Ask The Experts: Money Matters

By Mike Miles

Long-term care insurance

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Q: Can you explain what you meant when you said to buy just enough insurance so that the probability of exhausting the policy benefits is between 10 percent and 20 percent?

A: It is possible, although not necessarily easy, to estimate the probability of spending a given amount of money on long-term care insurance during your lifetime. A long term care insurance policy typically contains a lifetime limit on the amount of money it will pay. The goal is to buy enough insurance to reduce the probability of spending more than the amount of insurance on long term care during your lifetime to an acceptable level. I feel that a probability of something less than 20 percent is acceptable, although you may set the bar anywhere you’d like.

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TSP withdrawal

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Q: I’m  retired, 57, and would like to withdraw a portion of my TSP to put toward the purchase of a new house. Can this be done without an early withdrawal penalty?

A: Only if you separated from federal service during or after the year in which you reached age 55.

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TSP withdrawal

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Q: If I take an age-based withdrawal before I retire, to pay off the house, and start monthly withdrawals from the balance of my TSP funds after I retire, will I be allowed to stop the payments at a later date and purchase an annuity?

A: No, but you could roll the final payment from your account into an IRA and then buy a retail annuity from an insurance company from there.

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Tax on supplement

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Q: I have seen conflicting opinions on how the FERS annuity supplement is taxed at the federal level. Is it fully taxed, or is it taxed at 50 percent if your combined income is $32,000 to $44,000 and taxed at 85 percent if your income is $44,000? I start receiving the FERS supplement in June and I have to know how it’s taxed for next year’s tax filing. I retired under FERS. I get the supplement from my MRA of 56 years old until I’m 62 years old.

A: It is taxed as if it were a Social Security benefit. From the ssa.gov website:
“Some people have to pay federal income taxes on their Social Security benefits. This usually happens only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits.
No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules. If you:
file a federal tax return as an “individual” and your combined income* is
between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
more than $34,000, up to 85 percent of your benefits may be taxable.
file a joint return, and you and your spouse have a combined income* that is
between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
more than $44,000, up to 85 percent of your benefits may be taxable.
are married and file a separate tax return, you probably will pay taxes on your benefits.
*Note:
Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your “combined income””

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Transferring leave

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Q: I read that some congressional discussions occurred on the subject of allowing federal workers to transfer all or part of their unused sick and annual leave into their TSP accounts. Are there any discussions on this topic and, if so, do you know the status and if and when this would be implemented?

A: Nothing yet, although I tend not to worry about these things until they become law.

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TSP and MetLife

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Q: Could you please explain the MetLife choice we have for our TSP after we retire? I am trying to decide what to do with my TSP. I am retiring July 1 from the U.s. Postal Service. I would like to know what is the benefit of keeping my money in the TSP until 70 1/2 (I am 55) and what is the benefit of the Met life? I know nothing about this MetLife. Is it an insurance policy? I was always told not to invest in whole life insurance. Where can I read about the met life. Please give any info about the benefits of both and any downside.

A: MetLife is an insurance company and they offer immediate, fixed annuity contracts to TSP participants. You can learn more about the TSP annuity program at www.tsp.gov. The advantage of an immediate, fixed annuity is that it guarantees a predetermined stream of income for life payments for life (or longer) in exchange for a premium payment. The disadvantage is that you give up control of the principal and commit to a fixed income stream for life (or longer) when you buy the annuity. If you’re not sure about what to do, you should consult someone trustworthy to advise you. Buying the annuity is an irreversible decision and should not be taken lightly. If in doubt, keep your money in the TSP.

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How much long-term care insurance should you buy?

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The Federal Long-Term Care Insurance Program is conducting an open season for enrollment that continues until June 24.

The program is always open for enrollment, but during the open season — only the second such opportunity since the program’s introduction in 2002 — active federal employees and their spouses or qualified domestic partners will circumvent the usual medical underwriting requirements in favor of an abbreviated underwriting process. This means that some applicants who would otherwise be declined coverage will be able to get into the program.

The open season raises the visibility of the Federal Long-Term Care Insurance Program and undoubtedly inspires many employees and annuitants to learn more about the program and consider enrolling. I consider the federal program to be the benchmark for long-term care insurance for eligible participants. This should be your default choice for insurance, and all other options should be carefully considered in comparison to this program.

Whether you should buy long-term care insurance can be a difficult question to answer. It usually takes a rather rigorous financial analysis to determine and compare the costs and benefits of paying the insurance premiums against the costs and benefits of self-insuring. In many cases, the insurance can be ruled out as an option because it’s simply not affordable. Like traditional disability insurance, long-term care insurance is expensive — often costing thousands of dollars per year for meaningful coverage.

Additionally, the premiums are not guaranteed to remain level, and have gone up in the past, so allowing for large increases in future premiums is essential. The last thing you want to do is pay tens of thousands of dollars in premiums over the years, only to have the coverage become unaffordable when you’re most likely to need it. In fact, the instability in the long-term care insurance industry, including recent changes in the benefits and premiums for the federal program, raise serious questions about the viability of today’s long-term care insurance as a reliable solution over the long term.

As a financial analyst, I am still trying to determine how to rationally factor the risks inherent in owning long-term care insurance into the cost-benefit equation.

Once you have decided to buy long-term care insurance, you’ll be faced with the tricky task of deciding how much to buy. The ltcfeds.com website has introduced the Online Consultant Tool, an interactive presentation that promises to guide you in designing a personalized plan. This means configuring the benefit choices to meet your needs.

The tool falls short, however. While it clearly walks you through the benefit choices and provides some insight into each one’s utility, it doesn’t address the real issue: how you should configure the benefits to best address your needs.

Rather than relying on emotional responses and irrational biases, this insurance, like all insurance, should be configured to adequately reduce your exposure to risk at the lowest possible cost. Unfortunately, the consultant doesn’t provide you with enough information about the risk you face.

It is possible to use historical population usage data, medical history and life expectancy to estimate the probability of an individual spending a certain amount of money on long-term care during their lifetime. With this information, it is possible to determine how much insurance is required to reduce the probability of exhausting the policy’s benefits to a given level.

I estimate the risk target for long-term care insurance should be something in the 10 percent to 20 percent range. That is: Buy just enough insurance so that the probability of exhausting the policy’s benefits is between 10 percent and 20 percent.

I have been performing this analysis for clients for at least 10 years. Adding this capability to the Online Consultant Tool would enable it to fulfill its promise.

Buyouts and TSP loans

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Q: There is talk going around about a buyout for those eligible for early out retirement. I am eligible for early out retirement. Would the buyout be offered to someone who has a TSP loan? I know that a TSP loan must be paid off by time of retirement, and this is a plan that I would use (the buyout) to pay off the TSP loan.

A: Retirement buyouts are not contingent upon TSP loan status.

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IRA to TSP

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Q: I am retiring in July at age 56.6. Do I have to wait until after the day of my retirement to transfer any IRA money to my TSP? Do I only have 30 days from retirement to make that transfer? Can I start withdrawing that money from my TSP immediately, or do I have to wait until age 59.5, since it’s IRA money? Or do all resrictions end once it’s transferred to TSP?

A: You may transfer eligible money into the TSP at any time – before or after your retirement. Once the money is transferred into the TSP, only the rules governing the TSP will apply.

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TSP used to pay debt

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Q: Does this mean I can’t take a loan or retirement withdrawal until the government stops using TSP for government spending?

A: No.

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