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The Difference Between Transfers and Rollovers in the TSP/by Aubrey Lovegrove
The technical terms can sometimes be confusing when you’re moving your money to an IRA from your Thrift Savings Plan. Knowing the exact meaning of terms can be very important. And the fact of the matter is, there is a big difference between “transfers” and “rollovers.”
At a glance, the term “transfer” means that the company in charge of your IRA gets the money directly from the TSP. The term “rollover” in effect, means the money is sent directly to you instead.
Generally speaking, when moving money, most people are looking for a transfer and not for a rollover. The IRA should receive all of your TSP retirement fund in order to maximize it.
The problem with the rollover is this: the TSP will automatically send some of your money to the IRS (20 percent) and 80 percent directly to you. The problem comes when you transfer two months later when you have to send the totality of your TSP retirement fund to the new IRA account, or you will be hit with taxes.
Say you have a TSP worth $100,000 dollars. If you transfer it the right way, 100 percent of it would be sent directly to your IRA. Adversely, if you did a rollover, it would breakdown like this: you’d get $80,000 dollars, and the IRS would get $20,000 dollars, and then, after 60 days, you will be expected to deposit all $100,000 dollars into the IRA account, even though the IRS will never give the $20,000 dollar you initially sent them back. If you can’t make the full $100,000 dollar payment after that time, you’ll incur a 10 percent penalty (if under the age of 59.5 years old) or be required to pay income tax on the $20,000 dollar difference.
And the more money you have in your TSP, the higher these numbers will get. In most instances, a transfer is always better than a rollover.
You’ll encounter a lot of people with ideas about what you should do with your retirement. You may be able to get a lot of information from someone in your HR department or customer service people in general, but in the end, you are ultimately in charge of what happens with your money. You should double check the information your given to ensure the people you’re talking to are well informed so that you can weigh all your options. Perhaps even working with some financial planner would help to make sure that the transfer is completed right.
Saving Money at 80 Percent of Your Income Before Retirement/by Aubrey Lovegrove
There are three major things in life one usually saves for: their home, their education or the education of their children, and their retirement. And whether you’re using an IRA or the Thrift Savings Plan, your financial future should be a primary focus, especially considering that of the three things listed, retirement is the only one that you can’t take a loan out for at the bank.
There is something called the “80 percent rule” which basically states that a retiree can generally continue living at their same pre-retirement levels if they retire on 80 percent of their pre-retirement income. The problem is hitting that 80 percent mark. Unless you happened to have worked for 41 years and 11 months and are able to get covered by the CSRS (Civil Service Retirement System), it is going to take some tricky financial shuffling to reach that 80 percent mark.
For instance, Social Security and pension will only cover about 60 percent of the pre-retirement income for a person who enrolled in the FERS or CSRS for 30 years. That means the additional 20 percent will have to be made up by the TSP or some other retirement savings account.
The problem with tax-advantage plans like an IRA or TSP is the penalties that can occur if certain stipulations are not followed. If you take your money out before a predetermined age of 59 and a half, for IRAs and 55 for other retirement plans through your company, you will be fined. To get the maximum benefit from these plans, you can’t touch your money until it’s time. Even if you need to borrow against it to pay creditors and other bills (like for instance during the recent 35-day government shutdown) then you will be harming yourself for the future. That is why, in addition to a retirement fund, an emergency fund – or someplace to have easy access to money – should be saved towards as well. With many saving’s accounts accruing interest at 2 percent, this is not that far off from the TSP fund. If it remains unused, it will be there, earning money, just like it would’ve in your retirement account.
Three months to a year’s worth of bills and payments is what financial planners suggest you keep in this emergency fund. That would’ve easily covered the government shutdown and more. Even if you’re unable to put as much away in the TSP as you would, it is still important to start an emergency fund as soon as possible. Just make sure that you’re still hitting that 5 percent mark with your TSP funds to get the matching contributions from the government.
Retiring from the Military? Make the Most of It!/by Aubrey Lovegrove
There are many ways for enlisted people to maximize the benefits of the military’s new retirement system, the most important of which is to make sure you are eligible to have your contributions to the Thrift Savings Plan matched by contributing enough of your paycheck before you retire. The longer you’re enlisted and the more you put away, the higher that retirement account will grow.
For those who have enlisted in 2018 and beyond, you will be subject to the updated blended retirement system, possibly making you the recipient of a smaller pension over the retirement system in place before it. The pension you will now receive each year is as follows: 20 years on would be 40 percent of your base pay, and for 30 years on, you’d get 60 percent. The trade-off is that now you’ll be getting extra money set aside in your Thrift Savings Plan, which advantageous and only available to government employees and military members.
The Department of Defense is the one who would match your contributions under the new blended retirement system. This is in addition to the money in your TSP. 2 months of service is all it takes before the department contributes 1 percent of your base pay into the TSP, and after that, you’ll get 4 percent matching contributions for up to 26 more years of service. And as long as you’re enlistment is longer than two years, you can keep all of this money stashed safely away in your TSP.
To maximize your TSP and blended retirement system matching contributions, a few extra steps should be taken. To get the biggest match back from the Department of Defense you should be putting into the TSP 5 percent of your pay. Compounding your savings can happen quickly as long as your contributing the department minimum, but keep in mind, the more you put in, the more you get back.
The new blended retirement system was instituted after the government found out that the number of service members staying enlisted long enough to receive a pension was less than 20 percent. Service people can get up to half of their base pay in their pension if they stayed in the military for 20 years, under the old retirement system, and up the three-fourths of their base pay if they were enlisted for 30 years. Leaving before the 20-year mark negates any retirement pay though. If you joined the military before 2006 or decided not to use the new blended retirement system, you’ll still be covered under the old plan. Keep in mind, the Department of Defense will not have your TSP contributions matched if you stay with the traditional retirement system, BUT, you still get the tax benefits and get to, and the money kept in the TSP no matter when you choose to leave the service. Note though that if you withdraw before the age of 59 and a half, you will incur a 10 percent penalty.
