In frequent flyer plans, the more you take-to-the-air, the closer you get to elite status. And, the more you put away in your Thrift Savings Plan (TSP), the closer you will get to having TSP-millionaire status. For more on what that money can do for you, the Federal Drive Host Tom Temin talked with retired federal manager Abe Grungold of AG Financial Services.

Interview Transcript: 

Abe Grungold We always talk about how to become a TSP millionaire, but we really need to talk about why it’s so important to be a TSP millionaire. And I have three critical, reasons to be a TSP millionaire. And the first one is, in retirement, you may need to supplement your income. The second one is, how will you pay for your long term care needs in retirement? And the third one is, you never want to run out of money in retirement.

Tom Temin Well, those are pretty good reasons. And how does it fit in? We’re talking about the bulk of federal employees are [Federal Employees Retirement System (FERS)] retirees. And maybe just review for us what the FERS annuity is all about, in addition to Social Security and the relation of those two.

Abe Grungold Yes. The FERS annuity is based on a formula of the number of years that you have as a federal employee service time, multiply times your salary. And then there’s a multiplication factor. So you get a FERS annuity. It comes out to about one-third of your salary prior to retirement. So that is built together with Social Security. And you can have Social Security at age 62 or a later year, whichever year you decide to select it. So let’s say you are 62 and you are receiving a FERS annuity, and you have elected to take Social Security. What happens when both of those monthly, income payments to you cannot pay for your monthly expenses? How will you pay that difference in your monthly expenses? And if you’re a TSP millionaire, you would make a withdrawal from your TSP to supplement your income. And a lot of federal retirees have to do this. They have to, and it’s called filling the gap of your monthly expenses, especially if you don’t want to work part time in retirement.

Tom Temin Well, at some point you have to take a minimum withdrawal, by law. But 62 is way ahead of when that would happen. So it sounds like to supplement your income before the required minimum distribution of your TSP, your RMD, then you would have to withdraw from the principal at that point.

Abe Grungold Yeah it’s a required minimum distribution mandatory. It starts around age 73. But if you decide to retire at 62 and you still are carrying a mortgage, you want to start doing some travel and you want to do some other things, before you know it, your monthly expenses may far exceed your monthly income of your FERS annuity and your Social Security. So you need to make up the difference. And if you do not want to work part time in retirement, making up the difference can be done with making a withdrawal from your TSP. I did that when I first retired from the government, and I did have a part time job. I wasn’t collecting Social Security. I did have my FERS annuity, but I was making a TSP withdrawal to make up the difference.

Tom Temin Now 62. How realistic is that for people to retire in mass? Some people may want to work because they like their work, but 62 is kind of young these days to retire unless you’re rich.

Abe Grungold It is. There are federal retirees who retired at 57. There’s a large bulk of them. Law enforcement, air traffic controllers, they face mandatory retirement at 57. And certainly I have clients who are working for the government in their 70s. But 62 seems to be a popular time for retirees. And they start thinking about it very seriously at 62, because they know that they can collect that early Social Security. So they think that, oh, if I get my FERS annuity, along with my Social Security, that should be enough. But you may have to draw a little bit from your TSP, or you’re going to have to go back to work part time.

Tom Temin We are speaking with Abe Grundgold, proprietor of AG Financial Services in Florida and a retired federal manager. And we know how many millions you had in your TSP from earlier interviews. But if you retire at 62, you can have a reasonable expectation of living at least 20 more years. Very likely 30 more years. And so at some point, that you have to make sure that your investment strategy supports the required minimum distributions and not shrinking the principal.

Abe Grungold So that falls under my third reason, Tom. And that is you do not want to run out of money in retirement. So let’s take that scenario. Let’s say you do have $1 million in your TSP. You retire at age 62 and you want that million dollars to last. So let’s just assume that you have your entire million dollars in the G fund. You have invested in the G fund. At age 62 you have $1 million. And you start withdrawing $30,000 a year from your TSP to supplement your income or to do anything extra that you want to do travel wise, etc.. Spoil your grandchildren. That million dollars is going to last 33 years, and you’ll be 95 years old. Now, even if you invested in the G fund, you’re still going to have a balance in your TSP at age 95. And we should all be so lucky to live to be 95. But this is important that if you want to be in a position that you do not want to run out of money.

Tom Temin A couple of points. 95 can be a curse or a blessing. I’ve seen 95 year olds that are both ways, but their RMD is more than $30,000 on $1 million, wouldn’t it? Isn’t it 4%, so that would be 40,000.

Abe Grungold Yes.

Tom Temin So how long will it last then?

Abe Grungold It should still last, because your TSP will be growing in the G fund. But if you want to make sure that it’s going to be, certainly enough money to 95, you may have to invest a little bit more aggressively other than the G fund. But yes, it will last to 95. Even if you have to take out, your RMDs, you still will have a significant balance at age 95.

Tom Temin And if you spend like a few years, say, from 90 to 95, and you’re pulling out more than the RMD and reducing the principal, so what, you’ll still probably check out before the principal disappears.

Abe Grungold So let’s say you are 90,  you may have to go into a nursing home that falls under my second critical reset. So how will your long term care needs be paid for your nursing home? Well, nursing homes cost anywhere from 75,000 to $150,000 per year, depending where you are in the United States. And your TSP is going to fund that. It’s going to fund that, because you’ll be giving the nursing home your FERS annuity. You’ll be giving them your Social Security. And you can still have money from your TSP that covered that large expense of long term care from the age of 90 to 95. And that is a very important reason to have a TSP of $1 million.

Tom Temin So a very good rule of thumb might be to develop a budget and see where it stacks up against FERS plus Social Security plus withdrawal of TSP, followed by a replaced by the required minimum distribution when you reach that age.

Abe Grungold Right. It’s always good to have a budget, but it’s always better to know that you have a pile of money that you can go to. That rainy day fund that our parents always tell us. It’s good to have that available for whatever you need. Supplement your income, needing to go to a nursing home and you never want to run out of money during your retirement, so it is critical.

Tom Temin And don’t forget to budget $2 a week for a Powerball ticket.

Abe Grungold Absolutely, I still play.

The post Three good reasons to save toward TSP-millionaire status first appeared on Federal News Network.

The year-to date for the F fund is still positive, rising to 5.30%, as is the G fund, which is up to 4.65% in the last 12 months.

With all funds seeing positive returns in March, the common stock index C fund posted the highest Year-To-Date return at 10.55%,  and a 11.03% return over the last 12 months.

All Lifecycle funds posted positive returns. The L 2055, L 2060 and L 2065 all posted a 3.26% return, with year-to-date returns of 8.38%, and 14% returns for the last 12 months.

The post TSP sees all positive returns in March first appeared on Federal News Network.

With the era of near-zero inflation over, retirement planning has taken on some new urgency, simply because a fixed income and rising prices do not make a good combination. For some of the latest think on all that, the Federal Drive with Tom Temin spoke with Thiago Glieger, with RMG Advisors of Rockville, Maryland.

Interview Transcript: 

Tom Temin And you’ve got a lot of good advice for retirement planning at the season when people start to think about the end of the year, and this is when you start putting in papers and so forth. And inflation, though, can really be something. I think people have forgotten about how corrosive it can be.

Thiago Glieger They certainly have. Tom, I loosely call inflation the silent retirement killer. Because for a very long time we’ve not really had inflation like we have, here very recently. And when people think about risk, they often just think about volatility. So, investments in the TSP like the CSI funds but if you think about not growing your money fast enough, that’s also a pretty big risk. So having too much money inside the G fund, especially as you enter retirement, makes sense because you want to protect your wealth. But if you stay in the G fund, that could mean over time you may not be able to keep up with your spending. Imagine having to pay for things today, but with a salary from ten years ago, it would be very difficult to keep up and the concept is pretty much the same.

Tom Temin You would either have to trim your spending or figure out a new investment strategy, and I guess then you might be saying that don’t be overly conservative even though you are retired, you don’t want to bet in Bitcoin and futures and commodities, but maybe you should be a little more aggressive in the funds you pick.

Thiago Glieger Yeah, especially retiring feds who tend to be a little bit more conservative. You have to be prepared for an environment where you’re going to need to be growing your money fast enough to both outpace inflation, as well as replacing some of the spending that you’re doing. Because if you look at 10 or 15 years down the line, you may not be able to have the same kind of spending power if you’re just not keeping up because you’re in things like the G fund for the next decade.

Tom Temin Yeah. And if you look at things like automobiles or replacement roofing and other capital, so to speak, expenditures on your home if you are in your home, these things have gone well, no pun intended, through the roof.

Thiago Glieger They really have. The cost of material has gone up, the cost of labor has gone up, and people generally just spending money on things that they do most, which is food, travel in their home expenditures. Those are the things in which people are really seeing those price increases and struggling to be able to keep up.

Tom Temin And that gets to the topic of being realistic, simply about how much it’s going to cost you to live in retirement.

