By Mike Miles
November 20th, 2013 | Uncategorized
Are you planning to retire soon? If so, you’ll need to figure out whether you’re financially able to make it work in the near and the distant future. Because there are few, if any, truly reliable financial guarantees, this can be a difficult thing to determine.
The essential question is this: “Will I have the resources — usually cash — available when I need it to support my desired standard of living for the rest of my life?” If someone else is depending upon you for all or part of their financial support, your retirement decision will affect them, as well, and they should answer this question before you commit.
If you are relying solely on a CSRS annuity, or even Social Security, to support your living expenses in retirement, your job is fairly easy. Both of these income streams are fully indexed for inflation and guaranteed by the best guarantor there is. The most significant risk you have to consider with these is that the guarantee you’re counting on might fail. While this may seem like a large risk, it is relatively small when compared with the risks associated with other potential income sources, like FERS and private annuities, and withdrawals taken from an invested portfolio. These risks include loss of purchasing power, insolvency, reduction in benefits, and market and interest rate risks. Assigning probabilities to these risks and analyzing their potential effects on your retirement plan is beyond the ready ability of most people who don’t specialize in statistical analysis. So, what can you do?
Start with this basic test. Add up the sum of your guaranteed retirement income streams from such sources as CSRS, FERS, Social Security and other defined benefit pension plans.
Then do some research to see what kind of payout you can expect to receive if you used all of your savings and investments to purchase one or more inflation-adjusted guaranteed fixed immediate annuity contracts.
Make sure that you choose the maximum inflation adjustment rate available when requesting the quote. The Thift Savings Plan website has a calculator that will give you a quote, on the spot. Add this guaranteed annuity income to your other guaranteed income to find your total pretax guaranteed retirement income.
If this is enough to meet your expected cost of living, after deducting an allowance for taxes, then you can probably safely retire.
If not, you should investigate your options further to see if an alternative approach might be workable.
With annuity payouts near historical lows, the invest-and-withdraw option, if managed prudently, will probably support a higher standard of living and produce better results — at least until the payout rates rise significantly.
Here’s a sample test calculation based on three guaranteed income sourses — FERS, Social Security and TSP:
FERS annuity: $30,000
Social Security: $20,000
TSP annuity payout with increasing payments on $200,000: $10,000
Total guaranteed pretax income: $60,000
Less 25 percent allowance for taxes: -$15,000
Total guaranteed after-tax income: $45,000
After-tax cost of living in retirement: $40,000
Test result: Fit to retire.
This test is not conclusive, but it is a good starting point in determining your financial fitness for retirement.
November 19th, 2013 | Uncategorized
It’s easy to make mistakes when you are planning to retire. Some of the biggest mistakes apply to all employees; a few apply only to CSRS or FERS retirees. All can be costly. Here they are and what you can do to avoid them:
Retiring on the spur of the moment. It can be disastrous, for two reasons. First, if you hand in your retirement application at the last minute, it may contain errors that delay processing or even cause it to be rejected. Second, decisions made in haste often come back to bite you. Once committed to a course of action, it’s hard to undo it if you change your mind. If you do change your mind before you actually retire, you won’t be able to withdraw your application if your job has been abolished or it’s been offered to someone else. If you’ve already retired and want to cancel your retirement, your agency has no obligation to bring you back on board.
Confusing a salesperson with an adviser. The two are not the same. Actually, they’re opposites. One is paid to convince you to buy what they have to sell; the other is paid a fee to conduct analysis and provide you with decision support. One is your ally. The other is your adversary. Why would you trust an adversary for advice? Be skeptical of any source of “advice” that might be influenced by a conflict of interest. This is single mistake probably costs the American public more than any other when it comes to financial decision making.
Losing your health or life insurance. Make sure you are enrolled in the Federal Employees Health Benefits or Federal Employees’ Group Life Insurance programs for the five consecutive years before you retire. If you aren’t, with few exceptions, you won’t be able to carry that coverage into retirement. Here are the exceptions: you are covered by your spouse’s FEHB policy; you have been covered by Tricare of CHAMPVA, enroll in the FEHB program before retiring and the total equals five years; you enrolled in the FEHB at your first opportunity and retire in less than five years; or you accept an early retirement offer and were enrolled before the latest offer of early retirement was made by your agency.
