Thread: PBS Frontline: The Retirement Gamble

USRQ, I watched the video from beginning to end. Thanks that was very informative. I am now worried about my children who have 401Ks and not TSP. I have to make sure they are vigilant about their nest egg.

I feel bad for people who have 401Ks who do not understand or worse would not try to understand 401Ks intricacies.
One of those few times I am thankful we have TSP.

Originally Posted by Maricar19

USRQ, I watched the video from beginning to end. Thanks that was very informative. I am now worried about my children who have 401Ks and not TSP. I have to make sure they are vigilant about their nest egg.

I feel bad for people who have 401Ks who do not understand or worse would not try to understand 401Ks intricacies.
One of those few times I am thankful we have TSP.

Maricar19, Glad you liked it. And good deal on educating your children!

Originally Posted by Maricar19

USRQ, I watched the video from beginning to end. Thanks that was very informative. I am now worried about my children who have 401Ks and not TSP. I have to make sure they are vigilant about their nest egg.

I feel bad for people who have 401Ks who do not understand or worse would not try to understand 401Ks intricacies.
One of those few times I am thankful we have TSP.

Uh, Maricar19, TSP is a 401(k). Like many 401(k)s our TSP has low fees. Just because some employers (and employees) are dumb and ignorant and thus purchase (and/or use) high fee options doesn't mean 401(k)s are dumb. Our TSP is a low fee 401(k). I have seen many low fee 401(k)s that have REIT, Commodity, and Emerging Market options - which makes them better than our TSP offerings.

By the way, if pensions (see Detroit and soon Chicago and soon the Teamsters, Auto Union, and City, State, or Federal pensions near you) are being reneged on, exactly how does a pension differ from a 401(k). For example, the California Teachers Pension (CALSTRS) promises benefits assuming something like a 7% to 8% return. Thus, they invest in equity mutual funds and other 'high risk' options. Effectively they invest in C/S/I to bring their average return to 7%. They also invest in much more speculative and much riskier options. However, if their internal 401(k) does not meet their promise they must do one of two things: 1) Grab more money from taxpayers, and/or 2) Renege on some of the pension. They are not meeting their numbers as I type and their differential is not being met by the taxpayer because current politicians will not self-destruct to keep promises made by politicians 30 years ago. So a song and dance and hope all over is going on. See that shaman over there on the mountain. He is not a rain-man - he wants to be a rain-maker.

Math DOES NOT LIE, but politicians DO.

By the way, what is our pension. We pay 1/14th (or a little more now for new hires) and the gubmint pays 13/14th's toward it. That money is then 'invested' in the G Fund. The only way our pension is safe is if the retirement disbursements are based on the actual contributions and growth. Let us look at the numbers for our secure pension using a fictional employ that came in as a GS07 in 1987 (first year of the G Fund) is still a GS07 in 2015 and will retire as a GS07 in 2028 at age 65 with 41 years of service:

1987 Salary: $18,358

His/Her Contribution toward pension: $146.86
Gubmint Contribution toward pension: $2,423.26
Total Contribution toward pension: $2,570.12

2015 Salary: $34,662 (maps out to a wage growth rate of 2.25% per year - remember no promotions and no step increases)

His/Her Contribution toward pension: $277.30
Gubmint Contribution toward pension: $4,575.38
Total Contribution toward pension: $4,857.68

Projected 2028 Salary: $49,285 (at 2.25% wage growth)

His/Her Contribution toward pension: $394.28
Gubmint Contribution toward pension: $6,505.62
Total Contribution toward pension: $6,899.90

The G Fund has averaged 5.43% annual growth since 1987. Assuming 5.43% growth till 2028 (not very likely, but we want the happy face):
Assets in your Pension 'Lock Box': $525,272
Resulting in an annual distribution of: $12,309 (given an annual growth rate of 5.43% and croaking at age 85)

What the politicians are promising you:

Years of Service: 41
High 3 Average: $48,090
Pension Benefit (1.1 * 41)/100 * $48,090 = $21,688
Assets in your Politician Promised Pension 'Lock Box': $809,370