In 2019, you can contribute up to $19,000 dollar to the TSP regardless on if you with the old or new retirement system. Even more, if you’re over 50, for a maximum of $25,000 dollars. And even more than that – up to $56,000 dollars – if you are receiving tax-exempt pay while deployed in a combat zone. Those military members that are deployed can also get back a yearly interest of 10 percent and put up to $10,000 in your Savings Deposit Program.
Defining Returns on TSP/by Aubrey Lovegrove
End-of-year TSP fund returns have already been announced. Not long from now, the accrued and weighted ten-year returns will also be released by the Thrift Board, and this will undoubtedly illustrate that even though its annual returns are at 13.43 percent, the I Fund will soon be greater than the C and F funds.
Last year, on December 31st in 2017, the ten-year period showed us that the I Fund was placed last out of the five basic funds. This year, on December 31st in 2018, that same I Fund will now find itself in third. Logically you’d think that the I Fund had a good year this year. It did not. In fact, out of all five funds, the I Fund performed the worst this year.
Is this some kind of statistical anomaly? Of course not. Poorly performing funds can still look, on the surface, appear to be a good investment, if you are looking at them on a long enough scale. In this case, it had to do with the I Fund’s 2008 performance, which was a bad year for stock funds all around. The I Fund lost 42 percent that year, and as of 2018, it is not counted against the ten-year average returns anymore. This is why it suddenly surpassed the G and F Funds.
Example, let’s look at the information found in the C Fund’s “fund sheet” that was found on the TSP website. From January 1988 when it was activated, until December 2017, the average return of the C Fund is 10.53 percent.
But this statistic, while accurate, doesn’t predict where the fund may go. Just look at 2008 again, when the C Fund dropped by 36.99 percent. Or what about 2013, when it grew 32.45 percent? The problem being any adviser to your finances can focus on either statistic to justify their advice. One who wants you to “buy and hold” would look at the fund’s long-term return, and one who thinks equity-indexed annuity is the best investment would instead look at the percentages from 2008. And to top it all off, either of them could be wrong.
What is the best play here then? Firstly, any predictive value of any percentage statistic should never be assumed. After that, you should seek out a financial adviser and work out a strategy that is catered to you specifically. Lastly, putting in as much as you can to the TSP is a long-term investment, and it should always pay off.
Thrift Savings Plan Funds Are Only Getting Bigger/by Aubrey Lovegrove
The biggest retirement plan in the United States is only going to get bigger.
The TSP (Thrift Savings Plan) which is the retirement fund used by all 5.4 million federal workers and uniformed service members, has consistently grown, and as of September 30th will reach $578.8 billion dollars. This is a yearly average growth of 8.9 percent.
Here we will look at two articles of recent legislation that will aid in that continued growth for many years to come.
The first was the Blended Retirement System, a plan within the TSP, which came to us in late 2015 as the National Defense Authorization Act for Fiscal Year 2016. This finally took effect on Jan 1st, 2018. As director of external affairs, Kim Weaver, informed us: a little over a year later and now the Blended Retirement System bolsters nearly 408,000 participants.
The other was the TSP Modernization Act, which will go into effect in September, in which the Federal Retirement Thrift Investment Board (who are the ones who run the TSP) will be able to do what Weaver refers to as “additional withdrawal projects.”
These “projects” are intended to vary how and when employees can get to the money in their TSP fund.
The idea behind this is to thwart the transfer of funds out of the TSP into higher-fee accounts after the worker ceases employment with the federal government. While the TSP Modernization Act was being considered, it was estimated that $9 billion dollars were transferred out of TSP accounts yearly for this very reason.
A Brief History
The TSP was established in 1986 and consists of several parts: five investment funds, four index funds (managed by BlackRock) and one fund of securities of the Treasury that is internally controlled by the TSP board.
As of 2017, the executive director of the board is former TSP chief investment officer Ravindra Deo. She’s been on record saying that her main priority as the executive director is the BRS and the expansion of options for all TSP members. But, according to her, that’s just the start.
The board is proposing that two investment managers manage part of each of the index funds. This should be coming by the end of 2019. This has more to do with lowering risks than with any questions the TSP has with BlackRock.
BlackRock itself is also planning to enter a bid. A decision into this matter is expected to be arrived at by sometime in 2020.
Overhauls to the TSP I Fund (one of the index funds centered around international investments) are looking to tap into more markets as they emerge. This will happen once the managers are chosen.
In addition to that, participants should have greater options of when they can pull from their TSP accounts once the new withdrawal polices begin in September.
Jan 1st, 2018 marked one of the most significant changes to the TSP.
Before, service members had to put in 20 years or more to receive an annuity in their defined benefit plan. But now, new service personnel will be automatically entered into the Blended Retirement System. Additionally, as of Jan 1st of this year, anyone with less than 12 years of service is also able to enroll in the BRS.
The amount they were paid was figured out using the average of their basic pay plus their years of service rendered.
The worry was that members weren’t saving for retirement, and only a fraction of people actually made it to that 20-year mark. Now that the BRS is a part of the TSP, that 20-year landmark will come with a reduced pension payment should they reach it.
There has also been an increase in participants who have left employment with the federal government but have their TSP up to date. This hit 1.46 workers as of September 30th. This is up from five years ago when that number was.
Proposed Budget for 2020 Features Revived Retirement Cuts/by Aubrey Lovegrove
The proposed budget for 2020 once again features several of Trump’s previously suggested cuts to federal employee’s retirement fund.
As of early last week, the administration released the first section of their proposed budget, which included many possible alterations to federal worker benefits, especially in regards to their pensions. This is the third year in a row these proposals have come up, with Congress rejecting it each time prior.
The exact terms of each proposal haven’t been detailed yet, but what is known is that there is a 1 percent increase in mandatory worker contributions to the Federal Employees Retirement System’s annuity fund until the fund total reaches 50 percent solvent. This plan is expected to take six years until completion and was proposed by the administration last year as well.
Those retiring under FERS would also have their cost of living adjustments cut under this new proposal, and lower it to .5 percent for people in the Civil Service Retirement System. It would cut the supplemental pay that workers who retire before Social Security age would get.
Annuities that used to be based off the average highest three years of salary would now be based off the highest five, making payouts to retirees lower.
