Thrift Savings Plans: Avoid These Common Mistakes with your TSP: Audio automatically transcribed by Sonix

Thrift Savings Plans: Avoid These Common Mistakes with your TSP: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker1:
Welcome everybody, and welcome back to the federal retirement show. I'm your host, Val Majewski with American Benefits Exchange. Again, appreciate you joining us taking the time to learn more about your federal benefits, getting some advice from experts and people who have worked within your benefit structure for years and years. Today, we're going to follow along with our trend. If you went back a couple of episodes, previous where we talked about the top 10 mistakes that federal employees make and really how to avoid them. We're going to be talking about TSB now. Today will be a general overview of what TSB is and how it works. But there's a couple of things in there, right, that we talked about during the top 10 mistakes that I'm going to hit on along the way. So there's going to be a lot of information. Have your notepads ready questions handy. You can always reach out to us directly. Give us a message. Give us a shout. And we'd be happy to help you and answer any questions you might have. Because what we're going to be talking about through all of our series is pretty general in nature, and your situation is going to be different, different than the person that works next to you, different than the person that works halfway across the country. So we know you're going to have individualized and personalized questions that you need answered. So let's start with TSP.

Speaker1:
Thrift Savings Plan. What is it? Well, it's the government version of a 401 K. Ok, it's an administered account. It's not something that is actively managed for you. Tsp is an administrative account. Now what does that mean? You don't have a financial advisor at TSP that helps you out with all these investment choices and tells you what to do and what not to do. It is on you. That's why I call TSP your wild card when it comes to benefits and retirement. What do I mean by that? Well, when it comes to your pension, Social Security may be the first supplement. Those are things that you really don't control when it comes to what they produce in retirement. Tsp is entirely reliant on you, and you are left to manage those things over time. So it is a wild card. It is really one hundred percent reliant on you and the decisions that you make. That's why it is one of the mistakes in some areas within TSP are within the top 10 mistakes that I see federal employees make. Now again, it's one of your three retirement income sources. If you're a first employee, first pension, Social Security or the first supplement and tsp again tsp in the wild card. Also, because it's usually carrying the bulk of your retirement income. Now, if you're part of the old system CSRs, you do not receive any matching funds.

Speaker1:
I'm sorry, you're a one pension check kind of system, and TSP was optional when it came out, so no matching for CSRs. If you are a fers employee, you get up to five percent matching now. This is the first mistake that I see federal employees make when it comes to TSP is not taking advantage of the full five percent matching. Why not? Because this is free money. The government doesn't give you much for free and the best kind of money that you can have is free money. So take advantage of the five percent matching if you are not currently at five percent and you can get there. We recommend get up to at least five percent, get the maximum free money and you can allocate those monies into six different fund options. There's really more than that, but six letters that we can discuss when it comes to your investment choices. The funds that you can choose from and this is going from, I'd say, least risky to most risky, right? We're going to start in the conservative side, and that's with the G Fund. If you're not familiar with the G Fund, G, you can say stands for government securities or guaranteed. This is the only fund that is guaranteed not to lose any money over time. It's never had a losing year in its history, and it never will. It doesn't say that it can't go down to zero, but it's the only one that's guaranteed.

Speaker1:
So over the last two years, it's averaging about one percent. Over the past 10 years, it's averaging about two percent annual return per year. So protection against risk you can't lose any money, but not going to pay you out a whole lot. Going up is the f fun. No F is a bond index and it is a another type of conservative investment that you can have within TSP. It's only had a few losing years in its history, and when it's lost, it has not lost a whole lot. It's kind of a slow and steady wins the race kind of fund, generally going to perform better than the G Fund over time, but could come with a tiny little bit of risk involved going into the stock funds. We have the C fund now. If you've ever seen on TV, the S&P five hundred or a third of that index, the C fund is meant to mimic the S&P five hundred. So if you see on TV, the S&P is up, that means your C fund is up now. With this comes some inherent risk. S&p Five Hundred or the Sea fund is comprised of large U.S. companies, stocks of large U.S. companies, so there is some risk involved. It's moderate to high risk depending upon volatility that's going on out there. Next up is the S fund. So if the fund is large U.S.

