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Live Long and Prosper

Avoiding the dangers of outliving your money.

Have you heard of “longevity risk”? It refers to the chance that you’ll outlive your money. For those under the Federal Employees Retirement System, this risk is associated with the portion of retirement income that comes from your retirement savings in the Thrift Savings Plan. The FERS basic retirement benefit and Social Security benefits last for life.

Longevity risk is a relatively new concern for federal retirees. The older Civil Service Retirement System was a single benefit plan that did not depend on personal savings or Social Security retirement to help participants enjoy a financially secure life after retirement. 

Many Americans are not fortunate to have a pension to supplement their Social Security benefits and retirement savings. This can make it harder to create enough income from savings to last a lifetime. According to the Social Security Administration, 21 out of 100 married couples and 44 out of 100 unmarried people age 65 and older rely on Social Security for 90 percent or more of their income.

The risks involved with investing can make it hard for federal employees to manage their retirement savings. It’s difficult to trust that your savings will grow to adequately provide retirement income when there are dips in the market and periods of high inflation.

Some federal employee investors believe that investing in the Thrift Savings Plan’s government securities G Fund avoids this risk. The objective of the G Fund is to maintain a steady return without exposing the fund to risk of default or changes in market prices. But the low rate of return for the G fund may not be enough to increase the purchasing power of your money after factoring in the effects of inflation and taxes on withdrawals. 

That’s why TSP officials encourage investors to consider the potential gains of owning stocks and investment grade securities via the fixed income F Fund. The F Fund  is exposed to prepayment risk, which is the probability that if interest rates fall, bonds that are represented in the index will be paid back early, thus forcing lenders to reinvest at lower rates. F Fund investors are also exposed to credit and market risks. 

The stock index C, S, and I Funds involve market risk to an even greater degree, because the prices of the stocks in the underlying indexes rise and fall. The funds also are subject to inflation risk. You can let the TSP manage the mix of investments in all of the funds by opting to invest in the Lifecycle (L) Funds

Most Americans have put away some money for their retirement, but how do you make that money last for a retirement that could last longer than your career? According to the Office of Personnel Management, as of fiscal 2018, more than 1.5 million federal employee annuitants at least age 65 were receiving non-disability retirement benefits. The average age of all federal retirees is 73. There are more than 3,000 surviving spouses and former spouses who are over the age of 100.  

Since many federal retirees are now retiring under FERS, a good portion of retirement income will be generated by retirement savings. For most of them, such saving is done via the TSP, but might also include Individual Retirement Arrangements and private sector or other public sector retirement savings.

According to a report from a trio of actuaries groups, five factors frame the challenges of making your money last as long as your life:

  • Savings: Measures taken by the TSP to help participants build up adequate savings include automatic contributions for new hires, matching government contributions and the ability to defer traditional TSP savings from taxes while working.
  • Information: Many financial products are complex, so it’s important that a range of options be presented in clear language. The TSP provides this type of information through its website, publications, training and even a YouTube channel
  • Flexibility: There should be allowances for adjustments to meet individuals’ changing circumstances. The TSP allows employees to borrow from their savings and provides limited options for in-service withdrawals. The TSP is adding some additional flexibilities to post-separation withdrawals later this year. 
  • Fairness: From the government perspective, fairness is determined by a balance of what serves the interests of federal employees with the cost to taxpayers. Elected officials and the Federal Retirement Thrift Investment Board handle this responsibility.
  • Sustainability: The TSP takes advantage of economies of scale to keep expenses low and administrative costs spread over more than 5.5 million participant accounts. There are no added commissions, which also contributes to the low cost of the TSP. 

By far, the biggest change in federal employee retirement benefits since the creation of CSRS in 1920 was the change in 1987 from a single benefit retirement plan to the three-tiered FERS system. Although many proposals have been made to modify FERS, the biggest threat to employees’ retirement would be eliminating the FERS basic benefit in exchange for providing a more generous retirement savings plan. Hopefully such a change would only impact future hires.