And the administration also is planning on cutting the Thrift Savings Plan’s government securities fund’s interest rate, which is based off of all of the average of all investments in which the TSP is diversified, and grew by 2.91 percent last year alone.
For the 2019 budget, the Trump administration proposed that the G Fund’s interest rate should be based off the 1.03 percent three-month return on last year’s Treasury bill. It is anticipated that this budget would double the savings of that, and the new interest rate G Fund is proposed to be based off a one month Treasury bill, which returns annually at .84 percent.
Kim Weaver, a spokeswoman for the TSP, claims that any change to return rate on the G Fund would make the portfolio “virtually worthless” and from an investment standpoint, such a change would render the G Fund no longer effective.
There is also a proposal in the new budget that would change the matching contributions to the Federal Employees Health Benefits Program by the government. Currently, the fund pays 72 percent on the average of all premiums in the plan, capping off at 75 percent. The administration’s new plan would be based on the plan’s performance, and contribute between 65 and 75 percent.
The total of these proposed changes, if passed, could reduce the benefits of federal employees by 102.5 billion over the next ten years.
Congressional Aides Looking for Greener Investments/by Aubrey Lovegrove
It’s been rough for many federal staffers and aides who are concerned about climate change because the retirement funds they’ve been paying into are part of the problem.
The Thrift Savings Plan (TSP) is the investment program offered to most service people and federal employees, and there are few stock market options available to them that are environmentally green.
Research done by As You Sow, a nonprofit organization that keeps track of environmental issues in regards to corporations, makes note that most funds offered by the TSP have large holdings in fossil fuels, generally regarded to be the main source of global warming.
While other holdings are allowed to be offered, the TSP hasn’t come up with alternatives because federal employee unions aren’t prioritizing it. But that may soon change, as aides and the congresspeople they work for are beginning to look at the correlation between their retirement funds and environmentally friendly policies in order to more properly align people’s financial futures with their personal values.
A lot of federal employees are aware of the hypocritical nature of benefiting off of environmentally destructive stocks while simultaneously trying to change the economy to a less fossil-fuel dependent model. That is until you realize, there are no other options.
Anyone invested in the TSP would have their money put into these kinds of environmentally unsound companies just by virtue of how the TSP is organized. But it wasn’t set up like that. Between the 1920s and 80s, the government would match worker pension up to 56 percent. By the end of that era though, the federal government had rolled back their pension plan in favor of the TSP, in which employees would supplement their own pensions by putting part of their earnings into stocks. The TSP is now automatic for all federal workers, and anyone in civil service is enrolled.
So, What Does the TSP Offer?
At a half a trillion dollars, the TSP manages the retirement funds for over 5 million people. It is similar to a 401(k) for non-federal workers. The government matches at 5 percent of their investees salary.
Payouts on the TSP are figured out by the investments taken and the money put into it.
Currently, the law dictates that only three stock market index funds can be offered to the people enrolled. The reasoning behind this is that these funds are wider than most market options, which makes them less likely to be manipulated and keeps the costs of operating it low.
The downside to this is, as mentioned above, that federal workers are implored to put their money into the fossil fuel industry, such as The C Fund (made up of large US companies such as Exxon Mobil) the S Fund (smaller companies not included in the C Fund, and making up a significantly smaller portion of the investment) and the I Fund (international held companies, including things like Shell, BP, Total SA, and Royal Dutch.)
There are also investments in industries such as producers of palm oil and other brands that have been linked to deforestation.
Even with these questionable companies, the TSP still doesn’t disclose all their company holdings. Adding to that, even the congresspeople looking to make the environmental reform a platform are also beholding financially to the same retirement fund, and as such, beholden to the fossil fuel industry.
A Way Out
A bill passed in 2009 by then President Obama gave federal employees a way out of investing in fossil fuel companies, but over ten years later and the Thrift Savings Plan Enhancement Act still been finished being set up and put into place.
The Recession is partially to blame, as markets dipped during the first portion of Obama’s eight-year term.
The second reason is the board itself, who weren’t sold on the idea, to begin with, and didn’t actively pursue it for a long time.
But in 2014, that sentiment started to shift when the FRTIB passed a plan to look into getting more mutual fund offerings integrated into the TSP. This is still underway today and will need approval from the board before it can be implemented.
Rebuilding the Industry
Its been argued though that the disparity between environmental activism and being invested in the fossil fuel industry is part of the reason that the government hasn’t regulated it with any sort of efficiency. But that doesn’t mean the industry can’t shift. With new, greener technology and stronger regulations, the fossil fuel industry might lose its value. And if that were to happen, then the TSP would have to look to invest elsewhere.
Aides and staffers are aware of how their concerns about the environment might be economically bad for them, at least in the short term. A bill to cut out fossil fuel consumption would surely cause an oil company’s stock to suffer, which in turn would affect the TSP fund.
That is why it is such a precarious situation and one that is taking a long time resolve. The path to a greener future can’t be paved with the financial well-being of lower and middle-class families looking to change it.
2020 Budget Proposal Not Looking Good for Civil Service Workers/by Aubrey Lovegrove
Plans in 2020 to gut existing retirement programs for federal employees and to freeze the pay of federal workers are once again on the table from President Trump.
Salary freezes for federal employees is a part of the proposed 2020 fiscal budget, along with a whole bunch of other changes to the Civil Service Retirement System and Federal Employees Retirement System, which would include doing away with ‘cost of living’ adjustments for those retiring under FERS (and reducing it to .5 percent for those retiring under CSRS,) getting rid of the supplemental coverage by FERS for employees that have retired before the age in which they could collect Social Security (age 62,) lowering the interest rate on the Thrift Savings Plan’s government securities fund, altering the calculations used to figure out the annuity and raising the mandatory opt-in payment by one percent.
Exact details of this budget will not be made known by the White House until next week, but these ideas are not new, arising in some form of what we’re seeing now in both 2018 and 2017, but did not pass in Congress, a situation that will probably happen again, now that the Democrats have a majority in the House.
Tony Reardon, the President of the National Treasury Employees Union, vocalized the distaste that most federal employee organizations felt at this proposed budget once again rearing its ugly head. He states that federal workers shouldn’t have the burden of paying for the “deficit with their pensions.”
