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URL: http://www.fedsmith.com/articles/articles.showarticle.db.php?intArticleID=999

Nearing Retirement? You Probably Have Reason to be Thankful

August 2, 2006
By Ralph Smith

Anyone reading the comments from federal employees on sites such as FedSmith.com may come to the conclusion that there are a large number of federal employees who are unhappy and not afraid to express their discontent.

Complaints most often concern pay, performance management, supervisory skills (or lack thereof) and benefits.

No doubt some of these concerns are based on experience and the nature of the federal personnel system.

But there is one large benefit that most federal employees would agree is very beneficial to many of the large number of federal employees planning on walking out the door and turning in the federal employee badge.

And the benefit is looming large. The federal government is particularly vulnerable to the coming baby boomer retirements. While the average age of the American worker has increased over the past decade, the federal civil service has twice as many workers over age 45 (60 percent) as the private sector (31 percent). According to the Office of Personnel Management (OPM), among all full-time permanent employees in the federal workforce as of October 2004, 58 percent of supervisory and 42 percent of non-supervisory workers will be eligible to retire by the end of FY 2010.

Many of these federal employees who are planning to retire are under the Civil Service Retirement System (CSRS). Federal employees who started work in the mid-eighties are under the Federal Employees Retirement System (FERS).

The CSRS system is a throwback. It was created in the 1920's--before Social Security was created and at a time when most people did not have any retirement system. The CSRS system is a defined pension benefit plan. With this system, you can figure out (with some work, a little luck and a good software program or very knowledgeable human resources retirement specialist) how much you will receive in your retirement check.

CSRS doesn't require much in the way of pre-planning. Uncle Sam takes out a mandatory deduction from your paycheck and puts it into an account that you will draw down after you retire. Most retirees long outlive the amount of money they put into the plan. That doesn't matter; a retiree under CSRS keeps on getting checks and annual cost of living allowance increases each year. Moreover, CSRS employees still get to participate in the Thrift Savings Plan although under a different financial arrangement than employees under the FERS system.

Some readers have commented that private sector companies have more generous retirement benefits. No doubt, there are some employees in private companies that have much better plans than the CSRS. But there are not very many. Moreover, some employees in plans that may have been as good or better than CSRS have been shocked.

IBM has frozen its pension plan for its employees. As of January 1, 2008, no one in that retirement plan will accumulate any more benefits. And IBM employees are not alone. Employees at General Motors, Unisys, Verizon and others have had similar jolts to their future retirement plans.

And, in a way, employees at these companies are better off than employees in some other large American companies. At United Airlines, the company dumped its pension plan. Employees who planned on a luxurious retirement are now getting pensions from the Pension Benefit Guaranty Corp. and the amount for most is less than they anticipated or would have thought possible.

Even worse, some employees of companies like these still think they are going to receive a pension under a plan that no longer exists. According to the Employee Benefit Retirement Institute, 21% of American workers are now under a defined pension plan. 61% of American workers think they will be receiving benefits from a defined pension plan when they retire. You can do the math; there is obviously a problem looming.

One of the most popular articles on the FedSmith website in 2005 was entitled "High Three" to "High Five"? You can read the reaction of readers to a proposal to change the CSRS system to calculate retirement benefits in such a way that the government would save money. That proposal, by the way, has not resurfaced in recent months.

Occasional rumors also surface from readers to the effect that the federal government is going to retire the CSRS system and put all employees into FERS. While that rumor certainly reflects an unstated fear of many in the CSRS system, no serious proposal has been discussed, at least publicly, to do away with the CSRS system for those already in the system.

That does not mean it could not happen in the future. Uncle Sam is probably the safest employer a worker can have. Oddly enough, while companies can find themselves in legal hot water for having an underfunded pension plan, the federal government is a bigger violater of these rules than many companies. The difference is that Congress has the power to tax American citizens to fund future pension benefits. Moreover, the federal government is not subject to global competition which is driving American companies to eliminate or reduce benefits. In other words, Congress can create benefits and it can take them away.

As one Congressman noted: "[E]ven the Federal Government’s own defined benefit pension plan – the Civil Service Retirement System – is underfunded. As of the end of 2002, total assets attributable to CSRS amounted to $417 billion, but the liabilities for future benefits amounted to $950 billion, resulting in an unfunded liability for CSRS of $533 billion. As a result of this under funding, the assets attributable to CSRS are expected to be depleted by the year 2023. In contrast, the Federal Employees Retirement System (FERS), which covers employees hired since the beginning of 1984, is fully funded by the employees and agencies."

Politics being what it is, eliminating the CSRS system is very unlikely, at least in the near future as all of these retirees have plenty of time to vote, lobby and express their views in many different forums.

In effect, those federal employees under the Civil Service Retirement System are the beneficiaries of a system that is a remnant of a time when the American economy was in its golden age. There are certainly advantages to the FERS system--especially for federal employees who do not plan to make working for Uncle Sam a career. Overall, most federal employees getting ready to retire are undoubtedly thankful they started working for an employer at a time when the CSRS was common among large companies and but which is not going to go out of business or sell a big chunk of its assets to a global competitor.

