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October 22, 2018

Federal Employee Retirement and Benefits News

Category: Featured

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Are You Benefiting From Taxes Being “On Sale”?

Generally, you are told to defer taxes now because you will end up in a lower tax bracket by retirement. Modern Federal Employees with retirement savings, pensions, and concerns regarding national debt may find this advice outmoded.

We can delve further into this antiquated idea by inquiring about the following:

  • How does someone drop to a lower tax bracket?
  • How common is it for federal retirees to drop to a lower tax bracket?

You can drop to a lower income tax bracket by having less taxable income.There are two ways to lower your taxable income:

Imperfect as it may be for retirement savings, you have the easy option of taking home less overall income. The second option would be that you can invest in such a way as to generate tax-free income. This would be money that you can spend during your retirement that will not be flagged as income on your taxes by the IRS. This option is frequently overlooked but is especially crucial for employees who will be receiving forever-taxable benefits in their retirement, such as federal employees

A large number of FERS employees in the last seven years have been incorrectly told they would be seeing “retirement income tax relief”  and have not, simply because, on average, they were not qualifying for lower tax brackets in retirement because they brought home too much taxable income.

Retirement Stool of the FERS

Think about taxation of the three legs of the FERS retirement stool:

  1. FERS/LEO Pensions – Over 98% taxable as income

 

  1. Traditional TSP Disbursements – 100% taxable as income

– This is also applicable to Traditional 401Ks and Traditional IRAs

 

  1. Social Security Benefit – Often 85% is taxable as income

– Operating on the assumption that the combined total of your Traditional TSP/IRA withdrawals and  your FERS/LEO pension equals $34,000/year or more

There are three results from what we have charted this far:

  1. For most all of Federal retirees that follow the Traditional three-legged outline will be forever-taxable at whatever rate the government chooses.

 

  1. On average career, federal employees will have enough taxable income to stay in the same tax bracket through their retirement as they were during their working career.

 

  1. You will not ever be able to change or adjust the tax treatment of your social security benefits or your pension. Taking action to protect yourself from future higher tax rates will heavily depend on how you choose to invest your retirement savings.

Which leaves the question as to where taxes for your current bracket go in the future? There are a wealth of useful resources to aid you in forming your answers to this question. But with the national debt reaching $21trillion, the government was continually spending on the rise, and new tax cuts scheduled to recede in seven years, it is difficult to assume anything other than taxes rising in the next decade.

Retirement Income Tax Options

We cannot, within the confines of the law, avoid paying taxes outright, the contrast between tax-free and taxable income for retirement for Federal Employees is contingent upon when taxes are paid on savings for retirement.

Option 1: before funds are invested in growing, we can pay tax on contributions at current income-tax.

Option 2: we can pay income tax on our withdrawals (which will equal the sum of both your contributions and earnings) at whatever rate is assessed for your tax bracket in retirement (i.e., paying tax at an unknown rate on the entire “yield” later on). Many analysts predict that these rate increases are imminent. In the interest of quick assessment, let’s suppose tax rates stay the same in retirement as they are currently  and compare our options:

Option 1

    Invest $10,000 (after-tax)

    Total 2018 Tax Liability (at 22%): $2,200.00

    Balance at Retirement (hypothetical): $100,000

    Taxes owed upon withdrawal of $100,000: $0

    Balance After Tax: $100,000

    Sum of Taxes Paid: $2,200

Option 2

    Invest $10,000 (pre-tax)

    Total 2018 Tax Liability: $0 (deferred)

    Balance at Retirement (hypothetical): $100,000

    Taxes upon withdrawal of $100,000 (at 22%): $22,000

    Balance After Tax: $78,000

    Sum of Taxes Paid: $22,000

Realistically, there are a numerous aspects to think about regarding your financial professional or CPA, but if we hypothesize that it cost one thousand percent more to defer those taxes – even with the same rate – because you are not just paying your contributions, but you are paying tax on the full balance of the account..

There are not many legal strategies for generating tax-free income. Which is not at all surprising when you consider that the future of the government’s revenue heavily depends on taxation of the TRILLIONS of dollars being grown by Americans in their  retirement accounts, such as TSPs, IRAs, and 401Ks

Tax-Free Income Strategies

  1. Roth TSP/Roth 401K
  • No limited earnings
  • Annual contribution limits ($18,500/yr)
  • TSP Modernization Act = no more ‘Pro-Rata’ rule
  1. Roth IRA
  • Limited earnings apply (starting at $135,000 household income)
  • Annual Contribution limits ($5,500/yr)
  • Held for (longer of) 5 years or until 59.5
  1. Investment Grade Life Insurance
  • No earnings/contribution limits
  • Health & Lifestyle factors considered
  • Powerful additional benefits available
  1. Municipal Bonds
  • When interest rates rise, bonds lose value
  • Suppressed returns in the low-interest rate environment

This article is very much focused on how the incorporation of tax planning into the fabric of your retirement plan is of the utmost importance to everyone. However, deciding which strategies, or the combining of them, works best for you hinges on various other factors. Your dedication to voicing and acting on your concerns now makes all the difference for your future.

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Does Changing Annuity Contributions Make A Difference?

Those hired in 20013 may have felt tinges of envy regarding other employees hired on at an earlier time. Those employed in 2012 and prior merely paid 0.8% of their salary for retirement, while those hired after 2013 paid as much as 3.1% due to revisions to the RAE (Revised Annuity Employee) law. Despite its name, this law did not revise annuities. In fact, it altered the employee’s share of annuity contributions, with the hopes of policymakers that “no one would notice.”

They did it again after one year. The rate was raised again, this time to 4.4%. The raise was called the FRAE (Further Revised Annuity Employees). Still, with the hopes of policymakers to mislead. There are currently several changed being considered:

  • The possibility of elimination of the FERS annuity supplement for employees who choose to retire under age sixty-two.
  • Congress is also said to be taking additional increases in the contribution rate under consideration, which would be phased in over a span of years.
  • A bill to change the final average salary to 5 years instead of 3 years.

It would seem that we may be reaching a place wherein a cautious fed may find themselves in better financial standing if they “cashed in” their retirement contributions. That said, the best way to do this regarding current law is to resign and receive a refund of retirement contributions. Refunds, unfortunately, do not include a vital factor—interest. With no interest, it would seem that resignation instead of retirement would not be prudent financially.

For the purpose of planning it may still be interesting to crunch the numbers on how much an employee’s contribution, annuity, and high-three would total under the assumption of individual factors. For instance, the current contribution rate of 4.4% and annuity rate of 1% of high-three per year of service, and a base amount of $44,000 salary with annual increases averaging about 5%.  28 year of salaries would total $2,569,693 in earnings with a high-three average salary of $156,572. 28 years service yield an annuity of 28% of high-three.

Where input is concerned, the only variance below is the start year. This has a sizable impact on out of pocket contributions, as you can see:

Start Year Rate Contributions Annuity Payback Period
< 2013 0.8% $20,557 $48,340 5 months
2013 3.1% $79,660 $48,340 1.6 years
> 2013 4.4% $113,066 $48,340 2.39 years

For retirement costs, it is clear that before 2013 it was an ideal time for employees to begin their careers. When combined with Social Security, and Thrift Savings Plan Participation, the smaller annuity terms are still a decent return on investment.

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When Making Your Annuity Election, Consider This

It can be critical to making decisions about how to outline the choices federal employees have to make when electing Civil Service Retirement System or Federal Employees Retirement System benefits at the time of retirement. These can include:

  • Spousal survivor benefit elections for a maximum or partial survivor annuity.
  • No survivor benefit in the form of an annuity payable during your lifetime
  • An insurable interest election to provide for a person who has an insurable interest in you [as in a financial need for income that you provide
  • The option to provide for a former spouse despite the survivor annuity possibly not having been awarded in the court order at the time your divorce was finalized

 

It is essential to understand the potential cost and value of these elections and the impact they may have throughout the rest of your life, as well as the life of your spouse.