Speaker1:
companies, the SSE is small to medium U.S. companies that are not in the C fund, and this is another high risk, high reward type of investment. It's a stock fund in U.S. companies. Generally, it's a little more volatile, a little more risky than the C. The last stock fund is. The I Fund II stands for international now. This is made up of stocks from twenty one international countries. Some of the countries you may or may not know about you may or may not want to invest in. But of the three stock funds, in my opinion, and just based on performance, it has been the worst performing stock fund compared to the S&P, the C fund. Now lastly, there's the L Fund and L funds stand for life cycle funds. There's not just one of these. There are numerous health funds to choose from, starting with a conservative called the income all the way up to the twenty sixty five. Now these are mutual funds. Basically, if that's the right way to put it, because each L fund is made up of some sort of percentage of all the other five funds. So if you have an L fund, you're going to have some of the G, some of the F, some of the C, some of the S and some of the I-. If you want to find out how those are broken down, you can go to TSP.

Speaker1:
Dot gov. And you can check that out and see how those breakdowns are and how they change over time. Speaking of of tsp. Gov. Great resource for you. We've got it up here on the screen. If you're not familiar with the website, you may be looking at me saying Val, duh, we understand tsp dot gov. I get it. But the reason I bring it up is because there have been several federal employees that I've worked with over the course of the last ten plus years that have had twenty years within the government and had never once logged into their tsp gov account. So just to make sure that you're familiar with that website, all the tools that are available, resources account information that you can find at that website. Good resource for you. Typekit Gov. So now when it comes to TSP. People ask, Well, how can I contribute to TSP? The first one is a pretax contribution or a traditional contribution. This is money that comes out of your paycheck is tax deductible. You're not taxed on it. It goes into that bucket, the traditional bucket, and it grows tax deferred. And then when you take money out in the end, all that money is subject to tax. The other version of that, the other bucket is the Roth bucket or the post tax bucket. And this is money that goes in. You pay tax now it goes into that bucket.

Speaker1:
So when do you want to pay tax now or later, you can do a combination of either bucket. You can put some into the traditional sum into the Roth just depends on how you want to break down that tax liability or future tax liability when it comes to contribution limits. The annual maximum got bumped up this year twenty twenty two to twenty thousand five hundred dollars per year. So that's the annual maximum that you can defer and put into TSP, whether it's in the traditional or the Roth if you are 50 or older. The catch up contributions have remained the same at sixty five hundred, so if you're 50 or older, total contribution is now up to twenty seven thousand dollars per year. It's important to note that all agency matching contributions go into the traditional account. So even if you say I'm going to defer all of my money into the Roth, you don't just have a Roth account, you're going to have a traditional account because all the government matching funds go into the traditional side. So tsp. Again, it's your version of a 401 K. It's your way that you can defer money from each paycheck and save it up for your retirement. As I mentioned, it is your wild card when it comes to retirement because it is reliant on you and generally it's your wild card also, because it's going to carry the bulk of the weight when it comes to your post-retirement income.

Speaker1:
So let's take advantage of that five percent. Don't be part of those people that are making a mistake and not taking advantage of all the free money that they possibly can now to overview and to review TSP and get into the next mistake that we see people make, in my opinion. Tsp is great for accumulation. Why? Because of the five percent I just mentioned, you get the free money, you get the matching funds and you can put money aside for your retirement on a tax deferred or a tax free basis. And you have several different investment choices, depending upon your risk tolerance. So great for accumulation. But how does it work when it comes to distribution? And in my opinion, it's not so awesome when it comes to distribution, and I can also add on there. Not so awesome when it comes to. Conservation and preservation as you're getting closer to retirement. What do I mean by that? Well, as you're getting closer to retirement, your risk tolerance is most likely going to decrease. If you're only a few years from retirement, maybe within five years, you're thinking, I don't want to take too much risk, and I certainly want to protect all the money that I've made in my tsp over the course of my working career. I wouldn't want to be at too much of a risk, too late in the game and take a big hit at the last minute.

Speaker1:
So the only way to really protect your money within TSP. One hundred percent is to put your money in the fund. However, we just mentioned earlier that it's not going to pay you out much down the road, so you're kind of left to think, Well, OK, well, I have to take some risk if I don't want to just bury my money in the backyard or hide it under my mattress. I need to be in some kind of fund that's still going to risk a little bit and we'll get into how we can mitigate that and some options that are available for you. But the next mistake that I see people make with when it comes to TSP, especially tsp in retirement or as you approach retirement, is not understanding all of the distribution options when it comes to TSP and how they all work, because TSP will mostly mostly advertise for you. One distribution option and I'm going to get into that here in just a second. So there's two different types of distributions you can make. There are in-service distributions, either in service withdrawals or loans. And if you're familiar with the loan, there's two types of loans that you can take. There's a general purpose loan and a residential loan. This is money that you've borrowed from yourself, and you've got to pay yourself back with interest.

