Ask The Experts: Money Matters

By Mike Miles

Life annuity vs. TSP monthly payments

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Q. I am retired and turn 70 this month. Even though I do not want to begin distribution of my Thrift Savings Plan investment, I understand that by law I must select a required minimum distribution program. My dependent spouse is 76 and also retired.

I am healthy and, with my family genetics, could expect to live to age 100. I do not need the TSP to live on and want to maintain it in the TSP investment form for as long as possible.

Under these circumstances, what is the best RMD to select: a life annuity or a TSP monthly payment? Should it be a single, or joint with survivor benefits? What is the tax exposure for the recommended way to go?

A. You should request automatic monthly payments based on your life expectancy. This will minimize the size of the payments.

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TSP options

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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.

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TSP distribution

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Q. My husband is retiring from the Postal Service on Nov. 1. We have $850,000 in tax-free municipal funds (all AAA rated and paying over 5 percent), and another $200,000 in natural gas and oil limited partnerships and some preferred stocks in energy companies that I recently inherited. I would like to live on the interest from these investments, leaving the principal alone.

My husband is 62 and we want to wait until he is 66 to receive his Social Security payments. (Waiting until 70 is out of the question as both parents were stricken with Alzheimer’s disease at an early age. Mother at 70 and father at 75.)

My husband has a Thrift Savings Plan account with a balance of $91,000. I am concerned that the interest and dividends coming in from the inheritance have not had time to accrue enough interest for us to live on and would like your advice on how to distribute his TSP for the first few years.

I am disabled and am receiving a monthly check for $1,477. If my husband takes Social Security now, his monthly payments would be $1,588. Also, my husband will receive a monthly retirement check from the Postal Service for $850 — just enough to cover our health and life insurance and his long-term care insurance.

Can you give me some advice on the best way to get my TSP to pay out a larger sum in the first three years so I can protect the principal of my inheritance? Should we start now collecting his Social Security now?

A. It is not possible to determine the answers to your questions, which are complex and interdependent, without the proper understanding, analysis and consideration. There are no simple answers. Your questions are beyond the scope of a forum like this and will require comprehensive financial analysis to answer.

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Life insurance

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Q. I am retiring in the near future and I want to take my Thrift Savings Plan balance which is approximately $175,000 to $180,000 and purchase an annuity from MetLife. My concern is if MetLife were to fold. I think my state (Massachusetts) will insure me up to $100,000 in that event. I believe that is per insurance company. So would it be wise to split that total ($175,000-$180,000) and purchase an annuity from two different companies, so as not to exceed the 100,000 limit?

A. I’m not confirming your statements about the limits of protection in a particular state, but in general, dividing the purchase up among two or more guarantors will reduce the risk of default posed by a single guarantor.

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Survivor annuity

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Q. In Reg Jones’ column, he states, “Choosing to buy an insurance policy instead of a survivor annuity is seldom a good idea. Could you please expand on that thought? The financial planner I talked to, who also sells insurance, says if you are healthy, the insurance route will be cheaper to pay for and more lucrative in the end. If you plan on dying young, the survivor annuity is best.

A. This is a complex decision, and you should proceed with care since it is irreversible once it’s made. The simple answer is “guarantees.”

The federal survivor annuity is the safest option, with all elements guaranteed, including a guaranteed cost-of-living adjustment that applies before and during the payment of a benefit. If your spouse dies first, then your annuity benefit is guaranteed to “pop up” to what it would have been without the survivor benefit election. Any alternative, like life insurance, should be compared to this option by someone without a competing interest in the transaction.

I was trained to sell life insurance for this purpose, have run the analysis for clients at least dozens of times over the years, and have yet to see a solution that can compete with the survivor annuity benefit from the survivor’s point of view. The life insurance solution could work out in the survivor’s favor, but this is speculative at best. There may circumstances where the life insurance solution is the superior option, but they are the exception rather than the rule, and you shouldn’t rely on an agent’s arguments or analysis in making the commitment.

The agent you’re listening to isn’t your ally in considering this decision. They are your adversary. They will be paid compensation that at least equals the premium you’ll pay for the insurance during the first year if he/she can convince you make the purchase, so they are highly motivated, and legally allowed, to skew the arguments heavily in favor of the purchase.

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Pay off mortgage with TSP?

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Q. I know that you say (almost always) not to pay off the mortgage on retirement with Thrift Savings Plan funds. So when it is a good idea to do so? I’m CSRS Offset ending at GS-14, Step 8 with 32 years of service, $300,000 in TSP, $30,000 in cash on hand, will have no credit card or vehicle debt shortly as we are selling an investment property (taking the tax hit instead of identifying a new investment property because I really don’t want to be a landlord anymore), the usual monthly expenses, and will get the law enforcement/firefighter retirement benefit bump (did my 20, then moved to a noncovered position). I am 60 (and, at 62, the offset kicks in, and beyond my way of thinking, will increase my monthly pension).

