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

2. Traditional TSP Disbursements – 100% taxable as income

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

3. 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.

2. 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.

3. 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

2. 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

3. Investment Grade Life Insurance

• No earnings/contribution limits
• Health & Lifestyle factors considered
• Powerful additional benefits available

4. 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.

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:

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.

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.

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.

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

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.

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.

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.

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

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!

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.

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.

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.

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.

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.

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.

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.

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.