- The Washington Times - Monday, June 6, 2005

When it comes to planning for the future, most federal workers are in much better shape (or can be) than their counterparts in the private sector. The feds will geat an annuity for life, and it will be indexed fully or in part to inflation. And they will have health insurance for life. Less than half of private-sector retirees have or will have a company pension (especially one that lasts). Those that do have one won’t have inflation protection or a company health plan when they retire.

So when it comes to investing for the future, many financial planners say that feds — especially the 700,000 workers who are still under the older, more generous civil service retirement system (CSRS) — have more incentive to be bold. That is, they can be more aggressive with their investments, both inside and outside the federal 401k plan, because of their inflation-indexed pensions.

At the same time, most investors have heard about the dangers of putting all their investment eggs into one basket. People who went nuts over Internet stocks in the 1990s can tell you about the fallout when a bubble bursts.

And the eggs-in-one-basket analogy makes sense — up to a point. But for feds things are a little different. First, a true story that happened to my favorite person: me.

Years ago a financial planner warned me not to buy stock in the company I worked for. Although it was a good stock, and a great company, he said it was crazy. Reason: My salary came from the company. My vacation came from the company. My holidays came from the company. My health insurance came from the company. So, too, would my eventual pension check.

So why, he said, would you invest your money in company stock? If it goes belly up, I would be the investor version of dead meat.

Well, he was right. Also dead wrong. And you will notice this happens a lot with investment advice.

Anyhow, I took his advice and stopped buying company stock and shifted, instead to mutual funds. The funds did all right. But the company stock did much better. Had I maintained my mix, which had most of my financial eggs in the company basket, I would be writing this from my yacht anchored off the coast of Monaco. As it is, I anchor my Land Cruiser near the Tenleytown Metro stop.

And there is a lesson there for federal-postal-military investors in their 401k plans. The government isn’t going out of business — although some worry that it is either already broke or soon will be.

The government has an excellent business model. It prints the money and sends the money out to banks, then tells us (via the Internal Revenue Service) how much to send back. It is a good business plan.

Most federal 401k investors have some money in the Treasury securities stock fund, the G-fund of their Thrift Savings Plan. Some investors have everything in the TSP. For most people that is not smart. While the G-fund is super-safe, it is not the place to have all your 401k-plan eggs if you plan to live 10, 15, 20 or even 30 years after retiring. Why? Answer: inflation.

So what’s the right mix? Well, it depends on when you, the investor, will be withdrawing your TSP fund. Your so-called “target date” is the year you expect to start spending the money. For CSRS-covered feds, with inflation-indexed pensions, that could be 10 or more years after retirement.

One possible solution is to check out the L-fund (for lifestyle) coming next month or in August. The L-fund will setup the proper mix of funds for you, based on when you will be withdrawing the money. Remember, feds have the choice of the C-fund (big stocks) the S-fund (small stocks), the I-fund (international stocks), the F-fund (bonds) and the G-fund (treasury securities).

Under the self-adjusting L-fund guidelines, someone who is planning to tap their TSP account in the year 2010 (or a couple of years before or after that date), the mix would be C-fund, 27 percent; S-fund, 8 percent; I-fund, 15 percent; F-fund, 7 percent; and G-fund, 43 percent. That’s a conservative portfolio.

But if your target date, the date you will begin spending down your TSP account, is the year 2040 your mix would be C-fund, 42 percent; S-fund, 18 percent; I-fund, 25 percent; F-fund, 10 percent; and G-fund, 5 percent.

Bottom line: Whatever your goals, whatever your risk tolerance, investing in a tax-deferred option — especially if there is a matching contribution from the employer — is generally a very smart move.

Mike Causey, senior editor at FederalNewsRadio.com, can be reached at 202/895-5132 or [email protected]

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