Need a New Year’s Resolution Do-Over?

Is your New Year off to a rough start – More strength needed to birth a new habit, rocky investment markets, or perhaps your team didn’t make it to Super Bowl 50? Well, you’ll have the chance for a do-over. Chinese New Year – Spring Festival – is coming up.

The traditional Chinese calendar is old and complex. It dates back to the 14th Century BC (time of Egypt’s King Tut) and has been used to mark the best times to plant and harvest, festivals, and lucky times for your special events. And it uses various modes – lunar and solar, Ying and Yang, and the Chinese zodiac. Each year is represented by an animal of the zodiac, and legend says the order of the animals in the calendar was determined by how they finished a race across the river. 2016 is the year for monkey.

The most visible traditions for Chinese New Year include red and gold, loud and angry dragon dancers, and feasts with friends and family.  They make for great photos and memories. However, the more subtle traditions or taboos, serve as powerful shapers of character and values. These include: Cleaning house, settling unfinished business, resolving quarrels, and paying off debts. And, its bad luck to sleep past noon on the day after… it indicates a year ahead of laziness. Can you apply these to your on-going financial planning?

What should I contribute and how should I invest my retirement plan? Investors have big decisions to make. I’ll discuss the Federal Thrift Savings Plan (TSP) and common planning issues. If you’re working in the private sector, please read on because TSP is similar to 401k plans. The features and planning issues are related.

  • TSP Overview: Federal employees and servicemen and women are eligible. Augments other retirement benefits including FERS, CSRS, military retirement, and SS. Contributions are made via payroll deduction and ‘matched’ to a degree, several investment options, and 3 ways to access funds (loans, in-service and post-separation withdrawals). You may consolidate other retirement accounts. Please refer to TSP.gov for all details.

 

  • Contributions: Specified as a percentage of your compensation (3% automatic enrollment) and subject to a match up to 5% (via formula). If goal is to save 10% of pay, your ‘cost’ is 5%, and the Agency funds the rest. Members of the uniformed services have some special rules including the ability to contribute part or all of their incentive, special or bonus pay, but none from housing or subsistence allowances; and matching agency contributions are subject to rules specific to each individual service. Contributions are subject to IRS limits (e.g. $18,000 plus $6,000 catch ups for those 50 and above). Check with your HR department for specifics.

 

  • Traditional TSP vs Roth TSP: Your choice is paying taxes now, or later. Traditional contributions are tax deferred; withdrawals trigger tax. Roth TSP contributions are made after-taxes (i.e. pay taxes up front); withdrawals may be tax free. Consult your CPA for tax advice.

 

  • Investment Options: Five investment options include guaranteed account, and four index funds (bonds, large and small US stocks, and international stocks); plus five Lifecycle Funds (target funds).

How much to contribute? Your goal is to accumulate “your number” for retirement. Consider diversifying your wealth buckets. TSP saving is easy (save it before you can spend it). However, don’t have all of your retirement cash flow fully taxable. Consider a “3-legged stool” model consisting of Pre-Tax funds (traditional retirement accounts), After-Tax funds (joint, trust, Roth’s, etc.) and Business/Real Estate. Thus you’ll have various sources (and taxation) to fund your retirement. It’s multi-dimensional diversification – you’re diversifying investment risks, taxation, and liquidity – plus matching contributions.

Tax deductible contributions or Roth? Tax planning is complicated – balancing current taxes, guessing future tax policy, and simplicity. If your retirement tax brackets are lower, then consider tax deductible contributions. If opposite, consider Roth contributions. If taxable income fluctuates, you might ‘switch’ – make deductible contributions one year, and Roth the next. Others do a hybrid (fund both). Bottom line: Map things out so you’re not making decisions solely on short-sighted benefits (e.g. taxes).

What to do at retirement? This is Challenge #1 for investors. TSP participants have numerous options including a lump sum payment, monthly payments and a life annuity. You’ll face tax, financial and estate planning, and significant emotional issues. Investors tend to get serious about financial planning 5 to 10 years prior to retirement. You shift from saver to spender, don’t want to ‘screw things up,’ and the world gets a little more complicated when the world becomes your investment oyster. It’s a path you best not walk alone.

Prudent planning creates pathways towards your financial success, and breaks down the barriers (via education and good investor behavior). The choice is yours. You can count on others (marry wealth, live off SS or pensions, etc.), or do it yourself. Good luck!

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