FED News Daily

Federal News

Archives for December 2021

TSP investing during a growing pandemic: How’s that work?

Investing for retirement is tricky enough. Building and keeping a nest egg for life when three virus strains are ravaging the planet only adds to the stress. But many pros say that even in times like this there are things people can do to get the best returns. Earlier this year we asked D.C. area financial planner Arthur Stein how his investors were holding up. And what course he was advising them to take. We got so much reaction we’re going to rerun the Your Turn show today at 10 a.m. streaming here or on the radio at 1500 AM in the Baltimore-Washington area.

For background, and to setup what we’ll be talking about today, he’s written this do’s and don’ts for long range TSP investors. Here’s a look at what we’ll be talking about:

Stock Funds: Covid, Inflation, and Supply Chain Disruptions

By Arthur Stein, CFP®

The TSP U.S. stock funds (C and S) reached all-time highs in the last week of October, as stock investors seemed to focus on a resilient economic recovery, ongoing historic support from the Federal Reserve and strong corporate earnings. Year-to-date returns were excellent for all three of the stock funds.

F fund (intermediate-term US bonds) returns continue to be negative year-to-date and over the last twelve months. However, the F fund outperformed the G fund (short-term government bonds) over the last 5, 10 and 15 years.

A Frequent Question with No Answer

One of the most frequent questions I hear is how well the TSP funds will do in the future. I cannot answer that.

Stock market forecasts are not reliable, not by me or anyone else. An article by Barry Ritzholtz in the Washington Post, Would you let a mystic manage your investment portfolio?, contains many examples of failed stock market predictions. Ritzholz writes that the “data overwhelmingly show that the skill set of the predictive pundits is no better than a coin toss. The odd person gets these forecasts about the economy and stock markets right each year, but the lack of any sort of consistent winners and losers means that, mathematically, it is a random outcome.”

Old saying: Even a stopped clock tells the correct time twice a day.

So, what can an investor do? I suggest ignoring market forecasts. Instead, note that, historically, well diversified and well managed stock portfolios outperformed bonds and bank accounts over long periods of time. That means that the TSP stock funds are reasonable investments for money you need to withdraw more than ten years from now. Past performance is no guarantee of future performance but the historical record seems clear.

Nearly Useless Factoid

By Alazar Moges

17 of the 20 highest peaks in the United States are in Alaska. Denali is the highest peak in North America at 20,320 ft.

Source: Alaskan Government

January COLA or January raise: Why not both?

You don’t reach retirement age in the federal government without learning your way around many obstacles. And how to navigate sometimes conflicting or confusing rules and regulations.

Which is why every time there is a federal pay raise AND a cost of living adjustment (COLA) for retirees, some working folks figure they can get a piece of both. Retire late in the year to qualify for some of the COLA and/or retire in early January so some of their final pay and annual leave will be at the new higher rate.

While it’s a good plan, in theory, it has one important but fatal flaw. It won’t work.

Bottom line is that the retiree raise is based on the rise in living costs from the current quarter (in this case July, August, September of 2021 over the same time period last year. Since the COLA is effective Dec. 1 (first reflected in January annuity payments), it means the would-be retirees weren’t retirees for any, all or most of the inflation measuring period. COLAs are for people who are actually retired.

As benefits expert Tammy Flanagan explains it:

A COLA effective for December of the current year is equal to the percentage increase (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the last year in which a COLA became effective. If there is an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no COLA for the year. The latest COLA is 5.9 percent for Social Security benefits, military retirement pay and CSRS (Civil Service Retirement System) retirement benefits. Benefits will increase by 5.9 percent beginning with the December 2021 benefits, which are payable in January 2022. Due to the “diet” and delayed COLA for FERS (Federal Employees Retirement System), those who are eligible for the 2021 COLA will receive 4.9% in their January FERS retirement benefit (remember there is no COLA on the FERS supplement and most FERS retirees do not receive a COLA until after they reach 62).”

The same disappointing logic applies to plans of people who time their retirement for early January. They hope to get the last check, or part of it, and some or all of their payment for unused annual leave at the 2022 rate. Again, a non-starter. Those who retire on December 31, 2021 will have their lump sum annual leave paid at the 2022 pay rate since the rule is that the lump sum payment will equal the pay the employee would have received had they remained employed until expiration of the period covered by the annual leave.

