Ask The Experts: Money Matters

By Mike Miles

Long-term care

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Q: I plan to retire in early 2010 and I am thinking about getting long-term care before leaving. With the government plan going up significantly, do you advice looking at private plan? I understand, John Hancock offers both.

A: I always recommend that you compare your employer’s benefits to the retail or other options you may have available. When it comes to long-term care insurance, there are potential advantages of an individual policy over the FLTCIP, depending upon your circumstances.

— Mike Miles

Long-term care insurance

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Q: I am thinking about dropping my long-term care, or if I keep any, going to a company not associated with the Office of Personnel Management and the government plan. I feel they were not truthful and are in breach of contract with the raise in the premium. I paid the higher premium with the understanding that I would never have an increase. If they were not truthful with this, then I do not trust them for anything in the future; including any benefits when/if I try to collect them. Is it better to keep my current long-term care until I find another company and plan, or does it matter? In other words, is it easier to switch to another plan if you have a current plan or does it matter? Currently, I have no major health problems.

A: It doesn’t matter if you currently have coverage, or not, when you apply for long-term care insurance. Insurers underwrite each application without regard to existing coverage.

— Mike Miles

TSP partial withdrawal

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Q: I expect to retire around the middle of 2010 at 65. I will be using my Thrift Savings Plan savings to supplement my Social Security and my Federal Employees Retirement System pension. I understand that I may leave my money in TSP and take monthly withdrawals from the TSP starting in January. I also believe there is a one time withdrawal that I may make to tide me over between July 2010 until January 2011 when the monthly withdrawals start to kick in. I want to confirm that I may do so without jeopardizing my receipt of monthly withdrawals from the TSP. I also want to confirm that this would be my only chance to access any needed funds over and above the monthly withdrawals if I leave my money in the TSP. Can I roll over my TSP funds into an IRA several years after starting to receive the monthly withdrawals, should I need a sum of money for say medical bills?

A: You may take the one-time partial withdrawal and then initial the monthly payments, which are considered a full withdrawal option. After that, you may elect to change the monthly payment amount once each year and/or withdraw the remaining balance at any time. You may rollover any distributions which are not part of a Required Minimum Distribution to an IRA.

— Mike Miles

TSP options

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Q: When I retire as a Federal Employees Retirement System employee, what are the options I have in regard to my Thrift Savings Plan account? I am 70 years old and may work for 2-3 more years.

A: After you retire, you may maintain your TSP account for as long as you live and continue managing it, as usual, or you may withdraw all or part of your funds and roll over all or part of those distributions to an IRA, as long as the withdrawn funds are not part of a Required Minimum Distribution.

— Mike Miles

TSP contributions

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Q: I have been a rehired annuitant for the past year and have been told that, as such, I cannot contribute to the Thrift Savings Plan. Is that true?

A: It’s true.

— Mike Miles

TSP rollover

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Q: I am planning to retire with 23 years of service, under the Federal Employees Retirement System. I heard from an unofficial source that a retiree can outlive his retirement under the Federal Employees Retirement System. I was of the understanding that the retirement was for life — is that not correct? Also, I have seen the response to a couple of questions in regard to rolling over Thrift Savings Plan money to outside funds. The answer has been that you “cannot move TSP money until one separates from federal service.” I am a little confused by that answer, as I have rolled 90 percent of my TSP funds to another source outside of the TSP funds, and I am still a federal employee. What’s the answer? I’m also under FERS and went to the retirement training and found out that on FERS, you only receive your annuity up to the amount that has been put in; however, CSRS folks receive their annuity until the day they die. If they are paying survivor’s benefits, their spouse would receive the annuity until death. So what is it?

A: You may roll over one in-service, age-based withdrawal while you are still working, if you qualify. Just like CSRS retirees, FERS retirees continue to receive an annuity until the day they die.

— Mike Miles

Expenses

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Q: If someone is not qualified to obtain long-term care insurance, short of saving hundreds of thousands of dollars, are there any options to relieve the financial burden?

A: Medicaid is the payor of last resort.

— Mike Miles

401(k) rollovers

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Q: Would I be able to use the funds from my qualified 401(k) that I plan to roll over to make this payment into the Federal Employees Retirement System retirement without IRS penalty, losing 10 percent? For example, if the funds from the previous corporation’s 401(k) was $5,000 and the catch up I needed to make to FERS retirement was $5,500, could I pay that amount with the 401(k) funds and not get a penalty or pay early distribution fees?

A: Unfortunately, you can’t roll your 401(k) or IRA funds into your FERS annuity account. If you separated from your last employer during or after the year in which you reached age 55, you can tap your 401(k) without penalty, although you’d have to pay any tax due. Rolling over the balance to an IRA kills the penalty free access until you reach age 59½, unless you can meet one of the exception listed in IRS Publication 590. I recommend that you consider transferring any 401(k)/IRA balances that don’t contain after-tax money into your new TSP account. You won’t find a better retirement investment environment, anywhere.

— Mike Miles

Risky accounts

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Q: I have seen your recommended allocations for the Thrift Savings Plan. You mentioned using your lifetime expectancy, therefore placing you in the correct lifecycle fund. At that point, allocate the beginning percentages of that fund and rebalance annually until your life expectancy indicates a change to a different L Fund. This contribution allocation would have resulted in approximately a 30 percent to 35 percent loss in the account within the past two years. Utilizing this method, I would be contributing 15 percent combined to the G and F funds and 85 percent to the risky funds at the age of 65. Why would you recommend being so deeply funded in risky accounts at retirement age?

A: I recommended this approach to those TSP participants who wanted to maximize the after-tax, inflation adjusted withdrawal rates they could expect over their lifetime. To do this, you must maintain a significant exposure to equities. Remember that you ultimate success will depend upon what happens over the remainder of your life and those riskier funds can, and have, produced some very attractive upside results. The average healthy 65-year-old male, today, has a life expectancy of about 19 years. My recommendation would lead him to select either the L 2030 or L 2020 fund’s allocation. Using the more aggressive L 2030 allocation would result in an allocation to the G and F funds totaling 25 percent, not the 15 percent you indicate. You should keep in mind that I have always presented the recommendation you mention as an alternative to the TSP’s recommended use of the L Funds. It’s still only a do-it-yourself solution and not the ideal approach.

— Mike Miles