How to Figure the Value of your Retirement Annuity

Apr 11 2014

calculator3Occasionally I get a question about how to peg a value on the Service retirement annuity. I suggest you use an on-line calculator like the ones at Dinkytown.net. Click on the “Investment” choice and use the “Present Value” or “Future Value” calculators. Of course, both of these values are only approximations.

Present Value calculates the lump-sum amount you would need today to generate the annuity income amount you will receive over your lifetime.

Future Value calculates the final total value at death of the annuity payments you collected over your life.

Let’s start with the Present Value calculator first; the lump sum amount would you need now to last a period of time.

Say you get $2000 a month in gross retired pay, you expect to live 30 years and you expect the cost of living increases to average 2%. Plug these numbers in:

Start date is today. End date is 30 years from now. The future value will be zero because all the money will be used up 30 years from now. $2000 is withdrawn monthly. Compound interest (COLA) is annual. Check the deposits at the beginning box. If you were to deposit a lump sum today and live off it for 30 years at 2% interest withdrawing $2000 a month, it would take $544,425.

Next Future Value; the future value of all your monthly payments.

I’ll use the same numbers. Start today and end in 2044; 30 years from now or projected date of death. Initial deposit is zero. Rate of return is 2% COLA. Periodic deposit (pay) is $2000, monthly. Interest is annual. Check the box for deposit at beginning. You will receive $986,203 in payments over your lifetime.

You can see how the Future Value calculator can also help you with your savings and investment projections. You have kids or grandkids? You can show that teenager the value of starting a savings or investment account early.

Johnny starts early, in his 20s, and invests for 40 years with average contributions of $250 monthly and average returns of 8%. Johnny could have $811,000 for retirement. On the other hand, Johnny starts in his 30s and investment for 30 years. Everything else is the same. Now Johnny has $355,000. “Time is money” has new meaning for Johnny now that he really knows the value of time and money.

If your objective is net worth determination, I would go with the Present Value.

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Should You Work with a Financial Adviser?

Mar 26 2014

financialadviser_webDisclaimer: I have no bias in this discussion. MOAA doesn’t provide financial planning services from our staff so I’m not trying to make a case one way or the other. Maybe we can help each other by sharing our life experiences so others can either benefit or prevent heartache.

Reasons to Work with a Financial Adviser

  • You are not interested in financial issues.
  • You don’t trust your knowledge level.
  • You believe it is too complicated.
  • You believe it is too risky.
  • You are too emotional about your money.
  • You have better things to do with your time.
  • You don’t mind paying for services.
  • You like outside advice.
  • You are afraid marketing and media will negatively influence your decisions.
  • You prefer to work with an expert.
  • You think it gives you the best chance to succeed.

Reasons Not to Work with a Financial Adviser

  • You are interested in financial issues.
  • You are challenged by achieving your objective.
  • You are willing to learn.
  • You trust your knowledge.
  • You don’t let emotions dictate your decisions.
  • You are not swayed by marketing and media.
  • You understand the biases of financial firms and their advice.
  • You understand investment concepts and strategies.
  • You are willing to invest some time in the process.
  • You understand it doesn’t have to be complicated.
  • You aren’t willing to pay for something you can do.
  • You understand risk can be managed and how to do it.

Share your thoughts. Why do you use an adviser? Why don’t you? What lessons have you learned; the good and bad about managing your money. Has an adviser helped or hurt you?

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TRICARE for Guard and Reserve Members

Feb 27 2014

While not new, for those who haven’t heard the news…

TRICARE has two health plans for Guard and Reserve members. Both plans meet the essential coverage requirements under the Affordable Care Act.