Since 2022 is a pay raise and COLA year, we got lots of requests from retirement-eligible workers about how to proceed. Could they get one or both benefits by timing their retirement? As usual, when the questions get that complicated, I turn to benefits expert Tammy Flanagan. She’s a long-time, recently retired federal benefits expert. She now operates her own consulting operation, which has helped lots of active and retired feds get the most out of their excellent, but often tricky, benefit package. Typical of the questions I got this year is this one from an Interior Department worker. I passed it on to Tammy.

First, his question:

Hi Mike

I have enjoyed following your Federal Report for many years and I have learned a lot.

I thought I understood the timing for my retirement (setting a date).

Now I have an urgent question.

I had decided to retire 1/29/2022 to take advantage of the potential 2.7% 2022 COLA on federal salaries, near the last day of a month and end of a pay period.

I think I assumed that I would also benefit from the retirement COLA of 5.9%.

However, now I think I may have really made a big mistake and if I retire on 1/29/2022 I will miss the retirement COLA of 5.9% (in my case about $2,400) for the rest of my life.

That is a lot bigger benefit than working for two more pay periods at a slightly higher rate.

The question is should I retire on 12/31/2021 or 1/29/2022 to maximize my benefits?

Thanks,

Tom.

So I passed his question on to Tammy asking her if any benefit was possible or if he would miss the boat twice.

Tammy’s reply:

Hi Mike.

It is correct that this employee will not get any of the 2021 COLA since they weren’t retired in 2021 for any time before 12/1/2021. The January pay raise won’t help them much either for the high-three average salary computation since it will be in effect for less than one month out of 3 years. By retiring at the end of January, the value of FEGLI life insurance will be worth approximately 2.7% more and the FERS benefit will be a few dollars more every month due to having another month of service and a few weeks at the higher 2022 pay rate. In addition, the lump sum annual leave payment for leave eligible for carry-over into 2022 will be paid at the 2022 pay rate… that’s really about it. To provide more assistance, I would need to know more about things like age, retirement coverage and other details that could impact the retirement benefit as well as TSP and Social Security benefits.

You can always reach Tammy at Tammy@retirefederal.com.

Nearly Useless Factoid

By Alazar Moges

Over 300 species of fruit — including mangoes, bananas and guavas — depend on bats for pollination.

Source: Forest Service

DoD’s average housing subsidy sees big increase as real estate continues to get pricier

The average amount of housing subsidies the Defense Department will give out to service members in 2022 is increasing substantially compared to previous years.

The Pentagon says the mean increase of basic allowance for housing (BAH) will go up by 5.1%, a wide jump from the past two years, which have averaged just below 3%. DoD will spend $25.6 billion on BAH for 2022.

Depending on grade and dependency status, service members will see BAH go up by a range of $74 to $168. Allowances will not decrease.

“The department is committed to the preservation of a compensation and benefit structure that provides members with an adequate standard of living to sustain a trained, experienced, and ready force now and in the future,” DoD wrote in a Wednesday press release.

It’s important to note that the BAH increase is only an average. Some service members may not see the full 5.1% increase; others could see allowances even higher than that.

“The Department collects rental housing cost data annually for approximately 300 military housing areas in the United States, including Alaska and Hawaii,” the release states. “Median current market rent and average utilities (including electricity, heat, and water/sewer) comprise the total housing cost for each military housing area and are included in the BAH computation. Total housing costs are developed for six housing profiles (based on dwelling type and number of bedrooms) in each military housing area. BAH rates are then calculated for each pay grade, both with and without dependents.”

Part of the reason for the hefty increase in BAH may be because housing and rental prices rose in 2021 and 2020.

According to Redfin, a real estate brokerage firm, the median sales price for a house increased by 13.2% when comparing settlements from October 2020 to October 2021. Sales prices increased 14% from October 2019 to October 2020.

Meanwhile, the number of homes for sale is down nearly 18%, and 44.3% of houses sold over their listing price.

The housing market became so competitive last year that DoD temporarily increased BAH in 56 areas for the last quarter of the year.

“Rental housing market data collected by the Department of Defense from March-August 2021 indicates that the COVID-19 pandemic has had a significant impact on rental housing costs in the 56 affected markets. Notably, low availability and turnover of rental housing stock during the spring and summer months led to rental cost increases in many locations,” a DoD September release read.

The 2022 BAH rate supersedes those temporary increases.

According to Redfin, some of the areas with the fastest growing sales prices are cities in Florida and Arizona, as well as Detroit. The military has multiple bases in all of those areas.

Lawmakers have recently had some concerns about BAH. The 2022 Defense Authorization Act requires a report from DoD on whether BAH is sufficient enough for an average military family.

