70 1/2 have to withdrw from TSP, what to do?

[marcr]

My mom retired last year, she left the money in her TSP because she didn't know what to do with it. She turns 70 in April and as I understand it she has 6 months after her 70th to withdraw the money from the TSP, must I think.

She is thinking of getting an annuity, is this a good idea? She really needs the extra money each month to live and the extra money from the annuity is attractive.

She was under FERS, receives SS and needs extra income to live.

[rfalcan]

Please contact Fidelity and talk to a financial adviser. I hate annuities because you never out live the amount of money they cost. I would find out how much is being offered and then devide it into the total amount. this tells you how long the money will last. I may be wrong, but the rule is to start taking a monthly amount out. If not Fidelity can rollover the funds into an IRA and you can set up a monthly withdrawal. Please please talk to a financial advisor that is not going to get commision from the deal!!!!

[TSPKip]

First: has she developed a budget that is all inclusive and is real life. This includes cash flow: when one has a fixed income but various months have different cash requirements. One must also build in the budget an increased cost of living: 5% yearly generally; 10% cable/telephone, and 15% health cost. The budget must go out for 5 years and do the taxes on those years as one has several sources of income with different withholdings, and taxes fall due to senior tax rates kicking in. Review the budget monthly for reality. Budget programs are free from Open Office.
Second: Income must rise to the demand, so if an annuity is desired and she does not wish to work her TSP as we do here, then she should consider buying an annuity with cost of living increases built in [smaller income to start, but rises over time.]
Learn to live in the budgeted income, and do not give all that money away as gifts. If the income is insufficient for the lifestyle, then lifestyle must give way: consider renting over ownership as unexpected assessments and repairs can kill the budget.
If one uses a financial adviser, use a CPA as you can sue if they do not fulfill their professional fiduciary responsibility to you and do not buy products from your adviser.

[jackyl33]

I agree, I've used Fidelity for many years and have never payed a fee for anything. Yes, stay away from commission advisors.

[rich19971]

I agree that annuities are generally not a good option. Here is an article from ChicagoNow:

Annuities: High Fees Lower Investment Return
Susan Carr-Templeton on 06.08.10 at 9:00 AM
Susan J. Templeton is a personal wealth advisor with more than 20 years of investing experience. In addition to managing Stafford Wells Advisors, Susan volunteers on the investment committee for the Advocate Foundation.

Stumble
I have a client who invested his whole retirement portfolio in annuities, on the advice of his broker, who was also an insurance agent. When you buy an annuity, you give an insurance company money to guarantee you'll have ongoing income in the future--a promise that's often appealing to retirees. But your annuity's guarantee isn't without strings attached--usually high fees and low payouts.

In my client's situation, the broker walked away with a fat 7 percent or so commission and now the insurance company, which is well-known and highly-rated, charges the client more than 3 percent per year in fees. Due to these fees, the client's portion of the annuity that is invested in a money market fund has a return year to date of -3.5 percent. Yes, that is a minus sign in front of the 3.5 percent. Bear in mind that the appeal of money market funds is that their per-share value should never fall below $1.


The insurance company guarantees this annuity will earn 7 percent per year or the return of the mutual funds in which the money is invested, whichever is greater. Sounds like an attractive arrangement, but it's not and here's why. First, the fund's returns are less because of the high 3.5 percent fees so the overall return during the life of the annuity will be substantially lower than what you could have gotten by investing directly in a mutual fund (with fees as low as 0.17 percent for an index fund). But it gets worse...

Here's the catch: In order to get the guaranteed return, you have to annuitize. That means, if you want the 7 percent guarantee, you cannot take a lump sum or redeem your funds from the annuity (if you do try to pull your money out, you get the market value based on the returns less the 3.5 percent annual fees).

When you reach some predetermined retirement age, the insurance company pays you a fixed amount each month until you die. If you look at the paltry annuity payout, you realize that unless you live to a year that is so beyond comprehension, you lose a lot, and the insurance company and your broker make a lot of money off of you.

Problems with annuities are not new. In 2008, the SEC, NASD and Securities Law Information Center published a paper on the issues associated with annuities. Not much has changed since then.

Annuities are not all bad and do serve a purpose, but broker-sold guarantee return type annuities tend to give the rest of the industry a bad name.

I understand that many Americans fear not having enough money for retirement, especially after the recent financial crisis--it's a valid concern. If you're looking for a market return strategy with some downside protection, you should consider some strategies that are far better than an annuity. I'll share those ideas in a future blog.