Thus, even at an annual growth rate of 5.43% since your retirement - and in fact your Social Security - are invested in the G Fund you have a real hole in your pension 'obligation' of $9,379/year. So, if the politicians are actually assuming that pension fund investment will map to promised benefits than the average annual rate of return they are assuming is: 7.25%

Folks, your pension is a LINE ITEM in the annual Federal budget. It is unfunded. And, politicians set the G Fund rates. With Obama doubling the rolling debt to $18 Trillion dollars do you think anyone would start increasing the G Fund rates from around 2% to well over 5.43% (to get the average to 7.25% for the lifetime of our employee). It is a small line item and should be honored - but...

The only way your pension and your Social Security work is if your assets were invested in a 60% C, 40% F allocation.

Folks, that is why a PENSION is a bad deal. I DO NOT want to trust the promises of a union leader or a politician. A 401(k) is a pension that is real, is under your control, and has a real performance you can see. It is not a politician or union flak promise.

Originally Posted by Boghie

Uh, Maricar19, TSP is a 401(k). Like many 401(k)s our TSP has low fees. Just because some employers (and employees) are dumb and ignorant and thus purchase (and/or use) high fee options doesn't mean 401(k)s are dumb. Our TSP is a low fee 401(k). I have seen many low fee 401(k)s that have REIT, Commodity, and Emerging Market options - which makes them better than our TSP offerings.

Boghie, got that part about 401k (private industry retirement plan) and TSP (government retirement plan). However our advantage with the 401K people is that our current low fees make our money work for us. Since last night, I have been bugging my children to check their 401K as to how much the fees are being assessed and where they are invested. Of course, to no avail. At this time of their life, they are care free. Can't blame them, I didn't worry about my TSP until after 2008.

Originally Posted by Maricar19

Boghie, got that part about 401k (private industry retirement plan) and TSP (government retirement plan). However our advantage with the 401K people is that our current low fees make our money work for us. Since last night, I have been bugging my children to check their 401K as to how much the fees are being assessed and where they are invested. Of course, to no avail. At this time of their life, they are care free. Can't blame them, I didn't worry about my TSP until after 2008.

Many 401(k)s have low fee mutual funds. Ours are very low, but if there are index funds in someones 401(k) than the fees will be something less than 0.5%. Actively managed funds do cost more - but generally they have to be selected from the menu of funds.

Is it really a great thing to ONLY have low fee index funds? Why not have an option to have an actively managed fund. I know the chaps in the video disparage them - and to some extent they should be disparaged - but if I want to invest in equities in Southeast Asia than I would want a managed fund. Why not have the option of a Dodge & Cox Balanced Equity fund? Options add confusion, but options would allow me to diversify much better than I can now.

Right now, our bond fund (F Fund - the AGG) is behaving like an equity fund. It is NOT safe money. And, it WILL correct at the same time as our equity funds. It would be a perfect time to invest in a managed bond fund right now. Not for equity like growth - but instead for quality returns. Can we do that. Nope.

I do get tired of watching shows presenting some dumb business owner who never looked at his 401(k) offerings. Kinda tired of watching shows about dumb employees who 'invested' 100% in their companies stock, kinda tired of watching some gubmint bureaucrats talk up pensions as better than 401(k) - when they are the exact same thing in the end. Kinda tired about hearing some employee panicking out after a correction and never getting back in. Or, hearing about real estate never going down. Or, hearing about gold and precious metals.

Originally Posted by Boghie

The only way your pension and your Social Security work is if your assets were invested in a 60% C, 40% F allocation.

Folks, that is why a PENSION is a bad deal. I DO NOT want to trust the promises of a union leader or a politician. A 401(k) is a pension that is real, is under your control, and has a real performance you can see. It is not a politician or union flak promise.

Boghie, please understand that I am not being sarcastic here, just trying to understand the statements above. If I were invested since 1988 in C and F per your allocation, how much would my average rate of return would have been?

