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Archives for January 2022

You can’t take it with you! Or can you?

While Mike Causey is away, please enjoy this column from the archives.

Did your son or daughter marry the wrong person? Lots of them do, it turns out!  As in really wrong. Unstable. Maybe a gambling or drug problem? Violent? Decades-between-paying jobs? Concerned about the welfare of a surviving spouse, children or grandchildren?

Often what you can do in person is limited.  Support, advice, concern. But what about when you are no longer around? When your estate — and you very likely have one — is being settled. Do you let the courts decide? Perhaps unwittingly encourage rivalry among your survivors? Fear that whatever you built or acquired — money, property, insurance — will be lost? Or taken by the wrong people?

There are things you can do now.

Tom O’Rourke is a Washington area attorney who specializes in tax and estate law. Many of his clients are current or former feds. Several are TSP millionaires. Others are on track to become one soon — fingers crossed! He’s also a former IRS lawyer. Been there, done that!

Tom is going to be my guest today on Your Turn at 10 a.m. ET. You can listen live streaming here or on the radio at 1500 AM in the Washington D.C. area. The show will also be archived on our website so you can listen again, listen later or recommend it to a fed friend. He’s written this outline on how to avoid the most common estate planning errors. Starting with the all-important but often overlooked or outdated beneficiary notifications. Here’s his 8-point guide:

  1. Overlooking beneficiary designations, or failing to keep beneficiary designations up to date. For federal employees virtually all of your job related benefits (annuity, TSP, accumulated salary, life insurance) are governed by beneficiary designations. These beneficiary designations always supersede the terms of any will or trust.
  2. “Selling” property for a nominal amount (i.e. selling your home to your child for $1). This can cause a variety of estate, gift, and income tax issues.
  3. Naming specific investments in your will or trust. How does the sale or disposition of the named asset before your death affect any specific bequests you may have made?
  4. Not thinking through the practicalities of leaving real estate to your children in equal shares.
  5. Making a specific bequest to a minor. Until a person become an adult, he/she cannot legally own property. Who is going to manage this bequest for the child? Most likely, it will be the child’s guardian – who could be your former spouse? Is that what you intended.
  6. Failing to plan for the death of a person named as a beneficiary in your estate plan.  If you leave a bequest to a beneficiary and that person dies what happens to the bequest. Does it pass to the beneficiary’s children, or does it revert to the estate?
  7. Failing to include a residuary clause in a will or a trust. A residuary clause disposes of all assets not specifically mentioned in a will or a trust. For example, Mary writes a will that makes specific gifts of $500,000. What happens it f the value of her assets is more or less than $500,000? A residuary clause should address this issue.
  8. Failing to deal with unexpected contingencies. What happens if a primary beneficiary (often an adult child) develops a substance abuse problem or divorces his/her spouse?

Developing an effective estate plan requires a consideration of the “what-ifs” and hopefully can avoid problems that may occur after your death.

Nearly Useless Factoid

By David Thornton

While most frogs spend the winter dormant, hibernating deep under water, Alaskan wood frogs freeze solid during the winter. Their hearts stop beating and they stop breathing. Ice encases the internal organs and forms between the muscles and skin. Even their eye lenses freeze. But a glucose solution produced in their livers prevents their cells from freezing, which is what keeps them alive. No one is sure what causes their hearts to start beating again when they thaw.

Source: National Park Service

COVID’s financial impact and your TSP

To most Americans savings for retirement, the Thrift Savings Plan, Uncle’s Sam’s in-house 401k, seems like the best of all worlds. Especially for the majority of working non-feds whose companies don’t match their 401k plans, nor offer a stand-alone retirement plan like FERS and CSRS. How good is it? In an interview once, John Bogle, the founder of Vanguard and the father of the index fund, told me he wished he could get into the TSP!

So yes, its good. It has among the lowest administrative fees in the investing business. It has federal oversight, undersight, you-name-it. And it covers the nation’s elected and appointed leaders, as well as 6 million current, former and retired feds. As of Dec. 31, 2021, the were 112,880 people with million-dollar-plus accounts. Another 105,000 had between $750,000 and $999,999. And participants get matching contributions from their agencies of up to 5%.

In following its congressional mandate to keep-it-simple, keep-it-inexpensive to operate, the TSP doesn’t offer some perks that outside plans (that often cost users much, much more) do.  Recently the TSP announced some more changes are forthcoming.

