Anthony Capital, LLC
Matthew is an avid learner and as such, sees his role as a guide who helps clients as they navigate saving for retirement and spending in retirement. His training as an Retirement Management Analyst informs every aspect of his planning and centers every decision on the client. He has taught hundreds of seminars touching on subjects ranging from debt solutions, investing, Social Security, pensions, insurance, and other financial topics, with the emphasis being on what trade offs are made when each is selected.
Living in San Antonio, known as Military City USA, Matthew has become an expert in optimizing the financial lives of public as well as private sector employees. Matthew recognized a huge need for benefits education and basic financial planning among government employees. To serve this need, he started Federal Benefits and Retirement (fedbenretire.org) and teamed up with the nonprofit The Society for Financial Awareness to offer trainings and private consultations at no cost to federal employees. This collaboration has given thousands of federal employees access to fiduciary advice formerly reserved for the more affluent and has created millions in dollars of value for them and their families.
With everyone in the industry clamoring to proclaim their fiduciary status, Matthew is quick to point out that that actually requires more than honesty and transparency. Though without those one cannot claim to be advising, without a broad understanding of finance one cannot claim to be a true advisor.
Matthew is the 8th of 11 children, which he will tell you was an education in and of itself. He has graduated from Dixie State University and Brigham Young University, and has also taken numerous post-graduate courses including a 4 month stint in Medical School. He speaks fluent Thai and enjoys traveling whenever occasion permits. He enjoys being a father to 3 boys and husband to a beautiful and creative wife.
Brigham Young University
Assets Under Management:
Great question. Generally withdrawing early is frowned upon in financial circles- often because it is unwise for the client, sometimes because the manager is worried about assets under management. The underlying question is can I pay the taxman more right now so that I can pay the Bank less.
Let's look deeper at the numbers to determine what is right* for you (*this is hypothetical given I don't have all your financial information and is done in rough numbers for education purposes only).
If you withdraw $10,000 you will only take home roughly $7,500 after 15% tax and 10% penalty assuming you make ~$45,000 a year or less. If you need the full $10,000 and have it available in your IRA, then we would need to take $13,350 to get the $10,000 you need to payoff the card balances. Total cost = $3,350 taxes.
(Again, if you are making $97,000 or less that could be closer to $15,000 withdrawal with a $5,000 cost)
Pay $500 a month over the next 2 years to pay off the cards. Total cost = $1,709 interest
(However, if it takes you more than 3.8 years to pay off the loans then your total interest cost increases to $3,400!)
In summary, the rough numbers seem to suggest that you'd be better off cutting money out of some other part of your budget to set up an accelerated payment plan rather than take the withdrawal.
I like the way you are thinking about your situation- you've done your homework on TSP loans and are trying to look at your comprehensive picture.
Though generally, many financial planners and advisors will warn against taking 401(k) loans, being a federal employee you are in a unique situation from others when it comes to planning for retirement because of your pension provides a guaranteed minimum income stream. This means that your TSP/ 401(k) might not be needed to provide significant income from day 1 of retirement.
Additionally, the interest rates you are paying the bank are at least 4x higher than the G-fund rate. Even if you are in the L-2020, the interest you've made over the last year on that $43,000 has been less than what you've paid over the last year on the credit cards, making it a NET LOSS.
While one or the other could make a good argument, because both are present I wouldn't hesitate to tell you to take the TSP loan. It will provide better cash flow because of the lower interest rate, a lower interest cost, and you'll pay yourself the interest! Finally, though you are removing the money from the market, any comparable gains would likely not outweigh interest costs given your lower risk tolerance owing to your proximity to retirement.
Feel free to reach out with any more specific questions or clarifications through a private message.
To begin, annuities can be very complex with several different types of annuities available and each of those generally having a number of subgroups. To really assess what will happen to a specific annuity after death (or even to understand its features prior obtaining one), a qualified, fiduciary financial advisor should be consulted.
(The following is not individual advice nor an exhaustive list of annuities and their features but rather an oversimplification for the sake of education.)
Let's split annuities into two parts: Immediate and Deferred. (These terms refer to when the annuity starts paying you money).
Immediate: One of the most common Immediate annuities is a Single Premium Immediate Annuity. These allow you to exchange a lump sum for a guaranteed payment for certain period such as 5, 10, or 20 years, or a lifetime (the lifetime option can be on joint lives as well meaning that the last person to die of the two original people named keeps getting the same monthly check). People with a very low risk tolerance or who have a very long life expectancy often find these appealing. What is sometimes misunderstood however is that once elected, the lump sum is no longer your asset, but rather the insurance company's asset. In other words, you don't own your money anymore. You traded it for a paycheck. This makes these less desirable for people with shorter life expectancies and those desiring to leave money to heirs. Another drawback that is often understated is the fact that only a small part of the money coming in is investment income- the vast majority of it is just your money coming back to you.
