By Mike Miles
December 2nd, 2013 | Uncategorized
Q. I plan to retire next year with 35 years of federal service (FERS) at age 56, and eligible to receive a Thrift Savings Plan supplement of about $18,000 per year.
Once I retire, I plan to work to earn approximately $38,000 per year. Of the earned income, I plan to contribute $17,500 to my 401(k) plan and an additional $5,500 toward the catch-up contribution. The remaining $15,000 will be reported as an earned income on my W-2 and Form 1040.
I plan to earn $38,000 for the year, so that my supplemental income will not be deducted $1 from my TSP supplemental benefit payments for every $2 I earned above the annual limit of 15,120.
Are the 401(k) and the catch-up contribution considered earned income that could reduce the $18,000 TSP supplement per year?
A. You’re talking about the FERS special retirement supplement, not a TSP supplement. Earnings you direct into a 401(k) plan are still considered earnings for the FERS Supplement Earnings Test.
November 25th, 2013 | Uncategorized
Q. I understand that a federal civilian employee under FERS can make $52,000 a year to the Thrift Savings Plan. I know that the $17,500 regular contribution and the $5,500 catch-up contribution totaling $23,000 can be put into the Roth TSP. How much of the overall $52,000 limit can be put into the Roth TSP, and how would one contribute to the Roth TSP above the $17,500 and $5,500 limits?
A. You misunderstand the limits. The $17,500 and $5,500 limits are the total deferral limits to either the regular or Roth TSP.
November 25th, 2013 | Uncategorized
Q. I am in FERS (age 57 with 30 years). I have been offered the buyout and will have to be off the roll Jan. 31. How should I go about having a portion of my lump-sum annual leave payment go directly into my Thrift Savings Plan account?
A. This is not allowed.
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. I am a FERS employee and will have 30 years of service at age 56, my minimum retirement age. Thus, when I retire at 56, can I start withdrawing from my Thrift Savings Plan without any tax penalty? Or do I have to wait until 59½ to start withdrawing from my TSP to avoid any tax penalty?
A. In the circumstance you describe, your TSP withdrawals will not be subject to the early withdrawal penalty.
November 13th, 2013 | Uncategorized
Q. I am a FERS employee who turned 71 in September. I plan to retire in January 2015. When do I need to start taking my required minimum distribution?
A. Under the current rules, and these circumstances, your first RMD, for tax year 2015, will be due by April 1, 2016.
November 11th, 2013 | Uncategorized
Q. My wife and I are FERS employees. We are both considering retiring early if offered Voluntary Early Retirement Authority at ages 50+/- (both with more than 25 years of service). With children still in the picture for some time, access and flexibility with our Thrift Savings Plan accounts are crucial to any plan. I would like to accomplish two things:
1). 72(t) withdrawals until 59½ in one account.
2). Flexibility to roll over funds currently in TSP into a Roth IRA held at another institution (from an IRA as I see no method to do that while the funds are in TSP).
My plan would be to roll over just enough to “fill up” a certain tax bracket, say 15 percent, especially while we have many deductions related to children.
So, my thinking would be to have substantially equal payments out of one account soon after early retirement but not immediately. For the other TSP account, make a one-time partial withdrawal and transfer that to an IRA currently held at another institution. I’m assuming I can make that transfer/withdrawal at age 50 with no penalties, correct? This would allow me to each year assess our taxes and determine what amount of the IRA I would like to convert to my Roth IRA. I would only do a partial withdrawal as I appreciate the low expenses of the TSP, but the inflexibility to convert to a Roth is too limiting.
Does this make sense? And is everything I’ve laid out reasonable and doable?
A. What you’ve proposed is doable, but I’m not sure I see the value in the Roth IRA conversions.
November 11th, 2013 | Uncategorized
Q. I am considering retirement at 62 (FERS) but not collecting Social Security until my full retirement age of 66. I know that once you start withdrawing from your Thrift Savings Plan account, you must continue to make withdrawals each year. To bridge the time from 62 to 66, I’m thinking of taking funds from my IRA instead. If I start taking withdrawals at 62, can I stop taking withdrawals from my IRA at 66 when I start Social Security and then resume withdrawals at 70½?
A. You’ve got the right idea, and it will work. You may start and stop IRA withdrawals any time you want to. When you reach age 66 and stop taking money from your IRA, you should transfer what’s left into your TSP account, if it’s all pretax money.
November 11th, 2013 | Uncategorized
Q. I am a 60-year-old FERS employee and have decided to retire in March. With $250,000 in my Thrift Savings Plan, I am being courted by insurance companies to buy into their annuities. I can see some benefit but am worried that the administrative fees will take too much of my money. How can I overcome these anxieties?
A. If history has taught us anything, it’s that these “financial services” companies don’t care about you and your interests. They care about profits, which always come at their customers’ expense. They’ll do and say anything they think they can get away with to confiscate your money. They are your adversaries, not your allies. I know because I used to work for one.
I can’t think of a time when buying a deferred annuity contract is a smart move, and I can’t think of a worse time than now to buy a fixed annuity contract. Caveat emptor.