The Silk Road and Planning for Federal Employees

Beasts carried and merchants traded silk, porcelain, gold, spice and gunpowder along a 4,000 mile corridor between China and Greece for almost 2,000 years. It was called the Silk Road, and started about 200 BC when wealthy Romans sought soft and shimmering silk, and Chinese nobles wanted a special breed of horses that symbolized the sports car of their day.  The overland routes were valuable not only for the exchange of goods and luxuries between East and West, but also for the trade of philosophy, culture, religion and technology that helped shape the world.

The Silk Road had two unique features. First, it is not a single road, but rather a series of strategically located and connected trading posts, marketplaces and routes. It was a web similar to woven silk threads. Second, the flow could be interrupted due to weather, natural disasters, politics and marauding raiders to name a few. And it’s a good metaphor for one’s journey through life – there are multiple paths to the top of the mountain, and there’s likely to be numerous detours along the way.

Households across America pay close attention to their finances for New Year’s Resolutions and gearing up for income tax preparation. Others focus on planning summer vacation. Here are some issues Federal employees face as they consider employee benefit decisions. If you are not a Federal employee, consider reading on because we’re covering retirement and health planning issues.

Retirement benefits – Components may include Basic Annuity (FERS and CSRS), Thrift Savings Plan (TSP), and Social Security. (Note:  FERS and TSP are similar to PERS and 401k plans). The annuity benefit is based on your length of service and “high-3” average salary, reduced for survivor benefits, and subject to cost of living adjustments.

Retirement benefits from TSP are based on the account value – similar to 401k plans. Think of “fives” regarding TSP. First, consider contributing at least five percent to get matching contributions which are often five percent. (You may need to contribute more based on your situation). You get a huge return (100 percent here) on your contributions and ten percent of your pay goes to savings. Second, it’s simple investment menu – five index funds and five lifecycle funds. It’s a cheap way to invest – low management fees with index funds.  And you can contribute on a pre-tax or Roth option – the later may be better for those in a low tax bracket.

There are a couple of quirks to TSP such as (1) limited diversification – invest elsewhere if you want gold, real estate, small caps, etc.; (2) consider the other side to the “cheapest is best” rant – a bad (or poorly timed) investment, albeit cheap, is still a bad investment; and (3) limited withdrawal/distribution options – TSP encourages participants to transfer money in, but getting out is another issue.

Health benefits – The Feds have mass and offer a broad benefit and insurance program. I’ll cover three areas. Take a look at HSA (health savings) and FSA (flexible spending) to help cover out-of-pocket eligible healthcare costs on a tax-advantaged basis. Read the fine print of each. Second, review your life insurance needs and the group life program. Three reasons for insurance include income replacement, debt payoff, and estate taxes. The first two decrease over time, and few people have estate tax issues. And third, consider long-term care at LTCfeds.com.  We’re not going to get out of this world alive and consider potential LTC costs of four to eight thousand bucks a month for up to four years. Note:  The second spouse can sell the house, but who is the first spouse needing LTC?

Some experts say the three biggest threats to a successful retirement include inflation, taxes and down markets. Only three? Consider the path being more like the Silk Road. The journey can be great, and the road bumpy, so let’s plan for it. Good luck.

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