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Thrift Savings Plan (TSP): What Can it Offer at Retirement?

What is Thrift Savings Plan (TSP)

The TSP is mainly a retirement savings plan for federal employees and service members. The TSP, like a 401(k), allows participants to contribute to a low-cost retirement savings and investment account while receiving automatic and matching contributions from the government.

It is critical to regularly contribute to your TSP account to build your retirement savings. When you reach retirement age, the total value of your TSP account will be determined by the number of contributions you made during your career and the growth of the investments within the account.

Life at Retirement

According to statistics, people are living longer and healthier lives. Retirement could easily last two decades, if not three. Your TSP account funds are critical to your retirement plan. You’ll need those savings to supplement your income when the time comes. However, federal employees may be unsure of the best way to do so.

Retiring with a sizable TSP would be fantastic. However, there is an issue.

We’re not used to living on a huge amount of income. We are accustomed to receiving a paycheck every two weeks.

How do you safely convert your TSP into a paycheck without going bankrupt?

In this article, this very question will be examined in detail.

The most significant mistake on TSP paychecks

With the help of the 4% rule, you can determine how much of your salary can be supplemented by your 401(k) or other tax-deferred savings plan (like TSP) without jeopardizing your retirement savings.

However, the vast majority of people aren’t aware of how the 4% rule is supposed to function, so they end up misapplying it (which results in them leaving much money on the table!).

The Actual 4% Rule

Most people think the 4% rule says you can only take out 4% of your yearly TSP balance.

The 4% rule states that retirees should withdraw 4% of their TSP balance upon entering retirement and then increase that amount annually by the rate of inflation.

Here’s an Example

Assume you have $500,000 to retire with. 4% is $20,000, so you can withdraw $20,000 in your first year of retirement.

Most people believe that in year 2, you must multiply 4% by your new TSP balance, but that is not what the 4% says.

According to the actual 4% rules, you take the first year’s withdrawal amount and multiply it by the year’s inflation rate in year two.

So, assuming 5% inflation, your year 2 withdrawal would be $21,000 ($20,000 x 1.05).

The chart below depicts how a withdrawal would change over time with different inflation rates, assuming a $10,000 initial withdrawal.

But you’re not finished yet.

You want to withdraw $20,000 from your TSP in your first year; how much of that $20,000 will you get to keep? If your TSP balance is $500,000.

Uncle Sam appears. We must not overlook taxes!

Assuming a 20% effective tax rate, a $20,000 first-year withdrawal would result in $4,000 in taxes and $16,000 in spending.

Your overall tax rate during retirement will, of course, depend on the type of retirement account from which you are taking distributions and any other income you may have.

That’s right—zero dollars!

That is one of the many benefits of the Roth TSP, and you can read about the Roth TSP’s pros and cons here.

Making TSP Paychecks

After determining how much you can withdraw from your TSP each year, decide how frequently you want to receive payments (monthly, quarterly) and divide the annual amount accordingly.

Most people prefer monthly payments because they must pay most bills (such as utilities and credit cards) must be paid monthly.

So a $20,000 annual withdrawal would be approximately $1,666 per month or roughly $1,333 after tax.

However, you can modify your payment schedule to meet your specific requirements.

Contact Information:
Email: [email protected]
Phone: 2129517376

Bio:
M. Dutton and Associates is a full-service financial firm. We have been in business for over 30 years serving our community. Through comprehensive objective driven planning, we provide you with the research, analysis, and available options needed to guide you in implementing a sound plan for your retirement. We are committed to helping you achieve your goals. Visit us at MarvinDutton.com . Tel. 212-951-7376: email: [email protected]

The Best Ways to Use Your FERS Pension

The federal government has a three-legged chair for pension payments. 

The Basic Benefit Plan is often known as the federal pension plan, the Thrift Savings Plan, sometimes TSP, and Social Security.

However, this post focuses on the Federal Employees Retirement System’s (FERS) Basic Benefit Plan.

