ISO The Perfect Portfolio

Most of the 3.8 million people with Thrift Savings Plan accounts are — or were — long-term investors. They’re saving for retirement, maybe to buy a house or to help pay for college. TSP investors range from Senators and judges to CIA operatives, postal employees and Army PFCs.

When it comes to investing, feds can be much more aggressive than private sector workers. That’s because federal retirement benefits are guaranteed and indexed, in full or in part, to inflation. Many feds don’t have to tap into their TSP until years after they retire. That’s why many financial planners recommend that when planning for retirement, feds forget about when they will retire and instead focus on the likely date they will begin withdrawing funds from their federal 401(k) account.

Bethesda-based financial planner Dennis Gurtz says, “a federal retirement annuity is like a giant stack of T-bills. It is indexed to inflation. In bad financial times you (the retired fed) may be the richest guy on the block.”

By contrast most non-federal workers don’t have a defined benefit pension plan and, of those that do, cost of living adjustments are virtually unknown.

So what’s a good portfolio balance?

Here’s a question from a reader and some advice from the pros:

First, this question from David G.:

“I’m 48 years old and don’t plan on retiring until I hit 57. My current investment is 5% L fund, 2% G fund, 31% each for the C, S, and I. Do you feel that this is a good plan or should I make adjustments? Thank you for any help you can give.”

This from financial planner Alan Roth:

“I don’t know enough about David, including whether, as most of us do, he would panic and sell in a down market. Also retiring in 9 years doesn’t mean he would tap the money then.

Two comments though:

The L funds are a nice auto pilot way of keeping a balanced portfolio that gets more conservative as you get closer to needing the money.

For the portion in the stock market, I generally recommend:

C fund – 54% S fund – 13% I fund – 33%

This gets 67% in the U.S., roughly according to market capitalization, and 33% foreign. Again, this is only the portion that one puts in the stock market. Thus, David is betting more heavily to U.S. small and mid cap stocks. This concerns me because small cap stocks have outperformed large over the past few years and we tend to buy after a fund has performed well (performance chasing).

Again, I don’t know enough about David to give advice. I’d even need to know what assets he has outside of the TSP.”

Bethesda-based financial planner Arthur Stein also looked at David’s question.

His response:

“I think he’s doing fine, but I don’t know why he’s in the L fund (he could put that 5 percent in the F fund). He has 93 percent in stocks, however, and he’s nine years away from retirement and may be 20 years away from spending his TSP . . . certainly more than 10 years before he starts withdrawing from his TSP account. The C, S and I funds are great long term investments.”

To reach Arthur Stein, please call 301 941 9170.

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