More to helping furloughed clients than you'd think

And the pain spreads beyond federal employees

Oct 8, 2013 @ 3:25 pm

By Liz Skinner

It's the eighth day of the government shutdown and calls from furloughed clients to advisers are picking up.

Clients are starting to ask whether they can take a loan from their government-sponsored retirement plans while they are not being paid. Some who aren't worried about the short-term impact of their pay delay wonder if the work stoppage will affect the calculation of their years of service.

Others continue to question whether portfolio changes are needed in the wake of Washington's inertia on the budget and the intertwined discussion of whether the nation will default on its debt, advisers said.

“For some of those early on in their career, the shutdown is causing problems and rocking the boat financially for them,” said Neal Thompson, president of Thompson Wealth Management LLC. “I shy away from having them tap their Thrift Savings Plan, but if they have no emergency funds saved, they are getting nervous.”

Most federal employees are paid every two weeks, and as the shutdown moves into its second week, calls from concerned federal clients are rising. About 80% of Mr. Thompson's clients are retired or current federal employees.

Most furloughed employees cannot take out a new loan from their TSP, the government rendition of a 401(k) retirement plan, because they are not receiving any pay, Mr. Thompson said. Those loans are secured by payments made from the employee's pay check.

However, someone who is at least age 59½ can take a one-time, in-service withdrawal from their TSP, Mr. Thompson said.

Any federal employee also can take a TSP hardship distribution, but they have to pay ordinary income taxes on the withdrawal and won't be allowed to contribute to the account for six months, he said.

A couple of Mr. Thompson's clients took out loans before the government shutdown just to make sure they wouldn't have trouble paying their bills.

As to time-in-service calculations, clients thinking about retirement don't need to worry the shutdown affecting that time assessment unless it lasts at least six months, he said. Then those six months would be taken out of their employment time served.

Financial adviser Bob Hill, a principal with First Command Financial Services Inc. who has about 200 federal employee clients, recommends that those who aren't being paid during this government shutdown tell their creditors and lenders about the situation and try to work something out.

Furloughed workers also can apply for unemployment in the state in which they work, however, they will have to give back any unemployment assistance they receive after their wages are paid up in full, Mr. Hill said.

For clients who may be in less dire financial straits, advisers are recommending they cut back on discretionary spending through the shutdown.

Many clients are questioning the investment blowback of the government shutdown.

“They are concerned about the implications of this on their money,” Mr. Thompson said. “The general public tends to think that there is a 1-to-1 correlation with what happens in Washington and Wall Street, but I tell them I have accounted for things like this happening.”

Certain states with the greatest concentration of federal workers, the largest government contracts, and those with large populations who stand to risk losing government funding, stand to feel the greatest impact of the shutdown.

WalletHub Inc. took such factors into consideration in a new analysis and found that Virginia, Alaska, Alabama, the District of Columbia, Maine, Maryland, New Mexico, Colorado, Idaho and Hawaii are the 10 locations that face the greatest impact — in that order.

“It's becoming increasingly obvious that the impact of this forced hiatus will extend far beyond the 800,000 federal workers who are currently on furlough,” said Odysseas Papadimitriou, chief executive of WalletHub. “While we're all losers in this situation, it's interesting to note that Republican-leaning states stand to suffer the most.”

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