#11821 Mar 6 4:40 AM
Retirement PlanningFreefalling FERS?
By Tammy FlanaganNational Institute of Transition PlanningMarch 6, 2009Last week's columnstruck several nerves, judging from the comments I received fromreaders. I wanted to take some time this week to address one issue: thevalue of a retirement package under the Federal Employees RetirementSystem in the current economic environment.Here's what one commenter said: FERSis a paltry retirement, less than half a Civil Service RetirementSystem retirement with little inflation protection. The Thrift SavingsPlan has lost 50 percent in value for many, plus there are plans to cutSocial Security benefits. It would be nice if the federal governmentcould offer a retirement to FERS employees that offers an actualretirement.Another chimed in with this: Here'sthe biggest problem with FERS: Even leaving at full retirement [minimumretirement age and 30 years of service], if you're younger than 62,will leave you without a cost of living increase until you're 62. Sofor example, with an MRA of 56, your FERS component remains static forsix years. Assume just 4 percent inflation and run the numbers. Youwon't like what you see. And if inflation heats up during those sixyears ... lights out.Let's look at it this way:After 30 years, a CSRS employee would have a retirement equal to 56.25percent of their high three average salary. A FERS employee with 30years of service would have a basic benefit of 30 percent (or 33percent if they are 62 or older) of their high-three. Clearly the FERSretiree has to make up a difference of roughly 23 to 26 percent oftheir high-three to equal the CSRS benefit. Where is this going to comefrom?If the employee is in the lower salary range, most of itwill come from Social Security (or the FERS supplement, if the retireeis under 62 with unreduced FERS benefits). If the employee is in ahigher salary range, then more needs to come from TSP savings. Bydesign, Social Security replaces a proportionately higher amount ofpre-retirement income for low-wage earners. The theory is that ifyou're at the higher end of the scale, you should be able to save morefor your retirement.COLA ConcernsThe delayed costof living adjustment under FERS and the less generous COLA appliedafter 62 is a concern. Social Security benefits receive a full COLAannually, but the earliest you can receive such benefits is 62. FERSretirees will have to consider whether they can afford to retire ifthey are younger than 62, or whether they need to supplement theirretirement with additional wages from a second career or a part-timejob. A lot will depend on how well they have managed their investments.Ifall goes well, a larger investment portfolio can compensate for theloss of COLA. On the other hand, if your investment income is notadequate, you may need to reconsider your decision to retire.Toput things in perspective, though, consider how many employees outsidegovernment even get pensions these days, and how many of those areadjusted for cost of living. Only 21 percent of all private sectoremployees are covered by a traditional defined benefit pension, andCOLAs of any kind are rare, according to the May 2006 edition of Fedgazette, a publication of the Federal Reserve Bank of Minneapolis.Investment ManagementAddressingthe reader's comment about the TSP requires raising the issue of theway employees manage their accounts. Those nearing retirement shouldn'thave the majority of their TSP investments in stock funds, since theyare by definition riskier than other investment choices. Look at two ofthe lifecycle funds, which are aimed at providing a mix of investmentsbased on an employee's targeted retirement date -- L 2010, aimed atemployees retiring over the next few years, and L Income, targeted atthose leaving even sooner than that. More than 70 percent of the L 2010Fund is invested in two relatively safe harbors -- the G Fund(short-term Treasury securities) and the F Fund (fixed-income bonds).For the L Income Fund, the percentage is 80 percent. Over the last 12months, L 2010 lost 13 percent and L Income lost 7.5 percent. Those arecertainly not great numbers, but they're a lot better than the stockfunds performed.Finally, with respect to Social Securitybenefits, when the laws regarding them are changed -- as they probablywill be at some point -- it's almost certain that protections will beput in place for those who are already retired or nearing retirementage. Remember that when the Bush administration consideredmodifications to Social Security, the president promised that peopleborn before 1950 would not be affected by the changes.I'm hopingthat when the time comes, people born in 1958 or earlier won't have toworry about any changes. That's the year I was born.Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc.,which conducts federal retirement planning workshops and seminars. Shehas spent 25 years helping federal employees take charge of theirretirement by understanding their benefits.For moreretirement planning help, tune in to "For Your Benefit," presented bythe National Institute of Transition Planning Inc. live on Mondaymornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.