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January 19, 2022

Federal Employee Retirement and Benefits News

Category: Brad Furges

Will COVID-19 Impact Options for TSP Investors? By: Brad Furges

In recent months, the federal government has introduced many changes in its Thrift Savings Plan (TSP). Most of the newly introduced modifications have nothing to do with the novel COVID-19 coronavirus pandemic, but some unexpected events can inevitably impact the investors. In this case, it is advised to expand the I fund and include more companies, and lay emphasis on emerging markets like China.

The CARES Act that came into effect to fight the pandemic may also impact the TSP investors who want to withdraw money from their TSP account but do not want to pay any penalty.

 

What changes can change the impact and inclusions of the I fund?

One change is increasing the investment in international stocks, or we call them I funds in the TSP’s lifecycle funds. The amount in the lifecycle funds for foreign funds was increased from 30% to 35%. (This percentage increase is in terms of the I fund ratio to the C+ S + me ratio.) This new change came into effect on January 4, 2019. 

With this, a higher allocation of equity funds in the lifecycle income fund was also increased from the previous 20% to 30%. The change came into effect in January 2019 and will stay until July 2028. According to January 2020 reports, the L income fund has a target of equity allocation of 21.50%.

 

Changing contents of the I fund

The government is planning to change the I fund (International Stock Fund). The I fund’s current plan is to measure the stock market performance of developed markets working outside the U.S. and Canada. 

As of now, the I fund has stocks from 21 developed markets representing more than 600 companies from large and mid-sized markets. 

 

Things creating controversy over the I Fund Index

A group of senators is requesting the chairman of the Federal Retirement Thrift Investment Board (FRTIB), an agency responsible for the smooth working of the Thrift Savings Plan, to take back its decision to transfer the index tracked by the TSP’s I fund.

According to the new law, the new index will be completely different and represent more than 6,000 companies in the index containing 22 developed markets and 26 emerging markets. It will include large, medium, and small companies. 

Many people who read the new changes commented that the I fund should include emerging markets or separate funds for the emerging market. The new changes will consider these things. 

 

$50 billion in federal employee retirement assets are easily accessible to Chinese companies

This provision to change the I fund index has seen many controversies. Senators Marco Rubio (R-FL) and Jeanne Shaheen (D-NH) commented and said that changing the I fund to set a new benchmark index would expose more than $50 billion in federal retirement assets, including federal employees. Members of the U.S. Armed Forces would give birth to undisclosed material risks associated with many of the Chinese companies already listed on this MSCI index.

This controversy was the result of the ongoing market crisis due to the coronavirus pandemic and China’s pivotal role in the spread of this virus. Nobody knows the impact of this new change and the controversy on the world and the TSP investors.

 

When can we expect to see the changed new I fund index?

Several people reading the news have asked multiple times when they can see the new I fund index coming into effect. To answer this question of the new index’s date, Kim Weaver, the director of the Office of External Affairs for the Federal Retirement Thrift Investment Board (FRTIB), said that the board is working on this and will announce the date soon. 

It seems that the board is still working on the new index and has not come up with any specific date for implementation.

 

The new provision allows withdrawing from retirement accounts without paying any penalty.

The latest provision in the CARES Act will enable participants of any age to withdraw up to $100,000 from a retirement account early without paying the 10% early withdrawal penalty in case he or she is impacted by the coronavirus or was exposed to it. 

That means TSP investors can withdraw up to $100,000 from their account without paying any penalty.

Is this is allowed? What is the process of taking this step? No specific information on this question has been received so far. FedSmith asked the TSP what this rule means for the TSP investors. Ms. Weaver replied and said under the CARES Act, participants have this authority, and they have a project team to determine whether and how to implement the process. 

Though this provision looks attractive, withdrawing up to $100,000 from the TSP without paying a 10% penalty may be difficult for TSP investors to pay the amount. It seems that this option will be open for TSP investors, but we don’t know if this will be available to TSP investors, and when it will happen.

The coronavirus is expected to impact our society in ways that we never expected a short time ago. Many TSP investors seeing the rapid drop in the stock market are riding on an emotional ride while they are watching their investment dropping. The number of millionaires in the TSP club has dropped by more than 45% in a short while. 