Speaker1:
There's two types of withdrawals you can take while you're working. The first one, I don't recommend that. I don't hope that none of you have to experience this, but it's a hardship withdrawal and it requires a lot of documentation and you have to be in a financial hardship situation. We'll talk more about the in-service withdrawal in a little bit, but let me go to and fast forward to the separated from service or retired distribution options. And you can see them all listed here. And I'm going to briefly go over each one of these because I said, you need to understand all of the options you have available so you can make the best decision for you and your family and your situation as you enter retirement. The first is really the lack of a decision, the lack of a distribution. It's leaving it all in TSP. You can leave it there and then you're left to manage it. Go on tsp. Dot gov. Manage your money. Make it your fund transfers. Ride the market and do it with it as you see fit, but you're left to manage it yourself on the computer. There's no new money going in. It is just you managing your own money, not something I normally see people do, but certainly an option. You can take it all out now. What do I mean by this? This means taking everything and putting it into your checking or savings account.

Speaker1:
Probably the worst thing you can do when it comes to TSP. Why? Because there is a huge tax liability that you're going to owe on that distribution. So if you had three hundred thousand in your TSP and you took it out and put it into your checking or savings account, as far as the government's concerned, the IRS, you made an additional three hundred thousand during that calendar year and you're going to pay tax on everything you earned, including that three hundred thousand that probably now a higher or much higher tax bracket. So not something we normally see or normally recommend. Again, probably, in my opinion, the worst thing that you can do with your TSP. The next is setting up monthly payments. Now, I don't see this as often, but this is an option. You can basically tell TSB, Hey, pay me a thousand a month or whatever number you want for the rest of my life until it runs out. Now you can make changes to that amount over time. But the news is, and the bad news is that money can run out and the money is still invested in TSB. So if you're getting a thousand dollars a month in this example and the market goes down well, those payments aren't going to last as long the market goes up.

Speaker1:
Obviously, the payments are going to last a little longer. So setting up a monthly payment could be an option for you, and you can obviously make changes to those payments. But it's not something that I normally see a federal employees in retirement, especially if they're looking for TSP to cover them for the rest of their life. Want more guarantees than saying, Hey, pay me something until it runs out without knowing exactly when that's going to run out? Ok, the reason for that is most retirees that we talk to want to make sure they want to make sure that they have money for the rest of their life. There's a big fear out there for retirees of living without money or having their money run out. Now your pension and Social Security should not run out. Those are lifetime payments, but you need another one generally to supplement that in order to make you whole or get the maximum amount of income that you can get while retired. We want to make sure that that money does not run out, so that's why this option is not generally taken. Now there is a way within TSP that you can create a lifetime income stream. Now that's. The MetLife annuity now, in my opinion, this is the second worst thing that you can do within TSB, and this is what TSP will mostly advertise. You're going to see it on your annual statement.

Speaker1:
If you see on the first page of your annual statement a big, bold number, it's going to be the biggest and boldest number on there. That is generally what TSB will pay you per month for the rest of your life, assuming that you took the MetLife annuity. But what they don't tell you in that example or next to that number is that you need to cash in your balance. You need to make a deal with TSB, and TSB makes a deal with MetLife, who's an insurance company who's the same company that manages your Feghouli program. They make a deal with them, and they buy what's known as a single premium, immediate annuity, a spear. And what does that mean? That means you take your bag of money no matter how much you have. You give it to TSB, who gives it to MetLife, and they will send you a check for the rest of your life. Sounds like a good deal. I turn my bag of money into a lifetime income money that I cannot outlive. The problem is that you no longer have any ownership access control of that money. You've given up all your rights to it. There's no liquidity. There's no access to it. You can't go down the road and say, You know what? I gave up all this money. They haven't given me all back yet. I need to get some of it.

Speaker1:
It's not yours. You don't own it anymore. You will get that check, though, for the rest of your life. Whether you live five days after retirement, I hope that doesn't happen or you live 50 years in retirement, you will get that check for the rest of your life. However, if you choose the maximum payment, the maximum payment, the one that is advertised by TSB, if you take that payment and you died tomorrow or you die 10 years from now and they hadn't paid you all the money that you gave them, they keep the rest of it. Now there are other options that you can choose which reduce your payment, but most people are like, I want this maximum payment. That's the most attractive without knowing all the details that are behind it. So it's important to know how that MetLife annuity works and the consequences of making that decision. It's also an irrevocable decision. Once you make it, you can't go back. So once you said, Yeah, pay me that for the rest of my life, you're stuck with it. Unfortunately, you cannot make any changes and you can no longer get access or ownership to your money that you gave TSB and MetLife. The last thing that you can do and generally what we see most federal employees do is roll the money out. Now this is different than taking it out. This means that you roll it into another qualified account like an IRA.

