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.
September 9th, 2013 | Uncategorized
Q. I am retired military, drawing Social Security. I am planning on retiring from the federal government soon. If I take all of my Thrift Savings Plan, how much will be taken out? I owe $10,000 on a TSP loan and know I should pay it off. If I pay the loan before taking money and I roll into an IRA, will my money then be tied in the IRA and I can’t use it? Also, I heard you can combine military pay with federal retirement. How does that work?
A. Mike: If you withdraw your entire TSP balance after you retire, 20 percent will be withheld as a deposit against your federal income tax liability. If you request a direct rollover into an IRA, there will be no withholding. If you are retiring from TSP covered service between the ages of 54 and 59, inclusive, rolling your TSP money into an IRA may affect your ability to withdraw the money without penalty before you reach age 59½, so be careful if this is the case.
Reg: You can make a deposit to get credit for your active-duty service. That tie will be used to determining your total years of civilian service and in the computation of your annuity when you retire. However, because you are retired military, you’ll have to waive your military retired pay when you retire from your civilian job. If you don’t, your deposit will be returned to you and you won’t get any credit for that time.
July 24th, 2013 | Uncategorized
Q. I have been in FERS for 16 years. I have been in the Army Reserve for 21 and plan to stay in until after my FERS minimum retirement age (58). I have enough combat time to be eligible for early reserve retirement pay at 58.
I have deployed to combat several times and receive a combat-related injury compensation from the Veterans Affairs Department. I have a FERS Thrift Savings Plan and a military member TSP. I am thinking of buying back four years of active-duty time toward my FERS retirement. I believe former President Bush signed a special combat-related compensation offset to allow for full VA compensation and military retirement. I meet the criteria as I was injured in Iraq.
When I turn 58, would I receive:
My full FERS annuity (34 percent), my full VA compensation check, and my full Army Reserve military pay?
When I turn 59.5, would I receive:
My full FERS annuity (34 percent), my full VA compensation check, and my full Army Reserve military pay + now my TSP annuity + my military member TSP annuity?
When I turn 62, would I receive:
My full FERS annuity (34 percent), my full VA compensation check, and my full Army Reserve military pay + my FERS TSP annuity + my military member TSP annuity and now reduced Social Security?
A. You may purchase an annuity with your TSP money at any time following separation from federal service and that annuity income will continue for as long as you live, regardless of your other income.
May 31st, 2013 | Uncategorized
Q. Retirement date: Sept. 15, 2017, at age 62. Retire as GS-13, Step 7, FERS, with 38 years total service (figure includes my nine years military, bought back).
TSP: About $250,000, Social Security paid in full to receive full benefits for a 62-year-old.
I live in Washington state. I expect to pay spouse survivor benefits, federal income tax. Should I leave my Thrift Savings Plan alone or draw it out entirely?
A. Leave your TSP alone for as long as possible.
April 22nd, 2013 | Uncategorized
Q. I am making payments to buy back my military deposit, and I will also be making a redeposit of FERS funds. Can I transfer funds from the Thrift Savings Plan to military buyback and FERS? After all, these are both accounts for retirement and not money I’d be using now.
A. This is not allowed since your TSP money is pretax and your deposits must be made with post-tax money.
April 9th, 2013 | Uncategorized
Q. What types of funds can be used to buy back military service time (nonqualified, qualified, Thrift Savings Plan account funds, IRA funds)?
A. Only after-tax money can be used, so you can’t use TSP, IRA or 401(k) money for this unless you withdraw it and pay the tax bill first.
April 3rd, 2013 | Uncategorized
Q. I am making payments to buy back my military deposit and I will also be making a redeposit of FERS funds. Can I transfer funds from the Thrift Savings Plan to military buyback and FERS? After all, these are both accounts for retirement and not money I’d be using now.
April 2nd, 2013 | Uncategorized
Q. I am 57 years old. I have about a year and three months with the Defense Department (FERS). I am in the process of buying back 14.8 years of service, and I plan to retire in about 12 years. Will the buyback help with the Thrift Savings Plan? What is a good TSP investment option for someone in my situation?
A. I’m not sure how the buyback will help your TSP account, since you will not be entitled to any additional contributions as a result. The investment strategy that you choose should be based on more information that you’ve provided here. If you’re not sure what to do, I suggest that you use the L Fund that most closely corresponds to your life expectancy — or joint life expectancy, if you are married. The problem is that it’s impossible to know exactly how much you can safely withdraw — and when — without more analysis, planning and management along the way.
March 21st, 2013 | Uncategorized
Q. I’m a 58-year-old FERS employee with 29 years of service. I have two years of leave without pay from while I was mobilized in the Army Reserve (2004-06). I am in the process of paying my military deposit to buy back this time.
After returning to federal service, I did not identify that I wanted to catch up on the Thrift Savings Plan and get my TSP matching contributions.
I recently read on the TSP website that I could still use the substantial contributions I made to the uniformed services TSP to request my civilian matching contributions. I have my military leave and earnings statements to confirm my contributions; and the TSP website confirms I never received the automatic 1 percent or the 4 percent matching funds.
Can I still submit for the retroactive TSP contributions? If so, should I do it through the agency I was with while on duty, or through my current agency I subsequently transferred to later on?
A. See this notice https://www.tsp.gov/PDF/formspubs/oc95-5.pdf and go to your agency human resources office to pursue the missed agency contributions.
January 14th, 2013 | Uncategorized
Q. I am a federal firefighter and a FERS employee. In 2022, I will have 21 years of creditable service and four years of bought-back active military time and be 48 years old.
1. Will I be able to retire under the provisions of 25 years of service at any age?
2. Will I receive the special category retirement percentages (1.7 x high-3 x creditable service, etc.)?
3. Will I receive the special retirement supplement until 62?
4. Will I not be able to withdraw any Thrift Savings Plan annuities until 62?
A. Reg: 1. No, you won’t be able to retire. Only actual service as a firefighter — not active duty for which you’ve made a deposit — counts toward the 25-year requirement.
2. When you are eligible for retirement and do so, your annuity would be computed using the special category percentage for the first 20 years; the remaining time would be computed using the standard multiplier.
3. When you retire, you would receive the special retirement supplement, regardless of your age, until you reach age 62.
Mike: 4. You will have access to your TSP assets, for withdrawal or to purchase an annuity, as soon as you retire.