By Mike Miles
January 9th, 2013 | Uncategorized
Q. My wife has contributed to her Thrift Savings Plan all her career and we will draw on it soon. We both have federal pensions and Social Security pensions that do not count toward income for purposes of the Social Security cap.
If she receives her TSP in a lump sum, I know we have to pay taxes, but will that money be considered income for that year and offset our Social Security pensions, or is her TSP considered part of her retirement income?
A. TSP withdrawals are not considered earned income.
November 5th, 2012 | Uncategorized
Q. I wanted to know your thoughts over using a portion of my savings for a “fun” account. I am 57, retired from CSRS, debt-free with no children and a spouse who has a defined benefit pension that would cover her expenses independently.
I have $120,000 in a Roth IRA; $100,000 in CDs; and $225,000 in the Thrift Savings Plan, 50 percent in F and G funds. The Roth has 50 percent in a health mutual fund, 50 percent in a financial mutual fund and earns about 6 percent annually.
Why not take, say, $75,000 and put it in an account to travel the world? Would that be prudent?
A. If you’re sure that the money won’t be needed for more important things later, then it should be used for what you want most.
October 24th, 2012 | Uncategorized
Q. I am 72. My wife is 62. I get $1,700 a month in pension and $1,700 a month in Social Security. My wife gets $5,800 in pension.
We put $70,000 in a mutual fund three years ago. It is now $80,000. I would like to take out $20,000 a year. I have health problems. Good idea or not?
A. You have the “idea” of spending money that you’ve saved and invested in mutual funds, and you want to know if your idea is a good one? That’s like asking if your idea to eat the leftover birthday cake is a good one. It’s an idea. I can’t possibly determine, based on the information you’ve provided, whether it’s good or bad.
August 28th, 2012 | Uncategorized
Q. I am a single, 57-year-old CSRS Offset retiree, mortgage-free, no car payment, no children and debt-free. I have enough pension to live on comfortably and still put away money into savings monthly. I have more than 30 quarters of Social Security credit. I have two six-figure IRAs that I do not plan to touch until required. My Thrift Savings Plan is approximately $400,000 and I have yet to touch it. I am perplexed about when to begin drawing money from my TSP, but I know that I will have to begin withdrawals by age 70½. Should I draw TSP monthly distributions based on my life span, or should I pick the amount myself and be more conservative based on my outliving the actuarial table established by TSP and/or by insurance tables? At this point, while in good health, I would only use the extra money to take an extra vacation each year. One friend said that I should start withdrawing well before 70½ and live a higher lifestyle standard. Finally, I do not want to move the TSP money into an IRA since the fees in TSP are so low.
A. I recommend that you leave your money in the TSP as long as possible, spending other money first. Whether you can safely maintain a higher standard of living, and how much higher, is impossible to determine without a comprehensive analysis of your circumstances, goals and constraints. The answer is also dependent upon how you will manage your investment decisions along the way. Before you take your friend’s advice, you should make sure that he or she will stand responsible for the results if things don’t work out in your favor. What if you spend money now that you wind up needing later?
August 22nd, 2012 | Uncategorized
Q. In IRS Publication 575 on page 33, they list an exception from the 10 percent penalty on withdrawing from the Thrift Savings Plan fund for qualified public safety employees. As a federal agent, if I retire in the year in which I turn 50, am I exempt from the 10 percent early withdrawal penalty based on the qualified public safety employee clause? IRS Publication 721, pages 17-18 lists a law enforcement officer as a qualified public safety employee. If this is the case, why do they not mention this when doing pre-retirement seminars?
A. The exception only applies to defined benefit pension plans, not to defined contributions retirement plans such as TSP.
August 22nd, 2012 | Uncategorized
Q. I’m a FERS retiree, age 64, with a $36,000 annual pension. My spouse has a $40,000 annual salary. We have a rental property that brings us $24,000 a year. And we have a home mortgage balance of $500,000. Our living expenses so far do not require me to withdraw my $600,000 Thrift Savings Plan fund. I plan to live until age 85.
As I approach age 70½ with minimum distribution, what is the best tax strategy for transferring the $600,000 from the TSP into a private investment account? A lump-sum rollover into a Roth account after paying the taxes? A calculated annual withdrawal that would not push me into the next higher tax rate? Should I start withdrawing now at age 64 or wait until age 70? What type of private investment accounts best mirror the TSP accounts?
A. I suggest that your default approach should be to take the required minimum distribution and only take more, or withdraw the money sooner than necessary, if something compels you to do so. Finding a compelling case is up to you and your tax preparer. The closest things you’ll find to TSP funds, outside of the TSP, are Exchange Traded index Funds, or ETFs. iShares is the leader in these, but they are produced by a variety of firms, including Vanguard. iShares comps for the TSP funds are: IVV for the C Fund, IWM for the S Fund, EFA for the I Fund and AGG for the F Fund. Unfortunately, there is no equivalent for the G Fund, which is one of the arguments for sticking with the TSP for as long as possible.
July 9th, 2012 | Uncategorized
Q. I recently read your article, “Prepare now for possible hike in pension contribution.”
1. Can you respond with your thoughts regarding how proposed pension hikes would or would not affect federal employees with less than five years of service as of Jan. 1, 2013) who are subject to the 2.3 percentage-point increase signed into law by President Obama this winter?
2. How would the possible hike in pension contribution affect a CSRS employee who has over 41 years and 11 months of service?
