Edward A. Zurndorfer
Over the last few months, the COVID-19 virus pandemic has upended the lives of millions of Americans. The U.S. economy has been devastated, with record numbers of Americans filing for unemployment benefits and in many states individuals are lining up for free food handouts in an attempt to feed themselves and their families. The stock market has seen its lowest levels in five years. In the United States, it has been reported that as of April 20, 2020, there have been 767,189 cases of the coronavirus with 40,743 deaths.
For federal employees and their families who have been fortunate that they have not been affected by the coronavirus, there are lessons that employees are encouraged to learn from and to take action as a result of what has transpired over the last few months and continues. There are also some lessons left over from the 2019 federal government shutdown that employees should learn from. This column discusses these lessons.
The good news for now for federal employees is that even though most employees are not allowed to go to their offices and have to telework if they can, all employees are being paid. There has been no disruption of bi-weekly payroll checks. Employee contributions to the TSP together with agency automatic and matching contributions for FERS employees continue. CSRS and FERS employees continue to contribute to their respective retirements and in so doing, are getting credit for their service which will result in expected starting CSRS and FERS annuities. FERS employees continue to pay the Social Security payroll (FICA) tax on their salaries, which will result in expected Social Security retirement benefits. All of this is brought up at this time to emphasize how fortunate federal employees are at this time of the country’s economic crisis. Individuals who have been laid off from their jobs in private industry are unable in most cases to pay into any retirement system nor into Social Security. A prolonged period of unemployment is having devastating effects both currently and on these individuals’ future retirement income.
The need for maintaining a minimum amount of liquid assets
With millions of Americans unemployed and unable to pay their bills, Congress passed the $2 trillion stimulus package. Among the provisions of the stimulus package, eligible individuals could receive as much as $1,200 ($2,400 per married couple plus $500 for each dependent child). While the payments were welcome by most individuals, the payments will not go very far if the economic downturn lasts too long, which many economists say it will. Many federal employees and annuitants will be receiving a stimulus payment. The payments are not considered income and employees and annuitants are free to spend this money anyway they want. Nevertheless, some suggestions for what should what be done with this “free money” are made below.
In early 2019, when parts of the federal government were shut down due to the budget impasse, many federal employees were furloughed and not paid for as much as two months. There were no stimulus payments passed by Congress. Affected employees were not technically “unemployed” and while some employees filed for state unemployment benefits and received them, once the government reopened and all affected employees got paid retroactively, any unemployment benefits received had to repaid back to the states. Also during the government shutdown, numerous furloughed employees turned to TSP loans and TSP hardship withdrawals in order to have funds available in which to pay their bills. In retrospect, using TSP loans and hardship withdrawals was poor planning as borrowing against or withdrawing from one’s retirement to pay one’s current bills is not a wise thing to do. Even in the case of a TSP loan in which the withdrawn funds are paid back, one should think about the permanently lost earnings on the withdrawn funds.
There is a valuable lesson that should be learned from both the current situation in which millions of individuals who are employed in small businesses are not working because of the coronavirus pandemic and the federal government shutdown in 2019 (or the other occasions in past years in which federal employees have been furloughed as a result of federal government shutdowns). All employees – whether they work in government or in private industry – should always have available a sufficient amount of liquid assets (that is, cash) in order to be prepared for a possible employer shutdown and a temporary suspension of payroll. Ideally, the average employee will have in liquid savings an amount equal to six months’ worth of their average monthly expenses. Moreover, employees should by all means avoid retirement loans and hardship withdrawals as a means of paying their short-term bills. This is the case no matter how attractive Congress makes these loans and withdrawals appear (such as paying the loans back with no interest or redepositing the amounts in an IRA as provided in the CARES Act passed by Congress on March 27, 2020). The recommendation is that every federal employee and annuitant have an amount equal to six months of their average monthly expenses residing in a liquid savings or money market account. If an employee does not have any such account and is looking how and what to do to get started, perhaps going to their local bank or federal credit union and depositing their stimulus payment in a no-cost FDIC or NCUA insured savings account would be a good way to get the liquid account started.
Future pay increases and the cost of health benefits
With the $2 trillion stimulus program added to an already ballooning federal deficit, it is highly possible many federal programs will be frozen with respect to future funding. Once federal employees return to their jobs as they were before the COVID-19 pandemic crisis, employees should expect lower-than-average pay increases, perhaps in the order of 0.5 to 1.5 percent, if that much. It is quite possible that many federal programs will have their funding reduced as Congress looks for ways to help decrease the federal budget deficit. Those employees who would like to retire within the next one to five years will likely not get much of an increase in their salaries during the remaining years of their federal service. This will result most probably in lower high-three average salaries and smaller starting CSRS or FERS annuities.
Health insurance premiums, are likely to increase significantly over the next years, as a result of the COVID-19 virus costs now, and future research to help find some vaccine and hopefully preventing a pandemic from happening again. Federal Employee Health Benefit (FEHB) program premiums will likely rise for employees and annuitants over the next few years. Related to FEHB health insurance premiums, the monthly premiums for Medicare Part B (that most federal annuitants are enrolled in) will likely increase significantly.