Reardon said that the administration has learned nothing from the disastrous 35-day partial government shutdown.
David Cox, President of the American Federation of Government Employees agrees, calling the cuts “cruel and self-defeating,” and added that federal workers have lost more than $200 billion from cuts to their pay and benefits since 2011.
Even financial management groups chimed in, disapproving of the current cuts, stating that this is the government no longer investing in its own workforce, which clearly overshadow any of the proposed benefits this new budget would bring.
Required Federal Retirement Plan Backed by the American Council of Life Insurers/by Aubrey Lovegrove
The auto-enrollment of federal employees into a retirement savings program is being backed by the American Council of Life Insurers or ACLI.
The return of the Automatic Retirement Plan Act is being endorsed by the ACLI.
The bill, introduced by the chairman of the House Ways and Means Committee, Richard Neal, D-Mass, was proposed version at the last meeting of Congress.
Neal is expected to introduce the actual bill at some point this year.
Previously, the bill (H.R. 4523) made it mandatory for most employers to set up automatic contributions towards all employee retirement plans, which the employees would then have to choose to opt out from.
If an employer fails to set up these automatic contributions, the bill proposed that a tax be excised against them, the flip side being that were said employers compliant, they’d receive a tax credit instead.
The Insured Retirement Institute is among those organizations listed in favor of H.R. 4523.
Thirty million more people should have access to retirement funds under Neal’s new bill, according to the ACLI, with the number of those saving for retirement at about 22 million people.
The approach is a bold one, according to the President of the ACLI, Susan Neely, but a necessary one to prevent a retirement crisis and to close the retirement savings gap. “People are living longer without adequate retirement savings and increasing access to workplace plans can be a powerful solution,” Neely says. H.R. 4523 is built to make it more simple for employers to offer their workers retirement plans.
And while workers do have the option of not participating, Neely claims that 80 percent of the people who have the option to contribute to an employer-offered retirement plan usually do.
And according to Neely, this endorsement is not a cavalier decision that the ACLI has made. There is a crisis on the horizon, and new ideas might be what is needed to solve them. Automatically enrolling workers in a retirement plan may be just what is needed.
“It is a market-based solution that can help more people save more of their own money for the good of their families’ futures,” Neely said. “Family financial security is the ultimate peace of mind.”
The Social Security Hole is Only Getting Deeper/by Aubrey Lovegrove
Federal spending on the portion of the population over retirement age is up to 40 percent on non-interest outlays (which itself is a 35 percent increase from 2005) the Congressional Budget Office recently reported. The CBO projects this number to be 50 percent by 2029.
The CBO reports that the number of retirees over 65 is going to continue to increase by nearly 33 percent over the next ten years. Already there has been a 16 percent increase in 2018. Any way you cut it, the older population is going to be taking up a larger portion of the federal resources as we go on.
Over the next ten years, federal spending on programs intended to supplement retirees (mainly Medicare and Social Security, but also not limited to military retirement and long-term care under Medicaid) is projected to grow a whopping 66 percent.
Recently, legislation has been introduced to raise the spending limit. But to do so there were a few concessions. Firstly, to raise benefits quicker in the future, a cost-of-living adjustment was to be introduced — secondly, bigger benefits minimums for the less fortunate. Thirdly, a general tax cut for people paying money against their Social Security benefits. And lastly, a 2 percent payout increase overall.
Adversely, this contrasts what some current retirees have to say about their current living situations. Gallup reports that 78 percent (over three-fourths) claim they have enough money to live comfortably. That number is up from the last reporting in 1992, where 61 percent claimed that.
A 2014 report shows that 45 percent of retirees felt satisfied with their current financial situation, and 37 percent were ambivalent. Only 21 percent of people polled reported that they were not satisfied by the already implemented status quo.
The Census Bureau has determined that the median income in 2012 climbed from $33,800 to $44,400, nearly a third, while at the same time the poverty rate for retirees dropped by a quarter. With retired Americans numbering nearly 50 million, there should be a plan in the place to help the rest who are still struggling.
Taxing payrolls over $400,000 is one of the ways to possibly increase these funds. This could contain any deficits and increase the in-place payroll laws 4.9 percent.
Claiming either Democrats or Republicans responsible for the current deficits is only part of the issue, but until healthcare stops being political capital either side of the aisle tries to use for leverage, it is your average taxpayer, me and you, who is making up the difference.
Saver’s Credit Intended for Those with a Lower Income/by Aubrey Lovegrove
If your income happens to be on the lower end, and you’ve still managed to put money into a retirement fund, you may be eligible to receive a tax credit.
Up to $1000 is the may be included in your upcoming tax return if you have met a few requirements and kept your money in a simple retirement account, something like an IRA or a 401k.
You can even reallocate some of your retirement funds – up to $10,000 – to use towards your first purchase of a home, all without any penalty on your taxes. As long as you pulled that money from your eligible retirement fund, it still counts.
It’s called a “Saver’s Credit” and is usually intended for single-wage earners like newly-married couples, single parents, and adults at the onset of their careers.
It is an often overlooked deduction, especially if you’re not a professionally trained accountant and do your own tax returns. And if you used a 1040EZ income tax form, you would be unable to claim this credit, as the 1040EZ form was only intended for simple returns. But now, in 2018, the 1040EZ has been discontinued, and the Saver’s Credit should be more widely known.
In order to be eligible for a Saver’s Credit, you must be at least 18 years old, not be a full-time student, and not be a dependent on someone else’s federal tax return. After that, it’s just a matter of your income in regards to how much of it you put into a retirement fund. This is for IRA contributions in 2018, up until the conclusion of the filing season, which is April 15th of this year.
The amount of your income you may claim towards the Saver’s Credit depends on a few factors, those being as a single person ($31,500) a head of a household ($47,250) or a married person whose is planning to file jointly with your partner ($63,000.)
For single people and heads of household, a 10 percent credit is what you can claim, and you can receive in contributions for your retirement fund up to $2000. Married couples can claim this credit twice, as there are two people filing, and they can receive $2000 each in their retirement funds, as well as a $400 deduction from their federal taxes.
Even if you’re slightly above the threshold for acceptable incomes, you can contribute the difference to your retirement fund and still qualify.