35to49testsTRICARE Reserve Select is for Guard or Reserve members assigned to the Selected Reserves. You cannot be eligible or enrolled in the Federal Employees Health Plan. It is a premium based plan that must be purchased. It works similarly to TRICARE Standard. You can see any TRICARE authorized, network or non-network provider; costs will vary depending on the provider’s network status. The monthly premiums are $51.68 for an individual and $204.29 for the family plan. In addition, there is an annual deductible of $50ind/$100fam for E4s and below; $150ind/$300fam E5 and above. You also pay 15% of the bill, after your deductible, for network and 20% for non-network providers. Maximum out of pocket expense is $1000 per family per year.

TRICARE Retired Reserve is for retired members prior to age 60—in the gray zone. It is also similar to TRICARE Standard and Reserve Select above; but the costs are different. You must purchase the plan. The annual deductibles are $300ind/$600fam. The monthly premiums are $390.99ind/$956.65fam. After deductibles, you pay 20% of bill for network and 25% of bill for non-network providers. Maximum out of pocket expenses are $3000 per family per year.

Go to www.tricare.mil/Welcome/Enroll to learn more and enroll.

Looking for more in-depth information on TRICARE dental coverage, insurance rates and pharmacy options? MOAA members have access to the latest updates on health benefits at http://www.moaa.org/health.

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An Introduction to Concurrent Receipt–CRDP/CRSC

Feb 24 2014

servicemember_WEBI was asked to conduct a presentation recently about the basics of the concurrent receipt programs–CRDP and CRSC. Here is the presentation walking through some of the programs’ details. I hope you find this presentation helpful as you plan around your pay issues.

To find explanations to go with the slides, refer to our MOAA web pages on CRDP and CRSC by visiting: http://www.moaa.org/payissues.

Or find more articles on the subjects on the MOAA Financial Frontlines blog at http://moaablogs.org/financial. Search for CRSC and CRDP on the blog site.

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What To Do With Your TSP When Leaving the Service

Feb 06 2014

When you leave the Service, what happens to your TSP? You have four options to consider.

  • Leave your money in the TSP.
  • Transfer your money to an IRA.
  • Transfer your money to your future employer retirement plan (e.g. 401k).
  • Withdraw your money and put it in your pocket.

Before we get into the discussion about the four options, please be aware that the TSP has many rules. You’ll need to check the rules to understand the technicalities involved with your chosen plan of action. See the fine print of the technicalities here.

Be aware that in TSP lingo, “withdrawal” means putting money in your pocket. “Transfer” is moving money from one retirement account to another electronically and you never touch the money. A “rollover” is when you take delivery of the money before you roll it into another retirement account.

Withdrawals and rollovers have major tax issues. Transfers don’t (unless you are moving a traditional account to a Roth account).

piggy_bank_savingsFirst, let’s start with the last option because it’s the easiest to cover. Don’t do this.

You have one working lifetime to invest for your future. If you don’t get it right the first and only time you have, you have no options at the point of retirement to find retirement assets to live on. You can find sources of money for other, non-retirement, issues that pop-up during your working life. Use other sources of money before you rob your retirement accounts.

By robbing your retirement accounts you risk working a lot longer than desired or lowering your standard of living to correspond to your assets when you reach retirement age. Not good choices when you are in your 60s. The tax penalty for withdrawing retirement account money early, should you decide to use your future retirement income, is just the gravy on the potatoes.

Now to the meat of the issue. What to consider with the three remaining real options.

Pick your “base camp”

You’ve been with one employer up to now. The TSP is your only employer retirement plan. You are moving on and you can’t contribute to your TSP anymore. Your next employer will have their own version of a TSP, their 401k plan, and you will contribute to that plan. Now you have a TSP and a 401k plan.

When you change jobs one day (you will), you’ll have a TSP, a past employer 401k, and a new current employer 401k. See how your retirement accounts are growing? Plus you may have your personal Individual Retirement Account (IRA) on the side. Don’t let this growth in the number of accounts happen. Keep the number of your retirement accounts to a minimum.

