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. Continue reading


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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 ETF.com/AARP 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:

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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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Happy Memorial Day!

Since the Thrift Savings Plan (TSP) might soon be the cornerstone of the Military Retirement System, I though I’d take some time to highlight some of the attempted shenanigans taking place with the TSP.

I say attempted because it literally takes an act of Congress (that’s the entire Congress) to alter the TSP’s charter/regulations.  This is by design, because the TSP is deliberately designed to be apolitical and avoid the business of picking winners and losers.  This prevents a Congressman/Senator from creating a fund designed to funnel federal employee retirement savings to his or her district/state/pork project.

Enter Congressman Don Beyer (D-VA).   Continue reading


Happy New Year!
Before I do 2015 Predictions, let’s review how I did for 2014.  It looks like I got 5 out of 8 predictions correct!

1. Prediction: Feds, You’ll get your 1% raise, (if you’re still working).

Result: Correct.  Ok, this one took place in early 2014 (This one was pretty easy).

2. Prediction: Then again, maybe you won’t.
There’s no guarantee there won’t be another round of furloughs this year once the Defense Service Chiefs figure out they are going to run out of ‘Gas Money’ by August.
Result: Wrong.  Lots of talk, but there was no government shutdown and associated Shutdown Furlough in 2014. 
3. Prediction: 16,000 of you will take/receive a RIF in 2014.
Bold Prediction, you say? Try these numbers on for size:

The DoD is looking at trimming ~6300 heads in the next few years due to Sequestration- Divide this number by 4 yrs to get ~1,600 DoD RIFs/year.

The Army alone has stated it will reduce its end-strength by ~14% by FY2017, and that civilian headcount reduction will be in-line with Active Duty end-strength reduction. So knock 14% off of an Army Strong civilian workforce of ~264,000, which is 37,000 heads to RIF.
…Divide this number by 3 years (3 years left through FY2017) to get ~12,000 Army RIFs/year.
This adds up to 13,000 DoD RIFs (ALONE) per year.
Note that DoD makes up almost 41 percent of the federal workforce, so divide 13,000 by 40% to get ~32,000 RIFs out of the Executive Branch per year… However, since other Federal Agencies are not typically smacked as hard as DoD during budget crunches, I’m going to ‘whack this number in half’ and say there will be 16,000 Federal Civilian RIFs in 2014.

Result: Time to eat a bucket of Kentucky Fried Crow.  It looks like only a total of 1,700 employees took what OPM calls ‘Early Out Retirement’ in FY2014 (there is no data block for VERA on OPM’s statistics page).  There were only 560 RIF’s listed in OPM’s employment statistics database for FY14. 

4. Prediction: Over 120,000 of you will retire- Of which, more than 25,000 of will retire in January.
Another Bold Prediction, you say?
Consider that OPM’s CY2013 figures were ~108,000 retirees, with 22k of the retirements in January. Note that we’re now in CY2014, and the ‘No FERS Employee Retires in 2013 Act’ is no longer in effect-. You may now sell-back your 1,000+ hours of sick leave (that’s half a year) and use them to pad your FERS Annuity time-in-service calculation.

 Result: Close.  103,000 Retirements (by FERS /CSRS applications) in CY2014 by OPM’s retirement processing backlog page. Of these, 17,000 were in January.

 If you look at OPM’s employment statistics, there were a total of 142,000 Federal Employee Separations in FY14, of which roughly 54,000 were ‘Retirement’ and 49,000 were ‘Quit’. 

5. Prediction: FERS Annuity will continue to get chipped away.
The ‘Camel’s Nose’ is already Under the Tent.
And I’m not talking about the funny Geico Camel asking you what day it is, I’m talking about the ugly nose that wants to get in under the tent and raid pension benefits of Feds and Veterans. Congress has already gotten away with slashing the pension benefit of present and future Active Duty Retirees by tens of thousands of dollars. While there is a lot of Squawking and Harrumphing about this taking place in the Senate, Squawking and Harrumphing is not voting, and a LOT of votes from both sides of the aisle are necessary to remedy the attack on Military pension benefits.

Result:  Correct.  FERS remains under attack. Potential reductions in benefits on the backend (re-calculating inflation using ‘Chained CPI’) and reductions of benefits on the frontend (increased salary deferrals) continue to be suggested.

6. Prediction: TIP will not be restored to its previous $245 per month benefit.
There was plenty of time to fix this (the IRS Notice came in October), and it didn’t get fixed. Enough Said.

Result: True!

7. Prediction: Young Feds will leave in droves.
Many Millenials are up to their eyeballs in student debt (btw, Student Loan Debt is the next Housing Bubble, but that’s another topic for discussion).
Taking a Fed job as a first gig out of college makes sense for a lot of Millenials, as long as the stability, compensation, and benefits are in-line with private sector offers. However, Young Feds will soon:
  • Recognize they have a false sense of job security because they have a RIF target on their backs,
  • Notice their college classmates are earning as much or more in the private sector, and
  • Realize that their ‘take home’ pay is less due to ‘Fake FERS‘ – Increased FERS Annuity contributions for newly-hired Feds.

 Result:  Correct.  Almost 27,000 Employees aged 20-34 ‘Quit’ in FY14.   This is 57% of the total workforce’s 49,000 ‘Quits’ in FY14.  This is a pretty massive outflow of young talent, considering persons aged 20-34 made up only 18.8% of the federal workforce (385,680 of total 2,046,000) as of June 2014.

8. Prediction: FEHB Plan benefits and options will be curtailed in October.
The FEHB ‘Self-Plus-One’ option is almost a done deal.
Also, Look for fewer FEHB plans to be offered, and for increases in fees/reductions in FEHB benefits in order to avoid the ObamaCare ‘Cadillac Tax’ in 2018.

 Result: Wrong.  I think FEHB actually added 1 plan in CY2015 (257 offered, up from 256 in CY2014).  The number of Nationwide Fee-For-Service insurance plans available remained static, at 15.

 

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