When it comes to the 3.4 million optional retirement accounts set up by active and retired federal and military personnel, Uncle Sam has a bit of advice: Cover your assets.
Those assets — currently $159 billion — are expected to provide one third to one half of the income that most feds will have to spend in retirement. The goal, as with any long-term investment, is to maximize the return while minimizing the risk.
To help investors avoid being too conservative or taking too much risk, the government next month will mail a DVD that will explain the newest option to the Thrift Savings Plan. It is called the L fund. The L stands for “lifecycle.”
The idea is to set up a portfolio based on an investment timeline established by individual investors. That timeline will be the year when you anticipate starting to draw down (spend) from your TSP account. Because most longtime feds will get generous, inflation-indexed annuities (pensions) many of them don’t tap their TSP accounts until years after they have retired. If ever.
Once set up by the employee, the L-fund will automatically adjust and readjust over time to make sure that as the individual gets older and closer to retiring the mix of funds in that individual account gets more conservative — but not too conservative.
The L-fund will have five options. One is for people who are very close to their draw-down target date. Another will be for those whose target date is around the year 2010, 2020, 2030 or the year 2040.
Investors with the 2040 target date initially will have a riskier strategy, with a balance of 85 percent stocks (a mixture of large companies, small companies and foreign companies) with the rest in the bond or safe U.S. Treasury securities fund.
But if that person was close to retiring and starting to spend down his or her account, the mix would be different. It would put the investor in more conservative investments (such as 74 percent in the Treasury securities G-fund and 6 percent in the bond fund) with only 20 percent in the three stock funds. The idea is to protect that individual’s nest egg from sudden drops in the stock market that might take years to recover. At the same time, the 20 percent investment in the stock funds would — hopefully —provide for continued growth in the fund.
The government has earmarked $10 million for the education campaign, including the DVD.
Gary Amelio, executive director of the Federal Retirement Thrift Investment Board, says the education campaign includes the best of the best information that private firms have offered to their employee investors.
Officials hope that many feds will take advantage of the L fund. Those investors include Supreme Court justices, senators, CIA agents, forest rangers and members of the military, as well as most civilian federal workers. Even if feds decide to go it alone, designing their own portfolios and calling their own investment shots, officials hope information about the L fund and its goals will make them more aware of the importance of diversifying investments and regularly rebalancing their portfolios.
Retired federal workers can remain in the TSP if they have accounts at the time of retirement. They can also, like active duty feds, add outside tax-deferred funds (from IRAs and 401k plans) to their TSP accounts. But retirees cannot otherwise add money to the TSP and they cannot open an account after they are retired.
Mike Causey, senior editor at Federal News Radio AM 1050, can be reached at 202/895-5132 or email@example.com.