While the percentage of the lifecycle’s I funds has increased, we have no idea of the date when the new I fund will come into effect. The CARES Act to fight the COVID-19 crisis is expected to open up new withdrawal options for some TSP investors. It might be too early to guess how this situation will help TSP investors. More surprises are expected to come before the pandemic ends. 

Inflation and the Timeframe of Your Retirement. By: Brad Furges

With the growing inflation, an increasing number of federal employees are doing the figures to determine the financial benefits of working for another year or two. For many, the answer is startling: much more money in retirement for working a few years longer.

Example:

According to benefits expert, a Federal Employees Retirement System (FERS) employee earning $80,000 per year may increase their starting annuity by over $30,000 by staying on for another two years. That is a lot of money by any standard. Both now and later.

The FERS plan covers the great majority of still-working public workers. While it doesn’t have as generous civil service benefit as the Civil Service Retirement System (CSRS) scheme it replaced, FERS employees are eligible for Social Security benefits as well as a 5% government match to their Thrift Savings Plan (TSP) accounts. Retiring under the FERS program might be more complicated since it has more moving pieces and various requirements. But it’s well worth it if done right. Working longer for a greater pension allows many FERS retirees to put off accessing their TSP savings for years.

FERS employees must maximize their retirement benefits since FERS retirees are subject to the Cost-of-Living Adjustment (COLA) scheme opposite of their CSRS colleagues. In short, when inflation goes beyond 2% (as it’ll this year), retirees receive inflation catchup that is 1% less than the actual increase in inflation. The January 2022 COLA for CSRS, Social Security, and military retirees, for example, is 6%. Those on the FERS program will receive only 5%. Compounding-in-reverse indicates substantially reduced purchasing power over time.

So, aside from the obvious, what are the disadvantages of working longer than planned? 

According to a benefits expert, the $80,000 per year employee may increase their starting annuity by about $30,000 by working two more years, from age 60 to age 62. At the same time, they can also draw a full salary, qualify for pay increases and within-grade increments, and increase their high-3 year average salary.

Interested?

A benefits expert came up with this example of how postponing retirement may benefit you a great deal. Of course, there are several more factors to consider. However, money, as in having enough in your golden years, is a major one. You may use this example of an $80K employee working longer to receive more in retirement. Here’s the example:

Length of Service at 60: 19 years

    • 19 x $80,000 x 1% = $15,200 x .90 = $13,680 (10% reduction under the MRA + 10 retirement as employee didn’t have 20 years of service at age 60 to be eligible for an unreduced retirement)

Length of Service at 61: 20 years

    • 20 x $80,000 x 1% = $16,000 + $12,000 = $28,000 (The additional $12,000 is a FERS supplement of $1,000 a month payable to age 62 when retiree can file for SSA and receive an even greater SSA benefit depending on their lifetime of FICA taxed wages)

Length of Service at 62: 21 years

    • 21 x $80,000 x 1.1% = $18,400 + $24,000 = $42,480 (The $24,000 is the SSA benefit payable at age 62 of $2,000 a month from their lifetime of FICA taxed wages)

 

Of course, the individual who left at 60 may claim their SSA benefit, but the shortfall in their FERS basic retirement income would still be close to $5,000 per year or $600 per month – for life! They would have benefited from adding two more years at their presumably best earning years to their SSA record, as well as two additional years of contributions and growth to their TSP account.

They may withdraw $24,000 per year from their TSP account to get $43,000 per year by deferring SSA claims until age 70 and then taking considerably lower payments from the TSP to fulfill the required minimum distributions at 72.

Definitely one to have in your retirement planning toolbox. Also, don’t forget to forward it to a FERS friend.

What Next to Manage Your TSP: Buy, Sell, or Sit Tight? By: Brad Furges

Some time back, hundreds of Thrift Savings Plan account participants were dreaming of their entry into the Millionaires Club. Some believed that by mid-year, their accounts would have more than $2 million. Now, this seems like only a dream. So the question for all federal employees who are managing their finances during their retirement is what to do next to manage their TSP? During the last time, the Great Recession of 2008-2009, tens of hundreds of active and retired feds moved out of their stock indexed C, S, and I funds. Most switched to the Treasury securities G fund. Many never invested in stocks despite the 11-year bull market. So who can be done next? And what could have been done correctly at that time, and now? In this article, we will try to put some light on this question: 

To get an answer to this question, we contacted Abraham Grungold. He is a successful TSP investor and a financial coach who is known for his thoughts and a fantastic sense of words of wisdom. He answered this question and said that, for employees under the Federal Employees Retirement System (FERS), it is the best time to buy. 