FERS Pension Calculation

The length of creditable service is multiplied by a percentage (often 1% or 1.1%) and then multiplied by the “high-3” average salary to determine the FERS Basic Benefits package or pension. The 1% applies to those younger than 62 at the time of retirement or older than 62 but with fewer than 20 years of service.

If a federal employee quits with at least 20 years of reputable service and after turning age 62, the proportion rises to 1.1%. Typically, these three years are your last three in the military, but if your base pay is higher, they may be earlier. Here are examples of how the FERS pension is calculated.

Example 1

Age: Minimum Retirement Age

High-3: $50,000

30 years of service

0.01 x 30 x $50,000 = $15,000 (30% of high-3)

Example 2

Age: Minimum Retirement Age

 High-3: $50,000

 Service: 15 years

 0.01 x 15 x $50,000 = $ 7,500 (15% of high-3)

 35% reduction: $ 2,625 (7 years under 62) = $ 4,875 (9.75% of high-3)

It makes perfect sense to retire after earning the best salary in the federal government as a result of giving more weight to the three years of your top pay to optimize the pension benefit. You should also try to work till age 62 and have 20 years of experience to get 10% more of your lifetime pension savings to optimize your benefit.

Survivors’ Benefits 

The pension should also take the survivor’s benefit into account. This is particularly essential since, presuming you pass away before your spouse, you can give your surviving spouse up to half of your pension. The pension retirement income is 10% less, with a survivor’s benefit of 50%.

When evaluating your FERS pension payout, it’s common to forget the survivor’s benefit. You can offer the surviving spouse half of your annuity for a slight 10% reduction in the monthly annuity payment.

The Cost of Living Adjustments (COLAs)

COLAs are significant pension benefits. It allows you to balance your purchasing power as the cost of living increases for necessities like groceries, gas, and so forth.

There is a cost of living adjustment in the FERS pension. Raising your cost of living will be ideal if you are 62 years old.

As one of the major problems with many annuities that are not inflation-adjusted, the cost of living adjustment is a crucial component of the pension. Your purchasing power decreases over time, and you must find a way to balance your budget to make up the difference.

Tips for Increasing FERS

The following are the top four techniques to optimize your FERS pension:

1) Retire at least 62 years old and after 20 years of service. Your monthly pension income will grow if you can retire after more than 20 years of work. But keep in mind that you should be at least 62 years old.

2) Retire in your 60s with a maximum of three years of earnings. Before you retire, work toward obtaining your major federal government promotions. Your multiple is based on such a higher last three years of salary.

3) Hold off on taking the monthly allowance until you’re 62 to get the most out of the COLA. Use the COLA as an alternative. Then, if at all possible, retire at 62 or later.

4) If married, take into account the survivor’s benefit. You can provide your spouse with protection by purchasing a 50% monthly annuity for a slight decrease in your monthly annuity.

You should consult a financial counselor to acquire advice specific to your situation because these four general guidelines do not pertain to every instance. 

Contact Information:
Email: [email protected]
Phone: 2129517376

Bio:
M. Dutton and Associates is a full-service financial firm. We have been in business for over 30 years serving our community. Through comprehensive objective driven planning, we provide you with the research, analysis, and available options needed to guide you in implementiong a sound plan for your retirement. We are commited to helping you achieve your goals. Visit us at M. Dutton and Assoiciates.COM. Tel. 212-951-7376: email: [email protected]

Survivor Benefits May Be Payable Both Upon and After a Death in Service

While continuing payments to survivors upon the death of a retiree receive the majority of attention, survivorship benefits are also available if a current employee passes away. However, there are several additional eligibility requirements.

Your spouse would be eligible for a survivor annuity if you were an employee who was married at the time of your death and had at least 18 months of creditable civilian service. That annuity will be paid to you based on a portion of the annuity you were eligible for on the day of your death. This is 55% for CSRS survivors and 50% for Federal Employee Retirement System (FERS).

