Ask The Experts: Money Matters

By Mike Miles

Declining TSP return

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Q: I put in 20 percent of my income into my TSP and monthly see the amount decline rather than increase. Should I lower the amount I put in for the next year and place it in a regular savings account until the market comes back or continue the 20 percent and hope for the best?

A: You’re talking about market timing, which is a long-shot bet. Your odds of success will be better if you determine the correct asset allocation scheme for your circumstances and goals and stay in it. This will put you in a defensive position that balances all the investment risks you face, rather than speculating against downside volatility alone. But if you’re determined to go to cash, I don’t know of a better place to do it than the TSP’s G Fund.

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Broken contract

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Q: I’m 51 and have 27 years of postal service. If they pass a layoff or RIF, they broke the contract for me to save for my future. I would be retired in there eyes, why not let me have my TSP to pay off my home loan. I also have debt I would like to pay off. It’s not right to lay someone off before their time, then penalize them for drawing their money out.

A: Ask your elected representatives why they won’t change the law.

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Withdrawing TSP money

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Q: I am a retired postal clerk with FERS. I have money in my TSP. I am 57 and I called someone at TSP to ask if I can take a partial amount of my money now without getting penalized. They said I can do it only once. Is this true?

A: You are only allowed one partial lump-sum withdrawal from your TSP account. That’s a TSP rule. Whether your withdrawal is subject to the early withdrawal penalty is a matter of law. Once you have taken a partial lump-sum withdrawal from your TSP account, your only withdrawal option is as a series of monthly payments or a full lump-sum withdrawal.

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Managing your pension fund can seem like a full-time gig

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It looks like most career federal employees will wind up working in retirement, after all — as their own pension fund managers.

Federal employees, for all the challenges they face, enjoy something that is increasingly scarce in the private sector  — a guaranteed annuity. Not only are guaranteed retirement streams rare, but guaranteed retirement income with inflation protection — like that in Civil Service Retirement System and Federal Employees Retirement System annuity payments — is even rarer.

There are increasingly frequent and aggressive calls for cuts to the federal budget, and in particular, to federal retirement benefits costs. As a federal employee, you owe it to yourself to recognize and prepare for something your private-sector counterparts already are living with — greater risk.

In days long past, employers, both public and private, recognized that managing assets for retirement income was difficult and best left to experts. They often recognized the value in providing guaranteed retirement benefits, rather than just additional cash compensation.

The system was attractive to employers because it helped to bind their valued employees to them and give them the confidence they needed to devote their full time and effort to their work. The employer bore the burden of helping to fund and competently manage the employees’ pensions fund, but better-than-expected management performance, or luck, could reduce that burden. Remember when we used to hear about “over-funded” pension plans from time to time? That’s one to share with your grandchildren some day.

This pension system worked well through the years after World War II, when falling interest rates and rising investment markets made funding pension plans relatively easy. But all of that has changed over the past decade, and now even the granddaddy of all American pension plans — the federal retirement system — is beginning to show signs of stress. While no one can reliably predict the future of CSRS and FERS, it seems clear that the risk of losing at least some of the benefits they provide is likely.

When it comes to retirement income, this may mean a continuation of something that started with the introduction of FERS and the employee-managed Thrift Savings Plan in the early 1980s: You could be responsible for managing increasing amounts of financial risk in the future.

Are you up to the task? Get ready. Putting the responsibility for managing money in order to produce predictable, adequate and reliable streams of income over long periods, and protecting that income from the erosive effects of inflation is difficult. I should know: It’s my full-time job.

Asking the average, or even the exceptional, employee to take over the job of pension fund manager is, in my opinion, irresponsible and dangerous. It’s kind of like putting the employee in the cockpit of an airliner and asking him to land it with no training and no autopilot. The likelihood of a catastrophic mistake is huge.

The smart feds who haven’t already done so will begin educating themselves, in earnest, in the science and art of pension fund management. Notice that I didn’t say investing, which is often not the same. We’re not talking about the kind of education that brokerage firms, mutual funds or other purveyors of financial products and services offer. You’ll need to know how to manage money to support a stream of retirement income, which is much more demanding. You’ll have to know how to work backward from the results you want to develop a management approach that will produce those results with a minimum of risk.

Identifying a well-diversified, cost- and risk-efficient asset allocation model, like those used by the TSP’s L Funds, and actively managing your TSP account to support your retirement spending goals is the best way to accomplish this. If you’re not sure how to proceed, you should consider implementing the beginning asset allocation for the L Fund that most closely corresponds to your life expectancy, and rebalancing your account to this allocation at least once per year.

