Financial Frontlines®

This article was written by BG Gary G. Ottenbreit, Retired Brigadier General, Connecticut Army National Guard, and a new Life Member of MOAA. BG Ottenbreit is currently the District Manager for the Social Security Administration in New Haven, Connecticut, with more than 30 years of experience working in this agency.  This is his first blog post. These views are his own, and not necessarily the views of the SSA.

What is retirement? A century ago, it simply meant an event – when you opted to end your nine to five grind in the workforce. When a vast majority of the population found they could not afford that option, the government stepped in and passed the Social Security Act. Since then, the meaning of retirement has evolved into a ‘state of being’, an attainment of a certain age, financial stability. I believe that retirement has evolved sufficiently to be included as another step in one’s ‘life planning’.

As parents, we raise our children, educate them in preparation for life and then continue to offer support as we send them off into the world to make it on their own. We hope that sometime between their High School and College years they make their life plan. They make career choices, decide where to live, they may choose partners and/or raise a family and, yes, and if they are wise, begin to plan for their retirement.

For the purpose of this article, let us simply define retirement as that point in time when you are no longer in the work force. The funds you use to live your life are primarily income and not earnings. The goal, in retirement, is to maintain a life style that is equal to, or better than, the one you have grown accustomed to while you were working. It is not a question of if you will retire, but when, and planning for it will make the transition smoother. Retirement is a personal choice based on your ability to work, your choice to work or not, and your financial circumstances.

When conducting presentations, I often refer to Social Security benefit as the foundation. Social Security was designed to replace only one-third of your earnings. The other two-thirds should come from other sources; a pension from your employer, personal savings, investments, or other income. The combination of these resources will fund your retirement and if you planned correctly, sustain you as you move through them. However, the topic of this article is not Social Security – it is about how critical the savings portion is to your plan for retirement. Saving is the only building block that you can control.

A Social Security benefit and a company pension are subject to rules and predetermined formulas as are investment returns and rental income are subject to the current market value therefore, all are out of your control. However, you can control how much money you can save.

I have read articles from renown financial planners that recommend (retirement) planning a replacement rate of income for earnings at 70 to 80 percent. At retirement, to make your ‘nest-egg’ last, you should plan to withdraw only 4 percent a year. This is not an easy feat and certainly difficult to attempt to accomplish over a short period.

It is never too late to start planning for retirement. However, starting early means additional years of preparing and the less financially painful it will be to save. Saving smaller amounts, consistently over a long period, is easier than saving larger amounts of money over a short period. Just as important is tracking the growth of your retirement ‘nest-egg’. Review the year-to-date benefit projections from your retirement income instruments annually. [Analogy: You are reviewing Course-of-Actions and planning the battle.]

Waiting until mid-life to plan will probably extend the number of years you will need to work, force you to supersize your contributions and/or possibly cause you to alter your present and future lifestyle. [Analogy: The battle is half over and although you have not lost ground you have not gained any either.]

Waiting until you are within five years of retirement leaves you practically no room for improving your financial position. At best, you could rearrange your investment accounts and create a tax strategy. [Analogy: You are in retrograde.]

Visiting the Social Security website www.socialsecurity.gov can be helpful. There are many links and articles related to retirement planning. Two valuable requests that you can make online are the benefit estimate and the annual statement. The benefit estimate will not be exact, depending on how many additional years you will work, but it provides an excellent reference point. The Annual Statement lists your FICA wage by year, match the statement amounts against your pay stubs and/or tax returns for accuracy. Note: Later this year Social Security Administration will offer an Internet MySocialSecurity portal offering personalized service after the user registers with a self-selected username and password.

Contact the financial consultants from MOAA and/or USAA – I have and found them to be helpful. I stated earlier that it is never too late to start, however, the reverse is also true – it is never too early to start. Make sure that retirement planning is part of your children’s education.

This content is provided courtesy of USAA.

How did your tax return look?

If you got a big refund, think twice before celebrating. That only means you gave the government an interest-free loan during the year. On the other hand, if you ended up owing Uncle Sam a large amount, the IRS may have charged you interest and penalties for under-withholding. Fine-tune your withholding to make sure you’re closer to what you owe next time around.

Put Your Refund to Work

If you’re getting a tax refund, ask the IRS to deposit it directly into your checking or savings account.

Once the money is safely in your account, use it to make your financial future more secure:

• Pay down debt.
• Build your emergency fund.
• Consider an IRA.
• Save it for college.
• Repair or renovate your home.

Protect What Your Landlord Won’t

If you rent, your landlord’s insurance probably doesn’t cover your possessions, which means a fire or break-in could cost you dearly. You also may not be protected if a guest or visitor is injured in the house or apartment you’re renting. A renters policy can cover all those risks for a modest price.

The preceding discussion is not tax, legal or estate planning advice. Consult with your tax, legal or estate planning professional regarding your specific situation.

The article below on Roth TSP provides some good information on Roth TSP.   This article adds on to the information provided.  As mentioned, Roth TSP is similar to Roth 401k and in certain respects similar to Roth IRAs.  Roth TSP contributions are made with after tax earnings (no tax deduction), but the biggest benefit to any Roth account is that distributions are tax-free if certain requirements are met.  Beyond that how does the Roth TSP stack up?

Who is eligible?

All Federal employees eligible to participate in the Traditional TSP are eligible to participate in Roth TSP.

When can I participate?

Roth TSP will become available at most Federal Agencies on 7 May.  However for the uniformed services this will not be the case.  Roth TSP will become available to Marine Corps members in June, Defense and Veterans Affairs Department Civilians in July and Army, Navy and Air Force service members in October.