Speaker1:
If you take it out and put it into your own checking your savings, we said big tax liability. Moving it to an IRA is not the case. So how does this work? How does a TSP rollover work? Well, it's your opportunity to separate your money from the control and operation of TSP. Ok, you now take ownership and control of your money. This is available for those that are currently working, so you don't have to be retired in order to do a TSP transfer or TSP rollover. You can be still working and actively employed by the federal government as long as you are fifty nine and a half or older. You can do what's known as an age based in service withdrawal with a portion or all of your TSP funds and move it to an IRA of your choice. You can take ownership and control. Once you are separated from service at any age, you can do this as well and move it again into an IRA of your choice where there are no tax consequences for doing so. It allows you to take ownership. You're going to hear this a lot. Take ownership and control of your money and no longer have it in TSP control. Now, why is that beneficial for you? Because as you're getting closer towards retirement and generally people that are fifty nine and a half or older are approaching retirement in the relatively near future.

Speaker1:
As you're approaching that, you may be concerned again with risk and want to take control of the money. You may think, like I said earlier, TSP is great for accumulation, but not so awesome about preserving your money, keeping it safe and when it comes to distribution options. So you want to be able to take ownership of it, put it into a place that's more beneficial for you and your specific situation. So as I mentioned, how does the TSP rollover work? Well, you can take all or a portion of your TSP funds, either while you're working or separating from service and move it into an IRA of your choice. Now there are several different and I say several. There are many different types of IRAs out there. Which one is right for you? We need to look and analyze your situation. What is it? You're looking for tsp to accomplish in retirement? Do you just want to keep your money safe and sound and protected from risk while also giving the opportunity for growth? Do you want lifetime income, but you don't want to cash in your balance with the life annuity? What if you can remain in control of your money and still get a lifetime income? Best of both worlds, maybe it's a combination of both. Maybe you want to leave it to your beneficiaries. Maybe you want to donate it.

Speaker1:
I don't know. Everybody situation is a little different, but we need to analyze and. Figure out which which type of account is best for you. It's important to note that when transferring or doing a TSP rollover, there are no early withdrawal penalties. No taxes do. No transfer fees because you're moving it from one qualified account to another. There's no tax liability, no fees, no transfer, no management, nothing when making that the type of account that you have will vary. But the transfer of the rollover, all of that. No fees. No withdrawal penalties. No taxes. Now again, what type of account is right for you as you're approaching retirement, as you're in retirement? What do we recommend? What do we look at? What all depends upon your risk tolerance and you've got my teeter totter here between risk and no risk. And if you're just listening, if you cannot see this, there's you got to imagine a picture of a teeter totter. And on one side, we have risky types of accounts, and on the other side, we have risk free or no risk types of accounts. And on the risky side. Yes, there's a greater potential for growth, bigger risk, bigger reward. And that's when we go to the far left and we're looking at stock type accounts, right stocks and mutual funds. That's kind of like what your TSP is built with stocks and mutual funds.

Speaker1:
There can be some great returns, but we've seen there can be some big risks involved. So there's a big downside. There's also things called variable annuities. Any time you hear the word variable, that means it's invested directly in the market and there is risk involved bonds. There is some risk in bonds. Ok, a little bit lower growth potential. A little bit lower risk, but there still is some risk depending on the types of bonds. Now let's go to the low or no risk side. As you'll see, there's no downside arrows on the low to no risk side. Cash now, no cash. I'm considering that like the G Fund or your savings account, you know your money is going to be protected, but it's not going to grow as much as it could. It's almost like baring it in the backyard or hiding it under your mattress. Cds were getting a little better. Fixed annuities So there's we said, variable annuities are risky. Fixed annuities. There's a fixed interest rate involved, generally not so high, but it's going to be better than a CD and better than your savings account at your bank. The best type of account that we've seen to offer zero risk, meaning you cannot lose any money. It's just like your G fund, but still having a great potential for growth. It's called a fixed indexed annuity indexed annuity. Now I'll state that again, if you're looking for the protection of the G Fund, if you're a safe and sound kind of person, if you're saying, as I approach retirement, I like the protections of the G Fund.