This should support a regular withdrawal stream in retirement of between 4 percent and 6 percent of your beginning account balance, adjusted each year for inflation. While this might not be the best solution possible, it’s better than no sound strategy at all.

Unfortunately, your employer has given you very little support in your assignment as a pension manager, and odds are that your responsibility for this task will only grow in the future.

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C Fund purchases

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Q: Have you noticed that the C Fund is consistently up on the dates that the bi-weekly purchases are made for employee accounts? The attached table shows the closing price of the S&P 500 for each date in 2011, with TSP purchase dates in yellow. As you can see, a large number of the purchase dates occured on big up days and none of the purchase dates occured on big down days. The result of this is that participants receive less shares than they would if the purchases were distributed over each trading day of the period. To prove this point, the table shows that so far this year there have been 180 trading days through September 19, and 18 purchase dates. The average closing price of the 162 dates on which purchases WERE NOT made was $1,277 and the average closing price of the 18 dates when purchases WERE made was $1292, a difference of 15 full S&P points.
Based on this analysis, it looks like either a very long run of bad luck, or else maybe TSP C Fund participants are not getting good value by having their purchases concentrated on one day every two weeks. I personally believe it is the latter and that TSP participants are paying far more than they should for their shares under the current arrangement.

A: I think that your analysis is flawed in that 1) it analyzes a data set that is too small and 2) doesn’t actually use the C Fund’s price data. I expect that the more data you use, the smaller the difference in average price will be. Beyond that, you’re simply observing a result of dollar cost averaging. There are likely periods of time when the periodic purchases have, or will, work in your favor.

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TSP and divorce

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Q: I am 37 and have three children. My spouse will retire after 20 years in the Army in December or January. We are in the middle of a divorce. What are my options regarding any portion of my spouse’s TSP I may be entitled to? Does an annuity make sense?

A: An annuity is an option, but you would lock in today’s interest rate for life. Otherwise, you may continue to manage the money yourself, or pay someone else to do it for you.

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Withdrawal penalty

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Q: I am 56 and will retire in December under FERS. I read your article in Federal Times’ Sept. 12 issue, “How to avoid TSP early withdrawal penalty.” What other options are available besides transferring my TSP to an annuity with an insurance company?

A: The article clearly explained the answer to your question – since you’re retiring during or after the year in which you reach age 55, the early withdrawal penalty will not apply to your TSP withdrawals.

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TSP annuities

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Q: Should I entertain the idea of purchasing a TSP annuity? Since I have been in the system, the annuity interest-rate index has tanked from well more than 4 percent to today’s rate of 2.875 percent. To me this means I would have made more per month a few years ago retiring when I had $300,000 than I can now with $560,000! Wow, big mistake. Can you advise if 1) the AIRI will bounce back? Or 2) what is my alternative if I should decide to pull the plug next July?

A: You should always be willing to consider the purchase of a guaranteed life annuity for the purpose of producing retirement income. I agree that the current interest-rate environment makes this commitment unattractive to many investors, since it will, in essence, lock in what might wind up being a low rate for life. The AIRI will rise when interest rates rise. When that will happen is anyone’s guess. Your alternative is to continue to manage your TSP assets in a way that supports your objectives.

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TSP and retirement

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Q: I plan to retire March 1. I am thinking about maximizing my TSP and TSP catch-up contributions for the first two months of 2012.  That would be a total contribution of $16,500 and $5,500 respectively. I know this would have huge tax advantages for 2012 and increase my retirement investments, so is this a good plan?  Upon retirement, I will have 720+ hours of annual leave and do not want to have a huge salary increase for the tax year, and this is one way to accomplish this. Am I overlooking something?

A: “Is this a good plan?” is too broad a question to be answered here. I suggest you start by running pro-forma tax calculations to see what the effect on your tax return will be. It’s safe to assume that it would be in your best interests to at least maximize any employer matching contributions. Beyond that, it’s impossible to say here what is the best strategy for you.

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TSP restrictions

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Q: I know I can receive a monthly payment once I retire, I can take all my money out when I retire, and I can leave my money in TSP until I am 70 1/2. Someone told me that there are some restrictions about  taking my money out. I am 58 and have 35 years service so when I retire I intend to keep my money in TSP. I know that when I am 70 ½ I have to start taking money out. I want to know if, say five years down the road, I decid I want to take some of my money out. Can I take a lump sum, or do I have to take it all out? Do I only get one withdrawal from the time I retire to when I hit 70 ½.  Can I take part of the money out and leave the rest?

A: You are allowed one partial, lump-sum withdrawal from the TSP before you begin taking regular monthly distributions. Once regular monthly payments have begun, you may request a full and final distribution of your account balance at any time.

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