Understand that happens to your benefits when one spouse passes on before the other, is vital. This includes life insurance, Social Security, health insurance, and the profits of the Thrift Savings Plan as well as the election of the survivor’s annuity benefit under FERS or CSRS.

Taking the time to ask each other “If I die before you, will you have enough income to continue your lifestyle?” when electing the spousal survival benefit. Making assumptions as to who will die first because of age or health is not sensible. Nothing is certain.

If both spouses receive Social Security retirement, only the highest Social Security benefit of the two are payable. If the widow’s benefit is payable first the surviving spouse may put off their own earned benefit for a time.

Other important things to ask:

    Who, between the spouses, is the spender? Who is the saver? While the saver may find themselves lonely, they would be more financially stable.

    Upon the death of a spouse, is there any other income from the sale of property of life insurance? Is there other income from life insurance or the sale of property that would come into play upon the death of one spouse?

    When the spouses are no longer two, but one, is there a source of income that will become available? Such as the choice to delay Social Security for one spouse while both are still living so that you are not used to having an additional source of income. The benefits of delaying Social Security benefit may provide a greater widow’s benefit to the surviving spouse. You may want to consider “switching on” the second spouses Social Security at age seventy. Unless one spouse happens to pass away at a younger generation.

Pension Maximization Use For Spouses Who Are Both Federal Retirees

Pension maximization can be viewed as a risky strategy for retiring couples seeking to secure the best possible annuity payout and balance the risk with life insurance.

What makes it “risky?” Because life insurance (a product of pension maximization) value is dependent upon asking the following:

    When will you be dying?

    If at all, how long will your spouse outlive you?

    What will inflation look like over the lifetime of both you and your spouse?

    Are you young and healthy enough to, at a cost that may be less than the reduction to your CSRS or FERS annuity, purchase this product?

    Will the beneficiary be able to manage the proceeds in such a way that they will be sure to maintain enough income if they should survive you?

There is a limited value of life insurance on the date it is sold. Generally, the amount will be the same on the date that it is paid. There no income guarantee or cost of living adjustment on a whole life or term life insurance policy.  Some annuity products will provide a lifetime stream of income. However, there are some caveats. Such as age and health at the time of purchase, as well as how long you intend to delay receiving annuity payments from the date of purchase. As well as the health of the insurance company selling the product. These products can prove very complicated, so be cautious and diligent.

The need to provide protection to a surviving spouse for health insurance continuation is another facet related to the election of FERS or CSRS survivor benefit. To continue coverage for a surviving spouse under the Federal Employees Health Benefits program, they need to have entitlement from their federal salary or retirement. Or they must have entitlement to a survivor annuity, either full or partial spousal election, or be named as the insurance interest election, based on your FERS or CSRS retirement. It may be necessary to elect a minimum spousal survivor annuity, even if you provide a life insurance benefit so that your spouse might maintain FEHB in the event you pass away before them.

“Spousal protection” does not exist on the pension maximization product. Coverage may be changed or canceled without spousal consent. However, this is not so with a spousal survivor annuity under FERS or CSRS, as the federal law protects them under the spouse equity provisions.

Use caution when considering substituting pension max for the spousal survival benefit. There is a commission on the sale of insurance products. If you choose the survivor benefit under FERS or CSRS, there is no go-between or middleman.

Be sure to ask questions when you don’t understand something before you sign anything. It is also highly recommended to get a reference to a resource or policy when you have questions. Be sure to get their answer in writing. Getting documentation in any government work is essential. And that includes your retirement.

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Benefits: What Exactly is a TSP? | Kelly Fasterling

What is TSP?

Kelly Fasterling has worked for many years to help people achieve their financial freedom goals. As an independent financial advisor, she educates clients at or near retirement on strategies to position their assets to maximize benefits and create peace of mind.

When it comes to the Blended Retirement System (BRS), one of the most frequently asked questions received by Defense Department officials is “When can I expect to get my matching contributions to the TSP?”

These questions are generated by service members that have a true understanding of the value of the Thrift Savings Plan to the new BRS. They understand that they can grow their retirement much faster by contributing as much of their basic pay as they can as early as possible while receiving a government match of up to 5%.

The quick answer is that matching contributions begin in the pay period that starts on (or after) the date the service member has opted into BRS. According to DoD spokesman Navy Cmdr. Michael Cody, if that date of opt-in is in the middle of a month, then contributions should appear in the Leave and Earnings Statement at the end of the following month.

Now for an even bigger question: What is the TSP?

The best way to put it in perspective is to think of it like the 401K retirement plan for civilian employees; you decide what and how much to contribute as well as how to invest your money.

Members of the BRS that do not choose an investment fund will automatically have their money put into an age-appropriate Lifecycle Fund (or L Fund).  If you need to change your allocation, it is recommended that you talk to a financial advisor.

The government automatically contributes 1 percent of your base pay to your TSP under your BRS, and up to an additional 4% is matched. For example, if you provide 5%, then the government adds in an additional 5%.

For service members joining in 2018 or later, enrollment in BRS is automatic. The first pay period after 60 days from the pay entry base date is when the automatic government contributions begin (the matching contributions beginning in the 25th month of service).

Any of your contributions to the TSP are yours to keep, including the matched contributions of up to 4% as well as the earnings. There is no vesting period! After two years of service (or if you have at least two years of service before your BRS opt-in), the government’s basic automatic 1% contribution is yours to keep as well.

However, don’t jump at the thought of cashing it all in. There are penalties if you withdraw money before age 59 ½. You could be subject to paying a 10 percent withdrawal penalty tax on any taxable part of your money that wasn’t transferred to a qualified retirement account, paired with any additional taxes owed as a result of the withdrawal.

With a traditional Thrift Savings Plan, you are allowed to defer taxes on contributions and earnings until withdrawal at retirement.

Less money is held from your pay because your contribution is made before the calculation of federal income taxes.

Another retirement option is a Roth TSP. With this plan, you pay taxes on contributions as you make them, but you can also withdraw funds tax-free as long as you meet specific IRS requirements.

The IRS sets the contribution limit annually. For 2018 the contribution limit is $18,500.

The limit can potentially pose an issue if a service member contributes all or part of special pays or bonuses. It could also cause problems for Guard and Reserve members with civilian employment.

Traditional contributions made from tax-exempt pay earned in a combat zone is an exception because the limit does not apply in that case.

TSP contributions made by troops who exceed the limit must be ceased for the remainder of the year; otherwise, they could lose out on matching contributions at that time.

Overall, the participation rate in the TSP program by service members has seen an upward trend, which means that more are beginning to see the true value in this retirement program option.

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ASAs Based on TSP Reintroduced in Senate Bill

ASAs Based on TSP

Any worker that does not currently have access to an employer-sponsored retirement plan could potentially be given the opportunity for coverage under a new retirement savings account, thanks to the legislation introduced in the U.S. Senate.

Initially proposed in January 2016 by Sen. Jeff Merkley, The American Savings Act would give these workers access to a retirement plan with something called the “American Savings Account” (ASA). According to Merkley this plan would be “universal, portable, simple and personal.”

Merkley goes on to note that the American Savings Act would offer a “high-quality option for small businesses without added paperwork or hassle,” since employers won’t need to engage in new administrative processes. They would just need to send their employees’ ASA savings, alongside the already processed tax withholdings, to the federal government.

If a retirement plan is not already offered by an employer then the workers would receive their own ASAs automatically, according to a press release. By default, there is a 3% contribution. However, there are options for adjustment, which can be as low as 2% or as high as $18,000 per year. If workers do not wish to participate in their ASA then they have the option to opt out completely.

The ASA is modeled after the Thrift Savings Plan (TSP) and would offer the same investment options. Merkley states that ASA participants would experience “similar rock-bottom costs” as the TSP, and they would also have the ability to fully control their accounts online through a website.

