Ask The Experts: Money Matters

By Mike Miles

Using TSP funds

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Q: I’m trying to understand the effects of the RMD (at age 70) on a TSP withdrawal scheme if one is using the equal monthly payments method to draw on one’s TSP savings. Suppose one has about 150,000 in a TSP and starting at age 63 in retirement, they choose to withdraw 2 percent per year, almost guaranteeing growth of the fund to continue each year. Once the RMD kicks in, doesn’t that effectively switch the withdrawals over to a “Life-Expectancy” type of withdrawal (unless one elects to increase their withdrawals to exceed the RMD)?

A: Yes, once the RMD kicks in, you must withdraw at least as much as the life expectancy method would produce each year.

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Treasury borrowing from pension funds

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Q: According to two articles in the Federal Times, the U.S. Treasury is now borrowing tens of billions of dollars from the CSRS and TSP to cover government obligations until the debt ceiling is raised.  The article indicated that retirees would have nothing to worry about If the debt ceiling is raised. I’m planning to retire at the end of this month. After reading these two articles, I am concerned that if the debt ceiling is not raised (and according to many political pundits, this may be a real possibility given the political climate in Washington), there would be no funds available to replenish the CSRS and I would not receive my annuity on time or at all. If the debt ceiling is not raised or the financial world decides that U.S. Government securities are a bad risk and pull their money out and the value drops drastically, causing a financial crisis in the U.S., whom do you think the government will decide not to pay first, retirees or the federal workforce? Right now, based on other information I’ve read, I’m thinking that the government would decide that it would be more disruptive to the economy to not pay the federal workforce than not to pay retirees.  Therefore, if I retire now, I may not have an income in August or September, whereas if I stay in the workforce I may have better odds.  I know this seems like radical stuff, but I believe as many pundits do that we are in unprecedented times.

A: Your question is bait and I’m not going to bite. I have one for you: Do you really believe that if the debt ceiling isn’t raised, you won’t receive a retirement check as the result? I don’t think that’s the inevitable, or even a likely consequence.

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TSP funds

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Q: I am approaching 70, close to the 70.5 years of age TSP participation cutoff. I am required to make a decision on where to move my TSP money. I need info on what happens to my thrift savings money, if I choose to move the account funds to Met Life management. I need to know if the TSP  fund money I transfer will earn interest. Would the transferred money need to be reinvested so as to earn money ?  What are, if any, Met’s management fees? Are there other business fees? Will  MET Life REQUIRE use of the IRS life expectancy charts, without deviation, to compute monthly withdrawals? Can I use a monthly increment designation to receive an annuity payment not specifically listed on the IRS life expectancy chart, such as a shorter number of months, like 60 to 96 ?

A: You may continue to use the TSP for life, and I recommend that you do so as long as possible. You must begin taking annual distributions by April 1 of the year following the year in which you reach age 71 1/2. To meet this requirement with the smallest withdrawals possible, you may use form TSP-70 when the time comes. Check the box to have the TSP compute your minimum monthly payment in line 23.c of section IV. Simply pay the tax and reinvest the proceeds in a regular savings or investment account if you don’t need the money when you receive it.Using your TSP money to purchase a life annuity from MetLife is a big step and should be considered separately from the minimum withdrawal issue. Before making this commitment, I suggest that you seek fiduciary counsel. If you’re not sure, stick with the TSP and monthly withdrawals. You’ll find all of the info and forms you need concerning the required distributions at www.tsp.gov.

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Rebalancing TSP

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Q: I had a question in regards to the article in Federal times which is about managing risk by rebalancing accounts. I have all my TSP funds in the L2030. I am 44 and expect to retire around 2030. The article mentions to re-assess your TSP and rebalance your account regularly. Since I have all my funds in the L2030, which is diversified, would it be advisable to move the money around, especially in this market? The market appears to be unstable. Prior to investing in the L2030, I used to move my funds around based on my personal instinct, which was not always the best move.

A: As long as you choose to use the L Funds, there is no need to shuffle your money among funds. Pick the right L Fund and leave it alone.

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Asset allocation

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Q: When rebalancing my portfolio to meet asset allocation targets, should I consider retirement accounts separately from currently taxable investments, or lump them together for an overall asset allocation? I am about 12 years from retirement.

A: It’s most efficient to rebalance your entire portfolio, as a whole, while positioning assets in the account where they best fit. This approach can be difficult, however, and it may be more practical for you to rebalance each account on its own. There is no “right” answer for your question. The rebalancing approach selected depends upon the methods preferred by the person responsible for making your retirement plan work.

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TSP annuity

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Q: I have asked this question before but now I have been told the answer I received was wrong. Could you please verify your answer? Can one who has retired and is taking a full withdrawal by monthly payments from their TSP stop the payments and have the thrift buy an annuity through Met Life? Your answer was that I could by way of Form 70.

A: I’m sorry if I misread or misunderstood your earlier question. You may NOT buy a TSP annuity with a final payment after receiving monthly payments. The monthly payments are requested using form TSP-70, and the final lump-sum payment is requested using form TSP-73. You may roll your final payment to an IRA, however, and use the funds to buy a retail annuity from an insurance company from there.

