Thoughts, ideas, suggestions and education from financial adviser Jim Ludwick, Founder of MainStreet Financial Planning, Inc. of Odenton, MD; Washington, DC; New York City, and Santa Barbara, CA

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Tuesday, March 26, 2013

Why Don't Some Retiring Feds Get It?

Why don’t some federal workers nearing retirement in today’s interest rate environment, get it?  It’s all about the G Fund and bond allocation in a time period approaching increases (ok, I have no crystal ball) in interest rates after having been kept artificially low by the Federal Reserve in an effort to simulate the economy.   This is called interest rate risk.

Recently I was counseling a newly retired federal worker as he approached his 70th birthday and faced his first required minimum distribution, having received an announcement from TSP officials of his need to make some decisions.

Versus an IRA, the TSP is much more limited in taking withdrawals in retirement.  You can take up to two partial withdrawals and you can take a fixed amount monthly or annually or just your Required Minimum Distribution (RMD) of about 3.6% of last year’s balance.  IRAs are a lot more flexible and give retirees a lot of options beyond the same percentage withdrawal requirement beginning at age 70.5.

But let’s stick with our retired federal worker for the moment.  Faced with blunt demands from TSP, most workers opt for a rollover to a traditional IRA.  Folks who sell products (mutual funds, stocks, bonds, annuities) like this.  It’s an opportunity to make some money, sometimes at the consumer’s expense (another story).

We frequently encourage our clients to take a partial withdrawal from the TSP and leave the remainder in the G Fund.  Why?  Because its magic.  How is it magic, you ask? Well, it doesn’t go down in value like normal bond funds when interest rates rise.  Why not?

The G Fund, for federal workers and the military, is special.  It’s based upon an index of various maturities of Treasuries and that is what depositors in the G Fund receive each year.  It is not subject to the supply/demand fluctuations like other securities in the rest of the TSP and in the real world of securities transactions.

Most retirees become more conservative in the allocation to stocks (equities) as they grow older for two reasons: 1) they don’t want so much volatility opportunities and 2) they want more assured income that bonds or cash instruments like CDs or immediate annuities offer to depositors or owners.

With that assured income stream comes the risk of early redemption.  The market re-prices bonds and bond funds just like appraisers re-price houses based on previous sales.  CDs suffer an interest penalty for early withdrawal. So if interest rates have risen since you purchased your bond or bond fund, then those higher paying bonds are more attractive to new purchasers.  Your bond or bond fund will have to sell at a discount (read: loss) to meet the same income stream for a potential purchaser.

The G Fund does not operate the way we just described.  It never goes down due to supply/demand.  It’s not publically traded.  It is a true fixed (annually) income stream.

So Federal workers, after you’ve determined your comfort level and/or need of exposure to equities, consider using your TSP as your “fixed income-holding bank” up to the percentage of fixed income you need in your family asset allocation.  If you’ve been a diligent TSP saver, you’ll have more than enough in your TSP to have your bond percentage in the G Fund and either retain the rest in equities, or for more flexibility send the equities to a rollover IRA.

Now this is just a general discussion and not investment advice.  For that you have to pay me. This concept, however, comes to you courtesy of the TSP.  Don’t forget after you bail out of the TSP as a retiree, you can’t get back in.


Jim Ludwick is the President and founder of MainStreet Financial Planning, Inc., an hourly fee-only provider of advice on many financial issues.  This is just an educational story and not individual advice, says my attorney.


Tuesday, March 19, 2013

Andy Made Me Do It




You have probably enjoyed listening to and watching Andy Rooney.  Me too. I’ve read a couple of his books.

Andy didn’t always understand what was going on, and neither did I.   His introductory sentence, “How come….” always got my attention. I sensed a fuss was coming.  Andy was a person I could identify with as I ended watching an hour of investigative reporting on 60 minutes.  Yes, I miss him.

In my daily life, mostly involving financial services, I come across a fair amount of products and actions that I just don’t understand.  Human behavior probably fits in this category too; in fact it either is producing some consequence or is a reaction to some event or product pitch.  You know what I mean.

I find myself frequently asking myself the question in my mind, “Why would they do that?”  It could be about someone’s purchase of a financial product or a news report about an SEC investigation.  I suspect others like me have a similar reaction because of your personal observation or reading the financial news.

So I’ve decided to change the direction of my blog, Advice Only Musings, in a fussing sort of direction, much in the style that Andy Rooney might have done if he was a financial advisor/observer.  You may now switch the dial if this does not appeal to you.  However, you do this at your own risk of missing some important and useful fussing.

I’m not going to fuss in this first edition other than announce the change of focus as I observe the comings and goings of products, promotions, styles, and behaviors as reported in the press or other medium including my personal observation.

If you too ponder these seemingly strange occurrences in our daily financial lives, I’d appreciate your input and feedback.   I appreciate the interaction with clients, colleagues, acquaintances, and general correspondents as we travel this road of making our dreams come true, or seeing them dashed on occasion.  Maybe a fuss or two will help you avoid the later.

Until our next engagement, here’s to greater understanding, as Andy would have it.

Jim