Where will you live when you retire? A house near the beach? A condo in the mountains? A retirement community with an active lifestyle, a warm climate and great golf courses? A house overlooking a beautiful fairway with perfect grass and surrounded by small ponds and lakes?
Perhaps a better question is: Will you be able to retire at all. As a federal employee, you have good options. Some readers select the option of deciding not to retire–not because they want to keep working but because they have not planned for retirement and decided not to decide until later.
Ready…Set…Retire!: Financial Strategies for the Rest of Your Life is a book by Raymond J. Lucia. The author outlines the most fundamental considerations for retiring.
Take Responsiblity for Your Retirement
While most of our readers are federal employees or retirees, most have a good education and secure jobs, but many readers do not plan for their retirement. Federal employees have access to the Thrift Savings Plan. It has been referred to as a "model retirement plan" and the "Platinum standard" for retirement systems. A few ignore the TSP altogether.
There are certainly reasons for ignoring the TSP but anyone who does so is hoping that someone, somewhere will somehow take care of them in retirement–or hoping to remain healthy and able to work until their final day on earth. The TSP has the lowest investment fees you will find for a retirement fund. It is a benefit that is given to you whether you use it or not. Be smart and take advantage of that benefit to the fullest extent possible.
Invest Early, Invest Often, and Invest Until it Hurts
If you don’t want to depend on the charity of relatives, a spouse with a very generous retirement plan to take care of you, or subject yourself to the vagaries of the welfare system when you are old and possibly infirm, investing in the TSP is probably the smartest step you can take. Not investing in the TSP is costing you money because you lose the matching benefit from the government and your investment will not be able to compound over time.
Some readers take the approach that they don’t have to invest in the TSP now–there is plenty of time later. That has a nice ring to it. Most people who do not save anything when they are early in their career are often likely to find reasons not to invest in their retirement later in their career either.
Most Americans do not save much at all. Our savings rate as a nation is very low. There are different ways to count the savings rate but, by at least one measure, it is the lowest it has been since the Great Depression–and we are currently in the midst of a very good economic period.
You can set yourself apart from the crowd by saving and having enough for retirement. How much should you save? If you are in your 20’s, 10 percent of your income will get you to retirement because of the magic of time and compounding interest and dividends. If you don’t start saving until middle age (40-45), you should try to save 15 or 20 percent. If you don’t start later than that, put every cent you can into your TSP or an Individual Retirement Account or a stock fund.
Here is the reason for the difference. If you are 20 years old, and you put $1000 into a fund that grows at 10 percent each year, you will have over $70,000 by the time you turn 65. But, what happens if you invest that $1000 in the same fund at the same rate of return when you are 50? You will have about $4000 when you turn 65.
Being young is a gift. George Bernard Shaw said that "Youth is wasted on the young." Who wants to think about retirement when you are in your early 20’s? The truth is that most Americans do not think of it and, giving credit to Mr. Shaw, the gift of youth is often wasted from an investment standpoint. In short, if you are a federal employee, and can possibly do it, put as much as possible into the TSP each pay period.
Don’t Invest in One Fund
Some readers take the approach that the best and safest way to invest for retirement is to put most of their money in the G fund. From an historical perspective, that is a bad idea. And, if you are early in your career, it is a horrible idea. The G fund is safe in that it does not have the volatility of the stock market. But you will get a relatively meager return and the difference when you retire will probably be significant. Over long time periods, stocks return about 10% a year before inflation. You will be fortunate to have a return of 5% – 6% with the G fund.
The TSP offers a variety of stock and bond funds. It even offers the lifecycle funds that let you diversify your portfolio without giving it much thought. Just select the approximate time of your retirement and you can let the computer make your investment decisions with the right lifecycle fund.
Some readers do not like to invest in the I fund. Perhaps it seems less patriotic to invest in foreign stocks. Perhaps it seems more risky because of political instability or just lack of knowledge of foreign business practices and business climate. But, whatever reason you may have for ignoring foreign stocks, put your reasons aside and consider your retirement future as a first priority.
Foreign stock shares make up more than half of the world’s stock-market value. You should have foreign stocks in your investment portfolio. Here is the advice of Johnathan Clements in a recent article from The Wall Street Journal: Consider earmarking 20% or 30% of your stock portfolio for foreign shares — and then stick with your target percentage, come what may."
In short, invest as early in your career as possible. Invest as much as you can and try to invest more than you think you can afford. And, finally, diversify your portfolio. If you do these, you are well on your way to living your retirement the way you want to and not the way you will be forced to live because you can’t afford any other option.