We owe about $100,000 on the 6 percent rate 15-year mortgage that has 10 remaining years. We plan on selling the house in six years when the last kid leaves for college and downsizing into a condo up the street for about $300,000. The house will sell for around $600,000+ (100+ year old historic neighborhood, prices and sales were barely affected during the recession so these numbers are pretty solid). The caveat is, we are restoring this historic house ourselves (this is the third one that we have done) and put $1,000 to $2,000 a month in parts or subcontractors for the renovation and probably have about 36 months left of work on weekends to finish the house ($36,000 to $50,000).

The calculator says my retirement income after adjusting my life insurance, tax adjustments (I claim zero now cause I am a lousy-saving person and get $10,000 average back every year) will be 87 dollars less a pay period than what I take home now (without touching the TSP). So the reason for paying off the mortgage is my wife, who works in social work at a low wage, can quit working as not having the mortgage (paid off with TSP funds)  will make up for about half of what she brings in and then help me swing a hammer and finish the house and party a bit more. On a final note, we have not taken out old-age insurance for care.

A. You’ve identified an objective: To take a lump sum from our TSP account to pay off your mortgage. So the question is whether or not this is a safe — and, if safe, an optimal thing to do, given your current circumstances and future goals. Unfortunately, it’s not possible to answer this question responsibly without analyzing it in the context of your lifetime plans. Visit my website and www.variplan.com and contact me if you’d like to discuss your needs further.

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Multiple annuities in retirement

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Q. I am 41 and a “gray area retiree from the Maryland Army National Guard. I am employed with the Postal Service (FERS) and have about 19 years of service (including five years active duty, which I already paid back). I also collect 30 percent disability from the Veterans Affairs Department. In planning my final retirement living, it seems if I retire at my minimum retirement age of 57, I should be immediately eligible for full annuities of the following, with no penalties or offsets:

FERS basic annuity

Social Security offset (until 62)

TSP annuity (no IRS penalty)

VA compensation

Army retired pay (age 60)

Reduced Social Security (age 62)

Are my assumptions correct?

A. Mike: If you retire during or after the calendar year in which you reach age 55, you will have access to your Thrift Savings Plan account without penalty. If you use the balance to purchase a life annuity, there will be no penalty for this regardless of when you retire.

Reg: Assuming that you retire at age 57 with more than 30 years of combined service, you would be entitled to an unreduced FERS annuity and the special retirement supplement. (There is no such thing as a Social Security offset.) You would also be entitled to your reserve retired pay, VA disability compensation, and a reduced Social Security benefit.

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Survivor benefit vs. life insurance

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Q. I will be retiring at the end of this year with 37 years and 10 months of service. I am a CSRS employee and will be 57 years old in September. My annual annuity would be $81,958. I will have a little over $200,000 in my Thrift Savings Plan account.

Is it smartest to take the spousal annuity or take out a life insurance policy on myself to sustain my wife once I pass away? My annual annuity will be reduced by around $7,900 a year if I chose the spousal annuity. Which would be the wisest?

A. This isn’t your choice to make. It’s your spouse’s choice. If I were your spouse, I’d favor the full survivor benefit.

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Divorce and TSP

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Q. I am about to divorce my husband, who works for the Federal Aviation Administration.

1. Can I keep his health insurance as an individual? Does this cost anything to him? How much will it cost me?

2. How can I be eligible for his life insurance after divorce?

3. Which is more beneficial: Getting a survivor benefit or getting a higher pension?

4. When can he start taking money from his Thrift Savings Plan?

A. You can’t withdraw money from his TSP account. Your divorce settlement will govern how the TSP is divided and distributed and you’ll likely wind up with your share in an IRA in your name. The usual rules for distributions will then apply.

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Survivor benefits vs. life insurance

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Q. My husband is putting in papers to retire after 40 years in civil service. He wants me to sign a paper saying that I agree not to accept his retirement if he dies before me. He said it would be less costly to get a good life insurance policy. We are both 61 years old and in good health. I have asthma and take medication for cholesterol. I have 21 years with the public school system. I hope to retire in the next year or two. Is it a good idea for me to sign this paper? He doesn’t want to discuss it.

A. Here is a link to a column I wrote for Federal Times a few years ago on the topic: www.variplan.com/uploadedDocuments/1213969385How_pension_max_compares_to_survivor_annuity.pdf.

This is, potentially, a critical question, and the correct answer depends entirely upon your circumstances — your goals, resources and constraints. Unfortunately, the analysis required to answer it correctly is usually complex. The only universal recommendation I can make is that, if you’re in doubt, the safest bet is to elect the maximum CSRS or FERS survivor benefit.

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