Participants would be permitted to roll over previous IRAs into their ASA, or they could even roll their ASAs into a 401(k) or 403(b) employee-sponsored plan. Contributions to their ASA would also be tax-deductible, and the investment of the funds would be managed by an independent board of directors.

Last but not least, full-time workers, part-time workers, and contracted workers would all have access to the ASA plan.

Your FERS could change in retirement

A Closer Look At The Insurable Interest Annuity Option

For those retiring there may be more than just the standard annuity options available. There exists another rarely used option: the insurable interest annuity.

If you are not married but have a child or someone who would financially benefit from your being alive, this option may spark your interest. When a court order has already appointed a survivor benefit from a former spouse, it may also be used. The decrease from your annuity can, unfortunately, be substantial. Far above the cost of a standard survivor annuity.

A current spouse is also assumed to have a financial interest in you, as well as a former spouse, an adoptive or blood relative closer than a first cousin, a same-sex domestic partner (meeting certain standards), the person to whom you may be engaged to be married, or someone you are living in a relationship that could fall under common law marriage in a jurisdiction that recognizes common law marriage.

Should there be a person other than one of those above to whom you wish to provide an insurable interest annuity, you would need to submit an affidavit from one or more persons who have personal knowledge of that financial dependence. Computing the amount and cost of an insurable interest annuity has rules that differ from those governing standard survivor annuities. The designer will receive an amount totaling fifty-five percent of your reduced annuity under either FERS or CSRS. The reduction of your annuity computes as seen below:

10 % if the person is the same age, older than, or less than five years younger than you;

 

15 % if 5 but less than 10 years younger;

20 % if 10 but less than 15 years younger;

25 % if 15 but less than 20 years younger;

30 % if 20 but less than 25 years younger;

35 % if 25 but less than 30 years younger; and

40 % if 30 or more years younger than you

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Strong Gains for the TSP

Stong Gains for TSP

projections for stocks

With most funds in the green, July has proven to be a positive month for the TSP.

By just a tiny fraction of a percent, the G Fund is up while the F Fund is down, but the good news is that the three equity funds have increased:

C Fund: up roughly 3.8%

S Fund: up nearly 1.5%

I Fund:  up a reliable 2.7% despite the recent struggles in the past months

 

Earnings Season

With many companies reporting results for the previous fiscal quarter, earnings season is in full swing.

The average revenue increase in comparison to last year’s quarter was a reliable 8.6%, based on the hundreds of S&P 500 (C Fund) stocks that have reported quarterly results thus far, according to CNBC. Increased earnings are 22.4% on average (7-8% of that because of corporate tax cuts passed last year).

While most companies are exceeding analyst expectations, there is an outstanding exception to the positive trend; Facebook and some other high-flying tech stocks. Facebook’s reported number of average daily users (1.47 billion), as well as their reported revenue, was beneath analyst expectations. Their guidance for the rest of 2018 also slightly missed the mark.

Facebook’s stock fell hard, dropping over 20% in just a single day (their most significant single-day stock drop in history).

As a result, about $120 billion was cut from Facebook’s market capitalization. Despite the company’s continued growth regarding users, revenue, and profits, any reduction in growth is typically met with selling and sharply reduced valuations since investors place such a high valuation on the company overall.

Facebook shares represent nearly 1.8% of the 500-company C Fund and are the fifth largest holding.

Luckily, the diversity of the fund, stable earnings, and the results of other companies absorb Facebook’s stock price drop.

Two other tech high-fliers in the C Fund, Twitter, and Netflix saw similar declines (15-20%) late in July. While both companies reported decent results, they were still not adequate to meet the satisfaction of the investors with their high valuations.

 

Keeping an Eye on Tariff Impacts

Due to the country’s new aluminum and steel tariffs and rising material costs, many companies requiring considerable steel and aluminum in their operations announced softer results. Harley-Davidson, Coca-Cola, Honeywell, Whirlpool, General Electric, W.W. Grainger, Stanley Black and Decker, Genuine Parts, and a handful of other companies (all C Fund components) reported that they are exposed to higher material costs. In response, a majority of them are raising prices, which passes the price increase down the ladder, straight to their customers.

Many other companies, like Harley-Davidson, don’t foresee the ability to raise prices very much and expect to see themselves consuming most of the extra costs, which could result in an overall reduction of their profit margins.

Because of the combination of declining sales and rising material costs, companies like Whirlpool seem to have taken the hardest hit.

However, Nucor and other steel producers seem to be reporting positive results. The profit margins of domestic steel producers are increasing with the help of higher steel prices due to tariffs on imported metal since their selling price is higher and their expenses remain mostly the same.

TSP: What You Can and Can’t Rollover | Kelly Fasterling

TSP Rollover; What are you allowed to do?

Kelly Fasterling has worked for many years to help people achieve their financial freedom goals. As an independent financial advisor, she educates clients at or near retirement on strategies to position their assets to maximize benefits and create peace of mind.

During employment as well as after separation, Thrift Savings Plan (TSP) participants are permitted to roll the money into their TSPs. However, the money that is rolled over must come from qualified plans and/or qualifying IRAs. On the other hand, money can also be rolled out of the TSP, but also must go to a qualified plan or qualifying IRA and can only be done once while working and once or twice once after retirement.

If a separated worker stayed in the TSP and rolled more money into it from other qualified plans or qualifying accounts that would be ideal for the Thrift Investment Board.

Into the Traditional balance of your TSP, you can roll money from the following:

1) Traditional 401(k) – a Traditional employer-sponsored plan that was acquired either before or after your federal career.

2) Traditional deductible IRA – a Traditional IRA where contributions have been able to be deducted from your federal income tax.

3) Conventional non-deductible IRA – The earnings component from a Traditional IRA where you have not been able to deduct your IRA contributions.

Additionally, you are permitted to roll money from a Roth employer-sponsored plan, like a Roth 401(k), that was acquired before or after your federal career, into your TSP’s Roth balance.

You cannot roll money from any of the following into either the Roth or Traditional balance of a TSP:

1) Money that is not coming from a qualified plan.

2) Any money at all in a Roth IRA

3) The contributions component from a Traditional non-deductible IRA

4) Money that does not belong to you, regardless of whether it’s in a qualified plan or not. An example of this includes money in the qualified plan of a spouse.

Money that is moved into a Thrift Savings Plan via a rollover doesn’t count against the annual elective deferral limit. Currently, the limit for 2018 is $18,500.

Form TSP 60 would be used for a rollover into a traditional balance while form TSP 60-R would be used for any rollover for your Roth TSP balance.

But what about rolling money from the TSP and into another qualified plan or account? TSP rollovers have been permitted since the very beginning.

Almost all rollovers, whether it’s in or out of the TSP are completed as “direct rollovers.” This means a direct move between tax-advantaged accounts.

Currently, there are strict limitations on the number of rollovers that can be conducted when it comes to rolling money away from the TSP. As of right now, there are only two opportunities for TSP withdrawal and withdrawal is the modern-day method used to roll any money out of your TSP. This will continue to be the case until the TSP Modernization Act is implemented, which is expected to occur in September of 2019.

There are options when it comes to withdrawal forms such as age-based, partial, or full. You would select the form appropriate for your needs and then elect to make your withdrawal. At that point, the custodian of the receiving account would need to complete all transfer information on your selected form. Then the money should transition seamlessly from the TSP to your new account.

There is a publication available for the TSP in the “Forms and Publications” section of the TSP website called Transfers from the Thrift Savings Plan to Eligible Retirement Plans, which is made available for plan administrators of IRAs or other qualified plans. You may wish to provide this to the new plan’s custodian at the time of initiating a rollover.

Notebook Finance and Retirement Savings

Federal Employees to Get 12 Weeks of Paid Parental Leave

According to proposed legislation, federal employees will get 12 weeks of paid parental leave. This law applies to federal employees who adopt or welcome the birth of a new child. A Republican Congresswoman introduced the Federal Employees Paid Parental Leave Act of 2018 (H.R 6275) bill.