The ongoing COVID-19 pandemic is scary. People are losing their lives, and they should not be treated lightly. Everyone needs to stay cautious with his or her personal and financial health. This may end in the coming weeks or in months. The economic health has certainly taken everyone on the chin. Everyone feels knocked down, but we will return and become sharper after the outbreak is over. As far as employees under the FERS system are concerned, employees who have a Thrift Savings Plan will buy in a downward market. Doesn’t matter, if you are one year away from retirement or more from retirement, this time is a perfect buying opportunity.

He said he has transferred his cash balances to the C fund and changed his future contributions to buying C funds. For his personal IRA, he is purchasing every time the DOW dropped another 10%, buying when the market is low 10%, 20%, and then at 30%.

At his financial coaching site, he has both clients who are federal employees and non-federal employees. His advice is not to sell anything to all clients because you don’t lose anything when you don’t do anything. If you are watching the game, you will not be at a loss. But there are clients he is told that when the Dow dropped to 30% is the time to buy something. The financial expert’s advice is to buy when the market is low. One of his federal employee clients transferred 50% of his account into the C fund. That person retired, so 50% was good enough for him. There is one more fed client who has both C and F funds. Grungold advised him to increase his contributions to the maximum since he was good enough and could afford to do so.

Grungold said, “I also have two non-FERS clients—one purchased a considerable amount in an S&P 500 Fund with Vanguard, and the other is waiting to see a drop in the S&P fund. It is advised to invest in small quantities, and when the market is low, that is 20-30% of any purchase is a good option. For many non-fed clients who had small cash, I suggested high-quality value stocks going down 25-30% but which will come up quickly after the virus has left us.”

“No matter what type of decision you take on, the most important thing is that you feel good and comfortable with whatever you are doing. The money is yours, so the decision to invest it should rest in your hands only. Please do not hesitate to contact me on LinkedIn or my Facebook page for more queries.”

Plan to Retire at 65? Here’s How Coronavirus Could Impact Your Decision, by Brad Furges

As per Brad Furges, even before the COVID-19 pandemic, the tradition of retiring at 65 was changing. Now, it looks as though it could disappear altogether. According to an Allianz Life Insurance Company survey, around half of Americans retired earlier than expected. While one-third blamed job losses, others had healthcare issues that caused them to leave the working world behind. 

With the current global environment, it’s fair to say that people are worried about the future. With unemployment high and uncertainty filling the air, it’s impossible to predict how the economy will recover and whether previous roles will return.

According to Brad Furges, for the longest time, 65 was the magical age because of Medicare and Social Security benefits. Depending on the birth year, the latter now becomes available at 66 or 67. Despite this, many surveys show that there’s confusion surrounding retirement and that many still believe they’re eligible at 65. This being said, one study from the Transamerica Center for Retirement Studies showed over half of the participants plan to never retire or continue past 65. 

Therefore, COVID-19 pandemic could lead to one of two outcomes: 

• Working longer to catch up 

• Retiring earlier 

 

1. Early Retirement 

 

On the one hand, older individuals may not have the opportunities to succeed in their careers once the virus fades away. With millions of people looking for work, some will struggle for opportunities. In the United States, this could lead to an influx of 62-year-olds claiming Social Security. Of course, this causes permanently reduced benefits and a lower income than initially planned. 

 

2. Late Retirement 

 

For those who do get opportunities, there will be a need to replenish the funds lost during the pandemic. Again, there’s a whole host of questions, and older workers especially may face difficult times. Even if you can find work, there’s a question of whether wages will be lower than before because of the competition for each position.

According to some experts, it will be a decade before we fully understand the impact of the pandemic. Either way, financial experts around the country are pushing one key theme; the idea that financial planning is the key to surviving turbulent times. The more you plan, the more likely you are to have the capacity to deal with stressful situations.

If you were born 64 years ago, you have no control over what’s happening today. Therefore, the best way to deal with unforeseen downturns is to be sensible with finances and save for retirement early. 

Even before the COVID-19 pandemic, the tradition of retiring at 65 was changing. Now, it looks as though it could disappear altogether. According to an Allianz Life Insurance Company survey, around half of Americans retired earlier than expected. While one-third blamed job losses, others had healthcare issues that caused them to leave the working world behind.