Before you retire, check with your personnel office to be sure that you’ve met either the five-year rule or one of its exceptions.
Not getting credit for active-duty service in the military. If you served on active duty in the military, you can get credit for that time in determining your years of civilian service and have it used in the computation of your annuity. If you are a FERS employee, you’ll have to make a deposit to get credit for that time. If you are a CSRS employee, the rules differ depending on when you were first hired. If it was before Oct. 1, 1982, you will only have to make a deposit if you retire and are eligible for a Social Security benefit at age 62 (or when you retire, if it’s after age 62). If you were hired on or after that date, you’ll get credit for that time only if you make a deposit for that service. Whether you are a CSRS or FERS employee, if you’ll be eligible for or receiving military retired pay, in most cases you’ll have to waive that pay when you retire from your civilian job. You won’t have to do that if you are eligible for or receiving reserve retired pay.
Check with your personnel office to make sure that any active-duty service is recorded in your Official Personnel Folder and find out if a deposit will be required to get credit for that time.
Getting caught by “Catch-62.” If you are a CSRS employee who served on active duty in the armed forces after Dec. 31, 1956, and haven’t made a deposit for that time, you could be in for a rude awakening. If you retire and are eligible for a Social Security benefit at age 62 (or when you retire if it’s after age 62), your annuity will be reduced by 2 percent for each of those years of military service for which you haven’t made a deposit.
Determine whether you’ll be eligible for a Social Security benefit at either of those points in time. If you will, you may want to make a deposit for that time. If you won’t, don’t waste your money. Your CSRS annuity won’t be affected.
Rolling over Thrift Savings Plan assets. This mistake is usually caused by either trusting the wrong source for advice or failing to think “outside the box” a little when it comes to planning for your cash flow needs. Financial salespeople generally have to gain custody of your assets in order to be paid their commissions or fees, so naturally, their advice always includes rolling over any significant TSP sums into an IRA or other investment vehicle with higher costs. This is a formula for diminished investment performance. If the reason for leaving the TSP isn’t to enrich a financial salesperson, it’s often to gain more freedom in withdrawing TSP assets. While this is sometimes a valid reason to leave, it can often be dealt with through a combination of a lump-sum withdrawal or a series of fixed monthly distributions that will create and maintain a slush fund outside the TSP that is sufficient to meet your cash flow needs.
Focusing on wealth instead of cash flow. Speaking of cash flow, this mistake is propagated by financial professionals and journalists all the time. Much of what you’ll read and hear from financial and investment experts is aimed at maximizing economic wealth — basically your net worth. The mistake is in assuming this is your retirement goal. It’s probably not. And managing to this goal can cause serious problems for you in retirement. Paying off a fixed-rate, low-interest-rate mortgage is an example. It is often proposed that saving the interest over 10, 20 or 30 years will dramatically increase your net worth. While the validity of this proposal will vary from case to case, and is certainly debatable, it also completely misses the point that your retirement standard of living is not dependent upon your net worth but rather on your ability to generate cash flow. Having massive amounts of equity in a piece of real estate is of little use to you in making a car payment or paying for a cruise if you can’t sell the property or borrow against the equity on attractive terms.
Getting hit by the windfall elimination provision. If you are a CSRS retiree who will be eligible for a Social Security benefit, it may be reduced by the windfall elimination provision. That will happen if you have fewer than 30 years of “substantial earnings” under Social Security. The difference between the amount needed to earn four credits under Social Security and the amount considered to be substantial earnings is significant. In 2013, you would only need to earn $4,640 to get four credits; however, you would have to earn $21,075 for it to be considered substantial. (Since the Social Security Administration doesn’t know which retirement system you are in, if you are a CSRS employee, any estimate of future Social Security benefits they give you will very likely be wrong, often very wrong.)
