Ask The Experts: Money Matters

By Mike Miles

Stock dividends

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Q. The stock funds (TSP) offered, Small Cap/Large Cap, invest in stocks. What happens to the dividends?

A. They are retained inside the funds and are reflected in the share prices.

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TSP withdrawal

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Q. I will be 70 in February 2016 and plan to retire and take all my money out of my TSP. I am a single divorced woman and do have monthly security for which I have been paying taxes. Can I take all my money out, as I have calculated that the $1,000 I am from Social Security is not enough for my expenses as I have calculated it.

A. Yes, you may take all of your money out. Use form TSP-70.

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Why market timing is a sucker’s bet

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I have written about the perils of trying to time the investment markets for years, but I continue to receive questions from readers who use it to manage their Thrift Savings Plan accounts. There are a number of ways to effectively attack this misguided strategy, and the trick is to find the one that resonates with each investor. This time around, I’ll discuss the risk that market timers either don’t see, or choose to ignore: long-term risk.

Market-timing strategies are focused in avoiding near-term risk:; the risk of losing money to market declines, or the risk of failing to capture strongest returns when markets rise. Let’s refine our definitions for better clarity. Avoiding the risk of loss through market timing means being out of a market when you should be in it, while avoiding the risk of missing gains means being in the market when you should be out of it. This makes sense if you compare each of these exceptional states to the base, neutral state of being in the market when you need to be to achieve all of your investment objectives. This state is achieved by keeping your account invested in the mix of funds that is reasonably expected to support your lifetime financial goals with the minimum of risk. Timing decisions produce deviations from this base state, which I’ll call “properly invested.”

Of the two timed investment states you can be in, — over-invested or under-invested, — compared to the state of being properly invested, being over-invested is the easiest to discredit. In this case, you’re exposing your assets to the risk of loss to try to capture gains that you’ve already determined you don’t need to support your goals. Why would any rational person risk losing money they’ll need in order to chase gains they won’t? They wouldn’t, and neither should you.

The state of being under-invested is a little trickier to understand. The lure of avoiding the risk of loss is strong, and I regularly encounter TSP investors who want to retreat to the G Fund to avoid the risk of losing money in the C, S or I Funds. An otherwise intelligent TSP participant recently recited a common refrain: “The stock market is over-valued, and I’ll wait for a better opportunity to get back into stocks.” The basic instinct to avoid risk is beneficial, but a certain amount of risk is probably necessary to achieve your long-term objectives. Failing to take this amount of risk, and realize the returns that go with it, will doom you failure down the road, when it’s too late to recover.

But, what’s the harm is sitting out of the markets for short periods of time, when the risk of loss seems the greatest, if it makes us feel more comfortable, you ask?

First, your comfort is based on your perception, rather than reality. While you might be confident that the market is over-valued, there are thousands of professional investors who disagree. If they didn’t think the prices of securities fairly represented their value, the prices would quickly fall. You’re basing your decision to be under-invested on nothing more than intuition.

Second, the practical aspects of market timing make it nearly impossible to succeed in the long run. If you’re under-invested, you must, by definition, return to being properly invested or be doomed to failure in the long-term. If you’re out of the appropriate markets, you must, at some point, get back in. When will that be? What if your reinvestment trigger is never reached? Is one timing decision all you’ll need, or will you have to make them over and over again? What are the chances that you’ll beat the pros in capturing market-beating returns over and over again? Everyone can’t beat the market at the same time.

When only the possibilities are considered, market timing might seem like an attractive tool for managing your portfolio, but it’s clearly nothing better than a sucker’s bet — one you’re more likely to lose than to win.

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

TSP participation

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Q. I recently lost a high-paying private sector job. I may be getting a much lower-paying federal job. The only way I can make it is to cash out of my 401(k) about $35,000 to pay off debts. But I was thinking if I get the federal job, how long before I can participate in the TSP? And how long before I could take out a loan? Read the rest of this entry »

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IRA rollover from TSP?

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Q. After reviewing the TSP rules, it appears that I can’t transfer (or roll over) my Roth TSP monies into a qualified Roth IRA without a proportional share coming out of my traditional monies. Is this correct? I wanted to leave my traditional monies in my TSP and separate the Roth monies and roll them over into a Roth IRA. Read the rest of this entry »

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Diversification strategy

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Q. I just started a federal career at age 31. I rolled over about $21,000 dollars into the S fund from prior retirement. Would it be better to use the L funds for growth which carry less risk, or seek the highest amount of returns in the S fund. I am huge risk-taker when it comes to investing, just trying to make informed decision before accepting all the risk of the S fund with no diversification.

A. Let’s see … I know that you’re 31, have about $21,000 in the S Fund, are a huge risk-taker and know little or nothing about managing a retirement investment portfolio. Sorry, but that’s not nearly enough information to figure out what’s best for you. It’s like you’ve told me that you’re driving a Ferrari somewhere in Iowa with 1/4 of a tank of gas and asking which way you should turn the wheel. I can tell you that your one-fund portfolio takes more risk than needed for the expected return it produces, and that it could be made more risk-efficient through diversification.

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TSP and VERA

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Q. Can I withdraw from my TSP if I accept a VERA with 30 years of service and my age is 47, or is there a penalty? If so, how much?

A. If you separate from service before the calendar year in which you reach age 55, you will be subject to an IRS 10 percent early withdrawal penalty unless you qualify for one of the exceptions listed on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.

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TSP investment

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Q. My daughter is 20 and just entered the military, hopefully to make a career of it. She is contributing 10 percent to her traditional TSP and $25 per month to her Roth TSP. Her traditional TSP is fully invested in the G Fund (this was automatic and she didn’t know enough to change anything). Wouldn’t it be better for her to put the maximum amount she can afford into the Roth TSP before putting anything into the traditional? She will probably be making quite a bit more money when she retires than what she makes now. If not, what is your suggestion? If she keeps the traditional contribution, should she redistribute her fund percentages or just switch to one of the L funds that are managed for her? Read the rest of this entry »

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Partial lump sum

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Q. How do I request a TSP partial lump sum after age 59-1/2? What forms do I need to fill out, and how long does the process take? I plan to keep working until age 63 and continue contributing to my TSP.

A. Use form TSP-75 to request an age-based, in-service withdrawal. Allow weeks for the withdrawal to be processed.

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TSP setup

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Q. I was recently hired at the the FDA. I have about $43,000 in student loans with a high interest rate. How much should I set up to be put into my TSP in order to take a loan from myself? Would this be a smart move? I believe that this way I’ll take out a loan from myself at a lower interest rate. Read the rest of this entry »

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