Ask The Experts: Money Matters

By Mike Miles

It’s about how much you save, not where you save it

Bookmark and Share

When it comes to funding a retirement income stream, it generally doesn’t matter as much where you save your money — Thrift Savings Plan, IRA, Roth IRA, 401(k), etc. — as it does that you actually save your money.

Unfortunately, sometimes, more attention is paid to whether money should go to this or that type of account than to whether enough is being saved to safely support the desired retirement income stream, or even how the money will be invested once it is saved to a particular kind of account.

I’ve seen this confusion over priorities in the attention to the Roth IRA and Roth TSP topic. Many investors come to me wanting to know whether they should be investing in a Roth account when they haven’t properly determined whether their savings and other resources, such as annuity and Social Security income, will be adequate to support their desired lifestyle in retirement. They are putting the cart before the horse.

For most investors, selection of a pretax or post-tax savings plan will have little, if any, impact on their spendable retirement income later in life. Failing to save enough, or to invest savings prudently, however, can have a devastating effect on retirement income.

Successful retirement planning and investment management requires prioritizing your efforts and your resources. Spending time on secondary issues, such as whether a taxable, tax-deferred or tax-exempt account is the best place to save, before making sure that more important factors have been accounted for is foolish. Worry about the biggest, most important decisions first, and then, if you feel the need, you can sweat the smaller stuff. There’s only so much time, effort and expense that can be put into financial planning before the cost starts to work against you, and the trick to success is to carefully deploy your resources where they will have the greatest impact on results.

I recommend the following priorities for your retirement savings contributions:

• First, save as much as possible in the TSP. In most cases, it’s the best retirement savings environment you’ll have available — especially if you’re covered by the Federal Employees Retirement System, since you’ll also receive agency matching contributions. Max out your allowable TSP contributions, including any catch-up contributions if you’re age 50 or older.

• Your next target should be an employer’s 401(k) plan that will match your contributions. The matching contributions are the key to this one, since most employer-sponsored retirement plans are otherwise not very attractive. Grabbing the free money offered by your employer makes this a no-brainer, and after you leave that job, you can roll your balance into your TSP account or an IRA at a discount broker.

Next, direct your savings through deductible contributions to a traditional IRA at a discount broker. Depending upon your circumstances, you may only be able to do this through your spouse, but if available, I generally prefer a certain tax break today than a potential tax break tomorrow.

After that, contribute to a Roth IRA at a discount broker, if allowed, and after that to a taxable discount brokerage account or other taxable savings account.

It is likely that you don’t have access to all of these options because there are eligibility restrictions. Just skip through them until you come to the next available alternative. In some cases, that may mean investing only in the TSP, or in the TSP and a taxable discount brokerage account.

Notice that I didn’t mention nondeductible contributions to a traditional IRA, deferred annuity or variable life insurance policy. These vehicles are poor choices for retirement savings, when compared to the alternatives.

Once you’ve saved the money to the right accounts, you’ll have to invest and manage the money carefully to maximize the retirement income stream it will support. This is a difficult exercise that may require professional help. I encourage you to use the TSP as your guide in all of your accounts by trying to emulate its advantages of low cost, efficient diversification, minimized risk and simplicity.

Doing so will have a bigger impact on the results than whether your savings accounts are taxable, tax-deferred or tax-exempt.

TSP, bonds

Bookmark and Share

Q: I have never really understood bonds, and why yields and prices move opposite each other. But what I really need to know is if now is a good time to scale back on my TSP F-account purchases? Interest rates and inflation are very low now, and more likely to go up than down in the future. Am I buying bonds at a bad time now? The F-fund only makes up about 20 percent of my TSP portfolio, so I shouldn’t get creamed if inflation starts to kick in, but I’d just as soon not get hit even on this amount.

A: The fact that you’d ask this question is evidence that you should find someone who understands investment management to help you. The question  is not appropriate for this forum.

Tags: ,

2010 payroll contributions

Bookmark and Share

Q: How many payroll TSP deposits will there be for tax year 2010?

A: It depends upon where you work. Check with your payroll office.

Tags: ,

BCBS basic vs. standard plan

Bookmark and Share

Q: How can I find out the difference between the two health insurance plans? I understand the basic plan is cheaper than the standard for which I am paying $400.97/month for the family plan as a retired DoD employee.

A: Use the plan comparison tool available through www.opm.gov. This is the direct link to the plan comparison wizard: http://www.opm.gov/insure/health/search/plansearch.aspx

Tags: , ,

IRA rollover

Bookmark and Share

Q: Can you transfer (or rollover) money from your existing IRA to a CSRS Voluntary Contributions account?

A: No.

Tags: , ,

Withdrawing funds from TSP

Bookmark and Share

Q: If you have a TSP account and you have been gone from working for the federal government since 2006, can you withdraw your funds without any early withdrawal penalty fees?

A: Only if you separated from federal service during or after the year in which you reached age 55, have reached age 59 1/2, withdraw funds using a series of Substantially Equal Periodic Payments, use the money to buy a life annuity, or meet one of the specific exemptions to the penalty, which include disability and certain medical expenses. See the notice at https://www.tsp.gov/PDF/formspubs/octax92-32.pdf for more information.

Tags: ,

Long Term Care

Bookmark and Share

Q: Where can we shop for Federal Long Term Care plan?

A: www.ltcfeds.com

Tags:

Bear Fund

Bookmark and Share

Q: Does TSP have a “bear” fund, or are they planning to introduce that type of fund soon? If not, then how can I take advantages of a “bear” fund? Also, what is the allocation of instruments in the G fund?

A: There is no “bear” fund in the TSP — that is a fund that moves inversely to a particular market. Visit www.tsp.gov for a description of each of the available TSP funds and their contents.

Tags: , ,

Change from payments to annuity

Bookmark and Share
Q: Once you begin taking the Thrift Savings Plan (TSP) via monthly payments, can one change and have an annuity purchased through MetLife?

A: This is not currently an option for purchasing a MetLife annuity through the TSP.

Tags: , ,

Roth TSP

Bookmark and Share

Q: Once the Roth option becomes available through the Thrift Savings Plan (supposedly the first pay period in 2012), is there any IRS preclusion to making substantially equal periodic payment (SEPP) distributions in 10 years or less from our current TSP into our upcoming Roth TSPs?  SEPP distributions in 10 years or less are currently permitted in regular Roth IRA’s and regular Roth 401K’s;  I see no reason the IRS regulations would prohibit similar SEPP distributions in TSP, would love to be able to do so, and would like to be able to plan accordingly.

A: I’m not sure I understand the “10 year or less” premise underlying this question. SEPP is a way to extract money from a retirement plan account without incurring the early withdrawal penalty, but a SEPP stream must continue until age 59 1/2 or for at least 10 years, whichever is longer.

Tags: , , ,