Ask The Experts: Money Matters

By Mike Miles

TSP Monthly Payment Calculator

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Q. Why do you consider the TSP Monthly Payment Calculator useless? I have only G Fund allocations now that I am close to my FERS retirement of 34 years. I have even transferred all dollars from a traditional IRA into the TSP for ease of management and greater total G fund assets. My retirement stool has four legs: military reserve retirement, FERS, early Social Security income and TSP. The calculator allows us to put in any part of our accumulated expected TSP value that we desire for retirement supplementation and somehow calculates that against expected growth without any future contributions other than earned interest.If I chose a monthly payment that is too small, it tells me I need to plan to withdraw a higher amount. I don’t know why.It tells me, based on the calculations, that I can expect to deplete my TSP account in X number of months.From what I have read the G fund has a historical 5.76 percent annual payback. I watch it daily now and it is increasing $15+ a day. So if I assume that the annual percentage is possibly going to drop to 3 percent for the next X number of months and it is actually higher, I will have funds paying out for a longer period. So explain why you feel it is useless please.

A. Because it assumes a constant, predictable rate of return, which, as you’ve pointed out, will not actually occur. Its output is based upon a false assumption: That your account will produce exactly the rate of return you predict each and every year. Kind of like saying: “If you could flap your arms and fly 1,000 miles per hour, you could travel from Washington, D.C., to San Francisco in three hours.”

 

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Financial planner for retirement checkup

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Q. I am a 50-year-old federal employee looking for a fee-only financial planner to check my finances to see if I am on track to retire when I reach 65. I am not looking for someone to manage my finances — only to check my plan and maybe someone to check in with once ever couple of years. Is this expensive — where do I find someone who is very familiar with the FERS and federal retirement specifically in my area?

A. That’s what I do. You may visit www.variplan.com for more information.

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Financial questions

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Q. I read your article in the Federal Times and found it very enlightening and maybe an answer to my money concern. I have approximately $50,000.00 in a Funds account and I have approximately $92,000.00 in TSP. I have 32 years in the federal government under CSRS plus about 11 months’ sick leave and 240 hours annual leave.

I am interested in retiring from the government and working for private industry in a less paying, less stressful job. I am interested in finding out from you if it would benefit my wife and I financially to purchase or rent a house, right now we rent a townhouse. I am 65 and in good health and I enjoy working with my hands. I owned a house for 25 years in New Haven, Conn.

I would enjoy continuing to work but not in my current position. I do not have anything to retire to.

Do you think you can give me sound advice and or direction?

A. I can’t answer your question, since the answer depends upon a lot more than what you have provided here. I am confident that I can provide you with whatever financial guidance you need, but only if I’m allowed to do the requisite analysis.

 

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Retirement

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Q. When I hope to retire in FERS, I will be 62 years old with 28 years creditable service. I will receive TSP payouts, Social Security benefits and a FERS pension. My wife will benefit from Survivors’ Benefits. I’m concerned about what the living costs will be as a retiree.

Will I have to pay federal income taxes on all of the above income that I receive.

I am told that the tax rate is cheaper after retirement. Is that just because there is less income, or is it also because we are in a lower tax bracket?

A. All of your TSP withdrawals will be taxed as ordinary income for the year in which the withdrawal occurs. That means that it will be subject to federal, state and local income taxes in effect. If you experience lower tax rates in retirement, it would likely be the result of either: less income (which could put you in a lower tax bracket) or special tax breaks for retirees, or both.

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Managing your pension fund can seem like a full-time gig

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It looks like most career federal employees will wind up working in retirement, after all — as their own pension fund managers.

Federal employees, for all the challenges they face, enjoy something that is increasingly scarce in the private sector  — a guaranteed annuity. Not only are guaranteed retirement streams rare, but guaranteed retirement income with inflation protection — like that in Civil Service Retirement System and Federal Employees Retirement System annuity payments — is even rarer.

There are increasingly frequent and aggressive calls for cuts to the federal budget, and in particular, to federal retirement benefits costs. As a federal employee, you owe it to yourself to recognize and prepare for something your private-sector counterparts already are living with — greater risk.

In days long past, employers, both public and private, recognized that managing assets for retirement income was difficult and best left to experts. They often recognized the value in providing guaranteed retirement benefits, rather than just additional cash compensation.

The system was attractive to employers because it helped to bind their valued employees to them and give them the confidence they needed to devote their full time and effort to their work. The employer bore the burden of helping to fund and competently manage the employees’ pensions fund, but better-than-expected management performance, or luck, could reduce that burden. Remember when we used to hear about “over-funded” pension plans from time to time? That’s one to share with your grandchildren some day.

This pension system worked well through the years after World War II, when falling interest rates and rising investment markets made funding pension plans relatively easy. But all of that has changed over the past decade, and now even the granddaddy of all American pension plans — the federal retirement system — is beginning to show signs of stress. While no one can reliably predict the future of CSRS and FERS, it seems clear that the risk of losing at least some of the benefits they provide is likely.

When it comes to retirement income, this may mean a continuation of something that started with the introduction of FERS and the employee-managed Thrift Savings Plan in the early 1980s: You could be responsible for managing increasing amounts of financial risk in the future.

Are you up to the task? Get ready. Putting the responsibility for managing money in order to produce predictable, adequate and reliable streams of income over long periods, and protecting that income from the erosive effects of inflation is difficult. I should know: It’s my full-time job.

