Ten Moves Employees Should Consider Performing in 2023 in Order to Put Their Finances in Order
Edward A. Zurndorfer–
For most American households, the year 2022 was an economically challenging year in many ways. Among the reasons: (1) The highest inflation rate in 40 years; (2) A down bond and stock market; (3) Fears of a recession; and (4) A crypto implosion. For many federal employees, 2022 was a trying year in the form of strained budgets, reduced spending power and a depressed Thrift Savings Plan (TSP). Despite recent moderating inflation, many economists believe the economy will be in worst shape in 2023 than it was in 2022.
The following are 10 recommended moves that federal employees and retirees should consider performing during 2023 to help prepare and secure their finances during these financial challenging times:
10. Switch to Higher Yeilding Savings Accounts
Short-term interest rates have risen over the past year as the Federal Reserve has increased interest rates. But those increasing rates are not readily apparent in passbook savings accounts offered by commercial banks. According to the financial web site www.bankrate.com, the national average yield for savings accounts is 0.20 percent APY, as reported in Bankrate’s Dec. 28,2002 weekly survey of institutions. This means that the yield on a $1,000 balance held in a bank savings account is $2.00 (not enough to buy half a slice of pizza).
Some of the lowest rates offered in passbook savings accounts offered at the largest banks. Some online-only accounts pay as much as 4 percent on short-term savings and can be linked to an existing account for easy transfers.
For those employees and retirees who are willing to sacrifice some liquidity, one of the best risk-free returns currently comes from inflation adjusted I bonds (offered by the US Treasury through Treasury Direct). Currently I-bonds have a 6.89 percent yield held for at least one year. After an I bond, certificates of deposits or U.S. Treasury securities, including 13-week and 26-week US Treasury bills, offer higher rates than those on online savings accounts.
9. Check the Safety of Bank, Brokerage, Credit Union, & Retirement Accounts
The recent collapse of crypto exchange FTX should raise a question among federal employees and retirees who save and invest on a regular basis: What happens to an individual’s savings and investments if the company that holds the individual’s investments or savings – the bank, savings and loans association, credit union, brokerage, qualified retirement plan or crypto account fails? Employees and retirees are encouraged to review their banks and savings and loan association accounts to ensure that these accounts are protected by the Federal Deposit Insurance Corporation (FDIC). FDIC provides $250,000 of protection per single-owned accounts per bank and $500,000 of protection per jointly owned accounts per bank. The Securities Insurance Protection Corporation (SIPC) provides $500,000 for brokerage accounts held by individuals in member SIPC brokerage firms. Individuals who own qualified retirement plan accounts are provided protection through the federal Employee Retirement Income Security Act (ERISA) law.
8. If Necessary, Switch Banks Due to Increasing Fees
It makes sense to regularly shop around to make sure one is getting the best deal when it comes to bank checking and savings accounts. This is especially true if one is paying any ATM or monthly maintenance fees. According to the web site www.bankrate.com, it is easy to find a bank that offers those services free, and the benefits could outweigh the inconvenience of switching institutions.
7. Cancel Subscriptions Not Used and Not Necessary
According to a study by C&R Research conducted during 2022, the average American spends more than $200 a month on subscription fees and underestimates the cost by approximately $130. Three-quarters of consumers say that it is easy to forget about recurring monthly charges. 42 percent of individuals surveyed admitted that they were still paying for a subscription that they had forgotten about.
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The monthly costs associated with streaming services, gym memberships and mobile apps have all increased over the past year. Note that once an individual authorizes a company to take recurring payments from the individual’s checking or savings account, the company can change the price without asking permission. This makes it easy to lose track of exactly how much an individual is actually spending. Now at the beginning of 2023 it is important for individuals to not only take stock of their finances but also to cut unneeded expenses and prepare for a challenging 2023.
6. Renegotiate Some of the Recurring Bills, Especially Wireless Phone & Cable Bills
According to Ted Rossman, a consumer-spending analyst at bankrate.com, cable companies and wireless providers may be willing to lower an existing customer’s bill because it costs more to acquire a new customer than to keep an existing customer. One way to cut costs is to ask that certain fees to be removed from the customer’s statement. These fees include line times on one’s phone, internet, or cable bill, and may appear as “other fees.”
5. Pay Down Credit Card Debt & Improve FICO Scores
The holidays are over and with it, comes the bills to pay. As in previous years, many individuals used their credit cards to pay for holiday gifts. Some of these individuals piled on debt to existing debt and are carrying sizeable amounts of debt into 2023. The difference between 2023 and earlier years is that interest rates are significantly higher, meaning that the total amount of debt that has to be paid, including interest of as much as 25 to 30 percent, has skyrocketed. Individuals with credit card debt are encouraged to use every available amount of personal liquid savings to get their credit card debt paid back as early in 2023 as possible. They are also encouraged to check their credit reports (go to www.annualcreditreport.com) and try to close out credit cards they absolutely do not need and use. It is also recommended that they check their FICO scores to find out their credit rating. They may do so by going to www.myfico.com.
4. Review One’s Thrift Savings Plan (TSP)
Most financial advisor’s advice with respect to contributing to retirement plans including the TSP is to let them “run on autopilot” and to resist the temptation to constantly check one’s account, making changes when the stock and bond markets are down, as was experienced during 2022. However, at least once a year (and in the beginning of the year is a suitable time) it makes sense to log onto one’s TSP account and review one’s savings percentage rate and the investment mix one uses. The IRS raised the annual defined contribution plan (this includes the TSP) contribution limit $2,000 to $22,500 for 2023. This is the largest increase ever in terms of dollars and percentage. For those employees who will be at least age 50 as of December 31, 2023 (they were born before January 1, 1974) the “catch-up” contribution limit has increased by $1,000 to $7,500. This allows those employees aged 50 and older to contribute $30,000 to the TSP during 2023. Another decision that employees need to make is which TSP account to contribute to – the traditional (before-tax) TSP account, the Roth (after-tax) TSP account, or a combination of both. Contributing to each of them could pay off in the future. One advantage to contributing to the Roth TSP is that a federal annuitant can withdraw the Roth TSP account tax-free while withdrawing from the traditional TSP is fully taxable, pushing the annuitant into a higher federal and/or state marginal income tax bracket.