And the lower your income, the higher the percentage of the Saver’s Credit may be: 10%, 20%, or even 50%, as long as it ends up lower than that $2000 maximum retirement contribution. This is higher for lower earners because putting money aside for retirement is no easy task if you’re a single-earner with a relatively low salary. The incentive is to save for retirement, and 50 percent should help push you towards that.
Retirement: What is Your Agency’s Role in the Process?/by Aubrey Lovegrove
Planning ahead for retirement is always a smart move. Even if you’re close to retirement age already, you should utilize whatever time you have left and plan for the future.
To that end, let’s say you’re already in the midst of retiring. What is your employer or agency’s role in the process?
To be able to take advantage of your Federal Employees Group Life Insurance (FEGLI) or your Federal Employees Health Benefits (FEHB) your office clerk in charge of personnel will have to receive your retirement papers, and then verify that the date you have chosen will line up with the distribution of benefits.
From there, your civilian and military service will be listed on a Certified Summary of Federal Service. Your personnel office should give you this if everything in the aforementioned paragraph checked out. Be sure to check your record to make sure all the information on it is correct.
Your personnel office should do the following as you approach your retirement date:
1. Move your Federal Employee Health Benefits to OPM, if you are still able to be covered.
2. Make your Federal Employees Group Life Insurance valid and move that to OPM, if you are still able to be covered.
3. Finish the certification for the personnel office section of your application of retirement.
4. Finalized the beneficiaries of your insurance that are in your OPF.
5. Separate you from military service using a Notification of Personnel Action
6. Send all of this to the payroll office of your agency.
From there, the payroll office should take care of the following:
1. After you retire, it will authorize your final salary payment in addition to paying out any money that you were owed from unused leave.
2. Authorize and cease the record of pay rates, services and unused leave time for your retirement fund. This is called the IRR (Individual Retirement Record.) The IRR cannot be closed for good until your final paycheck has been given out.
3. For the purpose of life insurance, it will authorize your yearly pay, if you are using the same life insurance plan throughout your retirement.
4. send the entire thing to OPM
Your payroll office number, the transmittal dates, the mailing dates, and your register number will be sent to you by your payroll office once your papers have been filed with the OPM. It would be wise to follow-up with the OPM if you need to check on your case or if there are any irregularities.
If your personnel office is understaffed, or if there are an unusually large number of retirement applications to file, the time the process takes could vary. High volume times, such as the beginning and end of the year, the office can get overwhelmed. But they should be able to give you a portion of your annuity in the meantime, if at all possible. This money can be used until the application has been finalized. Afterward, you’ll receive the corrected payment amount, and they will catch you up with the differential while you were on interim pay.
Retirement Tactics for Service Members/by Aubrey Lovegrove
Between $1 and $1.5 million is the amount most Americans will need to have saved for retirement. Taking into account that the average soldier in the United States isn’t making a ton of money, then setting up a retirement plan – and setting it up early – is a very necessary endeavor.
As retired lieutenant colonel in the U.S. Army Reserves and investment advisor with Southern Capital Services, Eric Nager, put it: “As an investment advisor we see all too often the consequences of those who have not saved often and early enough to build up for retirement.”
Whether transition into civilian space is your plan, or you’re looking to re-enlist until retirement age, it’s best to plan for your retirement today.
Here are a few tactics you can do right now to begin planning for your retirement tomorrow.
Cease Spending, Start Saving
Military or not, the biggest thing you can do to control your spending is to put a budget together.
20-year U.S. Navy veteran Eric Jorgensen, who is also a director of financial planning at Maryland-based Turning Point Financial pointed out that there are many enlisted military members that join straight from high school and then have little to no experience when it comes to a budget or tracking their spending. Many of his coworkers overspent as a result of this, so it’s good to get a hold on your habits when you’re spending and to begin planning for the long-term now.
Taking Advantage of Benefits
There are a lot of benefits that aren’t available to civilians but may be available to you as a service member. If you’re a veteran or currently enlisted, it makes sense to try and familiarize yourself with what benefits may be offered.
For example, the Servicemembers Civil Relief Act can stop evictions and prevent repossessions, as well as several other several financial protections for those who are deployed.
Department of Veterans Affairs offers home loans, tuition assistance, and high-interest savings accounts while members are deployed. And things like the Department of Defense’s Savings Deposit Program (a savings account offering interest rates up to 10%.) is another example of federal programs designed to aid you.
Military Retirement Plans
The military has available savings and retirement plans options that soldiers can choose to utilize, just like those in the private sector.
The Thrift Savings Plan (the military’s version of a 401(k)) is the main plan.
As of the beginning of 2018, the traditional military pension system has been reorganized into the new Blended Retirement System, which blends the old pension system with the BRS, which then add a contribution requirement to the old pension system.
Early-to-mid 20s is when many service members will leave the military, meaning there is a lot of time still before they reach retirement age. A lot of soldiers will need to get jobs outside of the military.
Your financial needs past your enlistment is what you should be considering the most. You’re undoubtedly going to need to continue earning money for retirement, even if you’re eligible for the military’s pension plan. $200,000 is roughly the net value of a pension for an enlisted soldier and $700,000 for an officer. This isn’t enough to cover until you reach the average expected retirement age.
Like civilians, service members can maximize their earnings by saving early and investing often.
And in conjunction with your TSP, a contribution to an IRA may also be a smart move. Money there can accrue tax-deferred, which will give you another nest-egg for many decades to come.
Matching Benefits With FEHB & Other Health Insurers/by Aubrey Lovegrove
In an attempt to ensure that providers are getting paid, and that recipients are paying the correct amount regardless of the varying benefits the members might receive, The National Association of Insurance Commissioners has enacted standardized coordination of benefits that carriers in the Federal Employees Health Benefits (FEHB) program are obliged to follow.
If one is eligible, the OPM permits a retired person to forego the FEHB premiums by putting a hold on their coverage and enrolling in any of the following programs: Tricare or CHAMPVA, Medicaid, or a Medicare HMO. There will be no contributions on premiums that are applicable to OPM. Unless a previously-covered person has had their coverage revoked against their will, they are free to enroll again the FEHB program at the next open season.
