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What's New? Retirement ~ Fall 2005 Target Retirement Funds — In talking with a number of people in the NPS Human Resources Division I am not only troubled but disappointed in learning that there are still employees who are not fully contributing or even investing in the TSP. These individuals are usually newer employees. It is imperative that these employees contribute while they are young so that in 30 years they will be financially in good shape to weather those long years in retirement. New employees should receive better explanations about the TSP and then be automatically enrolled in the TSP. Once that 15 percent of their salary is regularly invested in the TSP, folks will become used to a smaller pay check and never miss it. A little catch-up reminder: Employees are eligible to make catch-up contributions to their TSP accounts of up to $4,000 if they are already age 50 or will turn 50 in 2005. In addition they must be making contributions to their regular TSP account at either the maximum percentage allowed by their retirement plan or an amount that will result in reaching the IRS annual elective deferral limit ($14,000 for 2005) by the end of the year. As those of you who have attended our workshops know, we recommend transfer (rollover) of the TSP funds into large families of mutual funds such as Fidelity, Vanguard or T. Rowe Price, etc. Our philosophy is that a key portion of the money you have in the TSP should be reinvested into stock funds in one of these families. These savings will continue to grow and provide income through your 20, 30 or hopefully 40-plus years of retirement. Putting a major portion of this money in annuities, bonds or other fixed income investments is risky because of the ever-present thing called inflation. However, investing for emergencies in money market funds or other short-term, liquid investments, is always recommended. After retirement you all will have fixed income through your CSRS or FERS pension. CSRS employees will receive more because they contributed more over the years. Although FERS pension will be less, FERS employees will also have Social Security payments. Target retirement funds are becoming more common place and they provide some interesting insights on the process of portfolio retirement diversification. These are “funds of their own funds” which Fidelity, Vanguard and T. Rowe Price advertise. Don’t confuse these with lifestyle funds that the TSP is planning to introduce. Lifestyle funds switch contributions into fixed income investments closer to retirement. I personally believe that, rather than becoming more conservative before retirement, to continue a diversified allotment of 40 percent C Fund, 40 percent S Fund and 20 percent I Fund right up to retirement. Target retirement funds are similar in diversification but still hold a good percentage (40 percent to 50 percent) of assets in income- producing stock equity funds. After looking at the target retirement funds of the above companies I have come to the conclusion that T. Rowe Price has an excellent stable of stock funds that cover small caps, mid-caps, large caps and foreign stocks. T. Rowe Price uses high-yield bonds rather than government bonds. Their funds are called the 2000 funds and range from 2005 (most conservative) through 2040 (most aggressive.) Of course these are no-load funds and, since they are funds of their own funds, the management fees are very low. This is also true of Fidelity, Vanguard and perhaps other no-load fund companies. ~ Frank Betts Previous Columns
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