Alphabet Soup 

Early FERS

Technically, this term doesn't exist in the "official" Office of Personnel Management's acronym guide.  But there are plenty of federal employees who have worked for their agency less than five years who are trying to determine the best way to maximize their benefits.  This group is a prime target audience for last month's "Steps to Retirement Planning" advice to save early and save often to enjoy the power of compounding.

Here are three more pieces of sound advice for you to consider if you are new to federal service:

1.     Contribute at least 10% each year to your Thrift Savings Plan or other retirement accounts.  Keeping in mind that you get a 5% matching contribution on the first 5% of your contributions to the TSP,  you should be doing that as a minimum. The next 5% can go to the TSP too, or another retirement account like a Roth IRA, where after paying taxes on your contribution now, your earnings are all tax-free.

2.     Invest in both stocks and bonds.  The recent financial crisis has sparked a conservative streak in younger investors, according to various studies.  This may cause them to opt for more safety and fewer equities. Looking at two portfolio options, one that is 100% bonds/fixed income (G and F Funds within your TSP), and one that is 60% equities and 40% bonds (60% to C, S, and I Funds with the remaining 40% in G and F Funds).  The all bond portfolio is considerably more likely to average around a 5.5% return than the 60/40 option.

The 60/40 portfolio averaged an 8% return 36 out of 46 times using a rolling 40-year average.  As an Early FERS , you presumably have more years until retirement and need the benefit of better average returns in order to retire when you want.

3.      Diversification works. To achieve optimum results, you may want to consider the benefits of a portfolio that is diversified not only among stocks and bonds, but other asset classes, as well. Under volatile market conditions, having some of your investments in non-correlated assets can soften the blow of losses in your account.  Because the equity funds (C, S and I Funds) within the TSP tend to highly correlated (see 2008's returns for a review), you'll need to look outside of TSP to gain true diversification.

With the excellent benefits currently offered through FERS, you have a great opportunity to maximize those benefits into a truly personal retirement plan.  If you'd like a copy of the white paper, "Celebrating Your 5-year Employment Anniversary with the Federal Government,"  reply to Christine@annvanderslice.com with Early FERS in the subject line and it will be emailed to you.

You'll want to continue to read "FedTelligence" for future updates on changes to your benefits.

Contact Us   

John M. Sklenar

Premier Financial Services, Inc.

202 West 7th St.

Carroll, IA  51401

Email:  federal.info@sklenar.com

Phone:  866-792-6668 (toll free)

712-792-6400 (local)

Fax: 712-792-6670

Economics 101  

 "Late Credit Card Payments Hit 15-Year Low" (Associated Press, May 24, 2011) Yes, you read the headline above correctly.  Late credit card payments are at their lowest levels since the late 1990s-the last time our economy was in a full-blown boom!

The rate of payments 90 days or more delinquent dropped to 0.74 percent in the first quarter-a reduction of almost half from the highs seen in the first quarter of 2009, during the peak of the meltdown and credit crisis.  Given that unemployment remains near multi-decade highs and that millions of Americans are in debt trouble or underwater on their mortgages, it is fair to ask: how is this possible?  Is the crisis over?

Not exactly.  When something sounds too good to be true, it generally is.  As is always the case with economic data, you have to read between the lines.  Yes, credit card delinquency is at its lowest levels since 1996.  But a major reason for this is that the banks have written off $74.5 billion in bad credit card debts over the past few years, according to Moody's.  It's not that delinquent borrowers got religion and started making payments.  No, the banks simply gave up and wrote off the debt as a loss.  Debt that gets written off is no longer "delinquent."  It just disappears, along with a corresponding amount of shareholder equity.

Continued consumer deleveraging has also played a large part.  Americans-and particularly the Baby Boomers who see retirement looming in front of them-underwent a major psychological shift over the last few years.  With their home equity and stock market investments decimated by the crisis, they have reacted prudently by cutting back on their spending, paying down their debts, and building up their savings.  As a result, the average credit card balance has dropped from $5,165 to $4,679 over the past year-a drop of 9 percent.

Consumers aren't the only ones with a newfound sense of responsibility.  The banks too have significantly raised credit standards.  Most mortgage lenders require substantial down payments now, and credit card lenders have become far more cautious about who gets a card and how large a credit line they get. 

So, while a reduction in credit card delinquency should be viewed as a positive, it's important to understand the underlying parts and what they mean for the economy.  Writing off bad loans reduces banks' capital and their ability to extend new credit.  Every dollar that a consumer opts to save is a dollar that does not get spent growing the economy. 

Consumers and banks are being more prudent, and that is good for the long-term health of the economy.  But in the short-term, it means there may be a long period of slow growth in front of us.

Meanwhile, conditions in the housing market-where this entire mess began-continue to deteriorate.    New data show that the Case-Shiller Home Price Index fell for its eighth consecutive month, and 18 of the 20 cities that comprise the index saw declines. 

Record numbers of foreclosures are flooding the market with inventory, and many Americans are unwilling or unable to buy-due in part to the tighter credit conditions mentioned above.  Deflationary credit contractions are never fun to live through, and we may have a couple more years to go.

Source for this article: Yahoo Finance