Retirement Benefits Query

[Walk The Line]

I recently changed jobs, moving from a university to the Federal Government. At my job with the university, they offered very generous retirement benefits. If I put 5% of my salary into my retirement account, they would match that up to 10%. So while I was at the university, I was putting in 15% of my salary into this retirement account. Over the course of my time there, I managed to build up a decent (though not large) sum for someone under the age of 30.

While I was with the university, I had my money with Fidelity (the other option with the university was TIAA-Cref), in one of their Freedom Funds. Freedom Funds are lifecycle funds that gradually invest in more conservative options over time. This freedom fund was a pretty easy vehicle for investing with a low expense ratio (.82%).

Now that I’m moving to a job with the federal government, I have to do decide what to do with this money. The federal government offers a handful of plan options that range from conservative (mostly investing in T-Bills and Bonds) to more aggressive (index funds of international and domestic stocks) to lifecycle funds (like the ones offered by Fidelity).

With this information in mind, I have a number of questions:

- Should I rollover my money into the Thrift Savings Plan (TSP) offered by the government, or keep it in an IRA? I’m thinking I should roll it over into the TSP because it would allow my money to compound at a greater rate than if it were by itself in an IRA.

- Would it be better to put my money in a life-cycle fund or an index fund of either international (the Morgan Stanley Capital International EAFE index) or domestic (Dow Jones Wilshire 4500 Completion index) stocks? I estimate that I’m about 40 years away from retirement, so I don’t think I would need a lifecycle fund because it has some investments in more conservative vehicles. But, I wanted to get some other opinions.

Thanks for your help!

[rjh01]

Remember you are in it for the long term, so you can afford to take some risks for long term gain.

[Spock Jenkins]

- Should I rollover my money into the Thrift Savings Plan (TSP) offered by the government, or keep it in an IRA? I’m thinking I should roll it over into the TSP because it would allow my money to compound at a greater rate than if it were by itself in an IRA.

Thanks for your help!

Why would it necessarily compound faster in a TSP than an IRA? An IRA is simply a type of account that allows for beneficial tax treatment (deferral). Your rate of return depends on how you choose to invest it.

If I understand you correctly: You could put a lump sum in an IRA and contribute from payroll $X per month into you new TSF. Or you could put a lump sum into your TSF and add $X per month from payroll to that figure?

If that's correct, having all of your retirement assets in TSF will only work to your benefit if TSF outperforms the IRA investment you didn't choose. Keep in mind, in your IRA you can invest in individual stocks, bonds, mutual funds (1,000's to choose from in a myriad of asset classes), cash reserves - pretty much anything you want.

[cgordon]

Whatever you do with your previous ret. funds, remember that TSP offers you free money when you invest up to the 5% mark. My financial advisor advises that Feds who contribute the max to TSP then start Roth IRAs ...

cg

[Walk The Line]

Remember you are in it for the long term, so you can afford to take some risks for long term gain.

Oh yes, that is the benefit of investing while I'm still young.

Why would it necessarily compound faster in a TSP than an IRA? An IRA is simply a type of account that allows for beneficial tax treatment (deferral). Your rate of return depends on how you choose to invest it.

If I understand you correctly: You could put a lump sum in an IRA and contribute from payroll $X per month into you new TSF. Or you could put a lump sum into your TSF and add $X per month from payroll to that figure?

Well, I'm going to have to check on this, but I think I need to invest in one of the government Thrift Savings Plans in order to take advantage of the 5% matching contribution from the government. So if that is true, I could put my money in the IRA, but I wouldn't be able to put any money in it from the TSP. If that is so, then I would think it would be better to throw my previous account into the TSP so that rather than keeping it in the IRA and not making contributions to it with each paycheck.

In other words, it's more a question of having my money in an IRA just sitting there without any more money going into it, or putting it into the TSP and having that money getting contributions.

If that's correct, having all of your retirement assets in TSF will only work to your benefit if TSF outperforms the IRA investment you didn't choose. Keep in mind, in your IRA you can invest in individual stocks, bonds, mutual funds (1,000's to choose from in a myriad of asset classes), cash reserves - pretty much anything you want.

Well, I would probably choose an index fund or a lifecycle fund with either an IRA or the TSP. So, I don't think investing in an IRA or TSP would significantly outperform the other.

Whatever you do with your previous ret. funds, remember that TSP offers you free money when you invest up to the 5% mark. My financial advisor advises that Feds who contribute the max to TSP then start Roth IRAs ...

