Q. I am a 66-year-old divorced federal employee. Currently I have $123,000 in my TSP account. I have been investing 100 percent in the G fund, the one that invests in government securities. I hope to work until I’m 69 or 70 and have saved the maximum allowed during the 9 years I’ve been eligible to invest. I have about $70,000 in IRAs and savings and have about $170,000 in equity in my home.
How should I invest the $123,000 in the various TSP funds--- the Government, Fixed Income, U.S. Common Stock, Small Cap common Stock, International Stock and Lifecycle funds?One article I’ve read suggests diversifying in cash, a mix of corporate and agency backed bonds, international bonds, large-growth stocks, large-value stocks, mid-value stocks, small value stocks, international stocks, gold, commodities and real estate.How should I divide the TSP money? ---K.H., by email
A. Since the Thrift Savings Plan is limited to the 5 investment options you named plus the "L" funds, which are portfolios built with those 5 options, you'll need to keep your portfolio simple. So as attractive as inflation hedges like gold, commodities, and real estate are, you'll have to invest with broader strokes.
One option is what I call the Margarita portfolio, three assets mixed in equal measure, just like the drink. The asset classes, in your case, are the C fund for large-cap domestic stocks, the I fund for international stocks, and the F fund for a broad index of domestic bonds. You can read more about Couch Potato investing on my website. There, the Margarita portfolio uses a Treasury inflation-indexed bond fund for the fixed-income asset.
At 67 percent equities, your portfolio would be a bit more aggressive than most retirement funds, mostly to offset the de facto bond fund you'll have in the relatively small (due to limited years of service) defined benefit pension you’ll have when you retire.
Q. I work for a public employer and have the option to restore retirement credit for times when I withdrew from the system. Basically I will get 2.5 percent of salary for every year of service that I add. This seems like a really good deal. Is it? ---B.D., by email
A. The first thing you need to know is that a 2.5 percent replacement rate of final salary costs a great deal to fund. It is significantly higher than typical private-sector pension formulas, and they cost about 7 percent of payroll.
Generally speaking, buying years of service is a slam dunk compared to alternative paths to the same lifetime income. You can evaluate this for yourself by taking these steps.
First, calculate the increased retirement benefit for buying one year of service, assuming you retired within a year. If you are currently 60 and earning $60,000 a year, a one-year gain in service would mean an additional income benefit of $1,500 a year, or $125 a month.
Second, go to www.immediateannuities.com , fill in the requested age and gender information, and learn how much it will cost to buy a lifetime-only annuity for $125 a month. Then compare this amount with the amount you will have to pay to gain that year of credit. Generally speaking, the private annuity purchase option will cost significantly more.
Third, if your lifetime annuity is adjusted for inflation--- as many state pensions are--- go to the annuity portion of the Vanguard website. Find out how much it will cost to have an inflation-adjusted life annuity in the same amount. Inflation adjustment generally costs about 50 percent more than a fixed annuity, so there is a good chance it would cost up to three times as much to get the same benefit from a private source as from your buy-in offer.
That makes your buy-in opportunity a real slam dunk--- you are buying lifetime benefits at 50 cents to 33 cents on the dollar.
Is there a caveat here? You bet. Public-sector pension funds all around the country were underfunded before the recent market bust. They are more underfunded today. So the real question is whether the public pension funds will be able to make good on all that they have promised. That isn’t a slam dunk.