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TSP withdrawal

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Q: I am 57 and I retired from civil service in December. I have not taken anything out of my TSP account at this time. I would like to withdraw a partial payment from my TSP account and then set up monthly payments. Will I have to pay the 10 percent penalty on the partial payment because of my age and since I have been retired for almost six months?

A: Since you retired during or after the year in which you reached age 55, you will not be subject to the 10 percent early withdrawal penalty.

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How deficit-cutting plans could affect you

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Three proposals to help reduce the nation’s deficit could reduce the standard of living of retirees covered by the Federal Employees Retirement System:

  • Computing the pension benefit with the average of the highest five years of salary, instead of the highest three.
  • Reducing cost-of-living adjustments.
  • Increasing the employee’s share of contributions to FERS before retirement.

Changes like these could affect the life you enjoy for many years after you stop working, so it is important that you understand what they mean to you. I analyzed the case of a hypothetical employee near the top of the pay scale, but the results are illustrative of the effects that any FERS-covered employee can expect.

Consider Jane, who intends to retire in two years, at age 62, with 20 years of FERS service. Her high-three will be $150,000 and she is entitled to maximum Social Security benefits when she claims them. She has $500,000 in her Thrift Savings Plan account and $100,000 in taxable savings, and plans to contribute $22,000 to her TSP account during each year she remains at work. She expects to have no accumulated sick leave at retirement.

If she came to me for help, I would advise her that she can plan to spend about $72,000 per year, after taxes, for life, during retirement. This amount would be supported by FERS pension payments that begin at about $33,000 per year, before taxes, and are adjusted annually for inflation by cost-of-living allowances (COLA). In addition, she would be entitled to Social Security benefits that begin at about $21,000 per year, before taxes.

I would be responsible for managing her remaining invested assets in a way that would produce withdrawals of the amount needed to make up the difference, after taxes of about $12,400, to $72,000 each year. In the first year of retirement, these withdrawals are equal to about $30,400, but they will have to increase over time because the FERS COLA will not keep pace with inflation. My goal would be to manage her invested assets to produce a 10 percent return each year.

The first proposal, to shift to a high-five, reduces the salary factor in the annuity calculation by varying amounts, depending on how rapidly your pay increased during the years used in the calculation. It turns out that the reduction in the result, and in the resulting FERS pension, is about equal to the pay growth rate. If your pay increased 3 percent per year, switching to a high-five will reduce your annuity by about 3 percent.

For the test case, I assumed a 5 percent reduction in the annuity amount, so Jane’s high-five average pay is $142,500 and her initial annuity income falls by $1,650 per year, to $31,350. This reduces the safe spending from $72,000 to $71,000, or by about 1.4 percent. Additional testing reveals that Jane could compensate for this loss by shifting to a more aggressive investment strategy to increase her expected annual return to 11.75 percent; by adding $25,000 to her portfolio by the time she retires; or by delaying her retirement by seven months to increase her annuity payment.

The second proposal, to reduce COLAs, might be a bigger threat. If the COLA were eliminated, for example, my analysis concludes that Jane’s retirement spending would be reduced by about 6 percent — to $68,000 per year, after taxes. It would take an additional $90,000 in after-tax saving, or a delay in retirement of at least a year, to compensate for this loss. She could not likely make it up by adjusting her investment strategy alone.

The third proposal, to increase employee contributions to FERS, is harder to nail down. Its impact would depend on how employees handle the reduction in take-home pay, which has been estimated to be about 5 percent. If Jane’s planned savings contributions continue until retirement, then there would be no effect on her retirement spending.

But if she saves less, then every $10,000 she hasn’t saved at retirement will reduce her retirement spending by about $1,000 per year. For example, if Jane took the entire 5 percent reduction in her gross pay, which would be $7,500, from her TSP contribution each year over the two years pending her retirement, she would save $15,000 less than now planned.

With investment earnings over these two years, I expect that reduction in contributions to cost about $17,000 in her TSP account’s value at her retirement. This would reduce her expected retirement spending by about $1,700 per year, to $70,300, after taxes.

The effect of each of these scenarios on your retirement income will depend largely on how much of your planned income will come from your FERS pension and how your investments are managed. Hopefully, this gives you a feel for what you may be up against if one of these plans becomes reality.

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TSP withdrawal after retirement

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Q: I am 57 years old. I retired from civil service on Dec. 31, 2010. I have not taken anything out of my TSP account. I would like to withdraw a partial payment from my TSP account and then set up monthly payments. Will I have to pay the 10 percent penalty, on the partial payment, since I am now 57 years old and have been retired for almost six months?

A: Since you retired during or after the year in which you reached age 55, you will not be subject to the 10 percent early withdrawal penalty.

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CSRS consultant

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Q: I am interested in contacting a financial planner/consultant to help me answer some CSRS questions (gross annuity and former spouse survivor benefits calculations) pertaining to a court order. Do you know where I can obtain this service?

A: Try visiting www.variplan.com.

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