The following are a few instances wherein OPM may coordinate with other programs:
Military retirees and their eligible dependents are the recipients of Tricare. The same is true of CHAMPVA with disabled veterans and their dependents too. Tricare and CHAMPVA benefits will be coordinated according to status by FEHB carriers. FEHB will always pay first when FEHB and Tricare or CHAMPVA cover the person who is enrolled.
The same can also be said of Medicaid. Once again, with the first payouts coming from the FEHB.
After 65, retirees can begin to receive Medicare. Medicare and FEHB carriers will coordinate, with Medicare in charge of deciding who is the primary provider. If a Medicare-aged person is still working or a federal employee, then the primary payments come from the FEHB. Adversely, Medicare pays first if the enrolled person is already retired.
NAIC guideline – the guidelines that are universal to all health care plans – state that if a person is enrolled in the FEHB and a spouse’s private employer, the two providers will have to coordinate to make sure all benefits are paid. Generally, a person’s own coverage would be the primary provider of that of their partner.
NAIC guidelines also state that if a person has coverage from their own private employment, then the person’s current active plan will payout before the plan that covers them as a retiree.
And NAIC guidelines say that FEHB carriers must also coordinate when the payout of medical coverage is through a no-fault or a different automobile insurance plan that also pays benefits without fault.
How to Be a TSP Millionaire/by Aubrey Lovegrove
The millionaires in the Thrift Savings Plan equaled 5,999 people in December of 2016. But, with the stock market inflating over the last few years, that figure has risen exponentially.
December 2017 saw the number of TSP Millionaires just to 23,962. To put that in perspective, that is a 150 percent increase. The next year, in 2018, amidst a market downturn, that same number dropped but not by nearly as much.
As of December 31st, 2018, TSP millionaires were topping off at 21,432 people. Further data shows us that 29.63 years is the average time that you typical TSP millionaire has been contributing to the fund.
If you’re wondering the most significant account value by any TSP participant, that number is $6,086,238
It should be noted, before we move on, that when money is taken out of your TSP fund state and federal taxes may be due, even for retired workers, who are obligated to pay tax on all of their withdrawals from the TSP. This means that even if your TSP account does have more than a million dollars in it, it doesn’t necessarily mean you’ll have that much cash to spend.
To see how much of your income is subject to taxes, an employee must wait for their 1099-R form to be issued to them in January. Things such as Roth contributions are not counted towards this, as the taxes on that should have already been deducted.
There are federal employees who may only hit that million dollar mark (or more) if they transfer funds from more lucrative jobs outside of the US Government into their TSP accounts. There are others who began investing funds early in their careers, who accumulated and surpassed the million dollar mark after several decades of thrifty savings.
That leaves one to wonder what some of the most significant factors they might encounter that could affect the dollar amount in their TSP, and whether you work for a private employer or the federal government, there are many things that could greatly impact this number.
Investing in Other Places Besides the G Fund
If you were to look at history, you’d see that money invested in stocks grows more than the same money put into bonds. The problem is, stocks are unreliable, while the G fund is steady, never going down in any given year. Regardless, in the long run, stocks will yield a better return than a bond. Therefore, you should invest in other places besides the G fund. This advice is especially prescient for young employees with their career future still ahead of them.
The Government Can Match Funds – Take Advantage of It!
If you can dodge taking money out of your account or withdrawing a loan against your Thrift Savings Plan fund, you may certainly see your money grow much faster. Also, putting the maximum amount into the TSP is crucial to having a large return on your investment.
A person who invests large sums into the market for a short period of time can be worse off than one who keeps a steady investment of the TSP funds throughout their entire career. Smart planning from the get-go is the key to hitting that million dollar mark.
How to Avoid the Impending Retirement Crisis/by Aubrey Lovegrove
There is an impending retirement crisis coming. Nearly half of all families in the United States have no money put into their retirement savings. While things are okay now, in 20 years time, it could prove disastrous to the economy, and future generations of Americans.
Currently, there are no retirement plans offered through the workplace for over one-third of all employed peoples. 44 percent of people that are over the age of 35 are at risk of running out of money in their retirement funds. And nearly 40 percent of all Americans are unable to pull together an emergency $400 for unexpected expenses.
This is a huge problem, and surely there is an impending crisis for most working Americans.
In 2020, there are three and a half working adults for every current retiree. In 2060, that number will drop to two and a half to one. And right in the middle, by 2035, people over the age of 65 will outnumber their children. This is the first time this has happened in American history.
Wage growth from 1989 to 2013, saw a small increase for already older Americans, but for people who are 61 and younger saw a 30 percent downturn in wages, according to a study done by the Federal Reserve Bank of St. Louis. This is a definite trend. It’s difficult to put money aside for retirement when you’re struggling to stay afloat.
In 20 years time, when the workforce of today is entering their retirement years, Americans are projected to be much poorer. And then we are left to wonder when the time comes, who is going to be taking care of these older Americans financially if they don’t have retirement funds put away?
To that end, we could potentially help avert this imminent crisis by taking a few simple steps today.
When you’re trying to make money and provide for your family, it can be burdensome to worry about your IRA or 401(k) but saving for retirement should be made a priority for families and individuals now. It will add up quickly if you stash a little bit of money away for retirement each month. The earlier you start doing this, the better.
By the time you’re 65, a little bit of money put into a retirement fund each month, and each year can add up to quite a bit of money, especially if you start when you’re just joining the workforce. 25 to 30 is the suggested age to start saving for your inevitable retirement.
A little example: if you were to put away $10 a day into a retirement fund, and did so for 40 years, you would end up with a return of $500,000, if the account has the typical 5 percent compounding interest. If you upped that to $650 a month, after 40 years that account would have $1 million in it. Even if you were saving at half the time (20 years) the return is still substantial, respectively at $132,000 and $267,000.
And beyond just you saving money, Congress must respond to this impending crisis as well.
The Bipartisan Policy Center has endorsed bills put forth by Todd Young (R-IN), Tom Cotton (R-AR), and Cory Booker (D-NJ) that would provide security for families and individuals embarking on their retirement. Families should be able to save towards their retirement today, to avert this crisis tomorrow, and these kinds of measures agreed upon by both sides of the aisle are surely needed. Coupled with education and incentives for families and individuals to work towards their retirement, and we might be able to prioritize our future, and the future of our children as well.
