Long-term care

Q: Could you elaborate on a couple of statements you made in your “Mistakes to Avoid” column that appeared in the July 13 issue of Federal Times? At mistake No. 2, “not having enough insurance,” you said “Once you are retired, long-term care insurance is a prudent thing to consider.” Many feds signed up for the federal long-term care insurance program when it first became available years ago. Are you saying that most of us workers don’t need to get long-term care coverage until we’re actually retired? You stated “Many people follow this rule of thumb: ‘It’s generally safe to base your withdrawals in retirement on 4 percent of the starting investment balance, and adjust this dollar amount by the amount of inflation each year.’ But they don’t seem to realize this rule is only reliable if the portfolio stays heavily invested in equities over their lifetime.” Most likely the reason your clients don’t understand this is that no one (well, far as I know) has ever said the withdrawal amount is influenced by the type of assets in the account. Could you say more about how the account’s assets may influence how much can be withdrawn? Would someone withdrawing from an all G Fund Thrift Savings Plan account be able to safely withdraw 4 percent for example, the same as someone who had 100 percent in the C Fund, versus someone who had all their funds in one of the Lifecycle accounts? Or would each of them need to have a different rate of withdrawal strategy due to their accounts having way different allocations (and we’re assuming all other factors, such as account balance, age withdrawals begin, etc., are the same)? For those of us who don’t plan to remain heavily invested in equities in retirement, how should we go about determining what’s a “safe” rate of withdrawal?

A: You can stack LTC insurance on top of your disability coverage (disability retirement or insurance) if you want to, but I usually don’t recommend it until you’re near retirement. Ultimately, the decision should be based upon your particular circumstances. The withdrawal rate that can be supported should be determined — estimated, actually — based on a number of factors including the amount of money to be invested, the investment strategy or strategies to be employed, and the size, duration and timing of the withdrawals. There is not simple formula and the analysis can be quite complex, including the need for estimating probabilities to various future events. The way the money is invested definitely affects the maximum withdrawal rate. Whether a particular TSP investment strategy will support a given withdrawal rate depends upon how long the withdrawals must last. This is all the responsibility of a pension fund manager, which your employer assumed you would become or hire when it put management of the TSP in your hands!

— Mike Miles