What Is A FERS Annuity Really Worth?
Federal employees get to enjoy the advantages of a great benefits package, such as the FERS annuity (a benefit considered one of the best in the workplace). What is the FERS annuity?
This is a pension that federal employees can enroll in if they began their career on or after Jan. 1, 1984. The pension amount is based on how many years the federal employee worked and their last three years of salary, but what’s the actual worth of the FERS annuity?
The actual value may not matter for some individuals, while others consider it a big deal when it comes to investment allocation. It is important to look at all income streams such as the FERS annuity and Social Security when figuring out what your asset allocation is, but how can one value the income stream?
How can you value your FERS annuity?
The simplest method to value the income stream is to determine the income percentage that is expected to be withdrawn from investments. The majority of studies noted that a four percent withdrawal rate is the usual rate. So, if you withdrawal just four percent of the entire investment, you can make the investment lasts the entire rest of your life.
This is what retirees want to have – income that lasts their entire life. If you choose to do more than four percent, you increase your chances of running out of money. Once you’ve determined how much is the right amount, now you need to determine what value it is needed to generate your needed income.
Many retirees will invest wisely in their TSP when retiring, but they look at just the TSP balance when determining the allocation. A 50/50 (stocks/bonds) retiree portfolio can change dramatically when the FERS annuity is added in. If the four percent rule is applied to investment withdrawals, the value will rise. With a guaranteed annuity, this is thought to be considered as the money is seen in fixed dollars.
A Look At Investment Allocation
If Social Security vales are included in the investment allocation, the worth would be around $500,000, and with two streams of incomes considered, an investor’s allocation would be seen as conservative especially if the TSP balance was also in the hundreds of thousands of dollars.
What About The Emotional Factor?
Should all federal employees then need to consider putting their TSPs into stock funds? If viewed in a logical sense, the majority of them could do this. However, investing is much more than math and numbers.
Emotion is another factor to consider, as they play a role in how one makes investments. The problem is that emotions often lead to terrible investment decisions. There have been an array of studies looked at the emotional side of investment – and they’ve all drawn the same conclusion: People will buy stocks when it’s high but sell when they hit low.
All you have to do is look at the 2009 stock market to get a sense of this truth. Many federal employees jumped out of the market because of their inability to handle things. It was the worst time in the last several decades to get out of the market.
The reason they left – they were emotional!
How Does This Apply To You?
There is much more to this than your TSP balance or investment when addressing an allocation. Logically, the majority of fed employees can take some risk with their TSP, but since logic isn’t always there, there is still some importance of understanding what risks are involved. While another 2008 could happen, you may not want to see stock funds drop.
Yes, a TSP investment strategy needs to be included in your financial plan, but it should also entail your Social Security and FERS annuity.