Thiago Glieger That’s right. I think that a lot of people just think about replacing their income. But really, that might not be all that you need. You know, the first thing is you always have to be thinking about, well, when are you going to file for Social Security? You’re potentially going to have a FERS pension that’s going to kick in at some point. And with those two, the third leg of the three-legged stool, as it’s commonly known, is your portfolio. So, then you start to determine how much do you need to take from your portfolio. But often I suggest to people be thinking about a higher degree of spending, especially in an early retirement. You know, Tom, you were telling me, last time we talked about that amazing trip that you went on recently, and that’s the kind of thing that people want maybe 2 or 3 times a year, while they still have their health and their energy. There’s more travel, there’s more experiences, more spending. You know, maybe you have grandkids at that point. And you start to see a whole lot of one-off expenses that creep up that you need to start beginning to plan for.

Tom Temin Right. So therefore, then the required minimum distributions from that third leg, if that’s all you can do and you’re worried about that, that gets back to the idea of being a little bit more aggressive. So maybe you could take more than the RMD. Confident that the principal will keep growing more than you’ve taken out as your withdrawal.

Thiago Glieger Right. Especially with RMDs where there’s a minimum amount that you have to take out. And so, you’re accelerating these distributions. And at some point you may want to be considering being a little more aggressive.

Tom Temin And how do you plan on what your withdrawals should be. Just simply whatever’s not covered by your FERS pension and Social Security.

Thiago Glieger I think that’s one way to start, you know, is really getting a base for what are your needs? But also, retirement is a time. We call them the golden years. Right? It’s a time where you really want to enjoy your time doing things, and you want to have these experiences that maybe you’ve been putting off for a while. In fact, with our clients, we call the first several years of retirement, maybe 5 or 10 years. We call that the Gogo phase. And that’s when you have the most time that you’ve had the most money you’ve ever had, and you still have a whole lot of energy. And so, thinking about how do I want to design these years? What kind of memories do I want to create? Is it more travel? Is it more this? Is it helping the grandkids? And that will begin to help you understand what kind of cash flow you’re going to need. Then you think you factor in Social Security and FERS and figure out how much more you need to draw from your portfolio.

Tom Temin Right. So that presupposes, at least for that first 5 or 10 years, when you have the intersection of some wealth you’ve accumulated and you’re still able because you won’t be able to forever. Nobody is. Even though the guy peddling pills on cable TV that’s 90, you know, and bench lifts 500 pounds. That’s not really what most people are going into. Then you need to plan for higher spending, perhaps, than you have been just commuting to the drudgery of your cubicle or your dining room.

Thiago Glieger Exactly. And that’s where it becomes really important to begin to finalize and implement that, initial short-term bucket of your portfolio. So, this is the part of your portfolio that’s going to have to be the most conservative, because it’s going to be the one that’s supporting you when you first retire. You know, the problem in investing in stocks is that they tend to be very volatile. And if you are close to retirement or you’re starting to use your money, then you really have to be cautious about how much you’re investing in stocks. The closer you are to using that capital, the more diversification you’re going to need in your portfolio. And one of those buckets is your short-term bucket. I often use the example of when you visit a doctor and the doctor says, Tom, we’re going to need to prescribe this medication for you to take. How much of it do you want to take? Your answer is, obviously, I don’t know as little as possible. Right. The medicine often comes with side effects, and investing for growth is very similar. Having too much in the form of growth investments can actually begin to hurt you in the long run because of that side effect of volatility and other risks that it introduces.

Tom Temin And there’s also tax planning, which can get complicated.

Thiago Glieger That’s right. Taxes are a huge part of every decision in retirement because when you’ve been working you don’t really have very much control over your taxes. You get a W-2 salary and maybe you’ve got some investment income and perhaps some rental properties, things like that. But in retirement, you’re the one that’s designing your income. And so, you get to pick which accounts the money comes from. You get to pick when you take those distributions. And if you think about what your cumulative lifetime tax liability is going to be, where you can estimate what that will be. It’s to the tune of several hundred thousand. Sometimes for some clients, it’s millions of dollars in estimated taxes throughout their whole retirement. And anything you can do to begin to keep some more of that capital for yourself is more living and more spending that you get to do yourself.

Tom Temin And you mentioned the go phase of retirement. What are the phases past that or should I ask?

Thiago Glieger Yeah. After you go through your go phase, we call the next phase the slow go phase. This is where life tends to slow down a little bit. You’re still active, but life has settled into retirement. And maybe your kids and grandkids are a little bit older now, so your priorities will begin to change. Maybe you’re spending more time with the kids rather than traveling. And then beyond that, once you hit the later stages of life, we call that the no go years. So, you have the go, the slow go and the no go and the no go years. You’re really focusing more on your health and taking care of yourself, maybe spending more time with family. And so, the expenses that tend to go for lifestyle are now maybe going towards medical.

Tom Temin And you may have disposed of your house by that point and living in a lower cost situation. Although some of the assisted living and independent living places, they are not low rent.

Thiago Glieger That’s right, many of those are very expensive and despite the cost, I think people are just generally looking for less maintenance. At that point, they may not be able to upkeep with the size of their house or all of the things that are required. So, either they downsize to something more manageable, or they actually move into a place that has some assistance for them to be able to live.

Tom Temin All right. So, you mentioned the go, the slow go and the no go. I guess beyond that is the undergo. No, I mean, it doesn’t matter at all anymore in some sense. Right. What are some good practical ways that if you’re still working to actually do this, start with a budget. Is that what everybody says? Or I mean, what should you be doing to plan for it because you don’t really know when the go will morph into the slow go.

Thiago Glieger Right? I think if you are still working and you are, at least 5 to 7 years from retirement, your priority at that time is still continuing to grow your wealth. And so, utilizing the TSP choices like the C, S and I funds, make sure you’re doing at least the agency maxing, matching contributions amount. If you can match your TSP. Absolutely put more into that every time you’re getting a raise. If you’re not yet maxed, split that raise in half and put half of it as a TSP contribution. And beyond there, as you begin to phase to retirement, that’s when you can start to be thinking about the more. Conservative portions of your portfolio, maybe start diversifying a little bit less. Maybe start taking some risk off the table. Because if you think about how long it takes for a bear market from what we call peak to trough, so that’s from the top to the bottom and back up again, it’s somewhere on average about two and a half years. And so, we tell people to really be thinking about twice that long. So about five years’ worth of a short-term bucket. If you know you’re coming up to that phase of life, that gives you enough time to be able to ride out some of that market volatility, if you’re going to use that money in the very short term, and the bottom falls out.

Tom Temin And right now at this as we speak, we seem to be in a peak. I think the Dow headed toward 40,000, although that’s a really terrible indicator because the Dow has almost no relation to anyone’s actual portfolio, does it?

Thiago Glieger That’s right. The Dow represents a market index, and most people are not invested 100% in the Dow. Same thing with the S&P 500 right. The TSP fund the fund. Those are representative of some of those market indices. But you’re really not 100% invested in that actual index.

Tom Temin And you can probably make yourself prematurely crazy if you watch your portfolio minute by minute.

Thiago Glieger Yeah. And we find that the stress level tends to increase the closer people get to retirement, they start to pay a little bit more attention to what’s happening in the markets than the economy. And the minute it reverses on you because that’s just a natural part of investing. It causes a lot of stress and anxiety for folks. So, we tell people, make sure you’re keeping track of things, but don’t look at it every single day because it’s really not necessary for you to do so.

The post Retirement planning enters era of renewed inflation first appeared on Federal News Network.

No one avoids death and taxes. But you can make sure an element — that is crucial to a comfortable retirement — lasts the rest of your life. For what it is and how to preserve it, the Federal Drive with Tom Temin talked with certified financial planner Art Stein of Arthur Stein Financial.

Interview Transcript: 

Tom Temin  All right, give us the big story. What needs to last the rest of your life?

Art Stein Tom, federal retirees or, you know, let’s talk about FERS retirees. They have two sources of income during retirement. And one, of course, is guaranteed income. And guaranteed income is Social Security and their FERS annuity. And those are great. They’re guaranteed to last the rest of their life. And they both have cost of living adjustments. But most FERS retirees at some time during their retirement are going to have to start taking money from their investments to supplement their guaranteed income, and that’s something that may happen to them. You know, as soon as they retire, it may be 5 or 10 years into retirement. Of course, one problem for FERS retirees is that any time inflation is more than 2%, the purchasing power of their annuity declines. And for most FERS retirees are going to have to make that up by taking money from their investments.

Tom Temin But the investment presumably it’s a TSP. I mean, you’ve got to make the minimum withdrawal at some point.

Art Stein Yeah, absolutely. But you don’t have to spend it. You can reinvest it, you know, after you pay the taxes.

Tom Temin Got it.