H.R. 6275 seeks to align federal employee retention policy with that of the private sector. In this way, the federal government can attract and retain top talent in federal service. What’s more, paid parental leave encourages more women to remain in the workforce, reduces infant mortality, depression, improves infant health, and helps women deal with postpartum challenges. Similarly, paid leave allows men to bond better with the child they are adopting. These benefits are long lasting even after both principals resume federal service.

Additionally, by matching paid parental leave to what the private sector offers, the federal government will remain competitive. Even though similar attempts have been made before, most failed to pass. Last year, another congresswoman proposed a bill that would have given federal employees six weeks of paid parental leave. Unfortunately, this bill never passed as of this post.

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Importance of Sick Leave

Today, we address the importance of sick leave. Initially, sick leave allows employees to miss work due to sickness or to seek for medical attention. Nowadays, the reasons why sick leave is granted have evolved to include bereavement, funerals, adoption, and family care. What’s more, sick leave hours can be used to increase an employee’s annuity.

Subsequently, any unused sick leave hours are aggregated into retirement months. For CSRS retirees, every month of unused sick leave increments their annuity by 0.6%. This means that for six months of unused sick leave, your annuity increases by 1%. Likewise, 12 months of sick leave increase an employee’s annuity by 2%. For FERS retirees, a year of unused sick leave increases annuities by 1% or 0.833% for every month. However, if one retires at age 62 with 20 years of service the multiplier changes from 1% to 1.1%.

Annuities depend on the number of full years and months in service. So, unused sick leaves that don’t make up an entire month determine the amount of credit you get. In case you do, remaining sick leave days are added to your retirement hours. In computing retirement periods, a day is reckoned as being 5.797+ hours. To arrive at this figure, the OPM divides the number of hours in a work year (2,087/360=5.797). Why is that so? It is because twelve 30 day months are used to ascertain annuities. However, any days that don’t make up a full month are not used in reckoning annuities.

Even so, FERS employees with a CSRS clause in their annuity, have their FERS sick leave transfer maximum days credited to CSRS annuities.  Any other hours above the transfer maximum are credited to the FERS annuity.

Unfortunately, sick leave can’t be used to claim retirement eligibility. Typically, it only applies where you’ve met the requirements of age and service years. Unused sick leave days are not credited where one leaves federal service before eligibility and applies for a deferred annuity.

In case you re-join federal service, sick leave hours are typically re-credited. Even so, if you receive a full salary and annuity, upon retiring you won’t receive any credit for unused sick leaves as well as any other while in service. This is because there is no recomputation of your annuity to cater for the new service period.

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Withdrawing from the TSP

You have several withdrawal options that you can choose from. Partial withdrawals are allowed in a single payment. You can also make a full withdrawal with any one or any combination of the following methods:

  • A single (lump sum) payment
  • A series of monthly payments
  • A life annuity (Thrift Savings Plan Lifetime payment options).

A combination of any of these three full withdrawal options is called a “mixed withdrawal.” You can have the Thrift Savings Plan transfer all or part of any single payment or, in some cases, a series of monthly payments, to a traditional IRA or an eligible employer plan by completing the TSP-70 form. Payments to you can be deposited directly into your checking or savings account using electronic funds transfer (EFT).

Spouse’s Rights

If you are a married Thrift Savings Plan participant (even if you are separated from your spouse), spouses’ rights apply to annuity purchases. If you are a married FERS or uniformed services participant with a total account balance of more than $3,500 and you are making a full withdrawal of your account, your spouse is entitled by law to an annuity with a 50% survivor benefit, level payments, and no cash refund. If you choose any other withdrawal option or combination of options by which your entire account balance is not used to purchase this particular type of annuity, your spouse must sign the statement on your withdrawal form that waives his or her right to that annuity.

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Federal Employees and Estate Planning | Linda Jensen

When it comes to financial planning, federal employees often neglect estate planning. Regrettably, you’ll hear the quip that estate planning “is for the rich!” Most feds believe that only the affluent and millionaires need financial planning. Some assume that estate planning entails complex legal processes and specialist estate attorneys.

Though this might be true depending on the size of your estate or family, adequate preparation can simplify the estate planning process. For a fact, a grasp of estate planning is necessary for determining what documentation you require.  Certainly, you don’t want to burden your family with estate planning after you are gone. What’s more, we all desire to have our wishes respected when we pass away.

So, read on to find what estate planning documents you need.

The Last Will

Typically, a will details how you want your estate distributed after you die. Ideally, all of us need to have a will. Even if you aren’t wealthy, the importance of a will cannot be overstated. This is especially true if you have a large estate and multiple beneficiaries. Often, where one dies intestate, the courts decide how your estate is divided. Of course, there are specific guidelines to which the courts adhere. Usually, your spouse is the first to inherit your estate, then your children, finally your parents, and siblings. Leaving a written will prevents the courts from arbitrating on your estate. If you don’t move a will, the judges create one for you.

Also, you can use a will to make your wishes regarding how to take care of your children known after you pass away. Through a will, you can appoint a guardian to manage your assets on behalf of any underage children. You can designate a caretaker, a family member, or a trustworthy friend.

However, you should keep it in mind that your beneficiaries enjoy precedence over other declarations in your will. And lastly, a written will won’t prevent an estate from going probate. But what is probate? It is a process in which the judge reads, interprets a will, and decides how to divide your estate. Typically, this information is accessible publicly. Depending on the size of your estate, the process can be expensive, lengthy, and complex.

The TSP, or Thrift Savings Plan, is a tax-advantaged retirement account offered exclusively to federal, postal, and military employees that operates similarly to private market 401(k)s, mostly in offering the option to save for retirement with TSP matching contributions you make. There are many ways that your Thrift Savings Plan can be unique to you: you can choose to put your money in your account pre-tax or pay the full income tax up front, you can choose which markets your money gets invested in, and more.

Living Trust

Unlike a will, a living trust isn’t public. But why is it “living”? It is because a living trust is created while you are still alive. In it, you transfer ownership of your assets to a trust. But while you’re living, you have control over assets in the trust. Even so, you don’t own these assets. Instead, the trust is the owner. Upon your demise, the trust transfers these assets to your beneficiaries.

A trust protects your assets from creditors. However, this is dependent on the type of trust you select. Preferably, most of your assets should be transferred into a trust while you’re alive. A trust has various tax exemptions and liabilities. For this reason, you should learn more about its implications as well as seek the guidance of an estate planning attorney.

Healthcare Power of Attorney

In case you become incapacitated, you can confer a power of attorney on an appointee. In essence, you appointee has the ability to make health care decisions on your behalf. Nonetheless, you should ensure that this individual shares your vision and thinking.

Note that a living will don’t include a testament or last will. Simply, it’s a legal document that outlines how others make deathbed decisions on your behalf. For instance, where there is no hope of recovery, it may detail how to affect any life-prolonging procedures. Perhaps, you could use this document to detail how you want deathbed decisions handled rather than creating a living will.

Financial Power of Attorney

Through this document, you can appoint an attorney to act on your behalf in case you’re incapacitated. For instance, military members in active duty, busy executives, or celebrities can vest the financial power of attorney on someone else to take care of their financial obligations while they’re unavailable. Also, you can use this document to handle the financial responsibilities in the event you’re incapacitated or mentally incapable of making decisions.

With this document, your appointee can enter into transactions such as real estate and other financial decisions. Every state has different estate planning laws. Therefore, you should consider the implications of these laws on property in multiple states.

Possibly you could collect these documents online where your situation is simple. But if you have multiple assets, a professional estate planning attorney is preferable.

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Linda Jensen is the principal and owner of Asset Care & Preservation Services with offices in Olympia, WA.  Linda began her career with Prudential Preferred in 1994 where she was an agency leader.  She earned the credentials of a financial planner and has been in practice as an investment and insurance professional since that time.  Linda started her own company in 1997.

