Government 401(k) creates, protects millionaires

There are at least 40 millionaires in the federal government. That number does not include political appointees or members of Congress who made or married their own fortunes.

The names of the fabulous 40 millionaires are secret. Many are thought to be federal judges who were wealthy lawyers before turning to public service. But all have one thing in common: They love the federal 401(k) plan.

After taking a look at the federal Thrift Savings Plan (TSP), they decided it was the perfect place to harbor some or all of their optional retirement nest egg.

The TSP is especially attractive because its investors include people who print, spend and collect U.S. currency; it offers the unique, super-safe Treasury securities investment option; and its administrative fees are the lowest in the business. Low fees, especially on a large account, translate into thousands of additional dollars over time.

Many career feds, whose TSP balances reflect what they and the government put in plus earnings, now have six-figure account balances. Experts say that a lot of people will have accounts worth $1 million or more when they retire. Financial planners generally recommend that people take no more than about 4 percent from their 401(k) plans after they retire. That doesn’t sound like much, but with a million-dollar balance, it would be a nice supplement to civil service retirement benefits and Social Security, both of which are indexed to inflation.

The average TSP balance for investors who are under the newer Federal Employees Retirement System (people hired since the mid-1980s) is $72,695. FERS employees are eligible for a 5 percent match from the government. They also pay for and receive Social Security benefits.

The average account balance for TSP investors under the old Civil Service Retirement System is $63,305. CSRS employees have a more general civil-service benefit, which they contribute to but do not receive matching agency contributions. They pay only the Medicare portion of Social Security.

Mike H., a Treasury Department employee who switched from CSRS to the FERS plan, said he has $300,000 in his TSP account. When asked about the prospect of becoming a pension millionaire he said:

“However much I have in the TSP, it won’t be enough to retire on, and the year I decide to retire, the market will dive and cut a chunk off my pile of pennies.

“Still I trudge on with the TSP, wishing I had never converted [to FERS].

“Barring some catastrophe, or series of them, employees starting today to invest can reasonably expect to be millionaires at retirement, a feat their parents and grandparents could only dream of. Yes, I know $1 million in 2050 will not have the purchasing power of that sum today, and today that sum does not have the purchasing power of $1 million in 1950, but [barring that catastrophe], $1 million should buy something.”

Investing in the TSP is a good thing for CSRS employees, but it is not essential because of their generally larger pensions. But the TSP is a must for FERS employees who get only about half the same pension benefit and whose retirement benefits are under a diet-COLA (cost of living adjustment) system.

The diet COLA (typically one percentage point less than the actual rate of inflation) doesn’t kick in until they turn 62.

When the TSP was set up, experts estimated that it would provide one-third of the post-retirement income for FERS employees. Now, with the booming stock market of the 1990s — and this past year — some have raised that estimate. They now think that TSP investments and earnings will account for about half the money that FERS retirees have to spend when they retire.

And as Mike pointed out, inflation may take a chunk out of each dollar in 10 years’ time, but it’s better to have what is left than to have nothing.

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