In today’s workplace, the employees with one of the best benefits packages available have to be the federal employees, and a big part of it is the Federal Employees Retirement System (FERS) annuity. Federal employees that started their career after or on January 1, 1994, are provided with this pension that is FERS annuity. FERS annuity is based on a retirees final three years of service and their years of service, but what is it really worth?
As for some, the value of the annuity may not really matter, but it can be really important for those that are planning on designing the appropriate investment allocation. It is then important to take all streams of income into consideration, but how is a stream of income valued?
When it comes to valuing a stream of income, the simplest possible method would be determining what percentage of income you expect to withdraw from your investments first. There is a high chance of your investments lasting you for the rest your lifetime if per year, you only withdraw 4% of your investment assets. Chances of running out of money drastically increase once your rate of withdrawal goes higher than 4%. A good number of retirees only look at their TSP balance when they are determining their allocation when wanting to invest.
If the 4% rule of investment withdrawals is applied and the value of FERS annuity is added, then there will be a significant change. This is because the value of the above FERS annuity is $600,000, and this would all be considered fixed dollars.
If the value of social security were to be included in the investment allocation, then $500,000 would be its value. Even if the entire $400,000 TSP balance was invested in stocks, with the two income streams accounted for the allocation by the investor still looks quite conservative.
Since emotions can cause a lot of bad decisions, it takes up a huge role in an individual’s investment decisions. Everyone wants to sell stocks at the market bottom, and everyone wants to buy them at the market top – this is according to a number of studies conducted to study the emotional side of investing, and they all came up with the above result.