Looking for a safe 7.1% investment?

As gasoline prices approach $5 per gallon in some places, lots of people are worried about being able to afford living in the future. A new variant after almost two years of a pandemic is also a deadly threat. And there’s Russia amassing troops on the Ukraine border and China’s goal of turning Taiwan into a larger version of Hong Kong. Always something.

So today we’ve got a double-header for you on Your Turn (10 a.m. EST), streaming here or on the radio in the D.C. area at 1500 AM.

My lead off guest is financial planner Arthur Stein, who specializes in managing finances of active and retired feds. Today he’s going to talk about the pros and cons of playing it “safe” with your TSP and the definition of just what “safe” is. In the second half of the show, I’ll do a year-in-review interview with colleague Nicole Ogrysko, our pay and benefits experts, with a surprise twist at the end. You can listen live or catch the show (which will be archived on our home page) later on.

Meantime, here’s Art Stein’s super investment tip:

A Government Guaranteed Bond Paying 7.1% Interest? Yes, It’s Real.

By Arthur Stein, CFP®

If your emergency funds are in bank accounts, it’s time to think about Series I Savings Bonds (I Bonds) from the U.S. Government, through TreasuryDirect. These bonds are currently paying 7.1% in interest.

Yes, there are disadvantages, explained below. However, transferring some of your bank funds to Series I Savings Bonds will probably be a profitable exchange with little risk.

I Bonds are 30-year bonds issued and guaranteed by the U.S. Treasury. There are two sources of interest income:

  • A rate based upon recent inflation, currently 7.12%. That rate is guaranteed for six months and then adjusts for inflation over the last six-month period. The current rate will be adjusted in April.
  • A rate fixed for the life of the bond, 0% for the life of the bonds being sold at this time.

The new inflation based rate, set in April for the next six months, could be higher or lower than the current rate. It depends upon whether inflation over the previous six months has increased or decreased.

Interest is added semi-annually to the value of the bond. If you hold the bond for at least five years, when you cash in (redeem) the bond, you receive all the interest the bond has earned plus the amount you paid for the bond. If you redeem after the one-year lock-in but before five years, three months of interest is deducted. Taxes on the interest are only due when you redeem the bond.

Advantages of Series I Savings Bonds include:

  • Guaranteed by the U.S. Government.
  • Currently, a much higher interest rate than bank accounts and CDs.
  • No commissions (to buy or sell) or any other fees.
  • Whether you sell an I Bond before it matures or hold it to maturity, you always receive full face value plus interest. Example: pay $10,000 for $10,000 of bonds and receive $10,000 plus interest when sold.
  • Taxes on interest are postponed until a bond is sold or matures.
  • Interest is exempt from state taxes.
  • Interest earnings may be excluded from Federal income tax when used to finance education (see education tax exclusions).

Disadvantages:

  • I Bonds cannot be sold for 12 months after the original purchase. Don’t invest funds you might need to spend within twelve months.
  • There is a penalty equal to three months of interest if a bond is sold less than five years after purchase
  • Interest must be reinvested; it cannot be taken as income.
  • Partial sales are not allowed. Therefore, I suggest multiple, smaller purchases instead of one large purchase.
  • Purchases and sales can only occur in a TreasuryDirect® account; they cannot be purchased, held or sold through the TSP, 401k, 403b or an IRA. You cannot purchase through an Investment Advisor, stock broker, bank or credit union.

The maximum investment is $10,000 per calendar year per social security number. The minimum investment is $25.

A parent or other adult custodian may open a Treasury Direct account for a child that is linked to the adult’s Treasury Direct account. The parent or other adult custodian can buy securities and conduct other transactions for the child, and other adults can buy savings bonds for a child as gifts.

More detailed information can be found at Treasury Direct. The link to purchase Series I Savings Bonds is here.

Because the show was prerecorded, we won’t be taking calls or questions today.

Nearly Useless Factoid

By Alazar Moges

The whale shark is the largest fish in the world. They can grow to be more than 50 feet long and weigh several tons.

Source: NOAA Fisheries

A 7-step pre-retirement checklist | Federal News Network

Many of you have have known experts who didn’t always practice what they preach. The married-five-times marriage counselor. The financial planner that has their mother pay his rent. The bookclub president who’s never finished the work of the week. Etc.

