Most Federal employees think about what they will do when they retire. Travel, going to movies during the day when the theatre is not crowded, eating at nice restaurants during off hours, visiting friends from out of town all pop up on lists of what a retiree plans to do with his new-found free time.
The nightmare for many current employees though is "what happens if I don’t have enough money." No doubt, this has cropped up more often with the dramatic drop in the stock funds in the government’s Thrift Savings Plan (and the stock market in general) during the past three years.
The Federal Government’s retirement system is often touted as a model for the rest of the country. The Federal Employee Health Benefits Plan is also routinely highlighted as one for other organizations to emulate. And, while some argue that Federal employees are underpaid when considering their education and experience, in some markets Federal jobs are coveted for a number of reasons including job security, regular pay increases, and these benefits. Even in the Washington, DC area, there are certainly better paying jobs but with the average Federal employee taking in more than $62,000, that is a lot better than most Americans will ever do.
Is there any way your retirement couldn’t work out for you?
Yes there is. Here is one example that every Federal employee should read.
A Wall Street Journal article profiled a successful Federal employee with 40 years of service. She was a government lawyer who graduated from Yale Law School. Her retirement plans were fairly typical. It was time to have fun and enjoy the retirement she had earned. She checked out in 2001. Three years later, the fun is gone and she is looking for work.
The big reason is the stock market. Her investment portfolio started out at one million (You read it correctly, that is $1,000,000.) She had this amount accumulated because she turned in her guaranteed-benefit pension for a lump sum cash payment. She also had money from an inheritance. She and her husband also divorced and some money from the house they sold also went toward her retirement investments.
She invested her retirement money in aggressive stock market mutual funds. Big mistake–they went down and never stopped going down. She then fired her broker and hired a financial planner who put about half of her money into annuities and income-oriented investments. She had expected an income of about $6000 a month. It is now a few hundred a month and going down as she dips into the investments to meet her monthly expenses.
The trips she had planned are off. She is now looking for a job. She still has a little more than $600,000 in investments but is worried about the future and has found that finding a job in the current market is tough. She has not found any work that comes close to approaching her former salary and has considered taking a job caring for elderly.
She says she feels "out of control" and that she is going back to work to try and regain control of her life again.
There are several lessons current Federal employees could take from this real life scenario. First, be careful how you invest your retirement money. The stock market always goes up and down and is beyond your control. While the market has always gone back up, it may take 10 years of so for the momentum to swing back. Can you afford to wait that long or can you stand to lose 30-40% or even 50% of your investment while you wait for the next bull market?
If not, consider more conservative investments if you are at or close to retirement age. An employee who is 25 has a lot more flexibility, may be able to wait to recoup losses and can take a lot more financial risk than someone who is 60. Be objective about your own financial situation and your ability to withstand financial stress.
Second, a guaranteed annuity is worth a lot to you–both financially and for your peace of mind. Employees who are in the Civil Service Retirement System (CSRS) may have been wishing they had switched to the newer FERS system back in 1999. If you didn’t switch, and if you are still tempted to cash in your annuity for a lump sum payment, you may want to talk to your agency’s retirement counselor before you go out to make the big bucks you dreamed about making in the private sector. Maybe it will work out for you. But what if it doesn’t?
Hope for the best and prepare for the worst. Remember that the small percentage increase you receive with the TSP’s G fund won’t make you rich but talk to your financial advisor and run several financial scenarios as you try and peer into your future. The paltry G fund return may be better for you than the potential of staring at a big loss in the stock market.
Third, put as much as you can afford into your retirement funds and do it as early in your career as you can. The money you invest in your early days of working will be worth much more to you than the dollars you put in toward the end of your career.
Fourth, diversify your investments. Even a person in retirement is likely to want some money invested in stocks. In general, stocks provide a better return than other investments–you just can’t predict when they will do it. Your financial advisor should be able to help you come up with a good ratio of investments (i.e. how much in stocks and how mucn in bonds).
Finally, enjoy your retirement. You earned it. Now enjoy it.