Be a couch potato on Thrift Savings Plan
Q: I saw your advice to a Seattle reader who had lost some money in the government Thrift Savings Plan. I also have over $100,000 in the TSP. I have been investing conservatively for the last few months because the stock market has been declining. I'm retired and 68. Soon I will have to take a monthly distribution. What allocation of the five TSP. funds would you suggest so that my TSP. gains rather than loses ground, especially at this time of my life?
Is it better to hold on to the TSP. till I'm ready to take a monthly distribution? Or should I roll over the account to a private company for later distribution? I'm not sure which way to go. Which would be less costly? - H.A., Franklin, Mass.
A: The federal Thrift Savings Plan (TSP.) has five basic building blocks from which to build your retirement portfolio. Those building blocks are: the two fixed-income funds, a domestic large-cap fund, a domestic small-cap fund and an international equity fund. This isn't a lot of choices, but it will give you broad representation in major asset classes.
One easy method for managing your savings is my Couch Potato Building Block approach. Using it, you can build your retirement portfolio with as few as two funds and as many as 10 funds. The popular Margarita Portfolio, for instance, is made by mixing equal measures of domestic stocks (the C fund in your plan), international stocks (the I fund in your plan) and a domestic fixed-income fund. I use a TIPS (Treasury Inflation-Protected Securities) fund, but you could substitute the G fund in your plan. It invests in U.S. government securities.
This would give you a portfolio that was two-thirds equities and one-third fixed-income. You could rebalance it once a year and practice for the event all year by making your own margaritas - one-third tequila, one-third triple sec and one-third fresh lime juice. This portfolio would cost only 1.5 basis points a year to run (there are 100 basis points in 1 percentage point), which is a tiny fraction of what the same portfolio would cost at Vanguard or Fidelity. So you should keep your $100,000 in the plan. You can read more about the Couch Potato approach on my Web site, www.assetbuilder.com.
Some of your friends (and some advisers) might consider this portfolio too risky. So let me explain. A major chunk of your retirement income is coming from Social Security, which is indexed to inflation. Another big chunk is coming from a federal pension. Although it is not directly indexed to inflation, this pension is one of the very few that regularly increases the benefit amount to reflect inflation.
Between those two pensions, you'll have much more guaranteed monthly income than most retired nongovernment workers. So you can tolerate a bit more risk with your savings. If you feel having a two-thirds commitment to equities is more risk than you can stand, then go for a basic Couch Potato portfolio, which is equal measures of just two funds, domestic equities (C fund) and government fixed-income securities (G fund).
Q: I am in my 70s, gazing longingly at a possible retirement. My modest portfolio, however, is getting more modest by the day. Can you give me a general idea of how much annual income a $100,000 lifetime annuity would generate? - J.M., by e-mail
A: The monthly payments from a lifetime annuity vary with your age and gender, so I can only give you ballpark figures. You can get figures specific to your age and state of residence by visiting the Web site www.immediateannuities.com.
A 70-year-old Texas male, for instance, would receive an estimated $769 a month, while a 75-year-old would receive $907 a month. This is for a contract that provides no payments to any surviving beneficiaries. Add such provisions, or lifetime benefits for a survivor, and the monthly payment will be reduced. Similarly, the benefits for women are lower because of their longer life expectancies.
A portion of these payments is deemed return of principal and is not taxed if the money comes from a taxable account.