Estate planning
As mentioned above, as of April 20 there have been nearly 750,000 reported cases of the coronavirus in the U.S. and nearly 41,000 death. Young and old have been affected and died. How many of coronavirus victims had an estate plan before they became affected by the virus? Did they have a living will, advanced health care directive, a will or trust, a power of attorney for financial affairs, and all of their beneficiary forms filled out and current? In case they did not and they were put on life support, who made any medical (including life-death) decisions on their behalf? Something that all federal employees should be asking themselves: Do I have an estate plan in place? This includes having a current will or a living trust, a financial power of attorney, a health care power of attorney, a living will, named guardians for any minor children, and all beneficiary forms filled out and up-to-date. Since most federal employees are covered by and pay into Social Security, are employees aware of Social Security survivor benefits for family members including surviving spouses, former spouses, children and parents? A recent FED-ZONE column explained Social Security survivor benefits which employees and annuitants are highly encouraged to read.
Somewhat related to estate planning is the concept of planning for incapacity. An employee or annuitant should ask himself or herself: If I were to become incapacitated due to an accident or a prolonged sickness and unable to manage my financial affairs, who would “take my place” and pay my bills, direct my investments, file my tax returns, and/or make any other financially-related decisions? If I were unable to work for a substantial period of time, do I have enough unused sick leave hours to pay my bills? Have I thought about purchasing disability income insurance, especially if I am younger than age 45? Planning for incapacity is a very important of estate planning that many individuals forget about. The statistics show that an individual younger than age 45 stands a far greater chance of being incapacitated at that age compared to dying at that age. But the latest statistics show that more Americans younger than age 45 own life insurance policies than disability income policies.
Thrift Savings Plan (TSP)
As mentioned earlier, since employees continue to be paid, employee contributions to the TSP continue as does the agency automatic and matching contributions for FERS employees. Federal employees should feel fortunate that their TSP contributions continue as does their matching contributions which means that their TSP retirement accounts continue to increase in amount. Many employees who work in private industry who are currently unemployed are unable to contribute to their retirement plans because of the suspension of their paychecks. Some private companies who are still operating during the current pandemic crisis have suspended any company matching contribution plans, similar to what happened during The Great Recession of 2008-2009.
Federal employees should therefore have more of an appreciation of what they have in their TSP as a result of the current crisis. Employees can – and should – contribute as much as they are allowed to the TSP for 2020; that is, $19,500 if they are under age 50 and $26,000 if they are over age 49. FERS employees are not losing any of their agency automatic and matching contributions. This means that all FERS employees should contribute at least five percent of their gross pay in 2020 in order to receive the maximum agency TSP match of four percent. Most importantly, all employees should focus on what the TSP is and how to invest in it accordingly. The TSP is a long-term investment vehicle that has to be maintained and last from now until the TSP participant and a loved one no longer needs the TSP. That time unfortunately is death which, hopefully, will be many years away. That being said, TSP participants are advised to invest most of their TSP money into three stock funds. The C, S and I funds. This is because stocks over the long-term have proven that their investment performance can overcome inflation and other reasons for economic downturns. As always, TSP participants should keep in mind that past TSP fund investment returns are no guarantee of future investment performance.
What to do with the stimulus payments and how to make the most of the payments during depressed economic times?
The following are some suggestions for employees and annuitants to take advantage of these depressed economic times. Above it was mentioned that the stimulus payment could be used to bolster an employee’s six month emergency liquid assets fund.
Since many employees and annuitants probably do not need their stimulus payments in order to pay their bills and they have a sufficient amount of liquid assets, employees should consider using their stimulus payment to increase their 2020 TSP contributions. While they cannot contribute their stimulus payments directly to the TSP, they can increase their bi-weekly payroll contributions and use their stimulus payments to pay their bills in place of the additional TSP contributions coming from their paycheck. If they are already on target for maximizing their TSP contributions for 2020, they should consider using their stimulus payment to contribute to an IRA for 2019 (contribution deadline for 2019 contributions has been extended to July 15, 2020) or for 2020 (contribution deadline is April 15, 2021). For 2019 and 2020, eligible individuals can contribute as much as $6,000 to an IRA if they are under age 50 and $7,000 if they are over age 49. Annuitants who are not eligible to contribute to the TSP because they are retired from federal service, and if they cannot contribute to an IRA because they or a spouse does not have earned income, may want to consider converting a traditional IRA and/or transferring part of their traditional TSP to a Roth IRA and use the stimulus payments to help pay the taxes due on conversion. Converting traditional IRAs invested in equities (stocks, or stock funds such as the C, S and I funds) is frequently recommended when the stock market is down in value, as is the current situation, with most major stock market indices down for the year 2020 in the order of 10 to 20 percent. The reason: Converting a traditional IRA that is decreased in value to a Roth IRA should result in a lower tax liability. But any employee or annuitant interested in performing such a Roth IRA conversion or traditional TSP transfer is highly encouraged to first consult with a knowledgeable accountant/tax professional in order to make sure that the conversion and/or transfer is appropriate and to make sure the IRA owner or TSP participant fully understands the tax consequences of a Roth IRA conversion or traditional TSP transfer.
Another advantage to converting a traditional IRA to a Roth IRA or for an IRA owner over age 70.5, is that no RMD must be taken in 2020 before the IRA is converted or the traditional TSP is transferred. This is because under the CARES Act, RMDs were suspended in 2020.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, 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 we 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.