Well, if I understand correctly, the IRS has set a $15,000 limit (that is an approximation, not an exact figure) for the amount of tax-deferred money you can contribute to a retirement account for a year. While I would love to hit that number, I don't think I can afford it at this point in time.

[Spock Jenkins]

Well, I'm going to have to check on this, but I think I need to invest in one of the government Thrift Savings Plans in order to take advantage of the 5% matching contribution from the government. So if that is true, I could put my money in the IRA, but I wouldn't be able to put any money in it from the TSP. If that is so, then I would think it would be better to throw my previous account into the TSP so that rather than keeping it in the IRA and not making contributions to it with each paycheck.


They will only match your future contributions not your rollover. If they're matching rollovers I'm writing my representative to complain. For most plans you can treat your rollover separate from your future contributions. In other words, you could have two separate accounts. Make one lump sum contribution into a Rollover IRA from your former employers retirement plan balance. Then start making your future contributions into your new employers (government) plan to get the match. For example, if your TSP has an index fund that has internal expenses of 1%, but you can take your rollover to a no fee, no load IRA for 0.25% internal expenses for an index fund - your lower expense fund will outperform the higher expense fund given identical underlying investments.

Vanguards S & P 500 index fund has an expense ratio of 0.15%. For comparison sake Fidelity's is 0.10%. Over the last five years, Vanguard has averaged 11.89% while Fidelity has averaged 11.94%. These are actual numbers from both company's material.

You could also roll your old plan over to a self-directed IRA allowing you to buy shares of individual stocks or any one of the thousands of mutual funds out there. This will have no impact on your future contributions to you new employer plan nor will it impact their match on your payroll deduction.

[rwguinn]

I'm going to askinthis one, since the title is actually Retirement Benefits Query:

I am facing a WARN layoff--got 60 days. Finding a new job is not difficult--I have many options.
I am also fully vested in the Pension plan here. I have 18.5 years, and am 57 years old. I can take early retirement at a 15% reduction over what I would get at age 60.
If I leave the company(don't get picked up by another facility), I cannot reopin the current pension plan if I ever return. All new/rehires come in under the new plan, which is essentially a 401(K)--which I already have.
The difference between taking pension now and waiting til age 60 is actually less than 15%, since you also take a hit for not working for the company when you do retire.
Since the retirement income wil essentially pay my mortgage, what recommendation does anybody have? (Not touching the 401(K) for as long as possible--unless moving it is profitable. Suggestions there?)

[bigred]

I recently changed jobs, moving from a university to the Federal Government. At my job with the university, they offered very generous retirement benefits. If I put 5% of my salary into my retirement account, they would match that up to 10%. :eye-poppi I'm jealous.


Freedom Funds are lifecycle funds that gradually invest in more conservative options over time. Just FYI that you've got it backwards. What you describe is a target fund; lifecycle funds pointedly do not change their strategy over time. I can't say what this freedom fund is either way, though.

- Should I rollover my money into the Thrift Savings Plan (TSP) offered by the government, or keep it in an IRA? I’m thinking I should roll it over into the TSP because it would allow my money to compound at a greater rate than if it were by itself in an IRA.I confess I'm not up on TSPs; why do you say it will compound at a greater rate?


- Would it be better to put my money in a life-cycle fund or an index fund of either international (the Morgan Stanley Capital International EAFE index) or domestic (Dow Jones Wilshire 4500 Completion index) stocks? I estimate that I’m about 40 years away from retirement, so I don’t think I would need a lifecycle fund because it has some investments in more conservative vehicles. But, I wanted to get some other opinions. Along with age, your retirement expectations and degree of willingness to accept risk also comes into play.....but IMO if you're that far away, I would invest aggressively (within reason) as you have plenty of time to endure the ups and downs of the market, and very generally speaking, a more aggressive approach will do better than a more conservative one. I sure as hell wouldn't bother with T-bills and would put only modest amounts in bonds (10-15% at most).

Kiplingers had a great Mutual Funds issue that's out now which had a lot of great "Investing 101" info in it and speaks to this kind of thing well IMO - I recommend at least browsing it, not so much for the specific fund recommendations (although that's of course worth a look) but the general strategies to consider and why.

[Huh-What?]

I would Rollover to an IRA. Contribute to your TSP. There is no benefit rolling over your funds to the TSP.
Stick with index funds if you do not want to put in the time to do the stock research yourself (or hire an adviser you trust to do the research).
Look into the target or lifecycle funds you mentioned. If they are the type that buys shares of other mutual funds; stay away. Their expense may be .82%, but the funds they are buying have their own fees as well. All of which comes out of your funds.