It looks like most career federal employees will wind up working in retirement, after all — as their own pension fund managers.
Federal employees, for all the challenges they face, enjoy something that is increasingly scarce in the private sector — a guaranteed annuity. Not only are guaranteed retirement streams rare, but guaranteed retirement income with inflation protection — like that in Civil Service Retirement System and Federal Employees Retirement System annuity payments — is even rarer.
There are increasingly frequent and aggressive calls for cuts to the federal budget, and in particular, to federal retirement benefits costs. As a federal employee, you owe it to yourself to recognize and prepare for something your private-sector counterparts already are living with — greater risk.
In days long past, employers, both public and private, recognized that managing assets for retirement income was difficult and best left to experts. They often recognized the value in providing guaranteed retirement benefits, rather than just additional cash compensation.
The system was attractive to employers because it helped to bind their valued employees to them and give them the confidence they needed to devote their full time and effort to their work. The employer bore the burden of helping to fund and competently manage the employees’ pensions fund, but better-than-expected management performance, or luck, could reduce that burden. Remember when we used to hear about “over-funded” pension plans from time to time? That’s one to share with your grandchildren some day.
This pension system worked well through the years after World War II, when falling interest rates and rising investment markets made funding pension plans relatively easy. But all of that has changed over the past decade, and now even the granddaddy of all American pension plans — the federal retirement system — is beginning to show signs of stress. While no one can reliably predict the future of CSRS and FERS, it seems clear that the risk of losing at least some of the benefits they provide is likely.
When it comes to retirement income, this may mean a continuation of something that started with the introduction of FERS and the employee-managed Thrift Savings Plan in the early 1980s: You could be responsible for managing increasing amounts of financial risk in the future.
Are you up to the task? Get ready. Putting the responsibility for managing money in order to produce predictable, adequate and reliable streams of income over long periods, and protecting that income from the erosive effects of inflation is difficult. I should know: It’s my full-time job.
Asking the average, or even the exceptional, employee to take over the job of pension fund manager is, in my opinion, irresponsible and dangerous. It’s kind of like putting the employee in the cockpit of an airliner and asking him to land it with no training and no autopilot. The likelihood of a catastrophic mistake is huge.
The smart feds who haven’t already done so will begin educating themselves, in earnest, in the science and art of pension fund management. Notice that I didn’t say investing, which is often not the same. We’re not talking about the kind of education that brokerage firms, mutual funds or other purveyors of financial products and services offer. You’ll need to know how to manage money to support a stream of retirement income, which is much more demanding. You’ll have to know how to work backward from the results you want to develop a management approach that will produce those results with a minimum of risk.
Identifying a well-diversified, cost- and risk-efficient asset allocation model, like those used by the TSP’s L Funds, and actively managing your TSP account to support your retirement spending goals is the best way to accomplish this. If you’re not sure how to proceed, you should consider implementing the beginning asset allocation for the L Fund that most closely corresponds to your life expectancy, and rebalancing your account to this allocation at least once per year.
This should support a regular withdrawal stream in retirement of between 4 percent and 6 percent of your beginning account balance, adjusted each year for inflation. While this might not be the best solution possible, it’s better than no sound strategy at all.
Unfortunately, your employer has given you very little support in your assignment as a pension manager, and odds are that your responsibility for this task will only grow in the future.