Couch potato investing in the federal thrift savings plan
Q: I am a former law enforcement officer. I retired from federal employment a few years ago under the Civil Service Retirement System (CSRS) at age 55, after 30 years of service. I invested in the Thrift Savings Plan (TSP) and have a balance of about $150,000. I plan to keep the funds in the TSP and take the required minimum distributions when required. From a Couch Potato perspective, which TSP funds should the money be allocated to - and at what percentages?
- E.A., by email
A: The simplest way to get close to the basic Couch Potato fund is to put half of your money in the C Fund and half into the G Fund. The C Fund tracks the S&P 500 stocks. The companies in this index account for 80 percent of the market value of all domestic stocks. The G Fund is a special fund that invests in government securities, but is guaranteed against loss of value. This is a unique advantage, so half your money should go into this fund.
Is that it? It could be.
But if you want the possible benefit of investing in the total domestic stock market, you'll need to add the S Fund. It includes mid-cap and small-cap companies. That way you'll have an investment in the 20 percent of the market that the S&P 500 index doesn't cover. If you choose to do that, you'll want to keep the funds in this balance: 5 parts G Fund, 4 parts C Fund and 1 part S fund.
There is a more diversified Couch Potato portfolio that I call the Margarita portfolio because it is invested in three equal parts - G Fund, C Fund and the I Fund. The I Fund invests in international stocks. This portfolio is more diversified, but since it has two-thirds equities instead of one-half equities, it has more risk and a somewhat higher expected return.
Whatever combination you choose, the low-low cost of the Thrift Savings Plan puts you far ahead of more expensive managed offers that are probably piling up in your mailbox.
Q: My former employer is offering a lump sum pension settlement of $180,000. I am single and 56 years old. I have progressive debilitating health issues. They have the potential to put me on permanent disability. I work as a nurse, make $90,000 a year and have $80,000 in my 401(k). I am in a balloon adjustable rate mortgage with a private mortgage company, HARP ineligible. I owe $140,000 but the home is worth $120,000. The interest rate can range from 6 percent to 14 percent. It's now over 7 percent. What do you suggest about paying the mortgage down?
- S.H., by email
A: It's good to consider these two issues separately. One is very long term - your retirement. The other is a money management issue. Let's take the home/mortgage question first. With a mortgage interest rate over 7 percent you are, effectively, being punished for being "upside down" on your home.
Since you don't have accessible savings, the alternative of paying down the mortgage and refinancing to a lower rate is not available. And selling the place to buy another would be difficult, too, even if you borrowed from your 401(k) to cover the difference because you'd need a down payment on the new house. One workable solution would be to borrow from your 401(k) to cover the cost of selling the place and then renting.
This would get you out from under the expensive mortgage and reduce your responsibilities at the same time. It might also reduce your cost of shelter.
If you take the lump sum pension offer, do it as a rollover to an IRA. That way you'll avoid having to pay taxes on the $180,000 lump, which would be painful. Transferred to an IRA you will only need to pay taxes on the money you withdraw from the account. That means it can continue to grow while you are still working.
If you really, really want to stay in your current house, you would also have the option of taking enough from the IRA/pension lump account to negotiate a new mortgage at a much lower interest rate. Since you would likely save at least 3 percent a year on the new mortgage - about $3,000 a year if you have a 20 percent down payment against the $120,000 market value of your house - it could be argued that the $40,000 cost of refinancing would reduce your cost of living by more than you can earn on any CD.
• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. Questions about personal finance and investments may be sent by email to scott@scottburns.com.