Ask The Experts: Money Matters

By Mike Miles

TSP allocation

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Q. I am 26 years old and have been investing into TSP (Roth) for about seven months. I am currently investing at just above 10 percent of base pay. I was investing into G Fund at 100 percent and recently moved to the L Fund 2040 at 100 percent. I have zero experience with investing and took this advice from a friend’s parent who has experience. Was this the right move?

A. Based only on your age, which is the only relevant clue you’ve provided, I think that the L 2050 Fund would have been a better choice. The person responsible for producing the results should have the final say, however.

TSP withdrawal

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Q. Can I take a partial lump-sum and then start a full withdrawal as monthly payments?

A. Yes.

RMD explainer

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Q. I turn 70 ½ in April. Must I take the required RMD by April 1? Do I take it all at once or can I spread it out over the year?
Must I take a certain amount from all accounts or can I take it all from one?

A. Your first RMD is due by April 1 of the year following the calendar year in which you reach age 70 ½. You may take the RMD any way you like, as long as the required amount has been withdrawn by the deadline. Your TSP RMD must come from your TSP account. Certain other types of accounts, including IRA accounts, may be aggregated for RMD purposes.

Share cost vs. share return

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Q. I’m a federal law enforcement agent that has been contributing about $1,500 per month, which includes the matching contribution. For the last few years I have been investing 100 percent into the S fund, and this year I have been investing 20 percent in the F fund, 30 percent in the C fund and 50 percent in the S fund. I have been a federal employee since 2009 and I have asked a number of agents at my work throughout the years if purchasing shares that are less inexpensive such as in the L 2050 will provide me with a lot more income vs. S fund since I could buy more shares in the L fund.

The way I understood it was that the share price or having thousands of shares in the G fund or L fund don’t matter; what is important is making the most interest from the share, i.e. the S fund or C fund. Clarification in this matter would be greatly appreciated.

A. There is no advantage to buying fund shares with lower prices. The share price nothing more than the fund’s total value divided by the number of shares. A little basic arithmetic will quickly prove that this is unrelated to the rate of return on your investment.

No partial TSP withdrawals after full withdrawal begins

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Q. I’m a CSRS person retiring at 64. I’ve read a couple of the comments and the TSP Web. As I understand I can: request a single partial withdraw, leaving the balance for future withdrawals; or I can request a monthly check varying the amount as needs dictate.

My question is: Can I start taking a monthly amount for, say, 2 years and then request my one-time partial withdrawal (for a large cost item), and stay with the current monthly amount? I would adjust my monthly payments downward at the next open period.

A. You may not request a partial lump-sum withdrawal once a full withdrawal as monthly payments has begun.

TSP distributions are not earned income

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Q. I am a 56-year-old considering early retirement, no disabilities. Example: If I withdraw $60,000 from TSP, I would have nearly $20,000 taken for taxes and 10 percent  penalty, but if I withdrew at the end of the pay year, will the additional $40,000 that I receive count towards my “High 3” for Social Security payment calculation? Or if I grossed $70,000 in earnings that year, and took the $40,000 from TSP after penalties and tax, would my income for that year be $70,000 earnings plus $40,000 TSP withdraw = $110,000 for that year’s income?

A. TSP distributions are not considered earned income and don’t count toward your Hi-3 or Social Security calculations. They are considered ordinary income for tax purposes, however.

Investing is hard

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Much attention is focused on constructing cost- and risk-efficient investment portfolios. The Thrift Savings Plan does an excellent job of supporting this effort by offering only ultra-low cost index funds, and preconfigured asset allocation models, in the form of the L Funds, that are carefully engineered to provide the maximum expected rate of return for varying levels of investment risk. In fact, it offers everything you need to build a superior portfolio — one that can be expected to outperform anything else out there. A cost- and risk-efficient portfolio is essential to any plan that seeks to maximize the lifetime income your lifetime income.

But, it’s a mistake to think that this is all you need to be successful in investing for retirement income. The truth is that constructing an exceptional portfolio is only the first step. Think of it like building the perfect rocket for a trip to the moon and back. While the right rocket is essential for a successful trip, it does not, on its own, guarantee success. What you do with that rocket, how you navigate and work the controls, is also a pretty big factor in how things will turn out. The ship must be capable of the journey, but a good pilot can make up for certain shortcomings in design.