Art Stein So it means that they never have to worry about running out of money because they’ll always have the guaranteed income. What they need to worry about is running out of investments. And that’s when being too conservative over a long period of time can really hasten the day that people run out of investments. Because the G fund, which is, you know, the most popular fund and even the F fund pretty much guaranteed to lose purchasing power once you take into account taxes and inflation. And that’s also true of bank accounts. And lots of federal employees and retirees have very significant amounts and bank accounts. And those lose purchasing power over time too. So let me just give you a really simple example. And the simplest example is going to be about bank accounts. Let’s say you’re going to give a party in 12 months. A couple is going to give a party in 12 months. And they estimate the cost of the party to be $1,000. So, they want to be very prudent. So, they take $1,000 and invest it in a bank account, money market fund. It’s considered 100% safe, guaranteed by the federal government. And it does not fluctuate in value. So, if they leave it in there for 12 months and they earn 2% simple interest, at the end of 12 months, I’ll have $1,020. Now they have to pay tax on the interest. They paid $6 in tax. They’d have $1,014 left. So, it sounds pretty good. They had $1,000 party. Now they have 1014. But we forgot to take into account inflation. Inflation’s only 3%. The thousand-dollar party is now costing $1,030. They only have $1,014 after taxes. So, they’re $16 short. They lost purchasing power after taxes and inflation. Now clearly in this example not a big deal. It’s only $16. It only compounds over, you know one year. But many retirees have heard and read that when they’re retired, and even as they approach retirement, they should have the majority of their money in bonds and bank accounts, which for the TSP means the G fund in the F fund. And for most TSP participants, it mainly means the G fund because they don’t like the F funds. So yeah.

Tom Temin That’s the preaching of safety. In other words, above all else.

Art Stein Preaching safety above all else. And that’s because those types of investments, when we say they’re safer, that’s very misleading, Tom. What they are is less volatile. And volatility is not the only investment risk. And really, for long term investors, the most important retirement risk is taxes and inflation reducing the purchasing power of their investments. It’s very difficult because people put their money in the G fund, and they see it gradually increase in value and they don’t think about, well, is it keeping up with taxes and inflation. And many people, you know, really, when they judge the amount of money they have, if they look at the amount in the TSP and say, I have $1 million in the TSP, I’ve got $1 million to spend. Well, of course that’s not true. It’s $1 million minus taxes, so it’s a much lower amount.

Tom Temin We’re speaking with certified planner Art Stein of Arthur Stein Financial. I guess I’m still trying to get my mind around the idea of $1,000 party. I guess in today’s inflation, that means a case of Budweiser. And four of your best friends at this point.

Art Stein What other kind of party is there?

Tom Temin That’s right. But if you take that million versus 1000, and you take your calculations out for 20, 25, 30 years, it’s tens or hundreds of thousands of dollars you might be forgoing in intrinsic value of your investments. That will never be.

Art Stein Absolutely. You know, I can tell you that, you know, with the cost-of-living adjustment for FERS retirees, if inflation were 3% a year, they’re only going to get a 2% per year inflation adjustment after ten years. That would reduce the purchasing power, their annuity 8%. After 20 years, you would reduce at 17%. They’re going to have to make up that difference.

Tom Temin So you really have to look at your future life and retirement, not so much from how many dollars are sitting in the different accounts, but what those accounts are doing and also what you actually need to maintain your lifestyle.

Art Stein Yes. And that’s what you know, retirement planning is all about, is looking, well, how much do I have? What kind of rate of return can I expect based upon, you know, what funds I’m invested in and how much do I expect to spend in retirement? And this is where, again, I think a lot of people make a mistake. How long a retirement do I need to plan for? Now, none of us know how long we’re going to live, but if we’re healthy now and say we retire at 65, people need to assume that they’re going to have a 30-year retirement, at least because many of us are going to live that long. And, you know, ten years from now, medical care is going to be much better than it is now. And same thing, true 20 and 30 years from now. Medical system, it’s great at keeping us alive. And it means that we could live a very long time and be very healthy. And a lot of people don’t think of it that way. I mean, I just spoke to a couple of yesterday and the wife is 82, and, you know, I was explaining this, and she said, well, you know, I’m 82. How long a retirement do I need to plan for? And I said, well, how’s your health? She said, well, I got some vision problems on there and that I’m 100% healthy. How long did your parents live while their mom lived to 92? Well, her mother died 20 years ago. If her mother could live to 92 with the medical care they had 20 years ago, why couldn’t she live another 10 or 15 years?

Tom Temin And just a practical question. Some people feel they need, and they do need, people need liquid assets. You might want to pay cash for a car or vacation or something, and that would not be in your TSP, because you don’t want to try to withdraw the principal if you can avoid that. What is a good way to keep cash? Or let’s say not so much cash, but a liquid asset that you can turn to cash quickly because you have a legitimate call for it.

Art Stein Yeah, absolutely. Everybody should have an emergency fund, which is not a great name for that, because it sounds like something bad happened, a new car and need to pay for a wedding for my son or daughter, or I want to get money to my grandkids. And you know, banks are great for that. But you also want to make sure you don’t have too much in low yielding bank accounts. I mean, if you look around in today’s world, you can find online bank accounts that are paying five, 5.25%. But many people are letting money just sit in their local bank account and getting a quarter of a percent, a half, a percent, 1%. That’s a big loss.

Tom Temin Then with respect to your TSP distributions. You can always change the distribution if you want to. You may not get that 25 years’ worth of better growth, but you can get better growth while you’re at it.

Art Stein Yeah. And money, you know, you expect to take out and spend in the next 3 or 4 years. I mean, the G fund is a good place for that. And the F fund in most normal years is also a good place for that. The stock funds C, S and I, the money that’s in there is money that you would need ten, 20, 30 years from now because stocks are much more volatile than bonds. But over long periods of time, historically, stocks have outperformed bonds by enough to make it worthwhile to put up with the bad years.

Tom Temin Good advice for making sure you can have that $1030 party, certified planner. Art Stein of Arthur Stein Financial. As always, thank you so much.

Art Stein Thank you Tom.

Tom Temin We’ll post this interview at Federal news network.com/Federal Drive. Subscribe to the federal drive wherever you get your podcasts.

The post How to make sure you outlive your investments after you retire first appeared on Federal News Network.

Because our tax-law is relatively friendly on inherited assets, many of the items that you inherit – including the house and any non-retirement investment account – receive a step-up in basis. This means, according to the IRS, it’s as if you purchased them on the date that your relative passed away and you don’t have to pay taxes on any of the gain that happened during their lifetime. Pretty nice, right?

But if those rules only apply to non-retirement assets, how do retirement investment accounts get considered?

Since the passing of the SECURE Act in 2019, here are the basic rules for inherited retirement accounts for owners that passed after Dec. 31st 2019:

• If you are the spouse of the original owner, you may move the account into your name and treat it as your own, following the required minimum distribution rules based on your own age.
• If you are not the spouse of the original owner you have 10 years to distribute the entire balance of the account.

Now this is where the tax considerations come into play.

Inheriting traditional retirement accounts:

If the retirement account was “traditional” or “pre-tax” (like the traditional TSP) all of the distributions are taxable to the beneficiary.

In other words, you are required to distribute and pay tax on the entire account balance within 10-years. And the distributions count as income, so the more money the recipient makes, the higher the tax rate on the withdrawals.

For a sizable TSP, 401(k) or traditional IRA, that could be a hefty tax bill each year – especially if the recipient is already a high-income earner.

Inheriting Roth retirement accounts:

Because taxes on traditional retirement accounts have been tax-deferred, the IRS wants to make sure they get their hands on those tax dollars eventually. So if they don’t get them from the original owner, they get them from the beneficiary.

Taxes on Roth accounts, on the other hand, have already been paid by the original owner when they funded the account.

Because of that, if you inherit a Roth retirement account, you still have to fully distribute the account within a 10-year period, but the distributions are tax-free for that entire ten years!

Now let’s be honest with each other for a moment.

If you were to inherit a large traditional retirement account and had to pay taxes on the withdrawals, would you be upset about it? Probably not. Paying taxes isn’t the end of the world, especially considering you’re only paying more taxes because you have more money.

That being said, if you knew there was a way that some or all of it could have been tax-free, would you be slightly disappointed? Probably.

Let’s look at an example scenario where recipient 1 receives a $500,000 traditional IRA and recipient 2 receives a $500,000 Roth IRA.

In both scenarios, we’ll assume that the account grows at 5% per year.

Recipient 1: Traditional retirement plan

In this scenario, the recipient decides to distribute the account in equal portions over the 10-year period to make sure they don’t spike their income in any given year.

They’re able to take a $60k distribution each year, which comes out to $46k after taxes (assuming they’re in the 24% tax bracket).

In the end, they’re able to receive a net after-tax total of $460,000.

Recipient 2: Roth Retirement Plan

In this scenario, the strategy changes.

Because a Roth retirement plan can continue to grow for 10 years without any tax liability, the beneficiary decides to wait until the very last year to withdraw the funds.

Since the entire balance is able to grow over that time period, recipient 2 is actually able to withdraw $815,000 from the account tax free.

That’s a difference of $355,000.

And 5% is a relatively conservative growth rate. Imagine if the growth was higher.

Planning with the end in mind

So what should you do, now that you know it’s so much nicer to inherit a Roth retirement account instead of a traditional account?