Public Pensions in California are Worse Than Initially Anticipated/by Aubrey Lovegrove
The California Public Employees Retirement System (CalPERS), which is also the country’s biggest pension trust fund, fully benefited from the ease in which in capital investment and stock profits rose for the fiscal year of 2017, and through most of 2018 as well.
For local government and state employees, the space between a pensioner’s future liabilities and their assets narrowed quite a bit with these healthy earnings. But this prosperity was not to last. And because of a new method of calculating liabilities, CalPERS may soon find that these yields have not only regressed but might soon be in the red.
For most of its existence, through the 90s and 00s, CalPERS had never encountered any trouble. In fact, it had been so successful that state officials voted to retroactively boost pension benefits. Times were good.
This changed during the Recession of 2008. A $100 billion hit was what CalPERS alone lost. To this day, most have not recovered in full.
The total liability for CalPERS rose a shocking amount – 76 percent – between 2007 and 2016. To put that in terms of dollars, that is an increase from $248 billion to $436 billion. CalPERS unfunded liabilities also steeply rose, when, in addition, the aforementioned numbers, assets went up by only 19 percent, a relatively meager dollar jump from $251 billion to $298 billion.
Mandatory contributions from local governments and the increase in earnings managed to raise the CalPERS fund to 70 percent, but that was still well below the 100 percent it had stood at for so long. And figures now indicate that that that number is dropping once again.\
A precipitous drop in the stock market in the latter half of 2018 decreased the CalPERS fund down below 67 percent, with CalPERS officials informing the board that the fund lost 3.9 percent throughout the year.
This means, the state has only two-thirds of the money it needs to cover pension promises, which in itself might be an optimistic reading. The Federal Bureau of Economic Analysis, doubled its calculated number of unfunded local and state pension liability to $4.1 trillion using a new method of called “projected benefit obligation.” The purpose of this method is to line up liabilities and assets with how the government figures out the value of its own workers’ pensions. This would follow the government’s own standards of accounting.
The $179 billion unfunded liability that is the current amount for CalPERS, would be closer to $360 billion were the “project benefit obligation” method go into effect. On paper, this would read bankrupt.
Head of the Govern for California, David Crane, had tried to get CalPERS to use the methods we just laid out by the Federal Reserve while serving on the California State Teachers Retirement System board, under Gov. Arnold Schwarzenegger. All of this, to no avail.
While Crane may now be having the last laugh, The Federal Reserve’s accounting system taking effect also illustrates the current crisis California faces when it comes to public pensions. And although it appears to be dire already, data indicates that things are going to get much worse before they get better.
Getting Your Adult Children Off Your Payroll/by Aubrey Lovegrove
As almost any parent knows, the responsibility to your children doesn’t end when they turn 18, and they may still be financially dependent on you, even if they’ve left the house. According to a Pew Research Center survey, 61 percent of parents with at least one adult child of legal age said they contribute to their financial wellbeing.
But, invariably, moving the burden of paying the bills from you to your grown children is a responsibility every parent must eventually face. It’s unfeasible and irresponsible to cover things like your kids’ credit cards, car payments, or cellphone bills forever.
Ensuring your children are prepared to dive into financial independence is crucial, according to personal finance professionals. Freeing up your own funds for things such as debt reduction, home repairs, car payments, and retirement accounts can be achieved much quicker once your children are taking care of themselves.
The challenge is, of course, to get the kids off of your payroll and onto their own. Here are some helpful tips to offload your kid’s bills:
Setting Your Kids Up For Success
If your children practice fiscal responsibility from the start, they will be less inclined to end up moving back home later. It makes sense to make sure they have the resources and knowledge to survive the transition before you cease paying the children bills completely.
Basic budgeting, avoiding credit card debt, and the benefits of putting money away for retirement in a 401(k) or other savings plan, are a few of the simple financial techniques that you can instill in your children at a young age.
If you think it could be helpful, you may way to expose them to a fund company website or point them towards a podcast that may have easy-to-follow beginner’s information on investment. Or, if you’re comfortable with it, you may even want to show them your own finances.
The point is, you don’t want to cut your child off before they have to knowledge to succeed on their own.
List Your Children’s Bills
Once you are at the point to where you know your child is be able to accomplish certain things, like paying their rent on time without racking up massive credit card debt in the process, you should add up the total of all the bills you’ve been paying for them over the years: things like cars, allowances, cellphones, gas, clothing and food, and cellphones.
This last one, cellphones, is especially true, as recurring bills like that often end up under the parent’s account forever, according to Anthony Ogorek, CEO of Ogorek Wealth Management in Buffalo. These things can end up as lifelong commitments if you’re not fastidious about it.
Consider cutting your over-eighteen child off if they have the funds to absorb any or all of these costs. That will put that money back into your own pocket. This could be a monthly net to you of several hundred dollars, if not more.
How quickly you ultimately cut the cord will be dependent on your children’s own financial security.
Costs and Needs
Unanticipated disability, loss due to disaster, health issues, car accidents: insuring yourself and your children against these burdens is an important part of personal finance. According to the director of financial planning at Creative Planning in Kansas City, Jonathan Knapp, the time to review your children’s policies is when they’re ready to move out of your house for good. Then you can evaluate what coverage they can pay for on their own. It is also a good time to review your own coverage and see if any of changing needs affect the costs.
For example, if your child’s student loans are all paid off, and if your personal mortgage is paid or about to be, it might not make sense to have an expensive life insurance policy.
Knapp says, stopping the coverage you don’t need will save you countless dollars in the end, and setting up a plan for long-term insurance care will help the financial strain of any nursing-home care you may need in your golden years.
If your child gets insurance coverage from their employment, for instance, you can save a lot of money in monthly premiums by reducing the coverage you used to be responsible for. The same is goes for auto insurance if your child makes enough money to cover their own.
New Changes to TSP Being Considered/by Aubrey Lovegrove
The TSP Modernization Act (effective September 15, 2019) isn’t the end of the Thrift Boards planned changes. Being implemented are several other modifications to the TSP.