If you’ll be affected by the WEP, know in advance how much less your Social Security benefit will be. You can get started by reading the Social Security Administration’s publication at ssa.gov/pubs/EN-05-10045.pdf.
Getting hit by the government pension offset. If you will be receiving a CSRS annuity, any spousal Social Security benefit you may be entitled to will be reduced or eliminated by the government pension offset. The GPO will reduce those Social Security benefits by $2 for every $3 you get in your CSRS annuity.
If you’ll be affected by the GPO, you need to find out how great the impact will be. That’s because it isn’t uncommon for the GPO to wipe out those benefits. You can learn more at ssa.gov/pubs/EN-05-10007.pdf.
Relying on emotion instead of reason. This mistake is so common, it’s the norm. It also has the potential to cause disaster. There have been books written about this mistake and how to avoid it, yet the behavior continues to be rampant. If you’re going to get the most of what you want from what you have, you need to realize that markets have evolved to take advantage of your fear and greed, which are amazingly predictable, and turn them against you. The investment markets aren’t fair; they’re like poker games, and trust me, you’re not the best player in the game. If you want to survive and, better yet, enjoy the game, you need to rely on a strategy that acknowledges the odds you face, accepts them and uses reason to turn them to your favor.
Failing to account for inflation. Inflation is a pervasive threat to any retirement plan. Not so much inflation in general, but differential rates of inflation among the various incomes and outflows that affect your plan. Your expenses will inflate, over time, at varying rates, while your income may or may not keep pace with that inflation. CSRS annuity and Social Security income increase with the Consumer Price Index (for now), FERS annuity income increases less than the rate of inflation, and many other pension and annuity income streams either don’t increase at all or increase at a fixed rate. Differences in these inflation rates can have a profound impact on your financial picture in retirement and failing to properly account and plan for this impact can leave you without the resources you’ll need to live the life you’ve been expecting years, or decades, down the road.
November 18th, 2013 | Uncategorized
Q. My husband and I would like to participate in a fixed index annuity offered by a nongovernment company, but the information I gathered about Thrift Savings Plan transfers, withdrawals and annuities is confusing. It appears that if we want any type of annuity, we can only purchase if TSP does it for us, and the choices are extremely limited. Also, there seems to be no “non-hardship” type of distribution available before age 59½ that we can use to move our funds. Am I missing anything here, or are we just stuck with our limited options and no way to move our funds before 59½?
A. If you’re still a federal employee, your only option for withdrawing money from the TSP before you’ve reached age 59½ is through a hardship withdrawal.
October 30th, 2013 | Uncategorized
Q. I am reading TSP-775 (6-2013) concerning important tax information about TSP withdrawals. First paragraph (Deadline for withdrawing your TSP Account) states that “By April 1 of the year following the year you become age 70.5 and are separated from Federal Service, the TSP requires that you withdraw your entire account balance in a single payment.” It goes on to give options about monthly payments, life annuities. This leaves me perplexed. I thought I only needed to withdraw the required minimum distribution after becoming age 70½. Also, I thought if I have other IRAs, I could take the RMD from those and leave my Thrift Savings Plan unscathed. If I withdraw the entire account balance from my TSP, I will have to pay federal tax on whole amount. Can you clarify?
A. Here’s what you read:
By April 1 of the year following the year you become age 70½ and are separated from Federal service, the TSP requires that you withdraw your entire account balance in a single payment, begin receiving monthly payments, purchase a life annuity, or use a combination of these withdrawal options.
The requirement is that you do one of the three basic options separated by commas (full lump-sum withdrawal, monthly payments, purchase a life annuity), or elect some combination of them by the required beginning date.
Unfortunately, the TSP does not allow you to waive the RMD for your TSP balance. It must be taken from your TSP account.
