By Mike Miles
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.
October 9th, 2013 | Uncategorized
Q. If the government doesn’t raise the debt ceiling, what does that mean in practical terms for the TSP G Fund, and for government bonds and securities, in general? The G Fund is backed by the good faith and credit of the government, but if the government doesn’t have the ability to pay its debts, even for a short time, does that mean that the G Fund could have a zero return for that period?
A. Interest rates could rise and bond values could fall. Higher interest rates are generally bad for the F Fund and good for the G Fund. It’s possible that the government could fail to deliver on its promise to G Fund investors, but this does not appear likely at this point.
October 6th, 2013 | Uncategorized
Q. What are the MetLife annual and/or one-time fees charged after annuity is purchased?
A. The only fee is the initial cost of the annuity, which depends upon your age, the annuity you purchase and the interest rate index at the time of the purchase.
October 3rd, 2013 | Uncategorized
Q. I was first employed by the Defense Department in October 1982 and placed in CSRS. During a reduction in force, I lost my position in July 1994. In 1996, I withdrew my CSRS contributions and had them rolled into an annuity with American Express (now Ameriprise).
In November 1998, I was rehired by DoD and became a FERS employee. When I was rehired by DoD, I took the funds I had earned at my previous (1994-1998) job’s 401(k) and rolled them into the same annuity with Ameriprise.
I am now nearing retirement age and plan to buy back the CSRS time I lost by withdrawing my funds.
Can any of the annuity I have with Ameriprise be rolled into repaying my CSRS without any penalty or tax burden? I would think that, at the least, the amount that I withdrew in 1996 and rolled into the annuity could be rolled back into the CSRS. I am not trying to increase the amount of the CSRS, only to repay what I withdrew, plus interest due.
A. You made your original CSRS contributions with after-tax dollars and the money was not taxed when it was withdrawn. Your redeposit must again be made with after-tax dollars, so you can’t do what you’re asking about.
August 29th, 2013 | Uncategorized
Q. I am the CSRS retiree who turned 70 years old in July. My email was posted Aug. 19.
Boy, you have a way of really making a person feel small and stupid. I chose to start withdrawing my money so I wouldn’t have to be concerned about the 70½ deadline. These withdrawals were based on my life expectancy, and I knowingly started withdrawing my money a little ahead of time. I have not concluded that I am not receiving any gain from the G Fund with the Thrift Savings Plan. I wondered why I was taking such a significant hit from the fund with DWS Scudder, which is also a GNMA fund?
I have taken your advice, and my DWS Scudder IRA is now being processed to be transferred to my TSP account. I appreciate the advice, but you could have been a little less brutal.
A. Oh, please! There’s was nothing “brutal” about my answer. If you didn’t want an honest, direct answer to your question, you should have asked a banker, broker or insurance agent. Furthermore, I gave you good advice that you’re using to your advantage — for FREE! A simple thank-you would have been sufficient.
But I’m not one for carrying a grudge, so I’ll answer your additional question, which was not clear to me in your earlier question: The DWS Scudder fund lost money because it is a bond fund and is subject to losses in an environment of rising interest rates. The G Fund is not a bond fund and is not subject to the risk of loss. They are two different types of investments.
July 24th, 2013 | Uncategorized
Q. How is the Thrift Savings Plan’s G Fund related to bonds I keep hearing about lately being sold off from other bond funds? How is the G Fund different from these funds? Is this bond fund an inflation-protected bond fund? How does this fund guarantee the principal investment? Who takes the loss if yields on bonds purchased are lower when shares in this fund are transferred than on when those shares were bought?
A. The G Fund is backed by the federal government and accrues interest equal the weighted average interest rate for all outstanding U.S. Treasury debt. It is not a bond and does not behave like one. It’s equivalent to cash with a high interest rate.
July 22nd, 2013 | Uncategorized
Q. Is there any way to have the Federal Retirement Thrift Investment Board add an investment option to the Thrift Savings Plan offering for religious reasons? The holy books of the Christians (Bible), Jews (Torah), and Muslims (Qur’an) all forbid earning or paying interest (aka usury-defined as a “use fee” for cash). Since I practice my faith as best I can, that leaves me no option to participate in the TSP program because all the offerings have some element of interest derived income in them. Although in modern times “usury” means exorbitant interest, in the holy books it was just a blanket term for any fee charge for the sake of using someone else’s cash.