But every now and then an “expert” comes along who actually walks the walk. Like Abraham Grungold. He’s a long-time, successful career fed and part time financial coach. He’s done very, very well with his Thrift Savings Plan. And he’ll soon be pulling the employment plug and switch to full-time financial coach/retiree. Typically he’s got a list. It is aimed at workers under the Federal Employees Retirement System (FERS), which covers 97% of the current workforce. FERS replaced the Civil Service Retirement System (CSRS) program where the final annuity was generously based on the employee’s length of service and highest 3-year average salary. And the annuity for life is linked to inflation.

FERS workers must plan their retirement under a system (which is generous by private sector standards) that has lots of moving parts. With CSRS, your annuity is pretty much fixed. With FERS you can raise or lower its starting amount in a variety of ways.

We asked Abraham if he had a plan. He did and he agreed to share it with us today:

FERS Mistakes to Avoid

Last month, I prepared my applications for my FERS retirement and my application for social security. When you near the end of your career, it is essential to devote time and effort to understand and prepare these challenging documents. However, in the case, for new employees, they do not have the luxury of time to read and understand all the documents and forms. New employees are anxious to start their new position and training. They feel rushed to fill out their employment forms as soon as possible. I remember when I prepared my own forms in 1985. The human resource person gave you one form at a time to fill out before you got the next one. They answered questions for you as you were preparing them.

Recently, I spoke with a newly hired employee in my office. I asked her how she found preparing all the forms and how much assistance did she receive. She responded that it was overwhelming and human resources could not go over each form with her. I informed her that she does not need to worry. She simply must fill out the forms to the best of her ability and she can change them later. When you initially received the HR forms, you are anxious to start your new position and you probably did not devote adequate time to review them. Today everything is done remotely, and you lose that human interaction with co-workers and mentors. Even our discussion was scheduled and done remotely. I suggested that she spend an hour or two per week reading the human resources materials and make any necessary changes.

Thinking about your career and your FERS retirement should begin on your first day of employment. On day one, you will fill out dozens of forms and listen to presentations on benefits and TSP. It is important to get started with your TSP retirement plans, and you can adjust along the way. However, there are mistakes that employees make when it comes to basic decisions with employee benefits and retirement, but you can avoid them. So, for your benefit, here are the top 7 mistakes for FERS employees to avoid.

  1. Not paying yourself first — TSP employee contributions of at least five percent guarantees a five percent employer match from the government. Thus, you should be taking advantage of this free money every year of your career. With every increase in your salary, increase your contributions to the TSP.
  2. Buying government sponsored life insurance — During their career, federal employees spend a fortune on government-sponsored plans. Instead, if you shop in the private sector, life insurance can be purchased at a much cheaper rate for the same type of coverage. The one caveat is that if you have health issues, the federal sponsored plans are okay because they do not ask medical questions.
  3. Not buying Long Term Care Insurance — This is a critical benefit for employees who could be injured during their federal career. And it is beneficial for retired feds who need long term care services during their elder years. Obtaining a basic long-term plan is better than having no plan at all.
  4. Health Insurance — In order to have health insurance in retirement, you must carry it five consecutive years before retiring. Even an inexpensive self-plan can save you from relying on a partner’s plan since their plan could become too expensive or you could face divorce prior to retirement.
  5. Do not retire at age 62 — This applies to FERS employees who are not in a special retirement category. Working to age 62 provides a 10 percent increase in your retirement. Retirement prior to age 62 will leave behind a big chunk of your retirement annuity income. This can result in thousands of dollars of lost retirement income.
  6. Closing your TSP in retirement — Deciding to transfer your entire TSP in retirement and closing out your TSP account prevents you from returning to the TSP. Therefore, you should keep at least 500 dollars in your TSP to give you the right to return.
  7. Forgetting your divorce agreements — You must consider what you will owe your ex-spouse when you decide to retire. This could be related to your annuity, TSP, and other retirement benefits. Be sure to check your divorce stipulation agreement.

As a financial coach, many federal employees contact me considering the early decisions of their career and their later decisions surrounding retirement. New and mid-career employees want to know which benefit choices best fit them. Employees who are within 5-10 years of retirement want to know when the best year is, financially for them to retire. I perform all their calculations and discuss their income during their retirement. We discuss and plan all their FERS decisions and how they can avoid any mistakes. Retirement is different for everyone, and many factors need to be considered.

Financial success can easily be achieved; it only takes a little effort.

Any questions or comments please contact me at Abraham Grungold – AG Financial Services or my Facebook page at FERS Federal Employees.

Nearly Useless Factoid

By Alazar Moges

The average total home water use for each person in the U.S. is about 50 gallons a day.

Source: EPA