What about retirees?

The only thing Retirees can do with Roth TSP is roll-over amounts from Roth 401k or Roth 403b accounts into Roth TSP (Roll-overs from Roth IRAs to Roth TSP are not allowed).  It is unclear when Roth TSP will be available to retirees.

What are the good points?

1. The contribution limits to Roth TSP are much higher than to a Roth IRA.  The maximum amount you can contribute to a Roth IRA is $5,000 ($6,000 if 50 or older) versus $17,000 ($22,500 if 50 or older) for Roth TSP.  So, if you have additional cash flow you want to contribute to a tax free account, Roth TSP gives you options.

2. There are no income limits to contribute to Roth TSP.  To contribute the full amount to a Roth IRA your Adjusted Gross Income (AGI) must be less than $183,000 if you are married filing jointly or $125,000 if you file single, head of household or married filing separately (under certain circumstances).  This could be important for retired military members who become GS employees or to married couples on active duty where both have income.

3. Roth TSP has all the benefits of the Traditional TSP.

- Low Operating Expenses

- The Unique Goverment Bond Fund

4. You can use Combat Zone Exclusion Income (Tax Exempt) to Fund the “Catch-up” contributions (for those 50 and older) in a Roth TSP.  You can’t do that with Traditional TSP.

What are the bad points?

1.  The Roth TSP and Traditional TSP combination is not well suited to tax efficient investing.  Specific fund holdings within TSP are allocated proportionally based on the distribution of Roth versus Traditional balances.  For example if your TSP account balance is 10% Roth and 90% Traditional and you own some amount of the “C” Fund then 10% of the C Fund will be in the Roth TSP and 90% will be in the Traditional TSP.  You cannot designate that a specific fund be inside one or the other account (Roth or Traditional).  This makes it difficult to efficiently invest in regards to minimizing your tax bill.

2.  You cannot convert Traditional TSP balances (including tax exempt balances) to Roth TSP balances.

3.  If you leave your funds in TSP your Required Minimum Distributions (RMD) will consist of both Roth and Traditional balances.  Roth IRAs do not have RMDs and as such can be very valuable estate planning tools.

4.  You have the option to transfer your Roth TSP balance to a Roth IRA, but if you do you must then leave the funds in the Roth IRA for five years to avoid early withdrawal penalties

5.Roth TSPs have potentially higher taxes (and penalties) for non-qualified distributions than a Roth IRA.  Non-qualified distributions generally are those taken before 59 ½ years old and with a Roth IRA that has been open less than 5 years.

I’m sure some of this will change as the program is implemented and as Congress tinkers with it.  So what should you do?  Well, you will have to consider the tax ramifications and you’ll have to weigh the plusses and minuses to determine what is best for you.

Were you disappointed when Social Security Administration (SSA) decided to no longer mail annual earnings statements? Well, there’s great news!

SSA plans to resume mailing paper statements later this year for workers age 25 and older.

In February, SSA resumed mailing paper statements to workers age 60 and older, if they were not already receiving social security benefits.

Why is this important?

Well, for many of us (or family members) who are between the ages of 40-60 and not quite tech-savvy or receptive to accessing personal documents online, this is huge.

This statement provides annual social security earnings and benefits information. It includes estimates for disability and survivors benefits, making the statement an important financial planning tool.

Social Security benefits are based on average earnings over a person’s lifetime. Therefore, it is important to review this statement annual to ensure the information reported is accurate.  Inaccurate information could affect the benefits to which a person may be entitled.

SSA will continue to offer online access for working individuals ages 18 or older. To access statements online individuals will need to provide information about themselves that matches information already on file with Social Security Administration. For more information visit the SSA website.

What’s the best way to save for this? What’s the best way to invest for that? Should I go with an insurance product or mutual funds or CDs or bonds or something else? Because financial decisions aren’t as cut and dry as buying groceries, it’s tough to be a savvy consumer. Here are some insights to consider.

There are many ways to accomplish your mission. Generally whoever you talk to only offers a solution based on their personal knowledge or what their company sells. Go to an insurance company and you’ll typically get an insurance solution for instance. There are always other options. Unfortunately you have to decide how many other options you are willing to find and learn about. Or find the right person to work with in the first place.

Buyer’s remorse is preventable. You make a decision to go with a specific person and their option. What if you regret your choice down the road? There are always other options. Do you still have avenues available if you learn of a better option later? Prevent the root cause of buyer’s remorse by hashing out all the issues before you make the decision to go in a certain direction.

It’s the person not the company. A company isn’t the answer to your situation; a person is. Every company has their share of “sales people” and those who truly place a client’s best interest above all else. You want someone committed to you and a long-term relationship. Seek someone who wants to know your issues up front, discusses the options, educates on the pros and cons, and wants you to make an informed decision. The right person may be an independent practitioner.

Don’t be pitched a product. Sales people pitch products. You have options so a person pitching one idea should be a red flag. How can anyone be expected to know what works best for you if they haven’t taken the time to get to know you and your need? If you meet with someone who pitches a hot tip or the perfect product and they don’t know you, run in the opposite direction. You want to understand your choices.

Don’t be sucked into the latest hot item. What’s hot now is only hot because it is currently news worthy and it feeds your greed or fear. Run in the opposite direction from the latest hot item. The time to invest in the latest hot item was when it wasn’t a hot item. Notice how all the hucksters come out after something makes the news? Don’t fall for it. Sorry to break this news but you (and all us common citizens) are the last to know of a good opportunity. Seek timeless advice.

It would be nice to have tangible instructions to follow for success but financial services and products by their nature are nuanced. Finding the right person to help is the best you can do.