Many feds who move their TSP accounts when they leave or retire say its because it is easier to get at their money — and pick among more choices — in outside investments. Abraham Grungold, long-time fed who just retired, is now a full-time financial coach. Most of his clients are current or former feds.  One of the changes he like to see — especially in this time of pandemic — is in the TSPs loan and repayment policies. Here’s what he wrote:

The Federal Financial Crisis of 2022

 The COVID-19 pandemic has not ended, and federal employees are facing the ultimate test. They, as well as their families, can get very sick. This leaves members of the household missing work or school. Continuing health issues pose a new challenge as bills are piling up. How do you try and pay your bills? You must turn to credits cards, or maybe apply for a Thrift Savings Plan loan.

The TSP allows for one personal loan of up to 50,000 dollars, and you can pay it back on a five-year plan. With an application fee of $50, you can make the loan request online. IRAs do not allow you to take a loan, and most private company 401k plans do not allow it either. It is an optional choice for private sector employers to grant this provision in their 401k plans.

I have been reading about all the new features that could be available in the 2022 TSP. The new setup allows for more funds, online assistance, and other great features. However, empathy is not the TSP Board’s main priority.

I recently had a client who was in a difficult financial situation. He was one payment away from paying off his TSP loan. However, due to his wife’s medical issues, she could only work part-time. This left the family with a large amount of credit card debt and medical bills. I suggested taking out a TSP loan to both pay off the bills and pay himself back. For him, it is more beneficial to pay himself the interest rather than paying it to a credit card company or to the bank. He mentioned that he had to wait 60 days to request the loan because he was finishing repaying a different TSP loan. For reference, the TSP board requires participants to wait 60 days before they can take out another loan. I encouraged my client to contact the TSP and ask them to waive his 60-day period per this difficult and unexpected situation. In response, the TSP Board said there were no exceptions to their 60-day waiting period.

Long ago, I remember when I first went to Burger King. They said you can have your burger any way you want; special orders did not upset them. Similarly, over my federal career, management always said if you need help, just ask. I do not find that the TSP Board accommodates its members in the same way.

During a time of crisis, the Thrift Savings Board does not break its rules, not for financial hardships or even a pandemic. I know we had the 2021 Cares Act, but that pertained to withdrawals only. The TSP should make waiving exceptions for its members just like my client. The loan is still my client’s money, and he is willing to pay both the application fee and the loan. TSP participants should be granted a one-time pass to waive the 60-day period. No one likes to ask for help, but in times of financial hardships, the TSP board could grant this waiver to alleviate stress and burdens for their members.

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 David Thornton

The axolotl has the most complex genome ever sequenced.

Source: Smithsonian Magazine

Retirement processing times rise again at end of 2021

After a brief reprieve in November, the time to process federal retirement claims slowed again in the last month of the year. The monthly average processing time for claims in December rose to 92 days, on par with average times for August through October, after dropping to 79 days in November.

The latest retirement data from the Office of Personnel Management also showed fiscal year to date average processing times increased to 89 days in December, compared to 88 days in November. Although it’s still shorter than October’s spike, FYTD average times have not fallen below 80 days since then.

New federal retirement claims dropped in December as did the number processed. New claims came to 7,569 in December, down from 8,266 in November, while the number processed declined to 7,200 after 8,010 processed in November. The backlog rose by 369 claims to 26,730 last month, which is still more than twice OPM’s steady state goal of 13,000 claims.

Initial retirement cases produced in less than 60 days on average took 44 days to complete; whereas cases that were produced in more than 60 days on average took 114 days to complete, OPM said in its report. The agency has struggled to process claims at pre-pandemic levels, as both its own workforce and those of the agencies that feed it personnel information to process those claims have been increasingly remote.

Inflation corrodes everything, including your old age

Stalin never actually said, “If only one man dies of hunger, that is a tragedy. If millions die, that’s only statistics.” Or if he did he, was restating a very old aphorism.

Whoever first expressed that idea, it came to mind from some of the emails we received after a column about the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The WEP limits Social Security benefits for people who had both federal and other jobs, if the federal was during the Civil Service Retirement System era. The GPO reduces Social Security benefits in proportion to public sector annuities, if the public sector salary was not subject to Social Security taxation.

Anyway, we reported a statistic: The two provisions — embedded in statute — affect about 1.9 million people, including some long-time federal employees. They get less Social Security than at least some of them think they should.

It’s all academic until you look at some of the individual situations, and when you think about pay and pensions in the lurid light of the inflation flames now licking at the economy.

One story comes from a 65-year-old retired teacher. He had to retire early because of an Alzheimer’s diagnosis. His teaching pension is therefore ten grand less a year that it would have been had he worked until now. His 40 quarters of work coming under the WEP rule means Social Security pays him $500 a month, not the $1,000 he otherwise would have received.

