Ask The Experts: Money Matters

By Mike Miles

F Fund attractiveness

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Q. Does the Fed’s announcement that it will not raise interest rates until unemployment reaches a specific target make the Thrift Savings Plan F Fund more attractive in the near term?

A. To the extent that it reduces the probability that market interest rates will rise, it reduces the F Fund’s downside risk. With interest rates near zero, and most outstanding bonds trading at a premium, I’m not sure that I’d call the F Fund particularly attractive, however.

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G Fund and economic collapse

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Q. I assume a high inflation rate is in our near future, based on the high amount of money being printed. I also assume the economy could go into a greater depression when all the corresponding actions take place — high inflation, high interest rates, market crash, possible dollar collapse. Is the G Fund going to be safe through all of this? With it being a government-backed bond, what if the government defaults on all debt and can no longer borrow to keep the economy from collapsing? Is any money in the Thrift Savings Plan safe? Basically, can I move everything to the G Fund and be safe through the upcoming collapse?

A. In the event of a catastrophic collapse of our economy, society and government, nothing is safe.

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F Fund

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Q. I am 61 and have $200,000 in the Thrift Savings Plan. I’m in process of transferring another $240,000 from an outside discount brokerage firm to my TSP. I would like to transfer all of the $240,000 to the F Fund. With interest rates possibly remaining low for another few years, is this a good move? When interest rates rise, how much will the F fund shares decrease? The bonds it holds are short and intermediate, so I’m assuming it won’t lose as much as if it held long-term bonds, but I’m not clear on how much I could lose.

I’m trying to move from equities to bonds due to my age and plans for retirement, but still make some money.  The G Fund has been doing so poorly. What are the risks to the F Fund? I’ve been watching the F Fund now for a few years, expecting it to go down, but so far it’s doing pretty well.

A. With interest rates near zero, I don’t think a 100 percent allocation to the F Fund is a good idea. In fact, I can’t think of a situation when it would ever be a good idea. I suggest that you use the L Fund that most closely corresponds to your life expectancy, or find a trustworthy investment adviser to help you.

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IRA

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Q. I have an IRA that guarantees me a 4.50 percent interest rate. I can roll over IRAs anytime. Very little fees if any. It is a variable annuity that I purchased in 1983 that has granted me the fixed income. I am thinking of rolling over my Thrift Savings Plan and only taking the required minimum distribution at the end of each year. I can take out money without any penalty except for taxes. There is also a good death benefit. There are no surrender fees. What are your thoughts? I am already 75 years old.

A. The phrases “very little fees” and “variable annuity” are usually mutually exclusive. Beyond this, I can’t possibly speculate on what you should do without reading the prospectus and contract for the annuity and analyzing your circumstances.

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Annuity interest rates

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Q. I recently received my “FERS Your Personal Benefits Statement Based on your Account as of January 01, 2012.” It states, “As of December 31, 2011, your TSP account balance was $130,841.13. It goes on to say, “Assuming you continue TSP contributions [$877 per pay period] at the same rate and earnings on your account average 7% [Wow. How unrealistic is this!], your estimated TSP balance when you are first eligible to retire would be $158,107.” My current TSP balance is $137,000. It gives estimated Thrift Savings Plan monthly annuities as follows:

If you retire at age 64, your single life annuity would be $868.06;

If you retire at age 65, your single life annuity would be $1,130.12.

The statement also mentions an interest rate index on the level payment annuity, with no cash refund, when purchased, will be 2.250 percent.

What does the interest rate index represent? Does this mean the yearly level payments would increase by 2.250 percent?

Given today’s low interest rates, what, realistically, would my annuities be at age 64 and age 65?

A. The annuity interest rate does not have anything to do with increasing payments. A level payment is just that: level. It doesn’t change over time. The index is used to determine the payment amount that your annuity purchase will produce. A higher index means a bigger payment. Annuity interest rates are currently hovering at or near historic lows. Buying an annuity today means locking in low interest rates for life. I’d say that the odds favor higher interest rates and higher annuity payout rates in the future.

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TSP withdrawal

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Q. I’m 72, and I must make a decision on Thrift Savings Plan withdrawals. I do not need any additional monthly income. Is there any advice/guidance on what options are best to take? Is it better to take a TSP annuity or to purchase one from another insurance company?

A. I don’t know why you’d use your TSP assets to buy an annuity if you don’t need income, particularly with interest rates so low. I suggest you manage your TSP and have them send you the Required Minimum Distribution each year. You can then reinvest the money, after taxes, in a taxable account.

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Annuity may be best choice

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Q: I retired in 2006 at the mandatory age of 57 under the Civil Service Retirement System/Federal Employees Retirement System. I am able to live comfortably on my monthly annuity and have not made any withdrawals from my Thrift Savings Plan account, which remains in the L2030 fund and now totals approximately $250,000. I would like to start withdrawing from the account in the next year or two to add to my quality of life, and not for living expenses. Does it make more sense to take monthly withdrawals rather than buying an annuity since I am not overly concerned about outliving my TSP account and I can live comfortably on my monthly annuity?

A: There is no one-size-fits-all answer to your question. Your choice will depend upon your specific goals and risk tolerance. Given the current interest rate environment, you would likely be locking in a relatively low payment by purchasing an annuity right now. That, combined with your stated indifference to a guarantee of lifetime income, makes it unlikely that an annuity will be a good choice for you, at least until interest and payout rates rise. Of course, without the annuity, you risk the consequences of mismanaging the money.

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