401K: Stay in or rollover (Beethoven)

[Dogcliff]

Being a current Federal employee, I have taken good advantage of the Gov 401K component of the current retirement system (the Thrift Savings Plan (TSP)). The investment choices are as follows:

Government Securities Investment (G) Fund : The G Fund is invested in short-term nonmarketable U.S. Treasury securities.

Fixed Income Index Investment ( F ) Fund :The F Fund is invested in a Lehman Brothers U.S. Aggregate (LBA) bond index fund.

Common Stock Index Investment (C) Fund : The C Fund is invested in a (S&P 500) stock index fund.

Small Capitalization Stock Index Investment ( S ) Fund : The S Fund is invested in a Wilshire 4500 stock index fund. The Wilshire 4500 index consists of the stocks of the companies which are actively traded in the U.S. stock markets, excluding the companies in the S&P 500 index.

International Stock Index Investment ( I ) Fund : The I Fund is invested in a Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) stock index fund.

I plan to retire @54, (T-5), and have several concerns. ~ 2/3s of my retirement savings will be in the TSP at retirement. I have several withdrawl options: rollover into a traditional IRA, purchase an annuity, SPP's, partial withdrawl, or a combination of the above.

How would y'all rate the advantages/disadvantages of a rollover to a self-directed traditional IRA, vs leaving the money in TSP.

My take~

TSP: Transfer between funds after I retire.
Annual change to the ammount of SPP.
Expense ratio is a very favorable .05-.07%.

IRA: More investment choices (not necessarily a + for my investment style)
your 2 cents here

dc

 

[JWR1945]

I recommend that you keep a good fraction of your investments inside of TSP. Index funds are usually a good investment choice.

You can't beat the C fund because it does a good job of tracking the S&P500 and its expenses are even lower than Vanguard's.

The G fund gives you a short-term cash equivalent investment that is better than anything outside of the TSP and it has AAA+ security.

It is often a good idea to roll money into several IRAs. It helps with Substantially Equal Periodic Payments (SEPP) if you want to withdraw money before age 59.5. Individual IRAs are treated separately. You can use SEPP with one and leave another untouched.

As far as the F, S and I funds, I can offer no opinion. Experienced indexers can help you. To the extent that you want to have your money in the S&P500 and cash equivalents, TSP is the way to go.

Have fun.

John R.

 

[Dogcliff]

Because I will retire in the year that I turn *55*, no need to 72T, the TSP is all mine... 100% taxable, but 10% penalty free!

Joy! (and a major reason to stay .... just a little bit longer ... )

dc

 

[ats5g]

IRA: More investment choices (not necessarily a + for my investment style)

I'm of the opinion that more choices aren't necessarily better. They certainly make things more confusing for a lot of people.

If you have 1/3 of your retirement savings in some other accounts (taxable, IRAs, etc.), you can use the other accounts for asset classes you cannot get in the TSP. For example, REITS, pure small cap, small cap value, emerging markets, etc. I think the TSP funds make excellent core holdings (low costs, broadly diversified), which you can then add to with non-TSP investments.

I think the F (Lehman Bros Agg Bond Index), C (S&P 500), and I (MSCI EAFE) funds are excellent choices for their respective asset classes (bonds, large caps, int'l large caps). However, if I was in retirement, I'm not so sure I'd choose to go with the F fund over the G fund since the G fund delivers similar long term returns with absolutely no chance of tanking when the stocks tank. Of course, that also rules out bonds taking off when stocks tank (like 2000-2002). I've decided to use the G fund for all of our (me + wife) bond allocation.

As for the S fund (Wilshire 4500), I'd rather go with a pure small cap index fund (like one based on the S&P 600 index, or Vanguard's small cap index) or small cap value for better diversification.

If you left the money in the TSP for a while after you retired, can you sometime later transfer a portion to an IRA? Can you start taking withdrawals from the TSP at retirement, and at some later date decide to annuitize some (or some more) of the TSP money? Transfering some money to an IRA at retirement will hamper your ability to get a larger life annuity (possibly with a small inflation adjustment) from the TSP, if you so desire at some point in the future.

Not to mention that IRAs can sometimes nickle and dime you to death with fees ($10 here, $15 there, low balance fees, purchase fees, 12b-1 fees, etc.).

- Alec

 

[John Galt]

Hello Alec. I am also of the opinion that "more investment choices" are frequently a problem.
Wading through the universe of possibilities is mostly a
waste of your time. Next to good health, time is your
most valuable commodity.

John Galt

 

[zuki]

suze orman says roth because of current interest rates vs where they may end up.

i know nothing but what i heard on a nightly business report update in less than 1 minute

 

[Dogcliff]

Alec,

Yes and no ...

As best as I understand the options, money can remain invested after retirement before a I begin my withdrawal. I can take a one time partial withdrawal (and do a rollover with it) followed by one of the other options at the start of the draw.

I do not really understand the value of an Annuity. Wouldn't one almost always be better off remaining invested in a deversified, tax deferred portfolio? Seems like better returns are more likley, plus, you or yours get to pass on the remainder.

'splain me please ....

dc

 

[ats5g]

Hey dc,

First, there are a couple kinds of annuities (you probably already know this). Deferred annuities and immediate annuities. The deferred annuities are used during accumulation/savings period of life, and the immediate annuities are used during the payout/retirement period of life. These products are usually riddled with all kinds of hidden fees, commissions, loads, surrender charges, etc, that make them rarely useful. TIAA-CREF and Vanguard seem to be the exceptions to this, but that's for another post.

In focusing on immediate payout annuities (like pensions, SS, etc.), their value is different depending on a couple of things.

The more of your money you want to leave to your heirs, the less valuable annuitizing assets (turning a lump sum into a stream of income) becomes b/c once you and beneficiary (like spouse) die, the payments cease.

The more pre-existing pension and SS income you have, the less valuable annuitizing assets becomes b/c you already have a good amount of lifetime guaranteed income (e.g. you already have a good amount of what economists like to call "longevity insurance"). For example, if I was a CSRS fed getting a very large pension, I already have the security and piece of mind of large monthly COLA's payments. However, if I was a retiring professor who only had my accumulation w/ TIAA-CREF (or Vanguard or some other 403(b) provider), no pension income, and SS, I may value the option to annuitize a portion of my accumulation more than a CSRS fed would. see?

A fairly major thing that people overlook with immediate annuities is that there are also variable immediate annuities, where a person can receive monthly income that goes up and down with the performance of underlying equity and bond investments. So, one can still keep the possible higher returns (and hopefully offseting inflation), but almost totally eliminate the risks of ever outliving his money. Of course, this also totally eliminates the chance of leaving an estate. As always, there are tradeoffs.

So, the value of an immediate annuity (fixed or variable) depends on your situation. That help any?

It's good to know that the TSP is so flexible w/ retirement payout options.

- Alec