Asking the average, or even the exceptional, employee to take over the job of pension fund manager is, in my opinion, irresponsible and dangerous. It’s kind of like putting the employee in the cockpit of an airliner and asking him to land it with no training and no autopilot. The likelihood of a catastrophic mistake is huge.

The smart feds who haven’t already done so will begin educating themselves, in earnest, in the science and art of pension fund management. Notice that I didn’t say investing, which is often not the same. We’re not talking about the kind of education that brokerage firms, mutual funds or other purveyors of financial products and services offer. You’ll need to know how to manage money to support a stream of retirement income, which is much more demanding. You’ll have to know how to work backward from the results you want to develop a management approach that will produce those results with a minimum of risk.

Identifying a well-diversified, cost- and risk-efficient asset allocation model, like those used by the TSP’s L Funds, and actively managing your TSP account to support your retirement spending goals is the best way to accomplish this. If you’re not sure how to proceed, you should consider implementing the beginning asset allocation for the L Fund that most closely corresponds to your life expectancy, and rebalancing your account to this allocation at least once per year.

This should support a regular withdrawal stream in retirement of between 4 percent and 6 percent of your beginning account balance, adjusted each year for inflation. While this might not be the best solution possible, it’s better than no sound strategy at all.

Unfortunately, your employer has given you very little support in your assignment as a pension manager, and odds are that your responsibility for this task will only grow in the future.

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TSP and retirement

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Q: I plan to retire March 1. I am thinking about maximizing my TSP and TSP catch-up contributions for the first two months of 2012.  That would be a total contribution of $16,500 and $5,500 respectively. I know this would have huge tax advantages for 2012 and increase my retirement investments, so is this a good plan?  Upon retirement, I will have 720+ hours of annual leave and do not want to have a huge salary increase for the tax year, and this is one way to accomplish this. Am I overlooking something?

A: “Is this a good plan?” is too broad a question to be answered here. I suggest you start by running pro-forma tax calculations to see what the effect on your tax return will be. It’s safe to assume that it would be in your best interests to at least maximize any employer matching contributions. Beyond that, it’s impossible to say here what is the best strategy for you.

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Treasury borrowing from pension funds

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Q: According to two articles in the Federal Times, the U.S. Treasury is now borrowing tens of billions of dollars from the CSRS and TSP to cover government obligations until the debt ceiling is raised.  The article indicated that retirees would have nothing to worry about If the debt ceiling is raised. I’m planning to retire at the end of this month. After reading these two articles, I am concerned that if the debt ceiling is not raised (and according to many political pundits, this may be a real possibility given the political climate in Washington), there would be no funds available to replenish the CSRS and I would not receive my annuity on time or at all. If the debt ceiling is not raised or the financial world decides that U.S. Government securities are a bad risk and pull their money out and the value drops drastically, causing a financial crisis in the U.S., whom do you think the government will decide not to pay first, retirees or the federal workforce? Right now, based on other information I’ve read, I’m thinking that the government would decide that it would be more disruptive to the economy to not pay the federal workforce than not to pay retirees.  Therefore, if I retire now, I may not have an income in August or September, whereas if I stay in the workforce I may have better odds.  I know this seems like radical stuff, but I believe as many pundits do that we are in unprecedented times.

A: Your question is bait and I’m not going to bite. I have one for you: Do you really believe that if the debt ceiling isn’t raised, you won’t receive a retirement check as the result? I don’t think that’s the inevitable, or even a likely consequence.

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TSP withdrawal

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Q: I am 57 and I retired from civil service in December. I have not taken anything out of my TSP account at this time. I would like to withdraw a partial payment from my TSP account and then set up monthly payments. Will I have to pay the 10 percent penalty on the partial payment because of my age and since I have been retired for almost six months?

A: Since you retired during or after the year in which you reached age 55, you will not be subject to the 10 percent early withdrawal penalty.

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Retirement

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Q. I am a FERS employee with the Postal Service. I am 60 years old with 26 years employment. If I decided to retire this year, can I then withdraw monthly allotments from my TSP until I am 62 and then stop and roll it over into an investment plan?

A. Yes, but it’s hard to imagine a better investment plan than the TSP.

 

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Q. I believe one of your previous columns indicated that the management fee of the TSP is far less than private sector investment firms. Could you provide scenarios comparing TSP vs. other well-known funds: Please include USAA on the list.  For planning purposes, assume $200,000 in the account.

A. There are thousands of funds out there, so I’m not about to spend hours doing your homework for you. I will give you an example, however. According to the TSP’s website, in 2010, the TSP’s funds cost their investors 0.025 percent to operate. So if you invest your TSP assets in a portfolio consisting of 30 percent C Fund, 20 percent S Fund, 10 percent I Fund and 40 percent F Fund, for example, your portfolio’s weighted average expense ration would be 0.025 percent.

According to Morningstar, the average expense ratio for their funds is as follows: domestic stock funds 0.86 percent, foreign stock funds 1.19 percent and taxable bond funds 0.57 percent. A similarly weighted portfolio composed of these “average” USAA funds would produce an expense ratio of 0.777 percent. If the expected market return for each of these similar portfolios were 8 percent per year, then the TSP investor can expect to realize 7.9975 percent per year and the USAA investor can expect to realize 7.223 percent per year.
Starting with $20,000 and applying these expected rates of return over 30 years, the TSP investor should expect to have an account worth $201,113 in the end, and the USAA investor should expect to have $162,057, or about 19.4 percent less than the TSP investor.
The results will depend upon the actual expense ratios for the funds you’re comparing and the expected rate of return for the portfolios, but you get the idea.

 

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