You are inundated with information. Everyone is. A lot is
just bits and pieces competing for your attention. That makes it
tough to put together a complete, well thought out plan for your
retirement.
Here is one fundamental issue to put you on track. I will build
on it in later articles. One warning: I'm going to be blunt and
I'm not going to pull any punches. The issue at hand demands it.
Reading this article may mean the difference between a
retirement of dignity and independence or spending your final
years in poverty.
The first thing you need to do is get a handle on your
investment horizon. Really, you have two horizons to think
about. The first horizon is your retirement date. You are going
to make different decisions if you are 10 years out versus if
you are 25 years from retiring. No big surprise there.
The second horizon is your life expectancy. Simply stated, folks
live a lot longer than they used to. Many folks today can expect
to live a couple or three decades in retirement. So your
financial plan must extend long past the day you retire. This
also means your money–your income–must keep growing with the
cost of living. This is the where the surprise is. It also means
that the ideas and approaches that worked for your grandparents,
or even your parents, will not work today.
Once you have a handle on how long you will be earning money,
and then how long you will be living off that money, you will
have some context to start making some decisions. Let me add one
fact into the mix. In 1977 a first class postage stamp was 13¢.
Until recently a postage stamp (in 2007) was 39¢ (before it
bumped up, of course). If you can accept the price of stamp as a
rough indicator of the cost of living, then the cost of living
tripled in 30 years. How's that for context?
So let's apply some of this information. If you are about 10
years from retiring, tack on another 20 to 30 years of life
expectancy after that. That means you need your TSP dollars need
to more-or-less triple in the same time frame, just to stay
even. (That's ‘inflation risk' for you savvy types). All of a
sudden a conservative, throw-it-all-in-G, approach is looking a
lot more dangerous. That's right. I said dangerous.
The guaranteed rate of return in the G fund is guaranteed to be
a low rate of return. Which will–over the course of a couple of
decades–lead to an eroding standard of living, possibly
(probably?) even running out of money. But that is a taste for
the next article.
Today, all I want you to do is this: figure out what your
horizon is. Gaining a firm understanding of your time left
working–and living–is going to provide vital context on what you
will need from your TSP and other retirement savings. In fact,
it will dictate how you must invest your retirement savings.
© 2007 FedSmith Inc. All rights reserved. This article may not
be reproduced without express written consent of FedSmith Inc.
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