October 28th, 2013 | Uncategorized
Q. I have a variable annuity (mutual fund) with Western Reserve Life Assurance and it has been doing terribly for many years. I put $10,000 in it in 2001, and it’s only valued at $14, 500 now, 12 years later! My Thrift Savings Plan account is doing much better, and I would love to transfer or roll over this money into my TSP account. Can it be done, should I, and, if so, how?
A. It may only be done if:
1. The annuity is an IRA or other Qualified Retirement Account; and
2. All of the money it contains is taxable on distribution.
October 28th, 2013 | Uncategorized
Q. I retired in 2011 and must start required minimum distributions soon. I understand taxation if the Thrift Savings Plan sends me fixed dollar payments or if TSP pays out based on life expectancy. But what if I have TSP buy an annuity with part of my TSP and I leave the balance in the TSP? How are taxes figured?
A. Your annuity income will be taxable as ordinary income and you will be required to take RMD from the remaining TSP balance, which will also be taxed as ordinary income.
October 21st, 2013 | Uncategorized
Q. I have been a CSRS retiree since Jan. 3, 2002. I turned 69 on July 14. What should I do with my Thrift Savings Plan funds at my age? What are my options?
A. You may invest your TSP money in any of the available investment funds or use the money to buy a life annuity. The investing option allows you to retain control of the principal but bring with it the risk of loss. The annuity will guarantee income for life, but you’ll give up the principal. You’ll have to determine which is appropriate for your particular situation. There is no universal solution for a 69-year-old CSRS retiree. I suggest that you start by looking at the annuity option and then use this a the benchmark for comparing the investment option.
October 15th, 2013 | Uncategorized
Q. I have 15 years of federal service and would like to do an early retirement with MRA+10. Would I have to take a reduction in my Thrift Savings Plan, or just my federal retirement only?
A. Mike: I’m not sure what you mean by a reduction in your TSP, but there is no reduction to your TSP account balance due to retirement.
Reg: If you retired under the MRA+10 provision, the only reduction would be in your annuity.
October 7th, 2013 | Uncategorized
Q. I took the Voluntary Early Retirement Authority on Jan. 31 at my minimum retirement age. I had 26 years at the Postal Service under FERS. After 16 years of marriage, I became a widow. The only income I have is my annuity and the special retirement supplement from the Office of Personnel Management. Will I be eligible to receive Social Security benefits from husband at 60, and will they end at 62? When I turn 62, my supplement will end. I have $190,000 in the L2020 fund. Would it be beneficial to me to start receiving money from my Thrift Savings Plan at 62 and delay Social Security until full retirement at 66 years and four months. A financial adviser told me to roll over my money into an IRA when I turn 59½. Is that a good idea, or should I keep it in the TSP? Would you recommend the G Fund, since I don’t have money to lose?
A. Mike: It’s impossible to give you specific personal financial advice with this tiny amount of information. In general, however, you should invest your money in a way that gives you a high probability of achieving your financial goals with a minimum of risk. There is no one-size-fits-all investment strategy, even for someone your sex and your age. Investment management is an ongoing and complex process. The advice you’re being given about rolling over you TSP to an IRA sounds like a sales pitch to me. You should preserve your TSP assets as long as possible unless a trustworthy analysis indicates that it would be in your best interest to do otherwise. Your question about using TSP funds to delay claiming Social Security is worth considering, but, again, finding the right answer will require some analytic work.
Reg: To find out how your own Social Security benefit would interact with your Social Security survivor benefit, go to http://ssa.gov/pubs/EN-05-10084.pdf.
October 6th, 2013 | Uncategorized
Q. How will Voluntary Early Retirement Authority/Voluntary Separation Incentive Pay affect my retirement benefits (annuity supplement, Social Security, pension and Thrift Savings Plan withdrawals)? I am an Air Force civilian GS-13, age 52, with 26 years of service under FERS.
A. A VERA/VSIP will not affect the rules governing your TSP withdrawals. You will be subject to the early withdrawal penalty until you reach age 59½ unless you can qualify for one of the exceptions listed on the left side of Page 7 of this notice: https://www.tsp.gov/PDF/formspubs/tsp-536.pdf.