Ask The Experts: Money Matters

By Mike Miles

TSP withdrawal

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Q: I am a CSRS employee with 36 years of service and will turn 55 in October 2011. If I withdraw all my TSP funds, will I incur the 10 percent penalty tax? I do not plan to retire for a couple of years.

A: You may only withdraw your funds for a demonstrated financial hardship and you will incur the early withdrawal penalty.

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Choosing a TSP fund

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Q: I’ve retired from the post office (CSRS) but haven’t decided just what to do with my TSP. Just to keep it safe, I’ve left all of it in the G-Fund. Do you think I should move it to one of the L-Funds. I probably won’t touch it for another year or two.

A: Not until you know what to do with it, which is what a good investment adviser is for. How you prudently invest your money will depend upon a number of important variables including your age, your marital status, your health, where you live, your current and future retirement income and, maybe most importantly, how much you’d like to have to spend and when you’d like to spend it. The investment strategy you employ should be selected based on a robust probability analysis that takes your goals and circumstances, as well as the characteristics of the strategy, into account. Depending upon your particulars, moving from the G Fund to an L Fund may, or may not, be a good move.

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TSP investments

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Q: My wife and I are retired from the Air Force. I am 50 and plan on working until I am at least 62 or 63 or until at least 65. How should I set up my TSP?

A: Based on what little I know about you, and assuming that your TSP account is your only investment account, I suggest the following allocation: C = 45%, S = 20%, I = 25%, G = 3%, F = 7%.

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RMD for TSP

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Q: I am a FERS employee who will be retiring in the year in which I will turn 70½, which will be in 2012. I am having difficulty understanding the timing requirements for withdrawing the RMD from my TSP account. I would like my first RMD to be a partial withdrawal from TSP of the lump sum required to be withdrawn; this would be followed by monthly payments starting a year later. Under the scenario above, would I have to take a RMD for the year 2012? Or does the RMD requirement start in 2013, the year after the year in which I reached 70½? If it starts in 2013, do I have to take a RMD by April and another RMD by Dec. 31 of 2013?

A: There are two sets of rules you’ll have to navigate. The IRS says you must take your first withdrawal, for 2012, by April 1, 2013. You must then take your second RMD, for 2013, by Dec. 31, 2013. The TSP says that you can take one partial withdrawal from your account, but you must do it before starting monthly payments. So, just make sure that you take the partial withdrawal for 2012 before you start the 2013 monthly payments. This could all occur during 2013 or be split between 2012 and 2013, at your option.

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Too many workers focus on one aspect of retirement

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While the media, investment industry and far too many investors are obsessed with the upside potential of how much this or that investment might return, the truth is that maximizing rates of return is not the primary goal of a prudent retirement plan. If you want to maximize the standard of living that can be supported by your resources in retirement, focus on controlling risk and neutralizing threats. That’s because downside surprises tend to do more damage to retirement cash flow than upside surprises do to improve it.

Threats to your retirement plan abound. Whether you’re still working or already retired, your standard of living in retirement faces a never-ending series of threats. Many of these threats are beyond your control — proposals to switch to a high-five rather than a high-three salary average for computing annuities, pay freezes, zero-dollar cost-of-living adjustments on annuities, investment market crashes, runaway inflation, skyrocketing tax rates. Add to these the risk of making mistakes in your planning or other threats within your control, and it’s no wonder that many retirees wind up impoverished by the end of their lives.

Most of the career feds I’ve worked with prefer the same, or an even better, standard of living in retirement than they lived with while working. If you fit this description, then your annuity — and Social Security for Federal Employees Retirement System annuitants — won’t be enough to meet your needs. You’ll have to rely on supplemental income from other sources, probably including your Thrift Savings Plan account and other savings. The old “70 or 80 percent of pre-retirement income” rule of thumb just doesn’t apply.

In my experience, most federal employees without professional guidance focus, almost exclusively, on their retirement date as the key variable in their retirement planning. Most federal annuitants tend to focus on trying to limit their spending to what can be supported by their after-tax retirement income from their annuity and, if applicable, Social Security. They tend to do this because they’re not sure how much they can safely withdraw from their savings, either on a regular basis, or from time to time.

If they do invade their savings for retirement income, it’s usually either because they have no choice and no clue about the long-term consequences of the move, or they are relying on faulty expectations about rates of return from their portfolio. If you think you can safely base your monthly or annual withdrawals on an expected rate of return, say 5 percent per year, you’re making this mistake. It’s not the average rate of return that matters, it’s the actual rate you realize as you are taking withdrawals that affects the viability of the plan.

