Retirement accounts means income instability

When President Bush proposed privatization of Social Security (Related article: Bush tries to convince skeptical Americans), while he indicated that all options were on the table, it is highly unlikely that taxes will go up or retirement age will change. One of the things that he mentioned and it is something that has been talked about for so long that it is almost bound to happen (unless the whole thing simply dies in Congress, as have many other unpopular initiatives like banning abortion or legalizing discrimination of gays when it comes to marriage, or drilling in Alaska for oil, etc.), and that is creation of private retirement accounts. The President also mentioned that a model to look at is the Thrift Savings plan used by federal employees.

Now mind you, the Thrift Savings plan is only a model. There is a lot of fine print to the proposal to private retirement accounts, and a lot of it is yet to be worked out, but one thing that is sure is that there is some upside to these for young Americans and a lot of downside, as shown by Center for Budget & Policy Priorities. (Related article: No net gain for younger Americans from private retirement accounts)

The Thrift Savings plan has some of the attributes of a 401(K) plan but is different in the sense that it does not give as many choices to federal employees. A participant in a 401(K) plan can diversify her/his portfolio by investing in all the way from very risky investments to basically zero risk investments. The Thrift Savings plan takes a more conservative approach and invests in only a handful of funds.

So how does the Thrift Savings plan perform?

As the chart (performance of the funds over a ten-year time period, 1994-2003, during which the stock market did extremely well) below shows, it shows most of the attributes of the financial markets. Except for the F and G funds, most other funds show enormous swings. So while you might gain a lot if you invest in the right fund at the right time and retire when it is at its best, you might be in pretty good shape. If not, you must rely on other sources of retirement income.

So what does it mean for you? Simply, that the government is no longer guaranteeing you a stable retirement income and is expecting that you will plan for your own retirement, save more, and invest it wisely.

Recommended article: How to get started with retirement planning?