Speaker1:
I'm just not too fond of the returns of the G Fund, then this could be an account for you to look at. Why? Because if you have the ability to get the protections of the fund with much better growth potential or opportunity for solid growth and much higher than the G Fund, is that something you'd be interested in and most people would probably be saying? Absolutely. Is that a dumb question? Is that a rhetorical question? Are you really asking me that question? Yes, I am. So if you want the same protection of the fund guarantee that you can never lose money over time, the worst you'd ever have in your account is exactly what you put in it. But you want the opportunity for growth two to four times what the fund performs at historically. Then a fixed indexed annuity could be right for you right now. How does this work? What is the benefits of a fixed indexed annuity? For those that are not seeing the screen and seeing this particular slide, let's imagine that you had kind of a funnel, right? And as that funnel expands out, that's like saying, OK, I've got I've got a big risk on both sides. I got risk of reward.

Speaker1:
So the more opportunity for growth that I have, the more risk that I take, the greater my reward could be. But I'm also OK with the fact that with that high risk or with that high reward comes some high risk. So as high as I can go up, I can equally go as far down. Well, what if what if you got solid growth like we're showing here in the red section where there is no downside, right? You may not have as high a growth as you know, investing directly in the stocks and taking as high a risk, you still have very solid growth. But what if you had zero chance you'd ever lose any money? So, you know, no matter what the market did, if the market went down for 10 years straight, the worst you have in your account is exactly what's in there at that time. That's a pretty cool protection to have. It may not be for everybody, but if you're looking for that kind of protection and you're looking for that kind of safety, a fixed indexed annuity might be right for you when it comes to your TSP as you're getting close to or entering into retirement. Why is it important or what is important to you? Why would we look at an account like that, something that gives you guaranteed protection and chance for solid growth? Well, if you look at my slide here, this is these are things that I've seen federal employees extremely concerned.

Speaker1:
About as they're nearing or entering retirement, a lot of federal employees want to protect against unnecessary risk. You know, say, within five years, three years, definitely two or one year within retirement, they want to make sure that their principal is safe. The money that they have in there, they do not want to lose it at the last minute. They want to ensure their financial security. They want to be confident. They want to insure. Let's use the word insure and ensure your financial security well. You can ensure it using a plan like a fixed indexed annuity. It is one hundred percent protected from risk. Now this all boils down to most federal employees as they're entering or nearing retirement. Do not want to lose money? Do not. You've done a good job over the course of your working career. Do not at the eleventh hour want to lose money? I use an example say you are a federal employee and you're going to retire at the beginning of two thousand nine and then two thousand eight happens and the bottom drops out and you lose 30 percent of your tsp at the last minute. Or maybe you got you pulled out and you only had you only lost 15 or 20 percent within the last year. That's a big jump or a big chunk of change.

Speaker1:
So I wouldn't want anybody to unnecessarily lose any money or any more than they have to by sticking with too much risk. Take whatever portion or whatever amount that you want to keep safe. Look into the options that are available. Flexibility and control. Like I said, you don't want to lose control by going with the life annuity or locking yourself into something within TSP. You can still remain in control and have flexibility with your money utilizing your own IRA account. You still have access to that money so it doesn't lock your money in or we're used frozen and you can't get it. You still have access to your money within your New IRA account. Pretty awesome. What if you wanted to get that income for life like we talked about? Unfortunately, within TSP, there's only that one option the MetLife annuity. Well, in your outside IRAs and different types of fixed indexed annuities, you can get an income for life while still remaining in control of your money. You don't have to cash it in in order to get that lifetime income. Pretty awesome stuff so you can get the best of both worlds. What about locking in interest? So what if I told you that not only are you protected against loss from the craziness that's going on in the market, you cannot lose any money. But what if I told you once you gained money, it's locked in.

Speaker1:
So say you started with one hundred thousand and you earned five percent in a given year. Now you're up to one hundred and five thousand. Well, that is your new bottom line. Your account can never go below one hundred and five thousand. No matter what happens. So the only way your account would go down is if you started withdrawing money from it. But you cannot lose any money due to the volatility of the stock market, which is awesome. So once you gain interest, it cannot be taken back from you. Pretty cool stuff. So we talked about TSP. We went over the ins and outs of what TSP is and the different mistakes that I've seen federal employees make when it comes to their TSP account. Hopefully, you have not already made those types of mistakes, or hopefully you still have the opportunity to correct those types of mistakes. But if you do have questions, if you do want a review of your TSP account or your federal employee benefits in general, you love to get a retirement estimate. Please reach out to us. Contact us in any way possible. Visit our website. We'd be happy to run a full benefits and retirement analysis. Answer your questions and make sure that you've got all the information so you can make the best decisions for you, your family and your situation. Thank you for joining us on this episode of the federal retirement show and look forward to seeing you on a future episode.

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