Too many retirement accounts cause problems. One is “out of sight, out of mind.” Two is that you start to juggle too many balls in the air. Three is cost. Four is managing an investment allocation. Five is the administrative hassle working with so many firms, separate management processes and paperwork. Six is what if one of your old employers goes out of business; hint, it’s a pain. Seven…you get the message.

Pick an account to be your retirement base camp. After you leave each job, transfer the retirement funds to your base retirement account. Now all employer retirement funds are consolidated in the fewest possible accounts. The following are not in priority order.

  • Base camp option #1. Keep your TSP and used it as your base camp. You can’t make regular payroll contributions to your TSP after you leave employment but you can transfer future retirement assets back into the TSP.
  • Option #2. Use your IRA. You’ll need a traditional IRA for traditional TSP/401k assets and a Roth IRA for future Roth TSP/401k assets.
  • Option #3. Your current employer’s 401k. Just keep transferring your old TSP/401k accounts into your new employer’s plan.

Before you pick one of these options, consider the factors that follow. These factors will help determine the best option for you.

Costs

This is important since the more the plan cost you, the more the costs whittle away at your returns. On an annual basis, some of the costs may not seem like much. But over decades, the final amount of your funds could be substantially less if you pay just a bit more each year.

Impact of Fund Annual Expenses

Type of Fund

Annual Expense %

Final Account Value*

Difference

TSP C fund

0.027

$296,443

-

TSP S fund

0.027

$296,443

-

Very Low Cost “C fund” equivalent

0.17

$287,983

-$8460

Very Low Cost “S fund” equivalent

0.24

$283,942

-$12,501

Standard “C fund” equivalent

1.25

$232,293

-$64,150

Standard “S fund” equivalent

1.65

$214,894

-$81,549

*30 years of work, $200 a month contribution, with an 8% return before expenses are factored for the final value.

NOTE: Larger contributions over time create larger differences in accumulated account values. Well over six figures difference lost to higher costs.

The very low cost funds noted in the table are available in an IRA if you have the right kind of IRA that allows the selection of very low cost funds. With an IRA, also consider any management fees your IRA company charges on top of your funds’ annual expenses. A do-it-yourselfer IRA with an on-line account can have very low cost funds and no company management fees.

Your 401k funds are what they are; you’re stuck with what the boss provides. You want to review your 401k fund choices before deciding to transfer retirement assets into your new employer’s 401k account. Employer 401k accounts can have very low cost funds or they could have the expensive funds noted—or a combination.

Familiarity and Simplicity

Your TSP has six fund choices and you are familiar with them. You don’t have to do anything to keep your TSP.

Your 401k is limited to the choices your employer allows in the 401k. You’ll have to start your 401k at your new employer but you would do that anyways. Research the choices well.

Your IRA could have one choice or all possible choices depending on your IRA provider. Your IRA may work as is or may require changing providers if you want something better or cheaper. The more choices you have available in the IRA, the more research or time may be required.

Investment choices

Your TSP has six fund choices. Your 401ks are limited to what the employer offers employees. An IRA can be limited based on your IRA provider or have unlimited choices if that’s what you want. What level of choice do you want? Does your employer provide 401k assistance?

Access

How easy is it for you to manage your funds? For instance; monitor the account, make changes, paperwork required, or contact a service rep.

Investment Strategy

One of the most important investment strategies for working people investing to build wealth for retirement is called “averaging down” or AKA “dollar-cost-averaging.” This strategy is based on the practice of contributing to your retirement account in regular, disciplined amounts every pay period. It is the best way to accumulate shares in your funds which leads to wealth over time.

If your base retirement account isn’t receiving regular contributions, you are not taking advantage of this critical wealth building strategy. Without averaging down, you need to rely on a proper allocation to do the heavy lifting in your wealth building strategy.

investors_guideMOAA members can download or order the MOAA Investors’ Manual for more details on these wealth building strategies. See http://www.moaa.org/InvestorsManual/ for info.

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