First, it may be helpful to explore if Roth contributions to your TSP or Roth conversions outside of your TSP are helpful to you during your lifetime. Because of our current “friendly” income tax brackets, there are many scenarios where making Roth contributions now can save an individual tens of thousands of dollars over your lifetime alone.

We don’t have enough space here to take a deep dive into the individual benefits of Roth contributions and conversions, but we wrote another article that does just that.

If it’s mutually beneficial, and choosing Roth benefits you and your loved ones, then your answer becomes pretty easy.

There are, however, situations where Roth contributions and conversions may not be beneficial to you in your lifetime. Then the question becomes what would the contributions or conversions cost me, and am I willing to pay that cost to ultimately provide a larger benefit to my heirs?

In our work with federal employees, we run into retirees all the time who are fully supported by their pension and social security, and have no need to touch their TSP. In this scenario, some may say “well, since I’m not going to need it, and I have an opportunity to pay the taxes at a lower rate than my beneficiaries will, I’ll go ahead and convert this to Roth as a ‘gift’ to my heirs.”

Of course, this decision is unique to each individual and there’s no right or wrong answer, but for those that want to be mindful of how they pass down money to the next generation, it’s a question that’s worth considering.

It’s also worth noting that this article only explores accounts being passed to individuals – not charities, trusts or any other entities. If passing funds to one of those other entities is in your plans, the strategies mentioned above could change.

Austin Costello is a certified financial planner with Capital Financial Planners.

The post The Roth TSP advantage: A closer look at tax-free inheritances first appeared on Federal News Network.

The fixed-income investment index F fund was the only fund in the negative for February with a -1.41% return. The F fund is negative year to date, still up 3.29% in the last 12 months.

With most funds in the positive column for the month, all funds are also in the black for the year-to-date. The common stock index C fund is posting the highest year to date return at 7.10%, and a 30.41% return over the past 12 months.

All Lifecycle funds posted positive returns. The L 2055, L 2060 and L 2065 continue to show healthy growth with year-to-date returns of 4.95% and showing 23.25% returns for the last 12 months.

The post TSP returns for February bring investors mostly positive news first appeared on Federal News Network.

• The Thrift Savings Plan board said it is ready to pivot in the case of a government shutdown this Friday. TSP operations continue normally during a shutdown, but the TSP offers some relief to participants who are affected. During a shutdown, if TSP participants miss a loan payment, they do not get placed in a default loan status. And for any fed who gets furloughed during a shutdown, the TSP automatically pauses paycheck deductions for loans. If there is a shutdown, about 100,000 federal employees could be furloughed. Congress, of course, still has a couple days to come to a government-spending agreement.
  (February board meeting - Federal Retirement Thrift Investment Board)
• A plan to roll back civil service protections would impact more federal employees than expected, according to the National Treasury Employees Union. The Trump administration planned to reclassify a large swath of federal employees who shape government policy, making them easier to fire. Former President Donald Trump said he’d bring those plans back if reelected. But new documents show the Office of Management and Budget also planned to reclassify lower-grade feds in HR, IT and other administrative positions. The NTEU, which obtained the documents, said more federal employees would fall under Schedule F than it previously estimated.
  (Schedule F plans show 'far higher' impact on federal workforce than first anticipated, NTEU warns - Federal News Network)
• Federal agencies have a role to play in a new effort to make sure the sensitive data of Americans is protected from foreign adversaries. President Joe Biden will sign an executive order today designed to safeguard sensitive U.S. data, like biometrics, personal health data and geolocation information. The Justice Department will issue regulations aimed at establishing clear protections for that data from being accessed by so-called countries of concern. And the departments of Health and Human Services, Defense and Veterans Affairs will be tasked with ensuring that federal grants, contracts and awards are not used to facilitate access to Americans’ sensitive data.
  (President Biden issues sweeping executive order to protect Americans’ sensitive personal data - White House)
• After getting direct-hire authority, agencies have even more help for AI hiring from the Office of Personnel Management. OPM’s latest guidance to agencies details how and when they can offer incentives to federal employees working in AI. In many cases, agencies already have the authority to give feds pay bonuses, telework opportunities and faster accrual of annual leave. Now OPM said those flexibilities, along with many others, should be extended to AI professionals. The guidance comes after President Biden signed an executive order telling agencies to start rapidly recruiting AI professionals to the federal workforce.
  ( Agencies should promote existing workplace flexibilities in federal AI hiring, OPM says - Federal News Network)
• The Army is cutting about 24,000 military positions, including about 3,000 positions from special operations forces, as it restructures itself for large scale combat operations. The service plans to get rid of positions that were created to support counterinsurgency efforts during the Iraq and Afghanistan wars, but are no longer needed given current strategic priorities. The cuts will not affect active-duty soldiers.
  (Army cutting jobs in major force structure transformation - U.S. Army)
• The Office of Personel Management and Office of Management and Budget have released a strategic plan to assist agencies with hiring and recruiting military-connected families. OPM has released the first-ever governmentwide military-connected strategic plan for fiscal 2024 to 2028. The plan will support agencies in recruiting, hiring and retaining military-connected families and caregivers. Agencies should identify barriers that prevent recruitment, hiring and retention of military-connected families within the federal workforce. Agencies are also encouraged to develop strategies and potential legislative proposals to address those barriers and promote employment opportunities. OPM will provide resources to support agencies in meeting the goals outlined in the plan.
  (OPM releases first-ever government-wide military-connected strategic plan - OPM)
• The Office of the Special Counsel has a new leader. The Senate yesterday confirmed Hampton Dellinger to be Special Counsel by a vote of 49 to 46. President Joe Biden nominated Dellinger in October. OSC has been without a leader since October, when Henry Kerner left after serving in the position for six years. Before coming to OSC, Dellinger served in the Justice Department as an assistant attorney general overseeing the Office of Legal Policy from October 2021 to June 2023.
  (Senate confirms OSC leader - U.S. Senate Majority Floor Updates on X)
• Big changes are coming to how the Defense Department measures its own cyber defenses. Instead of getting pass-fail inspections, commands can expect to see more nuanced assessments that try to measure how cyber risks affect their actual missions. The new process takes effect tomorrow and is called a Cyber Operational Readiness Assessment. It replaces the Command Cyber Readiness Inspection DoD has used for more than a decade.
  (DoD cyber readiness tests get a major overhaul - Federal News Network)
• The Biden administration has established a council of chief AI officers across the federal government. Austin Bonner, the deputy U.S. chief technology officer for policy at the White House Office of Science and Technology Policy, said that it is one of the latest steps under a recent executive order on AI in government. “This is a really important place for federal leaders to come together, share best practices, and coordinate their work. Not every federal agency needs to reinvent the wheel," Bonner said. The Office of Management and Budget directed agencies to name a chief AI officer last fall and accelerate the adoption of AI tools within agencies.
  (OSTP’s Austin Bonner on ‘leading by example’ as agencies implement AI executive order - Federal News Network)
• The Energy Department is doling out $45 million for 16 new cybersecurity projects. The goal is to develop tools and technologies that can protect energy systems from cyber attacks. The Biden administration has warned U.S. critical infrastructure, including the electric grid, is increasingly being targeted by hackers. The funding for the energy cybersecurity projects comes from the 2021 Infrastructure Investment and Jobs Act.
  (DOE announces $45 million to protect Americans from cyber threats and improve cybersecurity in America's energy sector - Energy Department)

The post Thrift Savings Plan board prepares for government shutdown first appeared on Federal News Network.

Retirement itself has an uncertain meaning, since people do things after they leave government that seem like work. Sometimes they actually do launch new careers. Others feel fine with traditional retirement.

I’m still dazzled by the fact that Abe himself managed to accumulate $3 million in his Thrift Savings Plan before retiring. As far as I know, he and his family ate normally, not Purina Cat Chow. So it shows what’s possible if you maybe skip the Lexus and the G-Fund. Yet, Abe said, his wife still regularly asks if they have enough money.

Specifically, Abe advised planning on a requirement of 80% of your pre-retirement gross income. For many retirees, that would come from a combination of FERS annuity, Social Security and TSP monthly withdrawals. I say “many” deliberately because “average” people don’t exist. Variables like health, spousal career, inheritances and lottery winnings mean everyone has a unique situation.

About that 80% rule of thumb, one reader asked whether that level “would allow for additional travel, fun etc. or just status quo.” Also, whether the 80% level included TSP contributions, which stop upon retirement.

The answer: Yes, the 80% takes into account that you won’t be adding to the TSP. But it doesn’t allow for a lifestyle expansion. “It’s a good starting point to continue your pre-retirement lifestyle,” Abe wrote. Abe himself is living on 110% of his pre-retirement gross, he said. He’s got his FERS annuity, withdrawals and part time work (advising people on finances).

In other words, if you weren’t buying expensive cars and luxury cruises before retirement, you probably won’t be able to start doing so after you retire.

Retirement planning often takes taxes into account. One reader wrote, “Living in New Hampshire – no income or sales tax.” He added, “And very skimpy services.” My recollection of New Hampshire is that state and local officials were superb at snow removal. I don’t know enough about the other services in the “Live Free or Die” state. New Hampshire, decades later, still holds a place in my heart, though.