With the current global environment, it’s fair to say that people are worried about the future. With unemployment high and uncertainty filling the air, it’s impossible to predict how the economy will recover and whether previous roles will return.

IRS Stimulus Check Tool to Consider During the Pandemic, by Brad Furges

According to Brad Furges, there’s no need to worry about registering and tracking the stimulus checks on the Internal Revenue Service (IRS) website. If you’re searching for the right tool to keep track of checks, then we will give you details of the two best tools, the non-filer tool and the Get My Payment tool that is readily available on the IRS website. The IRS has come up with additional guidance to explain the process of using these tools. Let’s see which tool should be used:

If you have filed your federal income tax return for 2018 or 2019 and given correct information about the direct deposit for your tax refund, you don’t need to worry, and you can avoid the additional steps.

  • You can easily use the Get My Payment Tool to keep track of your IRS stimulus check once the system has processed your tax return.

According to Brad Furges, but if you have filed a federal income tax return for 2018 or 2019 and not given the correct details of your direct deposit for your tax refund, your stimulus check will be deposited in the account number you mentioned on your return. If your account is not active, the IRS will mail your check to your address of record (on the address that you specified on your last tax return). You are not allowed to update your bank account information once your check has been scheduled for delivery, and you cannot change your bank account information, which you filled in at the time of filing your returns.

  • You can easily use the Get My Payment Tool to keep track of your IRS stimulus check once the system has processed your tax return.
  • Please note that if your refund was linked to the Refund Anticipation Loan (RAL), Refund Anticipation Check (RAC), or any product, the IRS will not give your check to the lender, but will try to send your check through direct deposit or mail.

Brad Furges said if you have filed a federal income tax return for 2018 or 2019 and need to pay taxes or failed to choose a direct deposit for your refund, then you can use the Get My Payment Tool to enter the correct information of your direct deposit account once the IRS has processed your tax return. If that tool doesn’t give you access to make changes, that means the IRS will mail your stimulus check. 

If you haven’t filed a federal tax return for 2018 or 2019 and expect a tax refund, you will be asked to file your 2019 individual tax return electronically (paperwork may take a longer time). If you opt for direct deposit for your tax refund, your stimulus check will be deposited to that account; if you do not opt for direct deposit, you may get access to use the Get My Payment Tool to enter account information after the IRS has processed your tax return. If that tool doesn’t give you access to make changes, that means the IRS will mail your stimulus check.

Brad Furges said if you haven’t filed a federal income return for 2018 or 2019, but you’re expected to repay taxes, you will be asked to file your 2019 individual tax return electronically (because paperwork may take a longer time). You may get access to use the Get My Payment Tool to enter account information after the IRS has processed your tax return. If that tool doesn’t give you access to make changes, that means the IRS will mail your stimulus check.

If you’re not eligible to file a federal income tax return for 2018 or 2019 and get Social Security retirement, SSI, disability (SSDI), or survivor benefits or Railroad Retirement benefits, you’re in a good position and don’t need to do anything. The IRS will immediately deposit or send your check in the bank account where you get your benefit, including Direct Express debit card for SSI recipients. The stimulus check will remain unaffected by these benefits.

But if you are an SSA or RRB Form 1099 recipient or SSI benefit recipient, your information may not be available using the tool.

If you are not eligible to file a federal income tax return for 2018 or 2019, and you do not get Social Security retirement, SSI, disability (SSDI), or survivor benefits or Railroad Retirement benefits, then you must use the Non-Filer tool. When you use this tool and enter your bank account information, the IRS will deposit your check directly into your account. In some cases, the IRS will send you a mail to send your check.

  • You can easily use the Get My Payment Tool to keep track of your IRS stimulus check once the system has processed your tax return in the Non-Filers tool.

We must mention here that only U.S. citizens, permanent residents, and resident aliens will qualify to get these checks (non-resident aliens do not qualify). You need to have a valid Social Security number (not an ITIN). If you are a dependent (filing a separate tax return), you will not be eligible for a check.

One more thing that we want to mention here is that the stimulus check is NOT taxable and will not impact your IRS 2020 refund.

If you are checking your check status multiple times a day, the results won’t change. According to the IRS, their data is updated once a day overnight, so there’s no need to check your status more than once a day.

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