Also on pension plan, I tend to disagree because our FERS annuity is the only thing constant and "stable" when and if I retire. It may not be much, but it's guaranteed until I croak. Don't get me wrong, I also like the TSP, but there's always the worry about market fluctuations but the alternative to put it on "G" may not meet my "future" needs.

It's a shame that a lot of my friends who have 401k do not know where their money is invested in. And some of them lose their jobs before getting vested. Some employees have to wait 2-6 years to be vested for the matching contributions.

Originally Posted by Boghie

I do get tired of watching shows presenting some dumb business owner who never looked at his 401(k) offerings. Kinda tired of watching shows about dumb employees who 'invested' 100% in their companies stock, kinda tired of watching some gubmint bureaucrats talk up pensions as better than 401(k) - when they are the exact same thing in the end. Kinda tired about hearing some employee panicking out after a correction and never getting back in. Or, hearing about real estate never going down. Or, hearing about gold and precious metals.

Have you spoken with someone about this?

JPCavin turned me on this site: Backtest Portfolio Asset Class Visualizer

For the purpose of our discussion it is obvious that the numbers quoted on the TSP site are CAGRs (or IRRs if you wish). CAGRs are generally less than average annual returns, but they attempt to take contributions into affect. They are generally a truer return than a simple average. I will use 1987 onward to match the above example - my numbers came very close the the documented number on the TSP site for late Jan 1988 on. So here are three portfolios using my example GS07:

This Guy/Gal invested in 60% C / 40% F and let it ride:

CAGR (Compound Annual Growth Rate): 9.16%/year
Initial contributions (including gubmint contributions); $2,570.12
Growth of Contributions: 2.5% (to match above example)
End Result:

Projected Assets in 2028: $1,296,876
Annual Disbursement till age 85: $40,148
Annual Disbursement till age 95: $33,874

This Guy/Gal invested in 100% C and let it ride:

CAGR (Compound Annual Growth Rate): 10.27%/year
Initial contributions (including gubmint contributions); $2,570.12
Growth of Contributions: 2.5% (to match above example)
End Result:

Projected Assets in 2028: $1,729,858
Annual Disbursement till age 85: $57,661
Annual Disbursement till age 95: $49,857

This Guy/Gal invested in 100% F and let it ride:

CAGR (Compound Annual Growth Rate): 6.50%/year
Initial contributions (including gubmint contributions); $2,570.12
Growth of Contributions: 2.5% (to match above example)
End Result:

Projected Assets in 2028: $672,788
Annual Disbursement till age 85: $17,162
Annual Disbursement till age 95: $13,455

Now, compare that to the actual asset value in this chaps pension as invested by the gubmint (only in the G Fund):

CAGR (Compound Annual Growth Rate): 5.43%/year (no way we will see the that average hold - but smiles all around)
Initial contributions (including gubmint contributions); $2,570.12
Growth of Contributions: 2.5% (to match above example)
End Result:

Projected Assets in 2028: $525,272
Annual Disbursement till age 85: $12,309
Annual Disbursement till age 95: $9,294

Finally, the Gubmint promises:

Pension: $21,688/year

Consider that any employer - to include the Feds - will actually incorporate ALL of the costs incurred by employment into the budget before hiring someone. Thus they cost out their contributions to your pension. My point is this: If this fictional employee could have invested the 14% of gross salary going to the pension in a 60/40 split than he/she WOULD NOT need to invest a dime in TSP. And, his/her income in retirement would be 150% of the Gubmint pension.

Finally, as to your point about the stability of the pension. Pensions are failing everywhere. Unions (ours included) force politicians to over-promise pension investment returns. It is a game public sector entities play. It keeps the cost of employment down and pushes the expenses to future politicians. Well, the future is now. Talk to Detroit city employees about the safety of their pension. Talk to the auto workers (heard what the union finance pensions are starting to demand). Talk to airline pensioners. All a pension is is an investment account. All it is is a 401(k) that tries to keep up with a promise based on some odd calculation rather than what is actually in the account. I, personally, think the pension is 'safe' because it is a rather small line item in the Federal budget (something like $5 Billion) - but, I am only going to count on about 75% of the promised benefit.