[crondanet5]

Remember that the Fidelity advisor is an advisor for Fidelity first, and an advisor for the prospective client second. I suggest you sit down with your Mother and make an exhaustive, total, accurate, and complete monthly budget with no criticism of what she is spending her money on. Tally all items up, subtract present income, determine how much more she needs. Multiply that amount of "extra needed" times 105% to provide for inflation. Now talk to the Fidelity advisor on speaker phones with your Mother and you on the line together so all parties know what is agreed upon and what is available to choose from. Find out what is available in the Fidelity family of funds that would pay her the difference between the minimum required withdrawal from the TSP rolledover account in dividend/interest income to meet her monthly shortfall. Sounds complicated but it does give you a bottom line figure needed to make ends meet. Have we answered your question?

[TSPKip]

To be clear: I feel on should take a full withdrawal of: 1] a one time withdrawal to pay off credit cards and meet cash flow discrepancies over the next year, 2] take TSP monthly payments longer than 10 years limiting to 4% of principle per year [one can adjust yearly by Dec 15 for the next year using the budget to calculate the future needs, and 3] no annuity [especially as the current interest rate growth is only 2.623% down from 5.75% 4 years ago.] Though I suspect that the TSP annuity contract with Met Life will be more financially advantageous with lower fees than through a retail financial adviser; I like the nearly no fees for TSP monthly payments more, where you can trade within TSP or place your money in Lifestyle Income Fund for those not wanting to trade. 3.5% in annuity fees is nearly what I will use the entire year.

[sprakass]

Take the money and roll it over to an Roth IRA, and complete monthly budget with no criticism of what she is spending her money on, subtract present income, determine how much more she needs. Multiply that amount of "extra needed" times 105% to provide for inflation.

[crondanet5]

tspkip. you have to watch that one-time withdrawal thingie. I fear some may interpret that to mean one can take money out of the TSP and put it in their checkbook once, then rollover the rest to something else. We need an IRSer to interpret the tax consequences because I believe all withdrawals are taxable. Yes, the TSP allows different ways of withdrawing it, but all the ways (except monies rolled into a 401k outside of the TSP are taxable events and have proven costly to some who did not understand this. marcr, perhaps another source of good advice might be a TSP counselor. The big thing in my mind is how many years can your mother survive on minimum withdrawals from her TSP rollover account to have a nice retirement. That should be the center of the conversation with Fidelity/TSP.

[MMARTI7]

I believe the TSP counselor will be the best for her, like crondanet said.

[TSPKip]

crondanet: Yes, as you know, distributions from TSP not rolled over to a 401K are taxable and one using the standard deduction will pay tax at 15% Federal tax bracket through ~ $93,000 income [married/joint return] for the year 2010. This is all income including 85% of SS, and all pensions, annuities, 401K [lump sum and monthly] and standard IRA distributions. Of course, it is less for a single person.
And, if the monthly payment distribution will run out in less than 10 years, then you are permitted to roll over the monthly sums to an IRA without taxation.
Alternatively, if you take out distributions which will last > 10 years, you can have the cash to your bank account and use it immediately, but it will be taxed and you cannot have it distributed as a rollover.

[TSPKip]

Crondanet: And you caution wisely against taking all the TSP money and putting it into your account. This will require TSP to deduct 20% and send it to the IRS, thereby reducing to 80% form opening an IRA account. Fortunately, for a limited time after the above transaction with appropriate paper work, the IRS will allow the taxes to be transferred into the IRA. To avoid all this, one must go to the IRA institution, and have them request transfer of the money directly, and also fill out similar paperwork with TSP permitting the transfer, thereby avoiding transfer to your bank account and the taxation.
Sprakass: Please correct me if I am wrong: a similar problem follows if one rolls all the money into a Roth as it must be taxed as income for the year transferred, which if more than $250,000 may require taxation at the 36% tax bracket if taxed in 1 year [there is an option apparently to tax the amount over a number of years thereby reducing any one year's tax liability.] Also, you can't use the money for 5 years without penalty. Of course, the principle and future interest is no longer taxable.
I again suggest the use of a CPA as taxation rules change.

[marcr]

Thanks for the replys. The problem is going to be sitting down with my mom and discussing this, she is deaf and lives in St Louis and I'm overseas for the next two yers. She is very defensive about her budget, going to take a lot of emails back and forth to get an idea of what she is needs.

From reading the about I should contact a CPA about the tax liability and look into rolling her TSP into an IRA (Fidelity) with the ability to recieve monthly payments from the IRA?

If I'm not getting right please let me know, I'm great at my job but not so good at this type of thing.

Thanks

[crondanet5]

Okay let's rally your resources, one at a time. Any sisters or brothers stateside who can sit with her while you Skype with her?

[marcr]

Was finally able (via email) to get a list of her obligations. It doesn't look good. Once all her bills are paid each month she has $440 left. Not much room to live on and plan for emergencies.