You can’t exactly say the authors of the WEP and GPO legislation were stingy-minded skinflints. The logic of what they were trying to do is clear: ensuring fair distribution of benefits. Consequences vary though, and distortions can creep into any system over time. Plus, no one can anticipate terrible rolls of the dice, like the teacher got. If nothing else, it pays to add in the Social Security implications of a job, if it’s not subject to the payroll tax and therefore will limit benefits down the line.

A long-shot legislative gambit to suspend WEP and GPO for four years in some ways is a referendum on Social Security itself. In reality a pay-as-you-go system, its premise is nonetheless that people and their employers pay in, and employees upon retirement receive benefits in proportion to what they paid in. What does it say if a certain few million beneficiaries get a bump for payroll taxes they did not put in? The answer carries big implications.

More mail came in about the 2.7% raise federal employees are receiving this year. Against the inflationary backdrop, it’s strengthened the idea that federal pay is keeping up neither with pay levels in the private sector nor with the cost of living.

One reader wrote, “This barely covers the cost-of-living expenses going up and the insurance providers raising our medical and dental insurance.” She added, “The federal government does not keep up with the private sector and a number of federal employees are barely getting by. It is almost like they punish you in this country if you have kids, especially three kids like myself.”

Others make a connection between retirement and what’s going on now. A federal employee from Hawaii noted that they get a combination of (untaxed) locality pay and cost-of-living-adjustments.

“But if you ask Hawaii federal workers the majority of us would rather receive 100% locality pay instead of a split between COLA and locality pay.” One reason: “COLA does not factor into an employee’s salary for retirement.”

The bigger theme here is that what you can accumulate while working will have a big impact in how your retirement will go. Hardly a profound insight, but it underscores the long-term trend away from employer-provided pensions and toward more self-reliance. Unfortunately, that’s a blade that doesn’t cut the same slice for everyone.

In his famous 1994 farewell letter to the nation, President Ronald Reagan revealed his own Alzheimer’s diagnosis, and his journey into the sunset of his life. It’s a grim diagnosis for anyone, but more bearable for people and families with serious means than for people like the schoolteacher whose career was cut by a decade. Believe me, at 66 and still working, I get it.

With prices on the rise seemingly across the board, both the current take-home and the future at-home can make you squirm.

Nearly Useless Factoid

By David Thornton

In 1974, President Gerald Ford encouraged Americans to wear pins saying “WIN” or “Whip Inflation Now.” Many people, however, turned theirs upside down so they read “NIM,” meaning “Need Immediate Money.”

Source: Fact Retriever

Self-made millionaires club shows growth spurt

The number of self-made members of the TSP’s millionaires club jumped again last month. The number of active and retired feds with million-dollar-plus balances was 112,880 as of December 31, 2021.

Source: Federal Retirement Thrift Investment Board

That’s up from a then-record 98,523 at the end of September, 2020 and 84,808 at the end of March 2021 due to a “correction” in the long-running bull market that was so brief, many investors didn’t notice it.

The largest end-of-year balance in Uncle Sam’s version of a 401k plan jumped to $10.9 million dollars!

When the TSP was set up all of the big accounts were owned by wealthy political appointees, successful lawyers-turned-federal-judges and others who brought big retirement nest eggs with them. For a while, Club Mil was really exclusively composed of people who were rich when they came into government. But over the years, tens of thousands of ordinary federal and postal workers built up their accounts via long-range investing. Virtually all put all or most of their contributions in the TSPs stock-indexed funds which rise and fall with the markets. But over the long haul, obviously, rise. Typical investors have been in the TSP for about 30 years and most stayed with the C, S and I stock-indexed funds during the jolting, but as it turns out relatively brief, period we call the Great Recession of 2018-19. Most also continued to buy shares when the market correction had reduced their price by 40 to 60%. When the market started back in March 2009 it went on a record upswing marked by a few corrections many didn’t notice. Or pay attention too. At least so far.

A growing number of the TSP millionaires are retirees. I talked with (or heard from) three people in the last week who retired earlier this month. All had account balances in excess of $3 million.

What’s ahead? Obviously nobody knows. The market could tank tomorrow and, if past is prologue, it will sooner or later. The question is what do you do when it does? So far nothing — as in doing nothing but staying the course — has worked for a lot of people.

While nobody can tell where things are going, where we (and the TSP) have been is pretty clear.

The real news here isn’t the growing number of millionaires. The news is how many people have $250 to $900 thousand in their accounts, many with years to go and invest.

Nearly Useless Factoid

By David Thornton

In the town of Wasau, Wisconsin, a law established in 1884 made it illegal to throw snowballs. The law was finally changed in 2020.

Source: Wasau Daily Herald