3. Get or Update an Estate Plan
Whether a federal employees’ or retiree’s total economic wealth is non-existent, small, medium or large, an employee and a retiree need to plan for the future. It is easy to believe that if one has limited assets that it is not necessary to make an estate plan. Many middle class and marginally wealthy individuals put off establishing an estate plan thinking that they have plenty of time to get an estate plan. Or they believe that someone in their family will automatically take care of their wishes when they die. Estate planning is not only about distributing finances and /or property, but also includes details such as health care directives, final arrangements, funeral expenses, and organ donation decisions. It also includes whether or not to purchase life insurance, proper document storage and assigning guardianship of minor children. These are all issues that should be addressed as soon as possible in an individual’s life. Those employees or retirees who have an estate plan may need to update their estate plan as a result of life events, such as childbirth, death of loved ones, and retirement. This is especially important if their estate plan was written more than 10 years ago.
2. Consolidate Retirement Accounts, especially if One is Close to Full Retirement or Getting Close
When a federal employee retires from federal service, he or she will receive either a CSRS or FERS annuity. He or she will be eligible to receive lifetime Social Security monthly retirement benefits. A federal employee will also receive Thrift Savings Plan (TSP) monthly benefits. In addition, most federal employees have contributed to traditional IRAs and Roth IRAs. Some retired employees have money in qualified retirement accounts, such as a 401(k), 403(b) and 457 plans, which will also be withdrawn during retirement. Federal employees can consolidate their TSP accounts with IRAs, 401(k), 403(b) and 457 plans. In particular, rolling over traditional RIAs and qualified retirement plan accounts into one’s TSP account, or rolling over all qualified retirement plan accounts and the TSP into a traditional IRA. There are several reasons for either type of consolidation including:
- Easier to manage investments. Upon retiring from federal service, a federal employee needs to figure out how to structure his or her investments so that they will continue to generate gains while providing enough steady income for the retiree to live on. This is difficult to do when someone owns multiple retirement accounts.
- Reduced fees. Retirement accounts such as an IRA require a custodian must report contributions and withdrawals to the IRS for tax-reporting purposes. Most custodians charge an annual fee. The more IRA accounts an individual owns, the more fees to individual will pay. One of the best ways to increase one’s retirement account investment returns is to reduce the investment fees one pays and consolidating retirement accounts helps in that regard.
- Minimizing the possibility of missed required minimum distributions. Once an individual under age 73 as of 1/1/2023 reaches age 73 (under the new SECURE 2.0 Act) there is an IRS formula the individual must follow in order to determines a minimum amount the individual is required to take out of his or her retirement account each year. This is called a “required minimum distribution (RMD).” If the individual has multiple retirement accounts, each financial firm (including the TSP) will send the individuals paperwork or an email each year notifying the individual’s RMD. That can be a challenge, especially as one gets older and possible overlooking these notifications. The IRS imposes a 50 percent penalty of the amount the individual should have withdrawn as an RMD but did not. It will be much easier to consolidate one’s accounts and take one distribution from one retirement account rather than trying to manage distributions from multiple retirement accounts.
- Easier for beneficiaries. After an individual dies, it will be much easier for the individual’s beneficiaries to deal with one consolidated account rather than having to track down accounts in numerous places. By consolidating retirement accounts, an individual is doing his or her beneficiaries a favor.
1. Plan to Self-Insure for Future Long-Term Care (LTC) Expenses
Most federal employees retire from federal service when they are in their late 50’s or early 60’s. They retire with guaranteed pensions in the form of a CSRS or FERS annuity, a sizeable amount in their Thrift Savings Plan, and Social Security retirement benefits. They most likely will have sufficient retirement income to sustain their lifestyle in retirement plus guaranteed health insurance benefits offered through the Federal Employees Health Benefits (FEHB) program in which the deferral government contributes 72 to 75 percent of the premium cost. For most federal retirees and their spouses if married, it sounds like everything is in place for a secure retirement. The only thing missing is a plan to deal with possible incapacity What happens if a retiree (or spouse) develops dementia and needs institutional care? What happens if a retiree (or spouse) has a stroke and is unable to perform the “activities of daily living” such as eating, toileting, showering, waking and transferring, and needs to enter a nursing home or pay for home health care? FEHBP programs and Medicare do not pay for “custodial” care. A retiree who has purchased long-term care insurance hopefully would have purchased a sufficient amount of long-term care insurance to pay for their and their spouse’s long-term care expenses.
But long-term care insurance has become expensive. Fewer insurance companies offer individual long-term care Insurance, and the five companies that do offer it have significantly raised their premiums to both new and existing policyholders. The Federal Long Term Care Insurance Program (FLTCIP) has been put on hiatus for the next two years, not accepting any applications.
The question is: What actions should employees and retirees who currently do not own any long- term care insurance take in order to prepare for future long-term care expenses? Instead of purchasing long-term insurance, they are advised to think of an alternative, such as “self-insuring.” “Self-insuring” involves setting aside an amount of savings that will be sufficient to pay for long-term care expenses if and when the need occurs. The challenge is what type of account would be best used to accumulate the required amount of savings to pay for future long-term care expenses. This is something all federal employees need to seriously consider.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.