Ask The Experts: Money Matters

By Mike Miles

Facing the truth about FERS

Bookmark and Share

Historical investment returns seem to be the focus of most investors’ attention. What rate of return did the C Fund produce over the past month? The past year? The past five or 10 years? Visit any investment product website, and this is pretty much all you find. Historical data sliced, diced and cooked up in just about every way imaginable. And, the Thrift Savings Plan’s website is no exception. It is filled with an impressive assortment of historical performance data for the various investment funds it offers. Unfortunately, and most critically, there is nothing about the prospective — or expected — performance of the investment funds to be found.

This is a serious problem for participants who are saddled with the responsibility of managing their accounts to produce a reliable and adequate stream of income during their retirement. Why? Because it is impossible to accomplish this task without knowing what to expect from the funds and, in turn, the entire account. If you use the retirement income calculator provided by the TSP, you’re obligated to enter a return number and then the calculator assumes that your TSP account will enjoy that return each and every future year, like clockwork. Of course, this is a ridiculous assumption and one that, on its own, should relegate the calculator to the trash bin. Even if we are willing to ignore this fatal flaw in the assumptions, how are you supposed to predict even the average rate of return for your TSP account? The best you can do is to estimate the probabilities of various returns, and that requires specialized expertise and a fair amount of effort. Without reliable estimates, all you can do is guess.

To predict the income-supporting capabilities of your TSP account, you must not only know the expected returns for your account over the coming years, but you must also know the range of returns it could produce and the probabilities across this range. If you figure out that the most likely return for the C Fund in a given year, for example, is 11 percent, you must also recognize that there is a slim chance that it will actually produce this return in a particular year. You also need to predict the worst possible outcome and then estimate the probabilities of the returns between the expected return and that worst case. If all of this sounds difficult, it is. But developing the best possible estimates for your account’s future behavior, and using these estimates to guide your withdrawal and investment management decisions along the way is the only way to safely maximize the standard of living your account will support.

The problems with the TSP’s calculator are merely symptoms of a larger problem. Pension fund management is beyond the current capability of the vast majority of TSP investors. With the growing dependence upon self-managed resources for producing retirement income among federal retirees and the prospect for continuing this trend, it’s time for TSP participants, their employer and their Thrift Savings Plan to stop pretending that investment management is something anyone can and should be prepared to do effectively. When the government moved from the CSRS to the FERS, it shifted the burden of funding a significant part of your retirement standard of living from it to you.

Effective investment management is a complex and difficult exercise, usually with life-altering outcomes. It’s not something to be taken lightly. In fact, if you can’t do it right, you probably shouldn’t do it at all. Without the necessary management capabilities, the safest thing to do is to park your savings in the G Fund until you retire and then either leave it there, or use your money to buy an immediate annuity that will guarantee your income for life. This is the dirty little secret that everyone seems all too willing to keep. Neither Wall Street, nor your employer, has any interest in letting the truth slip out. You may leave a large chunk of your retirement standard of living on the table, by doing this, but at least you’ll be secure in the knowledge of exactly how much you’ll have to live on each year. The alternative is to naïvely gamble with your resources in a game where you don’t know the odds.

Mike Miles is a Certified Financial Planner licensee and principal adviser for Variplan LLC, an independent fiduciary in Ashburn, Va. Email your financial questions to fedexperts@federaltimes.com and view his blog at blogs.federaltimes.com/ federal-money.

Loan down payment

Bookmark and Share

Q. I am a FERS employee eligible for a TSP residential loan of $23,000. If I request this amount for a primary-residence home purchase, would my down payment and closing cost need to be at or above this amount of $23,000 on my signed purchase contract? Not sure if I will put down 5 percent (13K) or 10 percent (26K). If I put 5 percent on purchase contract, will TSP decline the request for the full $23, 000 loan? I don’t want to write 10 percent on purchase contract if I am not going to put quite that much down, however I’m worried if I only say 5 percent that the loan won’t be approved for $23,000. Can you please explain? I could not find anything in the loan documents on this topic. Read the rest of this entry »

Tags:

Retirement options

Bookmark and Share

Q. I am 62 and a FERS employee. Can I retire with my FERS annuity and TSP and wait until my full retirement age of 66? I do not plan to work  after I leave.

A. Yes.

 

Tags: , ,

TSP withdrawal penalty

Bookmark and Share

Q. Is there a penalty for taking a lump sum TSP balance out at retirement for FERS employee to purchase a home? I may retire at age 56 or 57 with 30 years of federal service. If I decide to take my lump sum at retirement, will I be penalized? How much would come out if the amount is $170,000 right now? Read the rest of this entry »

TSP annuity taxation

Bookmark and Share

Q. I retired 2+ years ago under FERS with a substantial TSP account that I have not touched. I am looking at purchasing an annuity through TSP versus regular payments based on life expectancy (essentially the IRS required minimum withdrawals that I must start next year). I understand how the RMD is taxed. How will the annuity be taxed? Is there a source that explains the calculation? Read the rest of this entry »

Social Security reduction

Bookmark and Share

Q. I’ve read about the Social Security reduction if your income is above a certain amount. Does the calculation for that amount include the FERS pension and TSP annuity payments? In other words, does the Social Security Administration consider my pension and TSP payout to be “income” they will reduce against? Or is the reduction only against “wages” from actual employment income after you reach Social Security retirement age? Read the rest of this entry »

Tags: ,

Loans at retirement

Bookmark and Share

Q. I plan on retiring in August with 31 years FERS service at MRA. I have an outstanding loan of $15,000. I know they will report it as income earned. Will I have to pay a penalty since I will only be 56 on the balance I owe? Read the rest of this entry »

FERS disability process/TSP withdrawal

Bookmark and Share

Q. I am 64 and have 4.5 years in FERS. I want to know when i can fully withdraw my TSP? I have asked the base. I have called BEST and I have called OPM. I was told DFAS submits a code in an internal software system. So does that happen six months down the road when my disability retirement is approved? Read the rest of this entry »

TSP withdrawal

Bookmark and Share

Q. I am an Air Reserve Technician and 53 years old. I have lost my military requirement at no fault of my own, and now I am being made to retire from the civilian side (FERS). I have a total of 20 years. Can I withdraw all of my TSP from the civilian TSP and if so, what is the early withdrawal penalty and taxes associated with doing so? I am looking at paying off 50 percent of my debt. My TSP is around 75,000.

A. Since you are separating from TSP covered service before the calendar year in which you reach age 55, you will be subject to the 10% early withdrawal penalty unless you meet one of the other exceptions listed on Page 7 of the notice posted at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

 

Tags: ,

FERS retirement

Bookmark and Share

Q. I have two years of temporary services. What are the pros and cons of buying back the temp time? I am approaching my 27th year of federal service. I came in under FERS; at what age can I retire and get my TSP monies without being penalized?

A. You may avoid the early withdrawal penalty on TSP distributions at any age if you meet one of the exemptions listed on page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. One of these exemptions is for those who retire during or after the calendar year in which they reach age 55.