A. 1. With about half the increase I modeled for my article, I’d expect about the half the effect.
2. It would have VERY LITTLE effect, since the reduction in savings contributions would be relatively small.
May 22nd, 2012 | Uncategorized
Q. Do you happen to have any articles about the pros and cons of paying off the mortgage in retirement? We had paid off ours. But we moved to downsize before selling the bigger house. So we took on a VA mortgage at a relatively low interest rate last November.
When we sell the big house, we have two options: Keep the mortgage and invest all the money, or pay off the mortgage and invest the balance. I retire in January 2013, and our pension income will be half our current income. Is there a “calculator” to evaluate the choices?
A. You will find a column I wrote on the subject here: http://www.variplan.com/uploadedDocuments/1277733522Carrying_mortgage_into_retirement_can_pay_off.pdf.
There are calculators for everything, but they’ll give you whatever answer you want depending upon the assumptions put into them, so don’t rely too heavily on them in making your decisions.
May 14th, 2012 | Uncategorized
Q. I am a FERS employee who did a one-year-and-one-day residency (366 days) at the Veterans Affairs Department. During this residency, I was a full-time (40-hour-a-week) employee receiving benefits (health care, annual leave, sick leave, etc.). However, I did not contribute to FERS or the Thrift Savings Plan during this year and my “term” of employment was allotted for only one year. After the residency, I was hired as a full-time employee at VA contributing to the FERS pension, and I still continue to work in the VA system.
1. Does this one year of residency count as a year of service toward my retirement in FERS?
2. Does this one year of residency count as a year of service toward my TSP computation date?
A. All federal civilian service counts toward TSP vesting requirements.
June 26th, 2011 | Uncategorized
Three proposals to help reduce the nation’s deficit could reduce the standard of living of retirees covered by the Federal Employees Retirement System:
- Computing the pension benefit with the average of the highest five years of salary, instead of the highest three.
- Reducing cost-of-living adjustments.
- Increasing the employee’s share of contributions to FERS before retirement.
Changes like these could affect the life you enjoy for many years after you stop working, so it is important that you understand what they mean to you. I analyzed the case of a hypothetical employee near the top of the pay scale, but the results are illustrative of the effects that any FERS-covered employee can expect.
Consider Jane, who intends to retire in two years, at age 62, with 20 years of FERS service. Her high-three will be $150,000 and she is entitled to maximum Social Security benefits when she claims them. She has $500,000 in her Thrift Savings Plan account and $100,000 in taxable savings, and plans to contribute $22,000 to her TSP account during each year she remains at work. She expects to have no accumulated sick leave at retirement.
If she came to me for help, I would advise her that she can plan to spend about $72,000 per year, after taxes, for life, during retirement. This amount would be supported by FERS pension payments that begin at about $33,000 per year, before taxes, and are adjusted annually for inflation by cost-of-living allowances (COLA). In addition, she would be entitled to Social Security benefits that begin at about $21,000 per year, before taxes.
I would be responsible for managing her remaining invested assets in a way that would produce withdrawals of the amount needed to make up the difference, after taxes of about $12,400, to $72,000 each year. In the first year of retirement, these withdrawals are equal to about $30,400, but they will have to increase over time because the FERS COLA will not keep pace with inflation. My goal would be to manage her invested assets to produce a 10 percent return each year.
The first proposal, to shift to a high-five, reduces the salary factor in the annuity calculation by varying amounts, depending on how rapidly your pay increased during the years used in the calculation. It turns out that the reduction in the result, and in the resulting FERS pension, is about equal to the pay growth rate. If your pay increased 3 percent per year, switching to a high-five will reduce your annuity by about 3 percent.
For the test case, I assumed a 5 percent reduction in the annuity amount, so Jane’s high-five average pay is $142,500 and her initial annuity income falls by $1,650 per year, to $31,350. This reduces the safe spending from $72,000 to $71,000, or by about 1.4 percent. Additional testing reveals that Jane could compensate for this loss by shifting to a more aggressive investment strategy to increase her expected annual return to 11.75 percent; by adding $25,000 to her portfolio by the time she retires; or by delaying her retirement by seven months to increase her annuity payment.
The second proposal, to reduce COLAs, might be a bigger threat. If the COLA were eliminated, for example, my analysis concludes that Jane’s retirement spending would be reduced by about 6 percent — to $68,000 per year, after taxes. It would take an additional $90,000 in after-tax saving, or a delay in retirement of at least a year, to compensate for this loss. She could not likely make it up by adjusting her investment strategy alone.
The third proposal, to increase employee contributions to FERS, is harder to nail down. Its impact would depend on how employees handle the reduction in take-home pay, which has been estimated to be about 5 percent. If Jane’s planned savings contributions continue until retirement, then there would be no effect on her retirement spending.
But if she saves less, then every $10,000 she hasn’t saved at retirement will reduce her retirement spending by about $1,000 per year. For example, if Jane took the entire 5 percent reduction in her gross pay, which would be $7,500, from her TSP contribution each year over the two years pending her retirement, she would save $15,000 less than now planned.
With investment earnings over these two years, I expect that reduction in contributions to cost about $17,000 in her TSP account’s value at her retirement. This would reduce her expected retirement spending by about $1,700 per year, to $70,300, after taxes.
The effect of each of these scenarios on your retirement income will depend largely on how much of your planned income will come from your FERS pension and how your investments are managed. Hopefully, this gives you a feel for what you may be up against if one of these plans becomes reality.