Articles from Linda Jensen:

Linda Jensen | How to make the most out of your TSP Plan

Linda Jensen | Top Four Tips for IUL Shopping

Linda Jensen

TSP-Like Personal Savings Accounts Would be Created by Bill

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The American Savings Act has been reintroduced by Sen. Jeff Merkley (D-Oregon).

Currently, federal workers and Congress members use the Thrift Savings Plan (TSP). This reintroduced plan would be modeled after the TSP, giving every worker (not just federal employees) without access to a savings plan for retirement the opportunity of having their savings account specifically for just that. A large benefit to this is that these retirement savings accounts can be taken anywhere, even though job transitions.

Merkley says, “It shouldn’t matter whether you work part-time or full-time, as an employee or a contractor, or for a huge corporation or a tiny business, every American worker deserves access to a financially secure retirement. With private-sector pensions becoming rarer and rarer, Social Security and retirement savings are more important to retirement security than ever. That makes our mission clear. We need to strengthen Social Security, and we also must expand high-quality retirement savings options to all workers.”

Merkley has also noted that around 55 million Americans are without access to a retirement savings plan. If passed, this legislation could potentially allow employers to send their employees’ savings in an American Savings Account (ASA) to the federal government right along with the already processed employee tax withholdings. The great thing about this is that employers wouldn’t be forced into a new administrative process, therefore providing a seamless transition. In the beginning, it would defer 3% of salaries of workers. However, that can be changed by participants to 2% if preferred, and the contribution maximum would be capped off at $18,000 a year.

Like the TSP, the ASA would include the same investment options, even at the same low cost. Workers would control accounts through a website for quick and easy manageability. Additionally, workers would have the opportunity to roll any other individual retirement accounts they already have, such as an IRA for example, into the ASA. The ASA could also be rolled into an employer-sponsored 401(k) or 403(b) plans.

There are undeniable benefits. ASAs would be:

  • Universal
  • Portable
  • Simple
  • Personal

All workers would be able to determine just how much they want to save as well as how much they want to invest!

Why Military Pensions are Insufficient to Retire On

In most companies and industries, employee sponsored 401 (k) plans phased out traditional retirement plans. Still, the military offers its uniformed members a pension scheme. Typically, military members receive a pension equal to 50% of the highest three-year base pay. Each year, pension amounts increase by 2.5% for members with twenty and above years of service.

Though this amount is significant, it might not be enough for you and your family’s needs. Typically, military members serve for less than 20 years, meaning that after discharge, you’ll most likely have no pension.

A New Blended Retirement System

In January 2018, the Blended Retirement System (BRS) was introduced for service members who leave before the 20-year mark. It has three retirement options: pension only, a Thrift Savings Plan (TSP), or a reduced hybrid (pension and TSP) option.

After January 2018, enrollments into the BRS are automatic. If you have less than 12 years of service, you can elect to enroll into the BRS. Members with fewer than eight years can leverage the BRS’ provisions to save more for their retirement.  But why is that so? It is because your matching contributions can exceed your pension’s total value. But this requires that you remain in service for twenty years or more to qualify for a military TSP.

Depending on your status, it is challenging enrolling in the BRS if you have between 8 and 12 years of service. Additionally, your TSP contributions and base pay may affect your eligibility. Often military members with 20 or more years prefer a pension based retirement scheme.

Benefits of TSP

But What is TSP?

It is a retirement saving scheme for service members and federal employees. This plan remits 1% of an employee’s base pay into a TSP with a further 4% to 5% matching contribution. With a TSP, you can choose to invest your contributions in any of the five index funds or a lifecycle fund. An advantage of TSP indexed fund options is their relatively low expense ratios. Typically, expense ratios are 40 cents per $1,000 that you invest. Plus, you can opt between a traditional TSP, a Roth-based TSP, or a hybrid TSP. All matching contributions are deposited in a conventional TSP no matter what option you are enrolled in. For 2018, the maximum contribution value for a TSP is capped at $18,500.

What Are Other Saving Options Available?

Option# 1: Traditional and Roth IRAs

With this approach, members can contribute to Roth and non-deductible IRAs as well as TSPs. You can open either of these investment accounts at your local brokerage firm. What’s more, both function independently and contributions are capped at $5,500 per year. However, they are limits on incomes for eligibility.

Married service members can have their spouse make IRA contributions where applicable. Spousal IRAs have a contribution limit of $5,500 each year.

Option #2: Taxable Brokerage Accounts

Another alternative is to invest additional funds in a taxable brokerage account. Unlike IRAs and other retirement schemes, brokerage accounts charge no penalties for early withdrawals. Also, brokerage accounts impose no contribution caps.

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Estimating How Much You’ll Need for Retirement

  • Know Your Needs

Estimating how much money you’ll need requires understanding what retirement means as well as its implications. So evaluate your lifestyle to determine the finances you require. Below are the factors that can affect your financial status during retirement:

  • Maintaining a large house or living in a low-cost maintenance home
  • Whether you’re traveling internationally or living closer to home
  • Spending on hobbies such as golf or engaging in volunteer work
  • Taking up a part-time job

Although you are retired, you might secure a part-time job, earning you some much-needed income. If so, you are better off with fewer retirement savings.

  • Craft A Retirement Budget

After knowing what type of retirement you’re looking at, it’s time to create a budget. Start with public expenses to gain an idea of your retirement expenses. Let’s say you spend $5,000 each month; you need $60,000 each year to meet your living expenses. So if you retire at age 63 and live for another 27 years, your retirement estimate equates to $1,620,000. Of course, other costs and inflation might push this figure upwards. Nonetheless, it is a reasonable ballpark estimate.

Increased life expectancies and kids who need support beyond college might stretch your military pension.  This means you’ll have insufficient finances to cover all your needs. Typically, retirees withdraw 4% of their retirement benefits each year.  With the above example in mind, you require about $1,620,000 to cover $60,000 in monthly expenses.

Besides that, how much you need depends on the factors below:

  • Your place of residence as tax rates differ across states
  • Lifestyle choices you make during retirement
  • Any debts you might be paying while retired
  • Whether you have family members depending on you for support
  • Your revenue streams either from part-time work, real estate, or other investments

No matter your retirement status, a retirement calculator is a great way of simulating different saving scenarios. Alternatively, you can consult with a financial planner for help in creating a retirement plan.

How the Coming Bear Market Will Cause a Retirement Crisis

Speculation is rife that a coming bear market, as well as a recession, will wipe out large portions of retirement portfolios. Also, local, state, and federal pension funds will be affected as well. But do these governments have the resources to fight back?

To answer this question, let’s consider the following points.

  • In 2018, we are in the middle of the 10th year of economic recovery from the last recession and a bull run in the stock markets. Since March 2009, the S&P 500 index has gained more than four times in value. Each year, it has had a 17.5% growth rate. Although the S&P index has grown by 10% each year, at some point a reversion to the mean is well in order.

This is why investment firms like Charles Schwab and Morgan Stanley are wary of stocks in the next decade.   Even so, this doesn’t mean there will be an economic recession. Instead, you should expect subpar returns and the onset of a bear market.

This means that retirees will be hardest hit. Why is that so? On average, bear markets are 15 months long, and stocks decline by 32%. Early this year, average IRA and 401(k) balances rose upwards to $100,000. Nonetheless, this amount is not enough to support most retirees once they retire.

  • Besides, a bear market will affect both state and local government pension schemes. One report estimates that in 2016, 65% of state and local retirement funds were held in equities. In 2017, state and local authorities had a total of $4 trillion in assets and $1.8 trillion in unfunded liabilities. Today, managers of these funds expect returns of 7% annually. As a result, the arrival of a bear market would have significant impacts on states like Connecticut, Illinois, Kentucky, and New Jersey.

