Category Archives: Annuities

Beware the Quirks of the TSP in retirement

The TSP (Thrift Savings Plan) is a retirement savings and investment plan for Federal employees. It offers the kind of retirement plan that private corporations offer with 401(k) plans.

Here is a little information about he investment options in the TSP.

The TSP funds are not the typical mutual fund even though the C, F, I, and S index funds are similar to mutual fund offerings.

The C Fund is designed to match the performance of the S&P 500

The F Fund’s investment objective is to match the performance of the Barclays Capital U.S. Aggregate Bond Index, a broad index representing the U.S. bond market.

The I Fund’s investment objective is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index.

The Small Cap S Fund’s objective is to match the performance of the Dow Jones U.S. Completion Total Stock Market Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.

The G Fund is invested in nonmarketable U.S. Treasury securities that are guaranteed by the U.S. Government and the G Fund will not lose money.

One advantage of the TSP is that the expenses of the funds are very low.  However, if you plan to keep your money in the TSP after you retire you need to understand your options because there are traps for the unwary.

The irrevocable annuity option.  

This option provides you with a monthly income.  You can choose an income for yourself or a beneficiary – such as your spouse – that lasts your lifetime or the lifetime of the beneficiary.  The payments stop at death.  Once your annuity starts, you cannot change your mind.

Limited withdrawal options. 

You can’t take money out of your TSP whenever you want.  When it comes to taking money out you have two options.

  1. One time only partial withdrawal. You have a one-time chance to take a specific dollar amount from your account before taking a full withdrawal.
  2. Full withdrawal.   You can choose between a combination of lump-sum, monthly payments or a Met-Life annuity.

Limited Monthly Payment Changes

If you take monthly payments from your TSP as part of your full withdrawal option you can change the amount you receive once a year, during the “annual change period” but it takes effect the next calendar year.  If you choose this option, make sure that you know how much you will need for the coming year.

Proportionate distribution of funds

When you take money out of your TSP you have no choice over which fund is liquidated to meet your income needs.  It comes out in proportion to which your money is invested.  This means you can’t manage your TSP and decide which of the funds you will access to get your distribution.

If you want to give yourself greater flexibility once you retire you have the option of rolling the TSP assets into a rollover IRA without incurring any income tax.

 

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Buying insurance and annuities

Two kinds of insurance products are often sold as investments, and should not be:

  • Life insurance
  • Annuities

There may be a place for both of them in your financial plan.  But they are often bought for the wrong reason because they are often misrepresented by the agent or misunderstood by the buyer.

Insurance products are complex and difficult for a layman to understand.  Let’s first review the basic purpose of these products.

Life insurance – its primary purpose is to replace the income that is lost to a family because of the premature death of the primary earner.  A young family with one or more children should have a life insurance policy on the earners in the family.  Ideally the insurance is will allow the survivors to continue to live in their accustomed style and pay for children’s education.

This usually means that younger families need more insurance.  However, there will be a trade-off between what a young family needs and what they can afford.  To obtain the largest death benefit, I suggest using a “term” policy.   “Whole Life” policies which have some cash value generally do not provide nearly as much death benefit and are less than ideal as investment vehicles.  Whole life policies are often sold using illustrations showing the accumulation of cash value over time.  What most people don’t realize is that illustrations are based on assumptions that the insurance company is not committed to.  This is the point at which an advisor who’s not in the business of selling insurance can prevent people from making mistakes.

Life insurance can also be used for other purposes.  One popular reason was to pay for estate taxes.  However, changes in the estate tax exclusion amount have made this much less attractive except to the very wealthy.

Annuities – useful for providing an income stream that you cannot outlive.  Like life insurance, it comes in a dizzying array of options that the average layman has trouble understanding. It is also one of the most commonly misrepresented insurance products.

Some of the most heavily promoted annuities are sold as investments that allow you to get stock-market rates of return without risk.  That’s one of those “too good to be true” offers that some people simply can’t resist.  The problem is that few people either read, or understand the “small print.”  Insurance companies are really not in the business of giving you all the upside of the stock market and none of the downside.  If they did, they would quickly go out of business.

These products are popular with salespeople because they pay high commissions.  Unfortunately they also come with very high early redemption fees that often last from 7 years to as much as 16 years.

If you have been thinking about buying a life insurance policy or an annuity you should first get some unbiased advice on what to look for.  Most insurance agents are honest, but like most sales people they would like you to buy their product.  It would be wise to get advice from someone who is an expert, but who is not getting paid to sell you a product.  There are a number of financial advisors who will provide guidance.  At Korving & Company we are Certified Financial Planners™ (CFP®) and licensed insurance agents, but we do not sell insurance products.   Since we don’t get paid to sell insurance we can evaluate your situation, advise you, and if life insurance or an annuity is what you need we can refer you to a reputable agent who can get you what you need.

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