This reader also paid off his mortgage, which has tax implications. His car is paid off, but he still makes payments to a savings account so he can pay cash for the next car. And this: “I will not leave that much to my children, but I do give them money from time to time and also help them when needed.” Sounds like a good balance.

Some people opt to work after retirement. My headline for the interview, “How to avoid wearing a Walmart greeter’s vest after you retire,” was perhaps too dismissive of those who must work after retirement, as a couple of readers pointed out.

I’ve known scores of senior and sort of senior federal managers who put in substantial careers after government. Dozens have hung out consulting shingles. They like their fields and they want to stay relevant. Others say sayonara and pursue passions they haven’t had sufficient time for.

One regular pointed out, “You (Temin) are up there in age and still working. Maybe YOU need to listen closely to your guest.” Actually I do. I’m working well past the standard retirement date of 65 by choice. I still like it. This reader said of himself, “I retired at 56 and still have a nice portfolio. I started saving from day one of my federal service and I maxed out on my TSP.” Which, in 17 words, forms a great summary of the universal strategy.

A friend and neighbor worked for 36 years in the civil appellant division of the Justice Department. Ed was not just a good lawyer, he was a respected mentor to many a young colleague. He also lived a full and exemplary private life. He died months before retiring from an emergent health issue you could describe as a bolt of lightning. Sometimes the fates laugh without humor at our plans.

At his shiva I asked a mutual friend, still working at 72, if he had any plans to retire. He answered, “No, because I don’t know what I would do when I get up in the morning.” I thought, if I, Tom, ever do retire from the vocational scene, on that first morning after I won’t know what to do first. But it will likely involve a motorcycle.

Nearly Useless Factoid

By: Michele Sandiford

Based on a March 2022 survey, without Social Security, about 4 in 10 adults aged 65 and older would have incomes below the poverty line.

Source: Center on Budget and Policy Priorities 

The post Maybe you want that Walmart greeter’s vest after retirement first appeared on Federal News Network.

The biggest drop was in the S fund. The small cap stock index investment posted returns of -2.44%, seeing a large drop since October of last year which reached -6.26%.

The fixed-income investment index, F fund, and the international stock index, I fund, also saw a decline, posting negatives returns to start the year.  This comes after having positive returns from the months of November and December 2023.

While those three funds failed to reach positive returns, the other 12 funds grew mostly at a smaller rate than in previous months.

The big winner in January was the C fund. The common stock index posted positive returns with a 1.66%  increase and started the new year with the highest returns at 20.78%.

The government securities investment G fund posted positive returns with 0.34% to start January, which was .05% lower from December.

All Lifecycle funds posted positive returns to start the new year, though the L Income fund and L-2025 fund were below 0.40%.

The post TSP’s growth slows down to begin 2024 first appeared on Federal News Network.

If the 2023 stock market showed anything, it is that you cannot predict the stock market. Instead, you need a strategy you can stick with. To find out what the rear-view mirror is telling investors, the Federal Drive with Tom Temin spoke with Arthur Stein of Arthur Stein Financial.

Interview Transcript: 

Arthur Stein Last year was a very good year, and that was a welcome relief because 2022 was a historically bad year. I mean, not only were stocks down, but bonds were down, you know, double digit declines. And it was just, you know, was very unusual. It was two years in a row of bond declines, which almost never happens. It was the first time the TSP F fund and the stock funds had gone down in the same calendar year. And, you know, just looking at financial markets in general was the first time that anybody can remember maybe since the Great Depression or something like that. So, it’s pretty discouraging for investors. Then last year, there were a lot of ups and downs, but especially the last two, last two months of the year, everything really jumped. And we ended up the C fund was up 26%, the S fund 25%, the I fund 18%. And finally, the bond funds went up 5.6%, which is a good return for bond funds and outperformed the G fund for the first time in a long time. So, we finally saw what, you know investors are looking for. And it really benefited people who obviously stayed invested. So, if you were a TSP participant and became discouraged and either pulled out of the stock and the funds and the F fund, or whose, biweekly investments were not going into those funds, you really lost out. And actually, since the last two months of the year contained all the bond fund gains, all the fund gains, and a very large proportion of all the stock fund gains. You had to be in there for those two months especially.

Tom Temin It seems like people make the mistake of, you know, if they want a swing around their investments of taking what’s going on in the news and somehow overlaying that with what they think the market will do. And there’s been lots of bad news in the last quarter of 2023. The war in the Middle East, Ukraine situation droning on, the political paralysis in the United States. But the market doesn’t necessarily follow those things, which means you’re putting yourself in potential danger if you try to beat the market based on the news.

Arthur Stein Absolutely. And one way to put it, Tom, is the economy is not the stock market, and the stock market is not the economy. And one of the reasons that’s true is that the stock market is what’s called a leading indicator. It tends to go down before the economy starts to decline, and it tends to go up before the economy starts to recover. And so, it makes it very hard to time the market based upon what’s going on now. And it’s one of the reasons why trying to time the market, trying to get in and out of the stock or bond funds based upon what you think is going to happen, has really been a losing proposition.

Tom Temin Right?

Arthur Stein The better strategy is just to decide what allocation you want between stock funds and bond funds, and then invest accordingly. And stick to that allocation.

Tom Temin Yeah, people that have great stories about how they beat the market or time this or that stock sometimes remind me of people who went to Las Vegas and came back, and they never tell you about the losses. They only tell you about how they could do no wrong at the crap tables or something. And you would think that you actually could have a chance of winning at the long term in Las Vegas, which nobody does.

Arthur Stein Yeah. And there’s actually an academic term for this. It’s called recency bias that we tend to think that that whatever has happened recently is going to happen in the future because it’s, you know, what we remember most closely.

Tom Temin We’re speaking with Art Stein, certified financial planner with Arthur Stein Financial in Bethesda, Maryland. And so, looking ahead to 2024, people are, you know, we’re here already and the same wars are going on. The same political paralysis is in the country. And so, you know, the underlying situation hasn’t changed because the calendar turned over. So, what are you advising people with respect to thinking about strategy for the coming year?

Arthur Stein Okay. Well, first of all, we have to remember that there is a lot of good news about the economy. Employment has remained very strong and interest rates have come down a little bit. Inflation has certainly come down. And, you know, economic growth has continued. So, our economy continues to do well. You know, the general forecast for last year was that there would clearly be a recession. I mean, that was just, you know, most people who forecasted, that’s what they were forecasting. And now I’m seeing the same forecast. So, the people will keep forecasting a recession and eventually they’re going to be correct. Maybe not this year. Maybe it’d be ten years from now, but. And then they will be crowned the king or queen of forecasting because they got it right. I think a key thing for people to do in the early part of the year, it’s a great time to review your financial situation and see where you are and whether you are on the right path. So of course, you want to look at your TSP allocation. With all the ups and downs. I mean, is the allocation what you want, and if not, you can rebalance. Employees, of course, want to look at the allocation of their biweekly investments, which, you know, can be very different than their current allocation. And one thing we often recommend is that your bi-weekly investments can be much more aggressive than your current allocation, because that you just have smaller amounts going in every two weeks. And if the markets go down, that’s good for you at that point because you are buying low. Then another question you need to ask yourself is, do you want to be in the Roth TSP, or do you want your money in a Roth IRA? You know the whole Roth question. So current participants, employees have the choice of their contributions going either into the regular TSP or a Roth TSP or the Roth TSP. And the major difference is that the money put in the regular TSP, whatever you put in reduces your taxable income by the same amount for that year. So, if you put in 10,000 in the TSP you’re going to reduce your taxable income $10,000. Now of course when you take that money out it’s fully taxable. With a Roth the money that you put in does not reduce your taxable income. But when you take it out there’s no tax on the withdrawals. So, you’re forgoing a tax deduction on a smaller amount for a tax-free withdrawal on hopefully a much larger amount in the future. One downside of that is that for employees, the reduction in because there’s no tax break on contributions, your taxable income is going to be higher. And you want to make sure that you can afford that. Now you can split up, you know, so that some of your contribution goes to the Roth and some to the regular. But people need to look at that. And there are a lot of advantages to a Roth account. For retirees they can decide to do what’s called a Roth conversion. So, they can take money out of an IRA and put it in a Roth IRA. And but then the amount they transfer is fully taxable at the time. That’s a much more difficult decision and requires a lot of planning. And it’s very whether it’s a good idea or not depends upon one’s personal situation.

Tom Temin Right. So, in deciding, though, Roth or regular TSP 401 K style, you have to understand, or you have to kind of have an anticipation of what your tax rate will be when you withdraw. Presuming that it’s going to be lower. And if you get some great private sector job where your salary triples, when you when you turn, you know, and you’re still working at the age of the minimum withdrawal, then you might have a higher tax than you would have if you’d done the Roth years earlier.

