, but all the literature implies this rating comes from the Social Security Administration.

A. The TSP does not levy the penalty. You must convince the IRS that you meet the disability exemption requirement. You are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. A qualified physician must certify that the condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death.

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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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