In each of these cases, investors are either needlessly sacrificing their lifestyle in retirement or recklessly risking outliving their money. Like the risks you face, numerous variables affect the success or failure of your retirement plan. Your retirement date is just one of those variables.

How much you save, how much and when you plan to spend, how much you’d like to leave behind, where you live, and how you invest and manage your money are all important factors, usually within your control. Add to these controllable factors a variety of circumstances beyond your control, and retirement planning becomes incredibly complex. But there are ways to make a plan work, even in the face of unexpected changes.

Take the potential, for example, for a change in the way annuities are calculated — shifting from high-three to high-five — as has been proposed. Affected feds may be motivated to retire earlier, if they can do so before a change takes effect; or later, if the reduction in their annuity makes an earlier retirement impossible. This focus on retirement date oversimplifies the issue for an individual employee.

Sure, delaying retirement by a year will likely offset the effect of the change and allow you to maintain your planned standard of living in retirement, but so will shifting to a slightly more aggressive investment strategy, or saving a little more before retirement, or reducing your spending a little later in life, or taking steps to reduce your tax burden.

In many cases, a change from high-three to high-five can be absorbed without any change in the retirement date, and without affecting your standard of living in retirement. But, to make this happen, you’ll need to consider all of the variables that affect the outcome, not just one.

TSP withdrawals

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Q: I plan to retire under FERS at the end of the year. My wife and I want to pay off our house with some of my TSP savings so we won’t have to worry about our mortgage. I was planning to take out about $6,000 a month until the mortgage is paid and then reducing the monthly amount to $1,000 or less after that. I wanted to do it this way because the tax burden would be about the same as if I was still employed. Is this a plausible plan and would I be able to do this with my TSP savings?

A: While paying off the mortgage may not be in your best interests, the TSP will allow the withdrawal scheme. You’ll have to wait until the end of a year to make the change to the monthly payment amount, however.

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TSP transfers from 401(k) accounts

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Q: My wife and I are both 56 and planning to retire in the next couple of years. Is it possible for my wife to transfer her Army nonappropriated fund employee 401(k) funds into my Thrift Savings Plan account? I called the TSP office regarding TSP transfers from 401(k) accounts. The TSP office said I can only transfer my 401(k) funds to my TSP account. My wife cannot transfer her private sector job 401(k) funds 401(k) funds to my TSP accounts

A: That question has been answered numerous times in the archive. The fact is that retirement plan accounts are individually owned and your wife’s 401k assets can’t be moved into your 401k account.

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Federal medical retirement questions

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Q: I am a federal law enforcement officer (10 years+), and was injured at work. As a result of my injury, I may have to accept a medical retirement. I have not bought back my military service time. Is there any benefit to buying my military time back if I receive a medical retirement? Also, what happens to my TSP? What happens to my federal health insurance? Will I receive my Social Security immediately?

A: Because you are covered by FERS, if you apply for disability retirement you will also have to apply for Social Security disability benefits, otherwise your case won’t be processed by OPM. If you were approved for FERS disability retirement, for the first 12 months you would receive 60 percent of your high-3 minus 100 percent of any Social Security disability benefit. After the first year, you’d receive 40 percent of your high-3 minus 60 percent of any Social Security disability benefit. If your disability continued to age 62, you would receive the annuity you would have gotten if you hadn’t been disabled, increased by any cost-of-living increases that took effect while you were on disability retirement. Making a deposit for your active duty service would come into play when your annuity was recomputed, because it would add to your years of service. It would also count for length of service and annuity computation purposes when you applied for regular retirement. Your TSP account will remain open and you may continue to manage the money for as long as you like.

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TSP penalties

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Q: If I retire from active duty military service at the age of 42 after 20 years of service, can I withdraw from my TSP without tax penalties? Can I withdraw from my TSP after the age of 59½ with no tax penalties?

A: Unless you use the money to buy a life annuity, take the money as a series of Substantially Equal Periodic Payments under IRS rules, or meet one of the other specific exceptions, you’ll have to pay the penalty for withdrawals taken before your reach age 59½.

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Thrift Savings Plan

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Q: A retired USPS employee friend of mine told me that he was hit with a penalty because he started withdrawing money from his TSP account at the age of 60 instead of his retirement age of 62. Is this true?

A: No.

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