Arthur Stein Absolutely. See the especially with the Roth conversion. You have to look at one how long do you think the money is going to be invested in the Roth? And, you know, if you’re. 85 years old on a Roth conversion makes less sense. And if you’re. A 35-year-old employee. And it also makes a difference how aggressively you’re investing. You know, if all the money’s going in the G fund, it really doesn’t make much of a difference. But if you’re an aggressive investor, you’re putting a lot of money into stocks, into the stock funds C, S and I and you expect those to grow very rapidly. Then it makes more sense. Now those are not the other variables. Another way to look at that is that if you think that your tax rates are going to be lower when you withdraw the money, then just in terms of doing the calculations, a Roth conversion doesn’t make as much sense. But we have to look at the fact that, you know, taxes may be higher in the future because we’re running huge deficits.

Tom Temin All right. So have a plan. Have a strategy. Don’t time the market and some eternal truths you might say.

Arthur Stein Yeah. Another thing to look at is life insurance. And I find many people are under-insured, especially if you are, for instance, married, you have kids, and only one spouse works. You need a lot of life insurance on that spouse. Like ten times salary is not too much. And for a healthy person, they need to compare what it costs for FEGLI, the federal government life insurance, group policy with what they can get in the private sector. And healthy feds are going to probably find that the private sector policies are cheaper and no reason not to get them. I would say that everyone should calculate their net worth every year. It’s value of everything you own, minus your debts. And that should be going up every year. Or if it’s not, it’s a real warning signal. Now, if you’re retired and you’re older. You don’t expect to see that increase in net worth. Perhaps. But it’s still nice if it happens. So, life insurance, calculate net worth. Again, an area where I see a lot of mistakes being made is in homeowner’s and auto insurance, because many people do not have enough liability insurance. And this is if you have an accident, you’re at fault, you get sued. Or if someone’s at your house. And they fall or slip, and they’re seriously injured, and they sue you. How much is your insurance actually going to cover. And what you’re going to find? Is that for most people it’s going to be somewhere around 100 to maybe $500,000. And so, think of it, you know, like you have someone over to your house, your kids have friends over. Some kid falls down the stairs. Can’t walk for the rest of her life. You could easily get sued and lose 1 million or $2 million lawsuit. And your homeowner’s insurance is going to say great we’ll cover that up to $250,000. And the rest of it that’s on you. Well, you don’t want to be in that situation. You want to look at what’s called umbrella liability insurance, which is sold in million-dollar increments. To cover that excess liability and home and auto. And one of the great things about umbrella liability insurance is it’s very cheap. Like I’d say, most people get $1 million covering auto and home of umbrella coverage for about six, $800 a year. Why not have the extra coverage for that? And then finally. Make sure you have emergency funds sufficient to cover you for two, three, four, five, six months of expenses, especially for FEDs who are working. But even for retirees. You know, if the government closes down, we could be in a situation again where salaries are not being paid and it even it would be pretty extreme. But, you know, maybe, annuities are not being paid either. And people should be prepared for that. So, beginning of the year, it’s a great time to review your situation, make some decisions and do that every year.

The post When it comes to your TSP stocks, no use looking backward first appeared on Federal News Network.

Leaders on the Federal Retirement Thrift Investment Board saw 2023 as a relatively successful year of progressing toward long-term strategic goals for the Thrift Savings Plan (TSP).

Perhaps most notably, more TSP participants than ever are now contributing enough to their retirement accounts to receive a full match from the government.

Currently, 86.8% of feds in the Federal Employees Retirement System (FERS), as well as 84.9% of active-duty military members in the Blended Retirement System (BRS) are putting at least 5% of their biweekly paychecks into the TSP. Contributing at least 5% to the TSP is the amount required to receive the maximum 5% matching contribution from an employee’s agency or a military member’s branch of service.

Additionally, the TSP now has $845 billion in total assets — another record-high for the government’s 401(k)-esque retirement savings program for federal employees. And setting yet another record, 36% of the now roughly 7 million total TSP participants have Roth balances.

“These numbers tell me that 7 million current and former federal employees in both civilian and uniformed services have trusted us with $845 billion of their hard-earned money,” Ravi Deo, executive director of the FRTIB, said during a board meeting Tuesday. “It is a trust we must continue to earn.”

Jim Courtney, director of FRTIB’s Office of Communications and Education, has credited the growing number of participants who receive the full matching rate to the FRTIB’s switch in 2020 to auto-enroll participants at a 5% contribution rate, rather than the previous 3%.

The improvements during 2023 also show progress in the goals FRTIB set in its strategic plan for fiscal 2022 through 2026. For the past couple of years, the board has been aiming to provide more information to participants to help them make the most informed decisions possible about their investments and retirement savings.

One of the steps toward the strategic goal is encouraging best practices for savings, FRTIB said, including contributing enough to receive a full matching rate.

“TSP funds, when combined with regular savings and an employer match, can improve retirement security for millions of families with a TSP participant in their ranks,” Deo said. “And the $845 billion [in total assets] does have one big benefit — it allows us to provide our services at an extremely low cost, allowing our participants to keep more of their money.”

Over the last year, the FRTIB also learned of slight changes in participants’ views of their own financial wellness, and their confidence in their goals for retirement savings.

Currently, a little over half of TSP participants are confident they are on track for retirement, according to a survey the FRTIB conducted during June and July 2023.

The last time FRTIB conducted a financial wellness survey was in 2020. In the past couple of years, participants who are still employed but who have separated from public service have become noticeably less confident in their retirement goals.

With the survey now complete, National Association of State Retirement Administrators (NASRA) Executive Director Dana Bilyeu, a TSP board member, turned her attention to what comes next.

“What do we do now that we have this great information from our folks?” Bilyeu said during the board meeting. “What do we do to create action plans in the next year, two years, five years — however we’re going to do it — to address those areas that they feel most vulnerable?”

Tom Brandt, FRTIB’s chief risk officer and director of planning and risk, said the goal is to use the survey and new information when considering any changes, decision-making and communications going forward.

“It’s also used by the training team as they’re looking at what additional training might be appropriate, or perhaps when we want to make some adjustments,” Brandt said. “As we look through this data, we can see some areas where there might be some benefits from making some adjustments, making some enhancements, or perhaps adding some new components to our training and communication elements.”

In addition to improving communications and resources for FERS participants in the TSP, the board is also trying to adjust the way it reaches younger military members who are newly enrolled in BRS.

“They’re young, they’re transient, they’re hard to find,” Brandt said. “They have the hardest time at that age imagining retirement.”

The BRS is a relatively new retirement system, which many military members got access to as part of the fiscal 2016 National Defense Authorization Act. BRS offers a “blend” of two major sources of retirement income: a traditional retirement pension and a TSP account.

In addition to automatic enrollment into the BRS for new military members, TSP ensures that participants are enrolled at the 5% matching rate, and that they’re enrolled in the right lifecycle (L) fund for their age. In September 2023, for the first time since the launch of the BRS program in 2018, the number of BRS participants surpassed the number of participants in the military’s legacy retirement system.

Similar to the FRTIB’s goals for FERS participants, the board tries to communicate and inform BRS enrollees as much as possible.

The Defense Department “has identified 14 milestones in the career of a uniformed services person — touch points where they have to teach them something,” Brandt said. “We make sure that our TSP materials are part of those touch points.”

Deo said while enrollment in the BRS is certainly not the end of military members’ savings toward retirement, it’s a step in the right direction of trying to create good habits early on.

“To the extent that we can take someone who is spending 12 hours a day figuring out how they get really good at something that is completely unrelated to the TSP — whether it’s Army, Navy, Air Force — we stick them in automatically, we give them the match,” Deo said. “If they do nothing, they will reach the age of 22 better off than most 22-year-olds in America … We are — hopefully — pushing the boulder down the hill and we will continue to roll fast.”

The post Number of TSP participants receiving a full match reaches record high first appeared on Federal News Network.

December was the second month in a row that all funds posted positive returns. The government securities investment G fund posted the lowest returns for December at 0.39%, just short of last month’s 0.41%. The 12 month returns for the fund were still positive at 4.22%.

The common stock index C fund continued to post the highest returns for the year at 26.25%.

All Lifecycle funds posted positive returns for the month and the year, with all but the L Income fund posting annual returns above 10%. The L-2055, L2060 and the L-2060 funds posted returns just above 25%.

All together, 2023 was a positive year for TSP investors.

The post TSP returns offer strong finish in December first appeared on Federal News Network.

The I Fund, that is the international stock fund operated by the Thrift Savings Plan. Next year, the Federal Retirement Thrift Investment Board will overhaul how the I Fund goes about making investments. For what this means and why it’s important,  the Federal Drive with Tom Temin talked with Certified Financial Planner Arthur Stein.

Interview Transcript: 

Tom Temin And you have studied this pretty closely and there’s a new index associated with it. Can we begin by just explaining what an index is in this context and how it works generally?

Art Stein Yeah, an index is produced by an outside company and they make decisions about what investments should be included in their index and in what proportions, what percentage amounts should go into each stock. And they then license that index to various people. So the I fund has been using an index that is very common. It’s called the [Morgan Stanley Capital International, Europe, Australasia and the Far East (MSCI EAFE)] Index and it’s a very commonly used index and it only invests in developed countries, and only certain developed countries and only in very large companies.

