Federal Employees News Digest
Expert: COVID, inflation and what NOT to do with your TSP
- By Nathan Abse
- Sep 07, 2021
The world economy continues to struggle with COVID-19’s effects. But in U.S. markets specifically—beginning with mass vaccination earlier this year—housing prices and financial markets have recovered and even hit new highs. For most feds, employment has not been threatened and retirement is largely protected under the CSRS and FERS programs, as well as Social Security—all welcome data points. Still, economic uncertainties in markets and among family and friends remain, with unemployment still much higher than at the outset of the pandemic and a new concern: inflation. And fed retirement savings—just as for private-sector employees—is invested in and subject to the greater market volatility we see the past 18 months in federal TSP funds and private investments. Facing this confusing picture, most feds have more questions than ever about their financial investments and retirement planning. This week, Nathan Abse interviewed Ann Ozuna—a retirement expert and advisor focused on federal employees. Ozuna previously worked for two decades as a fed herself, as a retirement specialist with the DOD and Department of Energy. Her company website is thefederalretirementlady.com.
Q&A with Ann Ozuna
A year and a half ago, you told me even financially educated folks err in financial crises—so what are such people doing wrong now, and how can feds avoid those mistakes? Your advice?
Ozuna: The number one thing that feds should not do, specifically with their TSP, is to put 100% of their TSP in the G Fund. I did advise pretty much the same thing over a year ago. Unfortunately, some did this and still do. After my advice I got back some reply calls and emails, and some people I’d spoken to still said, “Well, I’m getting close to retirement, so I want to be safe.” They want safety. So, they put most—or all—of their TSP in the G Fund. And, you know what? They have since told me they regret it. Now, some of them, still scared, ask, “Do I come out of the G Fund now?” And, “How do I come out of the G Fund? What do I invest in?”
So, beyond not overinvesting in the G fund, what are you advising?
Ozuna: That answer is always customized for each person’s situation. The point is you don’t want your TSP to be almost all or all in the G Fund. I am not changing that advice, same as last year’s. It’s very safe but the return on the G Fund is very low. (Remember, in my work I do not sell any particular products and I do not make money from moving things around.) I tell them, “Look, you have to sleep at night. But, the G Fund? Inflation is more of a factor now. That loaf of bread or whatever that was $1.99 each is now marked “Two for $6.00.” Stores advertise to hide it, but you know, there’s been a huge bump in many product prices. I see purchasing power really sliding, and you can see it in the government figures. So, you have to try to make some of your money work for you here. That’s why I advise people to look at the L Income Funds, which are designed to spread your bets. The L Funds are very interesting. Nothing says you have to do it—but I’m here to report that my people who made progress, who now have much more savings in TSP, did not put all or most of their money in the G Fund. So, if you have, say, $300,000 or more, in most cases, and you are fully or mostly in the G Fund, I am suggesting likely you should change some portion of that into the L Fund, instead.
But what portion should a fed leave in the G Fund—or is that customized?
Ozuna: Again, that’s always customized, based on the person and their situation. Factors include how much savings they have, when will they start taking Social Security, where they are in their career, among others.
OK, G Fund problem noted, any other current pitfalls or misconceptions hurting fed savers?
Ozuna: Sure. These days, some feds say to me, “Hey, I’m going to hurry up and retire to get that Social Security 6% COLA I heard about this summer.” No. Not a good idea. What they don’t realize is this: You don’t get that big COLA if you haven’t been retired all year! And if you end up really retiring in November, you’ll get just one month of a big COLA, right? That’s a pitfall—a pretty big one. Of course, the COLA is added to the base for next year. But we don’t know what’s ahead, beyond that.
Got it—and, yes, expecting and not getting a big “raise” is disappointing. More current pitfalls?
Ozuna: Yes. New RMDs. People approaching 70 but who haven’t yet retired are going to need to be aware of the new RMD, or required minimum distribution, age for retirement situations. It used to be 70 ½ as many of your readers know, but now it’s 72—and Congress is deliberating whether it should be 75. RMDs can in a big way affect a retiree’s income and tax decisions, and how they should time their retirement. Each person’s situation is different.
