Most federal employees use the government Thrift Savings Plan (TSP).  Here's an update on performance and investment choices.  The Washington Post provides information.

TSP participants, like many other investors, are benefiting from the recent run-up in the stock market. Since the start of the year, the TSP's international stock index fund has gained 14.55 percent, and the large, common stock index fund has returned 8.49 percent, according to data presented to the board.

This is wonderful, a simple guide to financial planning according to Dilbert.  Nine points to remember.

1. Make a will
2. Pay off your credit cards
3. Get term life insurance if you have a family to support
4. Fund your 401k to the maximum
5. Fund your IRA to the maximum
6. Buy a house if you want to live in a house and can afford it
7. Put six months worth of expenses in a money-market account
8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio

Thanks to The Kirk Report for the link.

Hershey announced today it will close its defined benefit pension plan to new employees and begin to offer a higher match on their 401k plan in order to cut costs.  The nations largest candy maker joins a growing list of companies who have eliminated pension plans.  The Houston Chronicle provides details.

Currently, companies sponsor about 28,000 pension plans, down from a peak of 115,000 in the mid-1980s, according to the American Benefits Council. Changes in pension law, cheap overseas competition and the collapse of the stock market has convinced many companies that a traditional pension plan is too risky to continue funding, experts say.

Over 60% of retirees take their Social Security benefits at age 62.  However most financial writers have pointed out that these retirees could easily generate more income by delaying benefits.  Remember we can delay benefits until our "full retirement age" or age 70 to get a boost in retirement income.  Registered Rep magazine has provided some of the math.

The Social Security Administration takes a carrot-and-stick approach to encourage people to delay taking benefits. Beneficiaries who initiate payments at 62 receive monthly checks that are about 25 percent less than what they would have received had they waited until “full” retirement age. Those who hold off until age 70 get about 32 percent more per month than what they would have received if they had started taking payments at full retirement age.

I've been listening to NPR lately and thought I would share  a recent story on the Yale University investment manager.  He's had amazing results, up over 23% on his portfolio.  David Swensen has a great track record and provides his model portfolo.  You'll be able to listen to the interview.

Most of us would love to pay off our mortgages especially as we get close to retirement.  This study indicates that some of us are better off putting money into our 401k plans.

After doing a lot of complicated math, the researchers essentially endorsed the longstanding rule of thumb about mortgage prepayments: If the return on the 401(k) investment is higher than the interest rate on the mortgage, go with the investment. If not, prepay the mortgage.

Most financial planners will use  the term, "replacement rate" to help you determine how much money to save for retirement.  The replacement rate is simply the amount of your existing income you'll need to meet income needs in retirement.  Most financial planners will suggest we need between 78-85% our pre-retirement income will be necessary.  Humberto Cruz suggests this retirement "rule-of-thumb" may be a bit misleading.

Are you all set? Don't be so sure. Relying solely on such a replacement-rate formula will ignore what VanDerhei calls the most important financial risks retirees face.

Those are:

>Investment risk, or the risk that the investments you rely on for your spending money won't perform as you expect.

>Longevity risk, or the risk that you will live longer than expected so your money will have to last longer and keep up with inflation longer.

>The risk of catastrophic health-care costs.

Here's a helpful tool to help you look at withdrawal rates for your portfolio.  The tutorial will also explain Monte Carlo simulation.  

We've received a lot of e-mails this year asking us to explain distributions from 401k or other employer sponsored plans such as 403b plans.  This is important!  Make sure and understand your options.

If you are no longer active and have left the employer-any request for a distribution will require the plan to withhold taxes.  If a check is made to you, 20% of the distribution will be withheld for income taxes.  This is different from an IRA account.  Distributions from IRA accounts have a mandatory 10% withholding and give you the option to withhold a higher amount or have no taxes withheld.   Most plans will suggest you initiate a direct rollover into an IRA and then do a distribution from the IRA if you need the money.  Naturally if you take money from an IRA prior to 59 1/2 you may be subject to a10% penalty.

401khelpcenter.com provides more detailed information and the exceptions to the 20% rule.

Hopefully more companies will start to offer these plans.  They had been scheduled to disappear in 2011, but the Pension Protection Act will make these plans permanent.

If your company does offer both of these plans you have a decision to make and may elect to use both.  A recent WSJ article (9/6 subscription required} written by Jonathan Clements provided these suggestions:

• Favor the regular tax-deductible 401k if you expect to be in a much lower tax bracket in retirement.
• Opt for the Roth 401k if you don't expect your tax bracket to drop much, you want to make tax-free withdrawals before age 59 1/2, or if you plan to bequeath the account.

Retirement really does present two different challenges;  accumulating  a retirement nest egg, and then trying to generate income that will last a lifetime.  Walter Updegrave at CNNMoney provides some solutions.

In many ways, managing your assets so that you don't run out of money is trickier than saving it in the first place. One reason is that you have less wiggle room. During your career, you have plenty of time to bounce back from stock market slumps and poor investment choices. After you've retired, the clock is no longer on your side.

One of my favorite financial authors, Ben Stein reminds me I may want to forget the plasma TV for football season and focus on some long range retirement planning.  Here's his most recent column on YahooFinance.

I hope you had a great summer.  We took a week off but will be providing a lot of retirement information this fall.  Naturally we'd like your suggestions and appreciate all the comments.  Please use the contact us link on our home page and say hello.