Benefits of TSP

Recent cuts on corporate taxes and tightened spending policies will shore up budgetary deficits in the long term.  In the last week of June, the total federal debt rose to its highest level since the Second World War according to the Congressional Budget Office. What does this portend for retirees? With taxes and interests rate eating a huge chunk of the federal budget, it will be challenging sustaining Medicare and Social Security.

  • In the recent past, the Federal Reserve pushed interest rates upwards on a number of occasions. With a balance sheet that is $3 trillion in the red, it’s uncertain whether the Federal Reserve has sufficient resources to fight the coming recession. Currently, the federal funds rate is at 2% with the Fed projecting that this will increase to 3.5% by 2020. Given that, the Fed will be hard pressed to slash interest rates and reluctant to purchase bonds as it did in the last recession. So, what does this mean for you? It means you shouldn’t expect a Powell put to help you ride out a bear market.

All the same, a majority of retirees have made the necessary preparations in readiness for whatever the future unfolds. But for those who haven’t, their retirement savings are in jeopardy if the economy and markets behave as expected. Although we might ride out these fluctuations, however, it will be challenging to do so.

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TSP CSRS, or the Civil Service Retirement System, offers the Thrift Savings Plan as a supplement to your CSRS Annuity or military pay- as of January 1st, 2018, military employees also participate in a military TSP.

TSP and FERS, or Federal Employees’ Retirement System, makes your TSP one part of a three-part retirement plan. This also includes the FERS Basic Annuity and Social Security.

The difference between the FERS or CSRS Annuity and the TSP is that the annuity is based on your years of service, rather than how much you have contributed, and is also voluntary, as opposed to the annuity.

Regardless of which retirement system you qualify for, contributing to the Thrift Savings Plan is vital to your retirement, especially if you contribute early. TSP compound interest means that the earlier you start to make contributions, the better. However, if you did not start saving at an earlier point, committing to a steady and consistent contribution schedule will almost always produce positive results.

How does TSP work?

If you are a new federal employee, you most likely have an established account and were enrolled in a 3% payroll deduction. If you were hired before July 31st, 2010, you were not automatically enrolled in a TSP account and will need to create it yourself. For CSRS employees and members of the uniformed services, you must elect to contribute to the TSP. You are also not eligible for agency contributions.

You can elect to stop or change your contributions at any time. Check with your payroll office or agency to find out how to sign up for TSP. You may be required to use your agency or service’s electronic system, or you may have to submit Form TSP-1 (Form TSP-U-1 for uniformed services). The Thrift Savings Plan website has the forms available if your agency or service accepts them.

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TSP funds

There are five core funds in the Thrift Savings Plan- four of them are index funds, which mean that they are exactly matched to a broad market index.

  • G Fund (Government Securities Investment Fund)
    • This fund does not invest in an index. The only fund that it is connected to is a nonmarketable treasury security issued for the TSP by the U.S. Lowest return and risk
  • F Fund (Fixed Income Investment Index Fund)
    • Matches the Barclays Capital U.S. Aggregate Bond Index. Slightly higher return and slightly higher risk.
  • C Fund (Common Stock Index Investment Fund)
    • Out of the three stock funds in the TSP, the C is considered the most conservative. It is connected to the Standard and Poor’s 500 Index, which has greater volatility than either the G or F funds.
  • S Fund (Small Capitalization Stock Index Fund)
    • This fund is connected to the Dow Jones U.S. Completion Total Stock Market Index, which is a total of 4,500 companies that fall outside of the S&P 500’s list. Potential for large growth, but also large losses.
  • I Fund (International Stock Investment Fund)
    • The only internationally invested fund. High risk, but potentially high reward.

There is another option for Thrift Savings Plan investment funds- the L funds. These are funds that actually invest in a variety of all the other funds and target a specific retirement date, initially investing in the more aggressive funds and slowly moving into the more stable bonds funds as retirement approaches.

How to change my TSP contribution

If you have not made a contribution election through your agency to start contributions or change the way your contributions work, there are a few steps:

  1. Ask your personnel or benefits office whether your agency or service handles enrollments
  2. Determine the amount you want to contribute and whether you want a Roth or Traditional TSP
  3. Return your completed TSP-1 or TSP-U-1 to your employer to get your payroll deductions set up. Your election should be effective no later than the first full pay period after your agency or service receives it.
TSP and FERS are important parts of your retirement
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Withdrawing from the TSP

You have several withdrawal options that you can choose from. Partial withdrawals are allowed in a single payment. You can also make a full withdrawal with any one or any combination of the following methods:

  • A single (lump sum) payment
  • A series of monthly payments
  • A life annuity (Thrift Savings Plan Lifetime payment options).

A combination of any of these three full withdrawal options is called a “mixed withdrawal.” You can have the Thrift Savings Plan transfer all or part of any single payment or, in some cases, a series of monthly payments, to a traditional IRA or an eligible employer plan by completing the TSP-70 form. Payments to you can be deposited directly into your checking or savings account using electronic funds transfer (EFT).

Spouse’s Rights

If you are a married Thrift Savings Plan participant (even if you are separated from your spouse), spouses’ rights apply to annuity purchases. If you are a married FERS or uniformed services participant with a total account balance of more than $3,500 and you are making a full withdrawal of your account, your spouse is entitled by law to an annuity with a 50% survivor benefit, level payments, and no cash refund. If you choose any other withdrawal option or combination of options by which your entire account balance is not used to purchase this particular type of annuity, your spouse must sign the statement on your withdrawal form that waives his or her right to that annuity.

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Top Three Reasons Not To Trust a Balance Sheet

Often, most of us think we’ve got our balance sheets in order. For instance, you might know how much you owe on your car, mortgage, and other debts. Others may know how much they have in retirement assets, house equity, and in retirement savings.

However, if you hold any retirement savings in a 401(k) and an IRA, you should consider the effect of taxes on your cash value. Additionally, you need to factor in the impact of fluctuating stock indexes on your income.

In February, the stock market tanked with over 1,000 points, then recovered. Though analysts consider this a 10% correction, it may point to possible volatility. At present, it is impossible knowing what the future holds. But February’s revision prompted concern over IRA and 401(k) statements among Americans. For a majority of Americans, it is difficult telling the difference between paper wealth and actual wealth. What’s worse, this difference can have a significant impact on your net worth.

Ideally, you should maintain an annual balance sheet that tracks your progress towards financial goals. With it, you’ll have a picture of what you own and what you owe. An annual balance sheet can help you better understand your financial position. For instance, if you have debts that are greater than your income, then your net worth is negative. If so, then you could be staring at financial insolvency and possibly bankruptcy.

Luckily, there are many personal financial planning software applications for use in developing your balance sheet. Even so, keep it in mind that a balance sheet doesn’t always reflect your whole picture. A balance sheet can mislead when estimating your net worth.  Given that, let’s consider the factors that can affect your bottom line.

Benefits of TSP

Factor # 1: Hidden Taxes

Assume you have $300,000 in an IRA, a 401(k), or a traditional savings account (not a Roth IRA). Typically, these accounts are considered as $300,000 in assets with considerable tax liabilities. Every dollar withdrawn from a traditional retirement account is taxable. Using the above figure if you are in the 25% tax bracket, your tax equates to $75,000.

Factor # 2: Your Estate’s Value

All funds in a traditional retirement account go to your beneficiaries upon your demise. However, your heirs will have to clear any income taxes you owe. Additionally, they may have to pay estate tax on any retirement money they inherit.

Factor # 3: Adjusted Retirement Account Values

A balance sheet is just an estimate of the assets net worth of your assets at the present market rates. On the contrary, it doesn’t portray what you might be worth if the market collapses or rises. Since 2000, the market has dropped twice by more than 50%. This is why you need to factor this percentage when preparing a balance sheet. On the other hand, assume you had $300,000 in a dividend paying life insurance policy.  In this case, you could leverage a legal provision that allows for cash withdrawals that have no tax obligations. You get to keep your entire $300,000 asset.