You’ve noted Social Security COLAs and retirement RMDs pitfalls—but back to over-investment in G Funds: Is investing “too safely” common among feds, as cautious, detail-oriented people?
Ozuna: Yes, I believe that is a real character trait—and at least half the people I speak to have all or a really big proportion of their money in the G Fund. So, yes. It’s a problem. I have to say that those who have seen their TSP grow tremendously—to $700,000 or $800,000, and even one at over $1 million—did not invest much, or even any, into the G Fund. They rode their funds down, but they rode them back up, too. Often way up. It required intestinal fortitude, not looking at TSP numbers too often, and ignoring a fair bit of workplace break-room B.S.
Any other frequent retirement planning mistakes you see out there, recently?
Ozuna: Others? Sure. Another I see pretty often, and especially recently: People getting loans from TSP, because of a need—sometimes? —but also the good terms offered. Then, once they are stuck with regular payments due of $400 to $500 per pay period, they stop making TSP contributions altogether. It’s a terrible mistake. Why? Because they miss the federal match. You should at least put in 3% of your pay and get that 100% federal employer match of those funds.
Why do feds in that situation stop making TSP contributions?
Ozuna: They do it because they are using up more of their income, aiming to pay that big loan off before they retire. But you’re better off just avoiding all this. If you do take one of these loans, remember, you have other options to pay them off. First, you have 90 days of play to make the final payoff and some can find the money to do that someplace else, from other assets. And, second, you can pay it off another way—just declare a taxable distribution from your funds at the beginning of the tax year—leaving you with many months to save up from all your sources and pay off the rest of that loan.
Did more people you know take out such loans recently—maybe COVID and family needs?
Ozuna: Well, yes, I’ve seen more of them. Why? Possibly because of greater need. But part of it, from my point of view, is just that people suddenly had the opportunity to do it—special avenues were created for getting these and other loans during the COVID emergency.
Beyond missteps about COLAs, RMDs, TSP loans and contributions—any other current issues?
Ozuna: There are many additional issues stemming specifically from the COVID pandemic and the workplace situation, right? Most of my folks have shifted to working from home a long time now. Many fear returning to the workplace. Either because they are vaccine-averse (and the vaccine is increasingly required at the federal workplace) or because they fear getting sick from the workspace. For example, one is both vaccine-averse and mask-averse but wants to keep working, so is planning to move to a new state rather than getting vaccinated or complying with rules in place here (masking is required here, in Washington State). Still others are considering not just moving but retiring altogether, fearing COVID in the workplace but also rejecting both vaccine and masking—and, finally, not wanting the alternative weekly testing, or believing that’s not going to last as an option. With good reason, too—here, testing sites are disappearing as people with medical training are pinned down in hospitals with patients now.
Those are COVID pitfalls, yes—by the way, what sources of information cause vaccine aversion?
Ozuna: I don’t ask, really—and people usually don’t say. I accept their take on this issue. I don’t push, knowing it might lead to conflict that will damage things and my credibility with them. My main purpose, remember, is to help people with their money issues. My charges are modest. Many of my people are in the Forest Service and make around $40,000 a year—very modest pay. Anyway, yes COVID has caused many issues.
Terrible COVID dilemmas here; are there any other current pitfalls for your clients?
Ozuna: There are a couple others hitting especially my lower-income people. First, there’s a real slowdown—and breakdown in coordination—in processing retirement paperwork in some government offices. One client got hit with a demand letter because of such an error. This kind of thing—delays or office mistakes—is obviously hardest for people with fewer resources. I’m warning all my lower-income people about the National Finance Center, which is way behind in collecting payments, causing delays and errors in retirement processing. I tell people you just have to prepare to finance yourself and your family for five to six months, while your retirement is processed. Delay is especially the rule now for Forest Service and Department of Homeland Security employees. It’s so bad, two of my people had to contact their congressional office for assistance! I expect these delays to be common at least through the end of 2021.