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  Will They Be Ready?

Alicia O. McPhie,
52, Sterling

Annual earnings: $94,001.

Job: Equal- employment opportunity manager, Small Business Administration.

Sources of retirement income: Civil Service Retirement System (a federal pension program), Thrift Savings Plan (a federal savings and stock investment plan), Roth IRA.

Other assets, savings and investments: Half interest in a home worth an estimated $295,000.

By Martha M. Hamilton
Washington Post Staff Writer
Sunday, September 26, 1999; Page H4

Alicia McPhie has worked for the federal government for 25 years and hopes to be able to retire in 10 more years. In the meantime, she would like to attend graduate school to prepare for a second career after she retires from the federal government. She estimates that will cost about $50,000.

"I made a conscious effort to start seriously planning about five years ago," she said. "I didn't want to go into retirement, as a divorced female, poor."

As things stand now, she probably won't. When she retires after 35 years as a federal worker, she'll receive an inflation-indexed pension equal to about 64 percent her salary. Until then, however, she'll be contributing 7 percent of her salary toward her pension, which means she doesn't have the money for other expenditures. On top of her pension, she has approximately $45,000 in savings plans and an IRA.

What she doesn't have is enough savings to pay for graduate school, said Ron Gebhardtsbauer, senior pension fellow for the American Academy of Actuaries. While she conceivably could withdraw the money from her retirement accounts to cover some of those expenses, he said he wouldn't recommend doing so. The combination of the penalties, taxes and reduced retirement income is too steep a price to pay.

And she doesn't have much equity in her home, which she and her boyfriend bought just two years ago, to borrow against.

Instead, he recommends that McPhie reduce expenses, try to save more and also consider going to a less-expensive school.

When she retires, Gebhardtsbauer suggests that she consider choosing the annuity option from the Federal Thrift Savings Plan. An annuity guarantees a fixed or variable payment.

Gebhardtsbauer estimates that her living expenses in retirement will exceed her pension benefit by about $12,000 a year (in today's dollars). If McPhie were to withdraw $12,000 a year from the savings plan, eventually she could run out of funds. But when she retires, she will have enough money in the plan to pay for an annuity that would guarantee the same $12,000 per year as long she lives.

The price of the thrift plan annuity is set by assumptions about longevity that are closer to those for men than for women, which makes it a good deal for women because they tend to live longer than men. In addition, thrift plan annuities cost less than those purchased through an insurance firm because the thrift plan is so huge.

© Copyright 1999 The Washington Post Company

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