Tom Temin And we should point out that stands for Morgan Stanley, Capital International, Europe, Australasia and the Far East.

Art Stein Exactly. And now they’re in an index with an even more complicated name. Now they’re going to an index. That change will take place in 2024, called once again MSCI. Same company produced it. ACWI IMI ex USA ex China ex Hong Kong Index. And so here’s what that means. It’s a much broader based index. It’s going to invest in twice as many countries in stocks from twice as many countries. It’s going to invest in seven times as many stocks. So much larger percentage of foreign stocks that are out there. And it’s going to exclude stocks of companies from China and Hong Kong because this became a political issue.

Art Stein A lot of Congress people did not want TSP investing in China, and that includes now Hong Kong.

Tom Temin So it’s going from 21 countries in which stocks exist that this index can invest in to 44. So that is a major expansion.

Art Stein Major expansion. And all the extra countries, well, they added Canada finally, I don’t know why they ever excluded Canada, but then they added 23, what they call emerging market countries. This is like countries in Latin America and Thailand and various other places, so much more broader based. And I think that’s a good thing. What struck me is that the rate of return based upon the figures provided by the FRTIB, the Federal Retirement Thrift Investment Board, not a big difference in performance. And of course, performance has been a big complaint with the I fund for a long time. So I took the figures and tried to summarize them, did summarize them in a couple of ways. One, the average annual rate of return over the last 20 years, according to the FRTIB figures, would have been 9.3% for the new index, compared to 8.4% for the old index. And to give it perspective, I then did an example. Again, it’s in my blog. Suppose you had 100,000 in each of the indexes 20 years ago, and what would they be today? And with the new index it would be worth 437,000. With the current index would be 394,000. So that’s an advantage, but it’s only a 13% difference over a 20 year period. So really not a big difference in the performance.

Tom Temin So essentially they’re getting a tweak here. And just let me ask you one technical question, and this is my own ignorance about this. If you subscribed to that index, the new one that they’re about to use, does that index prescribe the percentage of each of the 5,621 stocks in that index? And if that’s the case, then every fund that subscribes to that index will have identical performance or how does that work?

Art Stein Yes, every fund that invests in that index would have identical performance, because part of the index is not only specifying which stocks, but which percentage and in each stock. So the same thing is true of the current index, the EAFE index. Its performance is going to be identical with the performance of any other mutual fund or exchange traded fund that uses the same index. It might be small differences because of expenses, but basically they’re going to have the same performance. And of course the C Fund and the fund in the F fund are all index funds too. And the same thing is true. Those funds use indexes that are readily available in funds outside the TSP, and the performance is basically the same.

Tom Temin Does that mean then, the skill of the managers in this case, the Federal Retirement Thrift Investment Board, is in picking the index, not in picking the mix of stocks that the fund represents?

Art Stein Exactly. That’s a perfect way to put it. They get to pick the index. Now it happens that they picked an index six years ago and they were ready to institute it. And I think 2020, it was going to go into effect. And that’s when members of Congress said, wait a second, this includes China. We don’t want that. Now, I’m not in favor of political interference, but it happened to be like sometimes it’s more important to be lucky than good. It was good that they did that because stocks and China have not done well over some period of time. What I think happened is then they turned to MSCI, the company that creates these indexes. So we want basically the same index only without China and Hong Kong. So they produced this index. As far as I can tell, it is not available outside the TSP at this point. I would not be at all surprised of that change because there are other people who don’t want to get involved with China and Hong Kong for a variety of reasons.

Tom Temin Well, if you look what’s been going on with the ant group, and some of the big public trials going on right now of Chinese, I guess their equivalent of oligarchs. Anything can happen. China is volatile and things bubble up and then they collapse totally often because you fall out of favor with the party.

Art Stein Where you have that problem. And just the fact that the economy in general is not doing well and their stock market is not doing well. Part of it is political interference and part of it is economic competition with the United States. And we’ve acted in ways that is for Chinese stocks, which I suppose is one of the goals. But excluding politics, it is what it is. I think there’s no reason to worry about the new index. I think it’s fine. The TSP is chosen to get an index from one of the major index providers. It shouldn’t be a problem to manage. And I don’t think people should worry about not being able to invest in Chinese stocks.

Tom Temin Yeah, well if you buy a Volvo, for example, a great Swedish car, it’s actually the parent company is Chinese and there’s a lot of major brands in the United States that if you trace it back, there’s Chinese ultimate ownership, very complicated.

Art Stein Lenovo, which makes computers that lots of people like and buy.

Tom Temin Yeah. So it’s pretty hard to escape China in daily life. Pretty much everything from what you wear, drive, eat and consume. Otherwise, there’s a connection to China. And just looking ahead to 2024, generally, the stocks in the United States, the Dow Jones Industrial Index, is at record highs. I don’t think anyone would have predicted that six or nine months ago. What’s your general feeling on how people again, not investment advice, but how should they think about what they do in the coming year with respect to TSP?

Art Stein Let’s say that this year through the end of last month, stocks have done great. The C funds up 21%, S fund 13%, the I fund is up 12%. It’s been a great year for stocks. The bond fund, the F fund is up a little bit, which is better than it has been doing. And the G Fund has been up 3.8% this year because interest rates got so high. So it’s been a great year, and it’s certainly rewarded people who stayed invested in 2022, which was a terrible year for stocks and bonds. And as a result, just a really bad year for investors because there aren’t many years where you have double digit declines in both stocks and bonds. But we saw that last year. So people didn’t bail out, really did themselves a favor. As far as next year, I would never forecast. It does appear that the Fed is not going to raise interest rates any more. In fact, they’ve indicated that they’re going to lower interest rates a little bit during the year. That should be very positive for bonds and stocks. But we don’t know what’s going to happen. I mean, and just look at 2020 started out as a very good year for about six weeks and then we got hit with COVID or there could be a war, there could be a natural disaster or who knows what is going to happen. But what I look at is long term stocks outperform bonds and bank accounts by significant amounts. And so for long term investors, I mean, I think that we say past performance, no guarantee of future performance, but there’s a pretty strong record for why people invest in stocks. And you speak of, I know that you have reported a lot on TSP millionaires. And when you look at what they are invested in, it’s mainly the C and the S funds. And they stuck with it. People who mainly invested in the F and G funds, they didn’t become TSP millionaires.

Tom Temin Right. Or else they did if they worked for 50 years.

Art Stein If you put in 900,000, you might have a million or whatever the figure would be. But they didn’t become TSP millionaires. It’s the people. I just heard from somebody last week and talking to them about doing a retirement plan. And they mainly invested in the G Fund, and they, after many, many decades, have about 500,000. It just doesn’t do that well.

Tom Temin And I guess to be careful of the shiny object, I’m just reading a story in the Wall Street Journal about the electric car startups. So Tesla has been an interesting investment, maybe. That looks like that company will last, but three electric car start ups and they all had billions in market capitalization. Briefly, Electric Mile Last Solutions, Proterra, Lordstown Motors have all filed for bankruptcy, and there’s a couple of others which are scraping by to get enough cash to be able to build the cars people ordered. So sometimes shiny things that are huge in potential also you would want to avoid is too risky on the upside.

Art Stein Well, that’s just an example of the difficulty of picking out individual stocks, because somebody is going to do really well with electric cars. And Tesla has done well, but not well enough, I think, to justify their stock price at the moment. But you don’t know. And frequently all these small companies who pile into something like electric vehicles, which becomes very popular, suddenly lots of them are going to fail. I mean, that’s just the nature of investing. Elon Musk has done a tremendous job of building up the company. Now, the question is, is he going to do a tremendous job of maintaining whatever performance they have? And that’s an issue.

The post The TSP doesn’t stand still, as one critical new feature debuts in 2024 first appeared on Federal News Network.

More than a million military service members participate in the so-called blended retirement system. It lets them make TSP-style savings contributions that are portable. The funds go with them when they leave the military. But there is more to financial readiness, something to think about in a high-spending season. For some ideas,  the Federal Drive with Tom Temin spoke with Mike Meese, the President of the American Armed Forces Mutual Aid Association.

Interview Transcript: 

Tom Temin And let’s talk about the blended retirement system. This has been around a few years, but it seems to be picking up lately.

Mike Meese It has. It started in 2018 when Congress made an adjustment. The first real big adjustment to the military retirement system in several decades where new members who come into the military have a slightly smaller retirement if they stay for a full 20 years. But the federal government contributes to their 401k like Thrift Savings Plan, which is the blended retirement part of that, so that they end up with something even if they only serve like a three year, four year enlistment, they could take some retirement savings with them.

Tom Temin It sounds like the best benefit is just developing the habit of putting away that money, because let’s face it, when you’re a new member of the military, you ain’t earning all that much.

Mike Meese That’s right. And the way it’s designed is the government will automatically contribute 1% and then it will match up to 5%. And so we just crossed over, as you mentioned, more people are actually participating in the blended retirement system. 1.3 million service members that were participating in the old system before. And that has caused people to take a look at this and realize how valuable it truly is.