In case you die before depleting saving in a traditional retirement account, your family pays any owed income taxes on the sum they inherit. Under current law, a life insurance policy pays the entire value of your death benefit to your family without any income tax deductions.

Therefore, you should consider the impact of income taxes, market volatility, and estate value when preparing a balance sheet in the future. Doing so will help you create a saving strategy to meet your unique needs.

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How To Choose A Supplemental Investment For Your TSP | Linda Jensen

LINDA JENSEN – About five million people have a good chunk of their retirement savings in the TSP (or Thrift Savings Plan), but there are many of them are not using it to its full potential. What is the TSP? It’s the government’s correspondent to a company’s 401(k) plan.  Money is automatically put into a plan each pay period into at least one basic investment option. The great thing about the TSP is its simplicity – unlike other plans. It provides a limited number of investment choices, which decreases the chances for mistakes. It also gets rid of asset classes that add to the long-term value for people looking to save for retirement.

Are you looking to get the most from your TSP?

The Thrift Savings Plan provides target-retirement date funds, making it really simple to choose an investment to save into. As an investor get closer to retirement, the investment gets a little riskier to ensure they have enough money for retirement. There are five choices with the TSP:

  • C – Considered a clone of the S&P 500
  • F – Index of government and corporate bonds throughout the world
  • G – Investment of short-term U.S. Treasury securities
  • I – Investment of International stocks of 21 countries (U.S., Canada, etc.)
  • S – Index of all stocks in the U.S. not seen on the S&P 500

Each choice is exposed to both small and large-cap U.S. stocks, international stocks, the basic bond market, and a cash-like, risk-free option.  The biggest weakness of the options is that there is no value option. In the last 10 or so years, value stocks have constantly offered great long-term returns in growth stocks of the TSP’s S and C funds.

be careful about the market

When You Want Higher Returns From The TSP

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If you go for a TSP option, you can attain high long-term results from the S Fund, which means you’re investing the portfolio in small and mid-cap stocks for an extended period. These funds have done much better than stocks seen in the I and C funds. Aggressive investors could put up to 80 percent of money into the S Fund. More conservative investors could boost the expected returns into equity funds, with an increase in combined equity between 60 and 70 percent. For every extra 10 percent in equities, the long-term expected return increases 0.5 percent a year. While this does not seem like a lot, it can make a huge difference over the span of 20 to 30 years. It also means you have much more money at the time you want to retire. If the investment is in a target-date TSP fund, a person could allocate another 10 to 20 percent of their typical contribution to the S fund.

Higher Returns From Stocks Not In The TSP

While the TSP has no value options, you can always have an outside account to complement the TSP. For example, the Roth IRA is one option that allows you to contribute $5,500 a year or $6,500 a year if you’re older than 50.  How do you do this? Invest the whole IRA into small and large-cap value stocks, emerging markets stocks. However, if you have a minute amount of money to go into this, you’ll have a great long-term option if you add the small-cap value either with a low-cost index fund or ETF.

cryptocurrency, though volatile, can be incredibly valuable

Linda Jensen is the principal and owner of Asset Care & Preservation Services with offices in Olympia, WA.  Linda began her career with Prudential Preferred in 1994 where she was an agency leader.  She earned the credentials of a financial planner and has been in practice as an investment and insurance professional since that time.  Linda started her own company in 1997.

Articles from Linda Jensen:

Linda Jensen | How to make the most out of your TSP Plan

Linda Jensen | How to Successfully Fund Your Retirement Years

Linda Jensen

Defense Department Reports On Take-Rates Projections For BRS

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A report from the Defense Department’s Office of Actuary provides “take-rates” projection for its new Blended Retirement System (BRS). Service members can choose a lump-sum, six-figure amount but they relinquish up to 50 percent of their earned retired pay until they reach 67-years of age. The latest “Valuation of the Military Retirement System” report suggests 22.8 percent of retiring enlisted and 5.2 percent of retiring officers will feel tempted by the cash amount and be okay with the deep cuts in their retired pay. When it comes to accounting, everyone that chooses the lump sum and cut their retired pay in half instead of a quarter will see full annuities start when they are 67 years of age.

The actuary predicts two percent of retired reserve officers and 8.4 percent of reserved retired enlisted will be tempted to take the lump-sum and cut their retirement pay by 50 percent until age 67. In the 2017 valuation report, looking at retirement plants, there was an estimated $14 billion in future savings to the BRS-related fund. However, there was no estimate on the take-rate for the lump-sum option. The cost savings also did not take into consideration two key aspects of the new system where department costs don’t impede retirement funding:

  • Continuation bonus payment between year 8 and year 12 of service
  • Government matching of TSP member contributions

Air Force Maj. Carla Gleason said the latest report did not estimate the savings that would be seen in the BRS, but that the goal was to improve the government-provided retirement benefits to more people in the armed forces. Many people have assumed it’s to reduce the government’s costs.

Federal banking took a hit this summer.

Why Is The BRS Blended?

The BRS is blended because it includes two new features with one from the High-3 plan. It offers a reduced annuity for 20 years or more of service (20 percent below those with the High-3 plan). The TSP offers government matching that gives federal employees a nest egg they can still use even when they leave the service. They’re also given a one-time payment to entice them to stay with the service for much longer. The Military Compensation and Retirement Modernization Commission came up with the BRS, which also offers a lump-sum option that people have regarded as being unfair.

Anyone entering the military on or after Jan. 1, 2018 are enrolled automatically into the program. Any person in the military before that date must decide before the end of the year (Dec. 31, 2018) if they want the BRS. Reservists with less than 4,320 points can opt into the program, but must also decide by the last day of the year. Anyone with 12 years or more of military service at the end of 2017 may stick with the High-3 plan, which is offered under the Final Pay plan. Another retirement plan called Redux is dedicated to the current 63,300 retirees. It was developed and is geared toward the employees that took the $30,000 Career Status bonus offered in year 15 of service to switch from the High-3 to a Redux.

Congress came up with this plan in 2000, but as the bonus value was lost to inflation, it became less attractive. The law that developed the Blended Retirement System also noted the CBS-Redux would end before 2018. However, the 63,300 who opted into the plan are stuck with that reduced annuity plan. The lump-sum feature of the BRS is simple but also controversial. After all, there is no federal retirement plan currently offered that provides a lump sum that replaces some of the defined benefits. It’s an offer typically seen in the corporate world, but they don’t tend to have the controversial formulas that determine the lump sum Congress imposes on BRS participants.

Defense officials were adamant that this feature wasn’t included in the new BRS when the plan was moving through Congress in 2016. However, the House caved to the Senate Armed Services Committee and included it anyway on their urging. They targeted it to retiring members by claiming it was giving them financial flexibility – to pay debts off, purchase a home, start a business, etc. For the majority of retirees, the lump sum isn’t a good idea, as it could lead to impulsive purchases and investments they don’t need. It would also cut into their retired pay that would have to last up to 30 years.

Actuaries are bothered by how the calculations of the lump sum, which uses personal discount rates and are regarded as not actuarially, sound. Personal discount rates evaluate a person’s current dollars over future dollars. The higher your discount rate, the more savings the Defense Department has. Should the department use the market rates rather than personal discount rates to determine the present value, the retirement lump sums would be much higher than initially planned.  The Department of Defense’s Board of Actuaries’ report states the amounts, though still extremely enticing are still rather unfair.

The Board stated the personal discount rate isn’t the right method for discounting. It also guessed that policymakers would include an aggregate personal discount rate for enlisted and officers, which wouldn’t be right for other individuals. And, they did, as noted by the most recent valuation report the aggregate personal discount rate is going to be used. According to the department, the discount rate is based on the Department of Treasury High-Quality Market rates for the benchmark. This adds a premium to the market of over four percentage points, following the BRS’s personal discount rate requirement.