With all that being said, I am being effectively locked out of the employer matching because of this and I would like to rectify it. I’d like to have a cash option. How would you suggest I go about having a cash option added?
A. I suggest that you start by contacting the FRTIB at 202-942-1600.
July 1st, 2013 | Uncategorized
Q. 1. I have $12,000 in student loans at about 6.5 percent interest rates. I had considered taking a loan from my Thrift Savings Plan account to pay off my balance as the interest rate I would pay back on the TSP loan is lower than my Stafford Loans. What is the maximum amount one can take out on loan from their TSP account? What is the repayment time frame demanded by TSP?
2. If I were able to pay off my Stafford loans with a TSP loan, I am not sure that would be the best decision. I am 26 years old and have approximately $15,000 in TSP. I know that money makes money over time and I can’t make up past years. If I take the funds out, I am losing some potential for the funds to work for me and increase themselves. Do I want to leave the money brewing where it is in the hopes it will bring more for my retirement, or take it out now and be debt-free and save myself some interest from my student loans. Are there any other factors that merit consideration?
3. I am looking into buying a house and want to know if a loan from my TSP account shows as part of my debt-to-income ratio. I have been considering taking out a TSP loan to pay down my student loans to lower my debt-to-income ratio to improve my home loan prequalification odds. Can you tell me if a TSP loan would be part of that ratio even though the loan is paid back to myself?
A. The maximum TSP general purpose loan amount is the smaller of 50 percent of your 12-month rolling average account balance or $50,000. The repayment period is five years, but you may reamortize the balance to extend the repayment term.
Whether or not you take the TSP loan depends upon a number of factors including the cost of the other debt, the cost of the TSP loan and your behavior.
You should check with your lender to see what, exactly, they count in underwriting your mortgage application. I suspect that they’ll want to consider all of your debt.
May 13th, 2013 | Uncategorized
Q. I have been a federal employee for 27 years, just long enough to have been one of the first forced into FERS. About seven years ago, I looked at my Thrift Savings Plan statement and learned that the prediction was that if I retired at age 62 and bought an annuity, I would have a pretty good monthly salary. Now, I notice that the prediction is that if I use my TSP savings, with about the same amount predicted for me at age 62, to buy a monthly annuity, that annuity will be about one-third of what was predicted seven years ago. Not a very good deal now.
My belief is that the years of low interest rates are responsible for the change in what the same amount of money will buy now. I wonder if that is true. I also wonder if these annuity companies that agreed to pay the larger amounts when they signed people up seven or more years ago are going to have to have massive bailouts by the federal government if interest rates continue to remain where they are. Finally, if I retire soon, I will not want to buy an annuity at that time, but if interest rates go up in five years, how much more attractive are monthly annuities going to be? If the interest rates go back to where they were 10 years ago, will the price of annuities go back to where they were, or have annuity companies learned a lesson and are likely to be more conservative in pricing?
This also might be a good topic for one of your columns for other FERS feds who have to decide about using some of their savings to buy annuities.
A. I have written columns about the pros and cons of using your savings to buy an annuity, and about the dangers of using the calculators provided by the TSP. You’re a witness to the problems. There was never a promise by the insurance company to provide a certain payout for a future annuity purchase. The payout is always calculated at the time of purchase. Annuity payouts are dependent upon the prevailing interest rates at the time of purchase, and those rates are now at historic lows. Same with the payout rate. If interest rates increase in the future, the payout you will be offered should also increase. In addition, as you age, the payout will go up since the number of payments the insurer expects to make will decrease.
May 9th, 2013 | Uncategorized
Q. I was recently informed that I fell under the Federal Erroneous Retirement Coverage Corrections Act and had an option to select CSRS Offset. I was also told that the 1 percent and matching in my Thrift Savings Plan would be removed if I selected CSRS Offset. My human resources office told me that it would be the exact amount that was put into my TSP. If it made money, I would be able to keep the difference; if it lost money, I would have to make up the difference. So I selected CSRS Offset. Now they are beginning to remove the 1 percent by pay period, but they are removing the amount plus interest. I also have a colleague who was told the same, but they are only removing the actual amount and not interest. What are they supposed to be removing from the TSP if you switch from FERS to CSRS Offset under FERCCA?
A. It’s not that simple. In fact, the FERCCA rules for this are pretty complex. The answer depends upon your particular circumstances.