Most of what I see presented as investment advice in the popular media is entirely concerned with portfolio construction. It’s basically equivalent to Popular Mechanics for investors. This would be fine if it didn’t lead too many investors to conclude that this – a particularly constructed portfolio – is the key to financial success. Nothing could be further from the truth or more irresponsible in trying to educate investors. And it’s naïve for investors to believe it. Sure, you must build a portfolio capable of getting you where you want to go; of achieving your goals. Ideally, you’ll build one that’s exactly suited to doing this: to supporting your goals with a minimum of risk. It’s possible to build one that has little, or even no, chance of doing what needs to be done. Without a great deal of care and competence, it’s more likely that you’ll fail to do this than that you’ll succeed. There are lots of ways to build a lousy portfolio and precious few ways to build a good one.

Without a clear understanding of your goals, resources and constraints, it’s impossible to know what’s best for you. And, without that knowledge, and the right understanding of portfolio navigation and control, it’s impossible to know how to manage that portfolio along the path to a successful outcome. How much of your resources you expose to risk at any point, how you allocate your resources to the various investment opportunities you have at your disposal and which securities you use to implement that allocation are all critical decisions that have to be made, again and again, until your goals have been met, or your portfolio runs dry — whichever comes first.

To manage a portfolio successfully through a lifetime requires far more than simply deciding on the right asset allocation model today. It requires making that decision over and over again. When John Bogle, founder of Vanguard Funds, recommends that you use a total stock market index fund for your entire portfolio, he’s offering you a specific vehicle, not the operating instructions and a map. It’s a Porsche and you have the keys, but that’s all. Whether it will get you where you want to go depends entirely on how you drive it. Investment recommendations offered by journalists and entertainers is, by necessity, one-size-fits-all. In reality, however, different goals, resources and constraints require different investment strategies. How you invest should be carefully tailored to your plans.

Boilerplate strategies like buy-and-hold, value, growth and dividend investing don’t take your objectives and circumstances into account and, therefore, can’t be relied upon to succeed. What works for one investor might be a formula for failure of another.

Like any complex, lengthy and important project, managing your retirement portfolio to meet your needs requires skill, attention and effort from beginning to end. It’s a process that begins with plotting a course to your objectives, measuring your progress against expectation frequently, and correcting your course as you go, before it’s too late to recover from the unexpected.

When it comes to investing for maximum retirement income, there simply is no such thing as a reliable, set-it-and-forget-it “investment strategy.”

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.

Partial TSP withdrawal

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Q. I plan on retiring under MRA+ 10, at age 59, with 16 years service in December. I also plan on starting monthly withdrawals from my TSP account as soon as possible after retiring, which I heard is 6 weeks.  If I do that and need a one-time lump sum in a year or two, is that possible? I’ve never taken any before and never had any loans either.

A. I may not take a partial withdrawal after you have started monthly withdrawals. You may not take a loan after you have retired. Once monthly payments start, they may only be adjusted annually or terminated in a full withdrawal.

Fund options

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Q. I have approximately 12 years before I retire. I have 5 percent of existing money located in the G Fund. Should I be placing this in a different fund that may give me a higher return versus this fund? Should I be carrying money in any of the L Funds? Right now, I use the G, C, S & I.

A. I can’t possibly tell you what you should do based on these facts. No one can. If you don’t know what to do, I suggest that you invest your money in the L Fund that most closely matches your life expectancy and withdraw as little as possible in retirement. If you’d like to consider a more advanced solution, you may email me directly at mmiles@variplan.com.

Managing TSP options

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Q. I will retire in December. I have $300,000.00 in the G fund as of now. I want to have  a monthly payment of $1,500 until my money runs out around 20 years or longer. What is a good strategy to put all my money in the 5 accounts that the TSP offers?

A. You’re looking for a 6 percent initial withdrawal rate. If you want to ensure that your money lasts at least 20 years, you’ll either need to hire a good investment manager, or use the money to buy an immediate fixed annuity. You should also consider the need for the monthly payments to keep pace with inflation over the years, which adds an interesting complication to the problem. You can email me directly at mmiles@variplan.com if you’d like to consider the investment management option, which will support this withdrawal rate with full inflation adjustments while you retain control of, and access to the principal. Before you decide how to proceed, you should objectively compare all of your options.