TSP and Divorce: How The Court Will Handle Your TSP and Other Federal Benefits | Linda Jensen

The number of couples getting divorced each year is quite high, and dividing up assets can be tricky. If you’re a current federal worker or a retiree who is getting divorced, it’s important to understand how the court will affect your TSP. 

 

Currently, there are no federal laws that former spouse automatic access to the TSP balance. You can either agree to add it to the division of assets, or the state will provide the awarded amount. The TSP will need a Retirement Benefits Court Order after the divorce. This can come from the divorce decree, legal separation or annulment or it can come from the court-approved property settlement agreement. 

The Qualified Domestic Relations Order may also serve as the RBCO.

The TSP has a Court Orders and Powers of Attorney booklet that you can find on the TSP website under “Forms and Publications.” It’s a 31-page booklet with a plethora of useful information, layman language and a checklist to help you and your attorney to create legal-looking documents. You can also find RBCO requirements in the booklet.

 

Once you have a court order in place, the TSP account will be frozen, and you won’t be able to get a loan or make withdrawals until the divorce is finalized. If there is an outstanding loan on the TSP account, the remaining loan balance is added into the account balance to determine how much the spouse is permitted to have unless the court order deems it can be excluded. The court order will provide the award in either percentage or award amounts. The TSP cannot be made to pay more than the current account balance.

 

The TSP goes along with the FERS annuity and CSRS, which means there are different rules for each one. You can learn more about these rules by going to the Handbook for Attorneys on the Office of Personnel Management website. If you’re getting divorced, it’s imperative that your divorce lawyer has a good understanding of the rules regarding federal benefits. It may not be enough to have a standard QDRO unless specific criteria are met. If there are no attorneys who understand the federal rules regarding your TRP and other federal benefits, give them the handbooks to read and familiarize themselves with.

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Linda Jensen is the principal and owner of Asset Care & Preservation Services with offices in Olympia, WA.  Linda began her career with Prudential Preferred in 1994 where she was an agency leader.  She earned the credentials of a financial planner and has been in practice as an investment and insurance professional since that time.  Linda started her own company in 1997.

 

Articles from Linda Jensen:

Linda Jensen | How to make the most out of your TSP Plan

Linda Jensen | Top Four Tips for IUL Shopping

Linda Jensen

Get A TSP Loan To Attain Money You Need

BUDDY NIDEY – When you need money, and you have a Thrift Savings Plan; you can take out a TSP loan to help you out in those tough times. Many employer-sponsored defined contribution plans let you take out loans – either for a primary residence or general purpose. In some cases, it can be for both.

 

There is one key restriction in getting a loan from the TSP – you may not borrow any more than $50,000 even if you have much more money in it. If your TSP balance is less than $100,000, you can only borrow half of what is in the account. So, if you have $70,000 in your account, you are eligible to take out $35,000. If you have $50,000, you can only request a $25,000 loan.

 

  • General Purpose Loan– This loan can be used for whatever you need it for. There is no need for documentation to prove what it’s used for and can be repaid up to five years.

 

  • Primary Residence Loan –Asking for this loan generally prove of what you’ll be using it for but can be paid back within 15 days. You can check out https://www.tsp.gov/forms/loans.htmlto find out what the specific documentation requirements are. A primary residence loan does extend to houseboats and RVs, so long as you’re using them for your main residence.

2 Requirements Of Either Loan Type

Whether you’re getting a primary residence loan or a general purpose one, there are two key requirements you must fulfill on them. If your TSP plan is funded under the FERS retirement system, you need your spouse’s consent. You’ll also need to pay a $50 application fees, which are used to dray the TSP expenses. You cannot apply for a second loan of the same type within two months (60 days) of paying the other loan off.

 

When taking out the TSP loan, the TSP account is reduced to the amount you borrowed. So, if you put money evenly in all five TSP funds and you’re borrowing $25,000, $5,000 would be deducted from all funds. The amount of interest you pay back is based on the G Fund return in the month the loan is granted. You can find this information on the TSP website under “loan and annuity rates.”  The interest paid returns to the TSP account based on the most recent contribution allocation.

 

The loan and repayment need to be comparative between the balances of your Roth TSP and the traditional TSP.

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What Does The Thrift Board Say About TSP Loans

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According to the Thrift Board, it’s never a good idea to take out a TSP loan, as people are borrowing from their retirement and may not be fully available at retirement. Their assumption is based on many TSP participants making investments in stock funds (C, I and S) where the return tends to be more than the G fund. There are exceptions here – 2008 and 2015, for instance.

 

If you’re paying on loan and leave federal service (for whatever reason), you are given two choices:

 

  • Pay the loan back
  • Take a taxable distribution

 

The TSP will be given notice that you are leaving the agency (usually 30 days) and will send you instructions on how to repay the loan. The notice informs you of the date the loan must be repaid by.

 

Failure to repay the loan by that date means the loan goes into default and the remaining balance is considered taxable distribution. The TSP sends you an IRS Form 1099.  The tax can be avoided paying if you transfer an equal amount of the remaining balance into an IRA or another tax-deferred account.

 

You cannot take out any money from the account until the outstanding loan is closed. If you don’t plan to pay the loan back, it’s imperative to contact the TSP and make a request for immediate determination of distribution.

Buddy Nidey, Financial Expert

As Certified Public Accountant and a graduate of the College of Financial Planning in Denver, Colorado, Buddy “Bud” Nidey applies his strong analytical background to his work as an investment advisor representative. He enjoys coordinating clients’ investment portfolios with solid financial planning that takes income taxes, diversification and safety into consideration.

Articles by Buddy Nidey:

Buddy Nidey | FEGLI Life Insurance Options

How does Divorce Affect your TSP?

TSP Stocks Face Uncertainty In Response To Worldwide Uncertainty With Tariffs

The Dow Jones Industrial Average had a rough start to 2018, with last month seeing a one percent decline in the C Fund, a two percent drop in the I Fund and a 0.2 percent increase in the S Fund.  However, an increase in U.S. interest rates are putting down negative pressure on stock valuations, but it’s the fear investors have on the trade wars that are affecting the TSP performance.

 

This is why you should diversify your portfolio.

Will There Be Higher Worldwide Tariffs?

For many years, the U.S has had relatively low import tariff rates compared to other parts of the world. With the nation threatening higher tariffs, there are two possible outcomes that could happen:

 

Other countries could lower their own tariffs, aligning them with the U.S. tariffs, ensuring that U.S. tariffs stay low. This means U.S. products would be able to compete ina global market.

Other countries could resort to retaliatory measures such as raising their tariffs, which would mean high tariffs for all nations, reduced worldwide trade and boost protectionism.

 

The Trump Administration has already announced it would implement tariffs on an extra $200 billion of Chinese products, and even flirted with the idea of imposing a 25 percent tariff on all European car imports. The current European car tax rate is 2.5 percent with European trucks taxed at 25 percent. The EU taxes the U.S. vehicles at 10 percent.

 

With countries looking at the second option in response to the U.S.’ moves, it means markets are on shaky ground. Many well-known U.S. companies – Apple, Caterpillar andothers, see a large part of their revenue from countries like China. For them, a trade war is risky.

 

For smaller companies that don’t have a lot of international exposure, tariffs are unlikely to affect them as much. Thiscould be why the S Fun appears to be doing better than the C Fund.

 

OPEC Will Boost Oil Production Slightly

 

Energy stocks have seen a boost thanks to OPEC’s decision to increase the production of oil slightly. This helped to ease investors’ concerns that OPEC would continue to reduce its production, which would have a negative impact on the energy stocks.

 

OPEC’s decision would help in one of two ways – stabilize the market or decrease the price of oil slightly. This would help consumers and businesses who often face higher prices during the summer months. When oil prices are astronomically high, it causes the economy to slow down and cause a recession. Therefore, a decision to boost oil production output can decrease the potential of this happening.

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