Note: A FERS employee’s eligible surviving spouse is entitled to a basic death benefit and 50% of the employee’s final salary (or high-3 if that amount is higher). That death benefit is around $37,000 in 2022.

The beneficiary(s) on your enrollment could continue your coverage if you were enrolled in the self plus one or self and family choices of the Federal Employees Health Benefits program at the time of your death. Any eligible survivors would be out of luck if you weren’t enrolled in the program (or if you were, but solely in the self-only option).

Benefits for FERS Survivors

A pension is given out upon retirement as part of the FERS defined benefit. This annuity, based on your age and the number of years you’ve worked for the federal government, offers a yearly payment equal to a set proportion of your most recent wage.

Your FERS account offers three types of survivor benefits, each with distinct rules.

Fundamental Death Benefit: When a FERS employee passes away, the surviving spouse is entitled to a lump-sum death benefit equivalent to $34,991 plus 50% of the deceased’s final income. (Note that while this is the approved sum for 2021, inflation is considered yearly.)

To be eligible, your surviving spouse must have been married to you for at least nine months or be the parent of a child born during your marriage.

Insurer Annuity: The surviving spouse is also qualified for an annual payout based on the deceased’s pension schedule if they match the qualifying criteria listed above and the deceased federal employee had ten years of creditable service. This benefit would equal 50% of their annual pension, with no age-related reductions if the federal employee passed away before retirement. Each year, this sum is adjusted for inflation.

Premiums

The benefits and government portion of the contributions are the same for an FEHB eligible survivor as they are for a current or retired employee participating in the same plan. The premiums would typically be subtracted from your survivor’s annuity payment, and they can also pay the premiums directly to OPM if the annuity is insufficient to cover them.

Any FEGLI benefits will be given to the person or people you designated on the Standard Form 2823, Designation of Beneficiary, if you enrolled in the Federal Employees’ Group Life Insurance program and have one on file. If you don’t, the money will be dispersed following the usual hierarchy of importance:

• First to a living spouse;

• Second, if there is no spouse, to your children, with the share of any deceased child being split among that child’s descendants, if any;

• Third, if none of the aforementioned apply, to your parents equally or in full to the lone survivor;

• Fourth, if none of the aforementioned, to your estate’s executor or administrator; and

• Sixth, if none of the aforementioned apply to your relatives as decided by the state’s legal system where you resided.

When you pass away, the Federal Long-Term Care Insurance Program will continue to cover your spouse or any other qualified family members as long as the premiums are paid. However, a family member who is receiving a survivor annuity is the only one who can sign up for the FLTCIP program for the first time.

• Any member of your family who previously had coverage via your Federal Dental and Vision Insurance Program enrollment is eligible to keep it. Similarly, anyone receiving a survivor annuity is also eligible to enroll.

• Any money in your TSP account at the time of your death will be distributed according to the above-mentioned standard order of priority unless you submitted a valid TSP-3, Beneficiary Election form.

• The beneficiary, if it’s your surviving spouse, can maintain the account and enjoy the same administration and withdrawal privileges as you did. Any other beneficiaries, however, are required to close the account.

• They can do that by either taking a withdrawal or transferring the funds to an IRA or another type of eligible retirement savings vehicle.

Contact Information:
Email: [email protected]
Phone: 2129517376

Bio:
M. Dutton and Associates is a full-service financial firm. We have been in business for over 30 years serving our community. Through comprehensive objective driven planning, we provide you with the research, analysis, and available options needed to guide you in implementiong a sound plan for your retirement. We are commited to helping you achieve your goals. Visit us at M. Dutton and Assoiciates.COM. Tel. 212-951-7376: email: [email protected]

What Is a Thrift Savings Plan, and How Does It Work?

A Thrift Savings Plan (TSP) is the equivalent of a 401(k) for government employees. In other words, it’s a government employee’s tax-advantaged retirement plan.

