Posted on Saturday, 16th May 2015 by Dennis DampPrint This Post
I received a call from the wife of a friend who passed away recently. She was concerned about her options after being notified by the TSP that her husband’s account was converted to the G Fund upon his death. She was approached by a financial planner that suggested she transfer her husband’s TSP account to them and they would manage it for her. Her husband was an astute investor and knew the ins and outs of the stock market and personally managed all of their investments.
Before considering moving your TSP to a financial planner read Have You Considered Hiring A Financial Planner that discusses the pros and cons that are involved with such a move. A financial planning firm will often charge 1.65% a year of your total account value or more to actively manage your funds. For example, if you have $300,000 in your TSP account, and transferred it to a financial planning firm, they would charge you $4,950 a year, with a 1.65% annual fee, for their services plus individual fund management fees and in some cases transaction fees. The TSP would have charged you $87 in 2014, .029% for that same amount, and they have no transaction fees! They only charged 29 cents per thousand dollars in your account in 2014. The financial planning firm would have to achieve much higher gains to offset their fees. Typically, higher gains often come from higher risk investments.
Often when a spouse who managed the finances for the family dies the surviving spouse is unsure how to manage the inherited account without risking the principle. This is why a financial plan and estate plan are so important. Not just for annuitants but for all federal employees as well. How would your family cope and survive if something tragic happens to you! I have always been a planner and enjoy the process because it creates order out of potential chaos.
A survivor is vulnerable at the time of loss and for many months thereafter. My suggestion to a surviving spouse is to not make any major financial decisions for at least 6 months or more to give you time to grieve and to deal with all of the issues that must be taken care of at the time.
The TSP is one of the lowest cost plans available anywhere and it can be easy to manage especially for retirees where they, for the most part, want to conserve and not risk their life savings. The G-Fund has NO MARKET RISK and Uncle Sam guarantees that the G-Fund will never decrease in value unlike all other funds. A recent article that I wrote titled The TSP Advantage (Should I Stay or Go) outlines the advantages of the THRIFT Plan including their extremely low management fees that average 29 cents per thousand dollars invested, by far the lowest fees available anywhere.
The disadvantage of bond funds in general right now is their low rate of return and the fact that once the Federal Reserve starts to increase interest rates bond funds typically decrease in value. That won’t happen with the G-Fund since it is guaranteed not to decrease in value as noted above. When you compare the G-Fund to any Certificate of Deposit (CD) or most other bond funds it’s rate of return is higher than most would expect. In 2014 the G-Fund averaged 2.4%, the same year it was difficult finding a CD that paid anywhere near 1% unless you tied up your money for 3 to 5 years. So far in 2015, January through April, the G-Fund has averaged .64% well on its way to earning 2% again this year. Your account will never decrease in value if you retain 100% of your account in the G-Fund.
The problem with keeping everything in the G-Fund is that, for the most part, it won’t keep up with inflation long term. There is another option for annuitants that many select, the L-Income fund. This fund is designed to achieve a low level of growth with a high emphasis on preservation of assets. Unlike the other four L Funds, the L Income Fund’s asset allocation does not change quarterly. However, like the other funds, it is rebalanced daily to maintain the following target investment mix:
- 74% G Fund (Government Bonds)
- 6% F Fund (Fixed Income)
- 12% C Fund (S&P Index)
- 3% S Fund (Small Cap)
- 5% I Fund (International)
The L Income fund averaged 3.77% in 2014 compared to 2.4% for the G Fund and for the past 12 months it has earned 3.98%. There is market risk to 26% of your total investment and the trade off for that risk is a higher yield overall as long as the market doesn’t tank again like it did in 2008 and 2009. The key to determining if you can tolerate the risk is whether or not you need the funds now to live on and when you anticipate taking withdrawals to maintain your lifestyle in retirement.
There are TSP options to consider with your THRIFT plan and the more you know about it the better prepared you will be when the funds are needed. Explore your options carefully and take time to understand exactly what impact your decisions will have on your account balance, the bottom line.
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The information provided may not cover all aspect of unique or special circumstances, federal regulations, medical procedures, and financial information are subject to change. To ensure the accuracy of this information, contact relevant parties and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice and our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change. The advice and strategies contained herein may not be suitable for your situation and this service is not affiliated with OPM or any federal entity. You should consult with a financial, medical or human resource professional where appropriate. Neither the publisher or author shall be liable for any loss or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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