Hypothetical Immediate Annuity: Pay $100,000 to ABC insurance company. They now own the $100,000. In turn, they send you $500 a month for the rest of your life. But until you've received checks for 16.6 years, you've made no money but just been receiving the original $100,000 in payments. Often these do have return of premium riders or other potential benefits you can add, but each rider usually decreases the monthly payout thus stretching out how long it takes to get your own money back to you. For most immediate annuities, when you die your estate gets nothing and payments cease (unless you were still within the guaranteed period i.e. 10 year certain and you die at year 8 then the estate would pick up payments for the next 2 years until the 10 years are complete).
Deferred: These annuities are often similar to traditional investments in that you are not generally giving the money to the insurance company but rather letting them invest it for you. In return, you can be guaranteed returns at a fixed rate, guaranteed a rate within a specified range, or given a varying rate based upon market performance. These can be cashed out when you're done with them or can be annuitized which means you switch the money into payment mode. Unlike the the majority of immediate annuities, in payment mode on most deferred annuities you are still owner of the money but the amount you "own" is decreased by each payment of your money you receive. It is possible however to add a lifetime income rider to these so that the annuity cannot stop payments to you while alive even if the account value reaches $0 but these are almost always subject to an additional cost. Hypothetical Example of Deferred Annuity: Put $100,000 into annuity, wait 10 years to draw. At that point you can take out $135,000 lump sum (with taxes due on all growth if bank money (N/A if IRA money)), start paychecks of desired amount every month until money is gone, or if the rider was elected for lifetime income $500 a month for the rest of your life. The disadvantage of these is that they generally have surrender periods which means even though the company does not own your money, they have a right to use it for a specified period (7, 10, 15 years are most common). If you decide you want it back in that specified period or if a financial need comes up that requires withdrawals above the allowed percentage (often 10%), then you can pay penalties in excess of 12%! This means that in the $100,000 example above, you could lose up to $12,000 to the insurance company if you decide to stop the investment during the surrender period. Ouch!!
At the annuity owners death, any remaining money in the actual account goes to named beneficiaries. (It should be noted that if you elect the lifetime income option on these types of annuities, they will often have two amounts listed on your statements: one is the actual money in the account and the other is how much they are basing your monthly payment on. The first is liquid; cash in your pocket money. The second is really just a theoretical number for calculating your payment and does not pass to beneficiaries as a lump sum (usually).).
Social Security will look at all "earned income" to determine your eligibility for benefits if you are drawing prior to your full Social Security benefit age. Pensions do not generally fit into the category of earned income so they will not be counted against you for the $15,720 earnings limit for 2016. (Earned income can be easily separated from other income by determining if you are paying Social Security and Medicare on it. If you are paying Social Security and Medicare on the income, it is earned income and subject to the SSA earnings test.)
You are asking how to make money on your money- it's a good question. But there's a question that should be asked before that really is, "what kind of vehicle (some people call it basket, bucket, etc) should I be putting my money in?" From there, it will be easier to determine what type of investments (high growth stocks, safe government bonds, or aggressive options, etc) to fill that basket with.
You have three options for your money- Here's a simplified version:
Bank money (the lingo in finance for this is Non-qualified money): Bank money is money that has been taxed and will usually be taxed every year (although some investments can avoid the yearly additional tax, they end up paying on all the growth at the end when it's taken out). You can take it out anytime though and you only have to pay taxes on the untaxed gains up to that point.
Traditional IRA money: This is money that you invest without having to pay any tax on it before it goes in the account. It grows tax free too. But you cannot get it out until 59.5 years old unless you pay taxes and a 10% penalty (although there are some circumstances to get it out without the penalty- you'll have to look those up). Upon taking money out though, you'll be taxed on what you put in and the growth. If you're going to be in a lower tax bracket in retirement- it's a great option.
Roth IRA money- This money gets taxed BEFORE it goes in the investment and just like the traditional, the money is fairly inaccessible until age 59.5. The awesome part about these accounts is that when you get money out- it will never be taxed again! Not the growth, not the original money you put in, not the dividends its received. None of it. The entire balance is yours.
So back to the original question: How should you invest it? Well, how much liquidity are you needing? Or in other words, are you going to need to grab some of that money within the next 5 years for college, housing, or other expenses? If not, and assuming the money you are stashing is from working a job wherein you are paying taxes and social security, you should consider a Roth IRA as an investment vehicle seeing as how you're only 21.I'll bet you a million dollars that taxes will go up in your lifetime... and that makes the Roth really shine out above the others.
Once you've got that settled and assuming you've got some time to let the investment grow, you should probably consider something that provides more growth. Equities (or as they are colloquially called, stocks) are usually the standard go-to for that. Something like an indexed fund that follows a large index like Dow Jones or S&P 500 are popular for your age group.