Participants in a TSP must be from one of the following groups:

  • The Federal Employees Retirement System (FERS), a retirement system for federal employees (FERS)
  • Retirement System for Civil Servants (CSRS)
  • Members of the armed forces (active duty or Ready Reserve)
  • Civilians in other kinds of service

What Is a TSP?

If you qualify for a Thrift Savings Plan, your employer will usually inform you at your job orientation.

Do you intend to donate to a TSP at work? There are a few options available to you:

• Will you donate a certain proportion of your salary?

• Will you donate to a standard TSP or a Roth TSP? (The distinctions between IRAs and 401(k) plans are the same.)

• What are your plans for investing your money in your TSP?

What Is a Thrift Savings Plan? Additional Considerations

Civil servants can only contribute to their TSP from their regular income (as opposed to bonus or overtime pay). Members of the armed forces can contribute from their normal pay, bonuses, or overtime pay.

If you work for FERS, 1% of your salary is automatically deposited into a TSP, whether you contribute or not. You lose your free retirement savings if you don’t stay on the job for three years. As a result, it is a retention strategy.

TSP contributions are automatically registered for some employees. The money is usually put into a lifecycle fund. Some people are surprised by this, as they are unaware that a portion of their salary is redirected to a retirement account. If you work in the government, this is something to consider.

If you switch from the private to the public sector, you can roll your 401(k) or IRA into a TSP. If you switch from government employment to a private company, you can do the same thing in reverse.

Normally, you won’t be able to contribute to a 401(k) and a TSP simultaneously. You can, however, contribute to both a TSP and an IRA at the same time.

What Are the 2022 TSP Contribution Limits?

Contribution Limits for the Thrift Savings Plan in 2022:

Employee contributions (under 50 years old) are capped at $20,500.

Employee catch-up contributions (for those aged 50 and up) are $6,500

All sources have a contribution limit (under age 50) of $61,000; $67,500 contribution limit, all sources (age 50+)

Thrift Savings Plan contribution limitations for 2022 are nearly identical to the 401(k) contribution limits.

You can contribute up to $20,500 to your TSP plan this year if you are under 50 years old on December 31, 2022. This holds even if you split your contributions across regular and Roth TSP plans.

Those aged 50 and up are eligible for an extra $6,500 in “catch-up” payments. You can also make after-tax contributions that exceed the base contribution limitations if your employer allows it.

The IRS enables you to put up to $61,000 in additional money into your TSP in 2022, including your contributions and any money your workplace provides. (For people aged 50 and up, the figure climbs to $67,500.)

Investment Options in the Thrift Savings Plan

Within your TSP, you have only six investing possibilities. Counting the ten separate “lifecycle” funds, which are the target date fund equivalent, brings the total to 15.

Here are the options:

  1. Government Securities Investment (G) Fund: This fund invests in US Treasury securities.
  2. Fixed-Income Investment (F) Fund: Follows a specific index fund that invests in government bonds in the United States.
  3. Common-Stock Index Investment (C) Fund: This fund mimics the S&P 500 index.
  4. Small-Cap Stock Index Investment (S) Fund: Follows a Dow Jones index of small- and mid-cap companies.
  5. International Stock Investment (I) Fund: Stock in non-US corporations is held in this fund.
  6. Lifecycle funds: These funds comprise a mix of each of the five other funds, balanced to a suitable level of risk depending on how near you are to retirement. They are available in five-year increments that indicate your estimated retirement date.

The government creates retirement programs with your best interests in mind, so you can hopefully support yourself in retirement. However, the IRS will eventually want a portion of your earnings, so you need to take a required minimum distribution.

Contact Information:
Email: [email protected]
Phone: 2129517376

Bio:
M. Dutton and Associates is a full-service financial firm. We have been in business for over 30 years serving our community. Through comprehensive objective driven planning, we provide you with the research, analysis, and available options needed to guide you in implementiong a sound plan for your retirement. We are commited to helping you achieve your goals. Visit us at M. Dutton and Assoiciates.COM. Tel. 212-951-7376: email: [email protected]