The Gold-Plated Value of FERS Annuity and Military Pensions

Don't go work for this guy.Mmm- Yeah, I’m gonna have to ask you to save much more for retirement, okay?

Defined-Benefit Pension Programs (like your FERS Annuity and/or Military Retirement Pension) are headed the way of the Dodo Bird.  Here’s a recent example.

The State of California recently illustrated the difficulty of running a Defined-Benefit Pension program.   CALSTRS (the California State Retirement System) is a juggernaut of a pension fund that is designed to support almost 500,000 teachers, state employees, and municipal employees in retirement.

CALSTRS are using an assumed average rate of return for the Pension of 7.5 percent per year over the next 30 years (cough, cough).  If this assumption isn’t laughable, it’s at least in Bernie Madoff territory- Especially since the state of California can’t print its own money (like the Federal Government) to work its way out of a jam if CALSTRS runs short of funds.  One of the reasons CALSTRS is using this 7.5% return assumption is that CALSTRS will have to funnel more money (from taxes) in to the pension if they assume a lower projected return rate of 5 or 6 percent.

Aside from the lofty assumed return rate of 7.5%, what’s keeping the CALSTRS actuaries up at night is the importance of ‘Sequencing of Returns’ in retirement.

As the infographic below shows, you can have two different funds with identical average rates of return, but if you invert the timing of the random events (that is, you have ‘bad’ years at the beginning of the retirement instead of towards the end of retirement) a retiree (or CALSTRS) could easily run out of money.  Take a look at the bottom two bar graphs and note that the average returns of 10.34$ are identical, but the timing of the individual bars is a mirror image left-to-right.  The top two graphs then illustrate the remaining balance in the portfolio while 7% per year from the initial value (7% is a very aggressive withdrawal rate, but it proves the point nonetheless):


Rather than look this 800-lb. gorilla directly in the eye, CALSTRS is investigating products that will move in the opposite direction of the stock market in the event of a severe downturn (Hedge Funds and ‘Alternatives’).

Dr. Moshe Milevsky has demonstrated the same damaging effects of Sequencing of Returns is in his book ‘Are you a Stock or Bond‘- He illustrates that in the Accumulation (saving) phase of retirement that the Sequence of Returns is irrelevant as long as the average rate of return is the same over the savings phase.  However, in the De-cumulation phase (retirement), Sequencing of Returns can bite you if you have ‘bad’ years at the start of retirement.    Dr. Milevsky recommends smoothing out the sequencing risk by annuitizing part of your income while in retirement.

Or, as stated in a more folksy manner by Ray Lucia, CFP – “If Dollar Cost Averaging in the accumulation phase is Good, then Reverse Dollar Cost Averaging in retirement must be Bad”.

Fortunately, if you’re a Federal Employee or Retired Veteran you don’t have to worry about this.  You already have a gold-plated pension assured by the Federal Government in the form of your FERS Annuity and/or your Military Retirement Pension- Both of which go up in value every year with Cost of Living Adjustments (COLAs).  Use this as the cornerstone source of income in your retirement portfolio and then you have the luxury of dialing up the risk/return on the rest of your retirement investments.

For further reading: Dr. Milevsky’s book is a good read regarding asset allocation based on your occupation (or ‘Human Capital’ as he calls it).

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TSP Board sees F Fund as a Ticking Time Bomb


During this past week the Federal Retirement Thrift Savings Board (the people who run the Thrift Savings Plan) made moves to tilt L Funds’  asset allocation away from F Fund and into the G Fund.

Why would they do this?  The TSP is one of the few Qualified Retirement Plans in the nation who actually takes their customers’ needs to heart and acts on their behalf  as a Fiduciary.

According to TSP’s Kim Weaver, “What we’ve determined is given the way interest rates have been remarkably low, we’re going to change some allocations, move it a little bit more to the G fund, a little less on the F fund, a little less on the S fund and a little higher on the I fund.”

The rest of the press releases and interviews with TSP don’t paint the whole picture on the Why’s of dialing-down the F-Fund allocation in all the  TSP L Funds.  Fortunately for all of you, Mr. Allan Roth, CFP has already illustrated this over at with a recent article.

Mr. Roth points out that the Barclay’s Aggregate Bond Fund (the index fund that represents the entire bond market, which is essentially identical to the TSP’s F Fund) is a terrible investment right now.

As of today, the F Fund/AGG index yields 2.01 percent, with a duration of 5.3 years.  Mr Roth’s opinion (which I violently agree with) is that the F Fund/AGG is a ticking time bomb with interest rates at near zero percent.  Look at the Duration of the F Fund – 5.3 years.  This means that if the Fed hikes rates by 1 percent, the F Fund/AGG drop in value by 5.3 percent.  FYI-  This is what Bonds and Bond Index Funds are supposed to prevent- They are supposed to provide Buoyancy to your investment portfolio and prevent you from taking a catastrophic loss.

Here’s what happens to today’s F Fund investment if the Fed hikes interest rates:

Screen Shot 2015-10-31 at 9.20.23 PM

As an alternative to F Fund/AGG, Mr Roth proposes purchasing a 5-year CD and a 10-Year CD, for a blended rate of 2.62 percent and duration of 4.6 years.  The money is government guaranteed (assuming you follow the FDIC single-bank CD investment limit of $250,000 or less)  and you have taken on less ‘interest rate risk’ – the loss you would take if prevailing interest rates rise.  Mr Roth’s strategy is for you to ‘Break’ the 5-year CD if interest rates rise and take the ‘early withdrawal’ penalty.

If this sounds like an elaborate, active-management strategy to hedge your supposedly safe investments from rising interest rates, it is.  As a Fed (or Veteran) participating in TSP, you already have a ready-made investment that does this for you inside the TSP- It’s called the G Fund.

Today’s G Fund rate is 2.00 percent, and the duration is 1 business day (or the time it takes you to make a transfer within the TSP).    The G Fund is a unique animal in that it provides TSP participants the liquidity of a Money Market Fund with the returns of government securities with maturities of 4+ years.  If you can find a product like the G Fund, please point it out to me.  I’ve mentioned here before that the G Fund is the Unicorn of Investing, and I’ve yet to be proven wrong.

Bottom Line:  If you’re invested in the TSP F Fund, or ANY of the TSP L funds (all of which contain some percentage of F Fund, depending on your birthday), I’d recommend ‘rolling your own’ allocation and substituting any current allocation in F Fund to G FundWe can’t have near-zero interest rates forever.

Disclosure: At the time of this article posting I do not own ANY AGG/F Fund and I hold a short position against Long-term Treasury Bonds.

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800,000 Active Military Miss Out on TSP Benefit


As I’ve written many a time before, GubMints is a big fan of the Thrift Savings Plan (TSP).

Recently the White House Social and Behavioral Sciences Team decided to get ‘Freaky’ with Behavioral Economics and do some experiments to encourage more Active Duty Servicemembers to enroll or re-enroll in the TSP.  They did some interesting experiments to try and ‘move the needle’. (Continue reading…) →

Most Feds to pay 10.6% FEHB rate hike in 2016

FEHB OPM Health Care Rates 2014

Happy Open Season, everyone!

OPM announced its Federal Employee Health Benefit (FEHB) rate hikes for 2016 FEHB Open Season.

OPM states that the average rate hike is 6.4 percent, which does not sound that bad.

…But the real news is not quite this good- Since none of the ‘averages’ are participation-weighted (that is, they pay no attention to what FEHB plans Feds actually select), the averages provided by OPM, GovExec, and FedTimes are essentially useless.

I’ll give you the only statistic that matters here, the one that applies to 40 percent of Feds. (Continue reading…) →