Issue 04 | August

THIS MONTH IN FEDERAL BENEFITS ADVISORS

Your TSP Balance Is Not the Plan. Cash Flow Is the Plan.

A large TSP balance feels good. It is visible. It is measurable. It gives you a number to point to. But that number alone does not tell you whether retirement works. The real question is simpler and more uncomfortable: will your income show up when you need it, after taxes, after healthcare costs, after market drops, and after one spouse dies?

01 • RETIREMENT OPERATIONS

The Market Drop Test

When markets fall, the common mistake is to treat the TSP balance like a scoreboard. You check it too often. You react emotionally. You move money after the damage is already done. That is how temporary volatility becomes a permanent loss.

Assign every dollar a job:

• Near-term income dollars should be stable enough to fund withdrawals without forcing stock sales during a downturn.

• Long-term growth dollars need time to recover and compound.

• Tax-free or tax-flexible dollars give you options when RMDs, Medicare surcharges, and survivor tax brackets start to matter.

The goal is not to predict the next market drop. The goal is to build a plan that does not require panic when the next drop arrives.

The Three-Layer Retirement Income Plan

For most federal employees, retirement income comes from three layers:

• The floor: FERS pension and Social Security. This is the predictable income base.

• The bridge: TSP and IRA withdrawals. This is where timing, taxes, and market risk collide.

• The flexibility bucket: Roth, taxable savings, cash reserves, and other assets that can help manage taxes and avoid forced withdrawals.

If the floor covers most essential expenses, the TSP does not have to carry the entire household. That reduces pressure during bad markets. But if the floor is not enough, your withdrawal strategy has to be precise.

Why Taxes Can Break a Good TSP Plan

Traditional TSP dollars are not the same as spendable dollars. Part of every future withdrawal belongs to the IRS. And because many federal retirees already have taxable FERS pension income and Social Security income, TSP withdrawals can stack on top and push the household into higher brackets.

This is where Roth conversions, Roth TSP contributions, and taxable savings become planning tools, not buzzwords. The point is not that every federal employee should convert. The point is that every federal employee needs to know which tax bucket they will draw from, in what year, and why.

Official TSP rules matter: Roth in-plan conversions are irrevocable, taxable in the year of conversion, and require taxes to be paid from outside funds. TSP.gov also notes a $500 minimum per conversion and up to 26 conversions per calendar year.

02 • POLICY AND COMPLIANCE

The Survivor Compression Problem

Married federal employees also need to model what happens after the first spouse dies. The surviving spouse may lose one Social Security benefit, file taxes as a single person, face compressed tax brackets, and potentially deal with lower Medicare IRMAA thresholds.

That is why the survivor annuity decision is not just a pension reduction question. If a spouse needs FEHB after the retiree dies, the survivor benefit election can be the difference between keeping coverage and losing it.

Divorce, Beneficiaries, and FEHB

For remarried federal employees, a prior divorce can create another hidden risk. A court order may already promise a portion of pension income or survivor benefits to a former spouse.

That can reduce what is available to the current spouse. And the TSP follows beneficiary designation forms, not your will. If those forms are stale after divorce or remarriage, the wrong person can receive the account.

03 • BENEFITS STRATEGY

Morningstar Market Lens

Morningstar’s Q3 outlook says the U.S. market is trading at a price/fair value estimate of 0.92, about an 8% discount to its fair value estimates. That sounds positive, but Morningstar does not view that discount as enough reason to overweight equities above a long-term target allocation.

The interesting signal is where investors are moving money. Morningstar reported that taxable-bond funds attracted $67 billion in July, with strong demand for ultrashort-bond strategies. U.S. equity funds brought in just $3 billion, while passive large-blend funds attracted about $36 billion. Large-growth funds lost roughly $15 billion in July and $92 billion over the trailing 12 months.

Translation: investors still want market exposure, but many are also building ballast. That lines up with the federal retirement planning message this week; growth matters, but the retirement plan must survive volatility, taxes, and cash-flow pressure.

04 • MARKET DYNAMICS

TSP Market Snapshot

What Is Your Cash Flow Map?

Your TSP balance is only one piece of the plan. The real question is how your pension, Social Security, TSP withdrawals, Roth dollars, taxes, FEHB, and survivor benefits work together over time.

This newsletter is for informational purposes only and does not constitute investment, tax, or legal advice. Consult a qualified professional before making financial decisions. Past performance does not guarantee future results.

PREPARED BY JOE AND THOM GLEASON