All of the newly on-boarded personnel should be the recipient of a full government match by October of 2020 when the default deferral rate given to new hires will increase from 3 percent to 5 percent. And at least 80 percent of all participants contributing at least 5 percent of their income to the TSP is the goal of the Thrift Board. But for lower-graded workers just starting their fledgling careers who have other pressing financial needs, this may be difficult to reach the goal.
“Strive for five” is the saying, and the number all workers should aim for. But if curbing their TSP contributions is necessary, the employee must consider which savings goals – such as children’s college fund, home ownership, or retirement savings – would a bank or credit union not lend the money toward.
Currently, there is a half-a-year hold on TSP contributions if you have taken a hardship withdrawal. This will be eliminated, coinciding with the TSP Modernization Act, which will go into effect on September 15th.
As the Act is put into place, the Roth Tax Trap will be removed. Traditional and Roth balances used to have to be in equal to one another when they were taken out of the Thrift Savings Plan. This was something the Modernization Act did not focus on. If you withdrew from you TSP before the age of 59 and a half, the part of the Roth balance that was not “qualified” was accountable for federal income tax. To be qualified and not accountable to the federal income tax rates, it would take five years of the Roth in the TSP, and the recipient must be older than over 59 and a half.
The workers who took money out of their TSP accounts will now be able to let them know whether it is the Traditional or Roth balance that they would like their withdrawals to be pulled from. This starts September 15th.
As these changes near launch, expect renewed discussion from the Thrift Board.
Tax Season 2019: Figuring Out Your Tax Bracket/by Aubrey Lovegrove
Figuring out your tax bracket is a necessary, yet surprisingly complicated, endeavor. This equation and calculation could be instrumental in finding additional ways to reduce your federal tax bill and to recheck any of the work that was already done by tax-software program or tax preparer.
It should be known that in 2019, the Tax Cuts and Jobs Act has already lowered tax rates. Also, amongst other factors, a loss of personal exemptions and an increase in the standard deduction can affect the formula used to decide the tax bracket into which a person’s income may fall.
There are seven general taxable brackets:
The filers’ annual income is used to decide the taxable bracket. A progressive tax system is employed by the federal government, meaning that higher tax rates are applied to people with higher incomes. Also, it is organized in such a manner so that taxpayers are paying higher rates on each dollar after a certain threshold is crossed, as opposed to everyone paying the same rate on every dollar earned.
Your tax bracket, and furthermore, your tax burden can be figured out by following these steps:
-Determine your filing status.
-Figure out the total of all of your income.
-Research the 2019 tax brackets.
-Learn about the effective rate vs. marginal rate.
-Understand all the other ways your tax rate may be lowered.
Additional information on how to use these steps in order to either increase your refund or reduce money owed can be found below.
Determine Your Filing Status
You should be aware of your tax-filing status before you can figure out what bracket your taxable income falls into. The most common statuses are:
-Married and filing jointly
-Married and filing separately
-Head of household
You will use different statuses depending on several different factors: if you’re married or single, having qualifying dependents, etc. and other specifics. Married couples are free to jointly file their taxes, but others often choose separate filing for many reasons, some of which include divorce proceedings, or separate student loan debt.
Adding Up Your Income
This is the trickiest step and can be somewhat daunting, but it helps in the long run.
To find your gross income, you must first add up all the earnings you accrued from things such as work, alimony, rental properties, various investments, and any other places you receive taxable income – and then you’re going to subtract from that any money that maybe be exempt via the current tax code. The number you end up with is what is known as your ‘gross income.’
As Christ Raulston, wealth strategist at Raymond James in Memphis, Tennesse puts it: “Gross income is pretty much everything, and it’s defined in the law as income from all sources unless there’s an exception in the tax code.”
Next, adjustments such as individual retirement account (IRA) contributions or student loan interest will need to be subtracted. This will yield your ‘adjusted gross income.’
You should subtract these tax deductions after the adjusted gross income has been determined. This is where you’ll opt to either itemize your deductions (which you can do by subtracting things such as mortgage interest, charitable contributions, and other below-the-line deductions) or you decide to go with the standard deduction (which is $12,000 for single filers; $24,000 for married filing jointly.)
The final step is to determine your tax bracket using the taxable income you have just figured out. Don’t forget that certain investments are taxed not at ordinary income levels, but using the capital gains rate. While you do this exercise, it is important that you remember that.
Learning About Effective Rate vs. Marginal Rate
Let’s say you earned $50,000 in 2018 in taxable income, and you’re a single-filer. That would mean the tax bracket you fall into would be the 22 percent, as per the table above. This is what is called a ‘marginal rate.’ But that doesn’t mean you must pay the federal government 22 percent of every taxable dollar.
Rather, any amount that exceeds $38,700 is what you’ll be paying tax on. Your tax rate will actually look more like this:
10% x $9,525 = $952.50
12% x $29,175 ($38,700 – $9,525) = $3,501
22% x $11,300 ($50,000 – $38,700) = $2,486
The ‘effective rate’ ( which is the amount of three of those) is $6939.50, which is nearly 14 percent, and that is your total tax liability.
Other Things to Consider when Attempting to Lowering Your Tax Rate
There are strategies that filers may want to use that can lower their tax bill by placing themselves in a lower tax bracket. If the taxable income falls on the cutoff line between brackets, this is especially true.
Experts say that the best time to examine moves such as delaying income or making contributions to personal trusts, like retirement funds or health savings accounts, is right before the end of the tax year. Even if it’s after January 1st, there are still some moves you can make to lower the burden. As Jaeger puts it: “Now that we’re in 2019, making those moves is starting to wind down. But you can still make that traditional IRA deduction until April 15.” However, be sure to make this retirement plan contribution before you file your taxes if you’re looking to lower your taxable income in 2019.
To narrow down any additional ways to lower your tax bracket, work with your financial professional or tax preparer. Deductions such as “bunching” may be suggested by a financial advisor in the 2019 tax season, which means you’d to qualify to make itemized deductions and, ultimately, lower your tax bill.
To sum it up: Understanding your tax rates is the first step to lowering your tax bracket, and reducing your bill.