I can count on my personal assets - of which my TSP/401(k) is an example. The gubmint grubbers can only grab those asset indirectly (like President Clinton did when he initiated income taxes on Social Security). They cannot jigger pension computations to ease things up on themselves.

Originally Posted by userque

Have you spoken with someone about this?

You guys :-}.

I tell the folks at work to invest in TSP for the reasons mentioned. Most of those around me are now at least 10% invested and will have a decent income stream in retirement. They can survive Social Security and pension cuts.

Now, for those in CSRS - a promise made MUST be a promise kept. They had no other alternative to the defined benefit plan (pension).

For those of us in FERS I have some degree of confidence that our pension will not be jiggered - but I do not count on it. I consider my FERS pension and my Social Security benefit sunk costs. I factor in an actual benefit of about 70% of that promised for my planning. Anything more and I will be happy.

And, yeah, every once in a while I whine about the Baby Boomers who spent their lives smoking dope, borrowing from their houses, buying new cars every two years, and raiding (or cashing out) their 401(k)s who then complain that they ain't got nuthin to retire on. Nice image, huh. That lovely teacher couple did everything dumb that could be done - and they are teachin' the childrun... On the other hand, I feel for folks without any basic investment knowledge. I mean, when I joined Federal Service my HRO slug warned me off of TSP - with nothing to replace it. You know the schlemiel - 'puttin money in dat thang is like lettin it ride at the casino'. Dumb and dumberer.

as soon as i can i am going to bet it all on red, c'mon honey hit me one time. and then take off all my clothes and live in a hut on the beach and try to catch enough fish. naked. or else a trailer if all the huts are sold already.

Originally Posted by Boghie

You guys :-}.

I tell the folks at work to invest in TSP for the reasons mentioned. Most of those around me are now at least 10% invested and will have a decent income stream in retirement. They can survive Social Security and pension cuts.

Now, for those in CSRS - a promise made MUST be a promise kept. They had no other alternative to the defined benefit plan (pension).

For those of us in FERS I have some degree of confidence that our pension will not be jiggered - but I do not count on it. I consider my FERS pension and my Social Security benefit sunk costs. I factor in an actual benefit of about 70% of that promised for my planning. Anything more and I will be happy.

And, yeah, every once in a while I whine about the Baby Boomers who spent their lives smoking dope, borrowing from their houses, buying new cars every two years, and raiding (or cashing out) their 401(k)s who then complain that they ain't got nuthin to retire on. Nice image, huh. That lovely teacher couple did everything dumb that could be done - and they are teachin' the childrun... On the other hand, I feel for folks without any basic investment knowledge. I mean, when I joined Federal Service my HRO slug warned me off of TSP - with nothing to replace it. You know the schlemiel - 'puttin money in dat thang is like lettin it ride at the casino'. Dumb and dumberer.

I no longer tell anyone at work what I think about where they should invest TSP funds. I went on a campaign several years ago to at least get them to get a password so they could log in and move funds if they wished. Mixed results, one out of several moves money around but very conservatively. The rest never mention TSP.

Whining about boomers pushes a button for me. Whining about the boomers described is warranted. I have taken a lot of crap over the years from other boomers about how I should be upgrading vehicles, houses and investment instruments. Not so much now. One has recently asked to borrow money. For a new investment opportunity. I said OK but we needed a legal document stating interest rates and default consequences. Was just like before, I am stupid and missing out on millions. Documents are not necessary.

I may not be the typical boomer but have done the best I can with the ancient “starter” house, “crappy” vehicles and not having the latest thing around to watch TV or stay connected to “friends”.

HR types don’t even mention TSP or FERS to employees unless asked and then usually refer them to OPM or TSP.gov.

Is PBS doing a public service or fomenting more panic amongst the proletariat?

I missed out on smoking all the dope due to conditions of employment. I will retire in 2.5 years and will need some advice on catching up.

PO