The Foreign Service Journal, April 2006

one needs an “income bridge” for a certain period, or where living to a ripe old age runs in the family. In such cases, money needs to be guar- anteed to last a long time. When Social Security was estab- lished 71 years ago, mortality in the U.S. was an average of 63 years. Today, that figure is 78, and rising — so running out of money in retire- ment is a real possibility. Because the only withdrawal option in the TSP that guarantees lifetime income is the annuity option, do consider it carefully. You may also want to investigate the possibility of a joint annuity with your spouse. This option pays while both are alive; when either dies, the survivor will be paid for the rest of his or her life. 5. Be cautious about using your TSP to pay off mortgages. The desire to retire debt-free, with no mortgage payment, is certainly understandable — even commend- able. But taking a lump-sum with- drawal at retirement to pay off your house could cost you tens of thou- sands of dollars. Assuming a $50,000 mortgage at retirement and a federal pension of $35,000, the adjusted gross income of the taxpayer is $85,000 if you use your TSP to pay off the mortgage (the Internal Revenue Service considers withdrawals from the TSP to be taxable income). The difference of taxable income rates in this example is 10 percentage points (15 percent at $35,000 of income vs. 25 percent of $85,000), costing the taxpayer an additional $12,500 in taxes that must come from some- where. And the impact is compound- ed as the amount needed to pay off the mortgage grows. So while the allure of no mortgage payment is strong, beware. 6. Keep beneficiary designa- tions current. This may seem like a small detail, but it can have enormous negative consequences if you get careless. Here’s why. A completed and witnessed designation of benefi- ciary form (TSP-3), with rare excep- tions, may override any designation of beneficiary you have stated in your will. It is very important, therefore, to periodically review your records to verify you have completed the form and, determine whether you need to cancel or change your designation. This is particularly important in the case of divorce, legal separation or death of a family member. In addi- tion, if you have recently retired, you may wish to complete a new designa- tion of beneficiary form and forward it to the TSP Service Office in New Orleans. A new form will automati- cally supercede any prior form you may have submitted. If you do not have a completed beneficiary form on file, in the event of your death the proceeds will be paid according to the government’s “order of precedence,” which may not be your own preference. Why take a chance? 7. Don’t be too financially aggressive … or conservative. Easier said than done, you may be thinking — and you’re right. But in general, the closer you are to retire- ment, the more important it is to avoid unnecessary risk in choosing investment options. Recall that in the late 1990s, with the sudden collapse of the high-tech boom, many retirees invested themselves back into employ- ment. At the same time, particularly for younger investors, it is necessary to take some equity risk to give your portfolio a chance to outpace infla- tion (which has begun to rise again, it should be noted). 8. Don’t try to time the mar- ket. On a related note, there are a number of companies claiming to have success in timing TSP invest- ments by making frequent switches among various funds. The tempta- tion for individual investors to do this for themselves has only grown with the proliferation of new TSP options. Beware of acting on im- pulse or unreliable information. Re- member: the only thing we know for sure about the future is that it’s always uncertain. 9. Attend a pre-retirement seminar. These critically important meetings give you a better perspec- tive on federal retirement, as well as instruction, advice and the opportu- nity to ask your own questions about the financial matters that mean the most to you personally. There is sim- ply no substitute for face-to-face interaction with the experts in this specialized field. 10. Stay informed. Your feder- al retirement is the single most important of your employment bene- fits by a long shot, so leave nothing to chance. Add www.tsp.gov to your online bookmarks and consult it fre- quently. n Steven Alan Honley, a Foreign Service officer from 1985 to 1997, is the editor of the Journal . This column has been adapted from “TSP: 8 Critical Mistakes” by Gary Melling and David Melling, written for FEDWeek (www.fedweek.com ) . A P R I L 2 0 0 6 / F O R E I G N S E R V I C E J O U R N A L 19 F S K N O W - H O W u In the late 1990s, the sudden collapse of the high-tech boom forced many retirees back to work.