Tom Temin That leads to the idea of keeping and hanging on to the money you should in a season where even military service members, if they walk into a [post exchange (PX)], are bombarded to say nothing of what comes through on social media with offers to how to part with your money in this holiday season because everything’s on sale.

Mike Meese Yeah, I think it’s really important for people to kind of have a perspective over the last several years coming out of COVID. Two or three years ago we weren’t traveling, people had more money. You got money from the federal government. So Christmas gifts got a little bit bigger because you felt kind of bad not being able to visit your loved ones during the holidays. And now people can travel because travel costs are up. People can spend money and they’re putting an increasing amount on their credit cards. So it’s important for people to have a budget, maintain a good perspective, perhaps do a little bit of the gift sharing where you’re drawing gifts, not necessarily getting one for every other relative that you have, like people had the capacity to do more during COVID.

Tom Temin Yes, I understand by reading the latest stats that the total credit card debt of people in the United States is more than a trillion dollars right now, and service members are part of that. I’m sure.

Mike Meese It’s increasing. And actually, what was good was it was being paid down during COVID as people had more dollars and were not spending more. And now it’s going right back up again. As a service member, especially at the end of the year since you’re on a fixed income. It’s important to as much as you possibly can keep that spending within reason. People will still appreciate you being home for the holidays and doing all that kind of stuff, but you don’t need to spend quite as much on lavish gifts.

Tom Temin Yeah, I was going to say, what are some of the other good pieces of advice, particularly for military members at this time of year, because they sometimes are more vulnerable to financial, I don’t know, not so much scams, but offers that aren’t all that useful to them.

Mike Meese That’s right. Well, it’s first being disciplined and making sure that you and your spouse or others in your family are keeping within your spending limits. And then there’s a lot of things to do at the end of the year, too, as we mentioned, with the blended retirement system. If you’re not contributing the full 5% to that match, now’s the time to take a look at that and be sure that you can do that. It’s also important for people that have a little bit more income to look at their charitable contributions and be sure that for the charities that they want to contribute to, that they contribute what they want to do. But again, you get lots and lots and lots of solicitations for that. You don’t want to overspend.

Tom Temin We’re speaking with Mike Meese. He’s president of the American Armed Forces Mutual Aid Association. And getting back to the topic of the TSP like or the 401k like blended retirement contributions. Is there a way that as people progress year to year like there are on some plans, a way to automatically up your contribution percentage year after year so that if you start at one or 2% by the time you’re a little bit better paid, a little bit more established, it might be up to four or 5% and you get that sense of acceleration there.

Mike Meese Exactly. The automatic contribution used to be just at 3%. Now the automatic contribution is at 5%, which is the maximum amount to get the match. What’s important, though, is you can actually contribute more than that and it will continue to grow. Deferring that savings will take advantage of the fact that you have compound interest. The Thrift Savings Plan has done particularly well in the various funds, as you may have seen this year. The C Fund is up, I just noticed, 13% over the last year, which is a great opportunity for people to save even beyond the amount that they are matched by the federal government. So if you can save 5%, you absolutely should do that to get the matching. But if you can up that by 6% or 7%, that could help you significantly in the long run.

Tom Temin Also, with interest rates high, I mean, it’s expensive to buy a home now and so forth relative to a few years ago. But on the other hand, there are instruments you can get from financial institutions now that pay that 5%. And that’s something especially for a young military member doesn’t remember the days of 13%, CDs and so forth that we had 40 years ago or so. But that’s a newly emergent way to boost your savings, isn’t it?

Mike Meese Yeah. A great example is recognize that you’re going to have to pay more for your automobile. Automobiles are lasting longer. So with that car payment ends, continue to pay yourself that car payment so that the next time you have to buy a car, you could put a lot more down, a lot more that can be in cash. So instead of paying the back a lot of interest, you’re actually pay yourself a lot of interest through either a CD or a high interest money market you get from many good reputable banks.

Tom Temin Yeah, I mean, those didn’t exist a few years ago. Last time they were even around was when you and I were young and you had CDs and wow, But we’ve had inflation and now we have inflation in interest rates. So that’s something.

Mike Meese People should take advantage of that be sure that, if you’re only making 0% or 1% on your checking account, you probably haven’t looked at the opportunities that you have to be able to put that into earning. Just a little bit more interest can go a long ways.

Tom Temin And again, on the topic of service members and what they might find appealing, let’s say at this time of year, especially in the case of vehicles, and they often tend to like nice vehicles. I had to resist the urge to put down on a trade in motorcycle the other day because I fell in love with one in the dealer. And the cool hand of logic finally grabbed my arm away. But sometimes if you’re younger, you may not be able to resist that F150 with the large wheels. And those are expensive and auto companies are offering and car loaners are offering seven and even eight year loans. That sounds like a terrible trap.

Mike Meese And recognize how much you’re going to be committed to that. Plus, look at the total cost of driving that automobile. When you look at the insurance for that expensive in Nevada may be adding several hundred dollars to your monthly payments in addition to the cost of the automobile payment over time.

Tom Temin And on the issue of that’s close to home to AAFMAA, anything new in life insurance that people should know about these days?

Mike Meese Well, the good news is the federal government has expanded the coverage from 400,000 to 500,000. But if you are married, and especially if you have any children, that amount is still not enough. And so that’s why we find a lot of people turning to AAFMAA and other life insurance providers to be able to get some supplemental insurance. We could do that actually at less costs that’s [Service Members Group Life Insurance (SGLI)]. And for veterans who leave, since SGLI ends, when you leave the service, it’s really important to turn to AAFMAA or somebody else to be able to get life insurance to protect your family even after you leave the service.

Tom Temin SGLI is?

Mike Meese That’s Service Members Group Life Insurance that is provided for, you pay for it. But the government provides that to you without any medical underwriting. We do the same kind of thing. Actually, a little bit less cost. And that’s why we encourage folks to look at that at aafmaa.com.

Tom Temin All right. In the meantime, service members watch your wallets and tread slowly right now.

The post How service members can get more out of their blended retirement system first appeared on Federal News Network.

Those changes come from the SECURE 2.0 Act, which President Joe Biden signed into law in December 2022. The legislation aims to make it easier for TSP participants — and others enrolled in employer-sponsored 401(k) plans — to save for retirement.

“Several provisions in the new law affect the TSP and how TSP participants contribute to and use their TSP savings,” the Federal Retirement Thrift Investment Board (FRTIB) said in SECURE 2.0 guidance on its website.

Notably, SECURE 2.0 pushes back the age for required minimum distributions (RMDs) and in some cases increases the limit for catch-up contributions.

But many provisions of the new law have different start dates.

The most immediate upcoming change from SECURE 2.0, beginning in 2024, is that Roth balances in the TSP will no longer be subject to RMDs prior to a TSP participant’s death, according to FRTIB.

“Your RMD calculation will include only your traditional TSP balance, and only distributions from your traditional TSP balance will count toward satisfying the RMD amount,” FRTIB said.

Other provisions of SECURE 2.0 have already taken effect. At the beginning of 2023, the starting age for RMDs increased from 72 to 73. Beginning in 2033, the starting age will increase even further — to 75.

By bumping up the minimum age requirement, SECURE 2.0 aims to let TSP participants, and others in employer-sponsored retirement plans, spend a longer time saving up in their accounts before having to start distributions.

The provision increasing the RMD age affects anyone born on or after Jan. 1, 1951. It doesn’t impact anyone born before 1951 — that group had to start taking distributions in April 2023. And the penalty for not taking the RMD on time also decreased this year — from 50% to 25%.

Additionally, all TSP participants ages 50 and older can make catch-up contributions, but starting in January 2025, the contribution limit will increase to $10,000, as a result of SECURE 2.0. The increased catch-up limit applies only to TSP participants ages 60 to 63. By comparison, the current catch-up contribution limit for anyone 50 and older is $7,500.

Another provision of SECURE 2.0 that affects higher earners in the TSP, however, has been punted down the road for a couple more years.

Once in effect, this provision will require that any catch-up contributions that higher‑income TSP participants make be designated as after-tax Roth contributions, according to the IRS.

The change from SECURE 2.0, originally set to take effect next month, now won’t happen until 2026. FRTIB and other employers have said they plan to use the next two years as a “transition period” to prepare for the change.

“This means, if your wages for 2025 are greater than the wage threshold and you’re eligible to make catch-up contributions, any catch-up contributions you make for 2026 will go to your Roth balance,” FRTIB said.

The initial language of SECURE 2.0 set the provision to affect anyone who earned $145,000 or more in salary in the prior calendar year. Once implemented, the IRS will adjust the wage threshold for inflation each year.

For the time being, higher-earning TSP participants can still make catch-up contributions as either Roth or traditional contributions.

Participants can find more information and details about the SECURE 2.0 changes on TSP’s website.

The post For TSP participants, more changes from SECURE 2.0 are coming soon first appeared on Federal News Network.