© 2006 FedSmith Inc. Very Happy Very Happy Very Happy

Last edited by greg on Mon Aug 14, 2006 4:48 pm; edited 1 time in total
Post Sat Aug 05, 2006 5:31 pm
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Tuesday, March 07, 2006

A Critique of Dave Ramsey

I wrote at length the other night about how much I owe to Dave Ramsey, and what a blessing I think his ministry - and I do think it's the best ministry in the country - has been for working Americans. He's a tremendous motivator, and does more than anyone else to help people harness emotional energy in pursuit of financial stability. And as any successful salesman will tell you, it is EMOTIONAL energy that closes the sale.

But as the saying goes, if two people agree all the time, only one of them is doing any thinking. And so here is where I would part company with Mr. Ramsey:

Ramsey's the best motivator in the business, but to be honest, it seems like he stopped learning new things somewhere around 1999. He does not seem to have kept up with any of the academic investment literature, for instance. If he had, he would have seen people like Vanguard Group founder John C. Bogle pointing out that for most of the period in which stocks had generated those 11-12 percent returns, they were issuing dividends at the rate of 4-6 percent, which is several TIMES what those dividends are today. Economic growth is strong...but it's not strong enough to make up for that, and because of the additional leverage implicit in the no-or-low dividend model, you have to expect volatility to increase - which is, over the last decade or so, exactly what we find.

Ramsey's insistent projection of 12% returns from equity mutual funds is, quite frankly, nuts. Ramsey is projecting the long term returns of an unmanaged index through a period of price-earnings multiple expansion on mutual funds which themselves experience cash drag, trading costs, and sap investors with tax inefficiency, loads, expenses, and 12-b-1 fees.

What concerns me is whether the endorsed local providers are using Dave's unrealistic assumptions when conducting financial planning, because if you're projecting 12% return on anything over more than a few years, you are going to undersave by as much as half, or even more.

Furthermore, if you really DID expect a 12% return on equities, you would have to be nuts to pay off a 6% mortgage with tax-deductible interest. You'd have to be bonkers, because mortgages come in 30 year chunks, and - I'm drawing on some research by Wharton's Jeremy Siegel here - there has never in market history been a 30-year period in which the S&P 500 has not outperformed the U.S. Bond market.

Now, if you're like me, and you're really looking for a 6-8% return on equities, then paying down a home mortgage makes a lot more sense. You can always borrow it back, tax deductible, up to 100,000 dollars, if you REALLY needed to (But Dave is right about being loathe to put your home at risk.)

Third, I think Dave Ramsey's missing an opportunity here, because he ought to be an index fund zealot. Index funds - particularly lifestyle funds that adjust asset allocation as an investor cohort nears retirement - are ideally suited for his usual audience, who have limited financial educations and, to be honest, have no business trying to select active fund managers. David could get his listeners an extra 70-100 basis points per year simply by pounding the table for them to use Index funds. He's got a lot of military listeners, too, and he should be pounding the table for the TSP program as well. He does not - at least, not in anything that I've heard. But expense ratios in the TSP program are as low as you'll find anywhere. Their large cap US fund charges just six basis points!

Fourth, Dave's hip-pocket approach to asset allocation is suboptimal. By advising listeners to divide up their money between "four types of mutual funds, growth, growth & income, fixed income, and international," he may get a rough value vs. growth split - but many investors will find themselves with no exposure to small caps or micro caps, and Dave ignores the diversification benefit of REITs and emerging markets altogether. Furthermore, by dividing contributions up four ways, well, 25% in international funds might be a bit much.

Lastly, Dave pays little attention to tax efficiency when discussing mutual funds. But the inherent low turnover in index funds makes a big difference in any money held outside of tax-advantaged accounts.

I would replace Dave's quick-and-dirty asset allocation advice with the following:

1.) Use index funds. 80 percent of money managers underperform indexes anyway by the amount of their costs. There is no reliable way to tell, IN ADVANCE, who the outperformers are going to be. Plus, research from Ibbotson shows that 90 percent of investment returns are attributable to asset allocation decisions, and NOT to individual security or fund selection. Costs will kill you.

2.) Put 40-50 percent of your money in a Large Cap index, like an S&P 500 fund. Don't pay more than .18 percent in expenses, and don't bother paying a load. That much you can do on line. That's going to get you growth, it will get you value stocks, it will get you dividend-paying stocks, and will get you all US industries in one shot.

2.) Put another 20-40 percent in bonds. Use an index that tracks the Lehman U.S. Aggregate market, which represents all investment-grade bonds traded in the United States.

3.)Divide the rest up between an international fund (not a global fund, which will duplicate your US exposure), a small-cap fund, and a REIT fund.

4.) Limit gold and precious metals to 2-5% of your portfolio.

5.) Alternatively seek out a cohort, or lifestyle fund, that does all the above FOR you in one account, but tailors your asset allocation to reflect your time horizon. For example, American Century's Target 2030 fund does that for a cohort of investors who are retiring in or close to 2030. You can choose a different fund to fund known time horizons, as well, such as a Target 2025 fund to save for college costs for children born today.

Notice that the INTENT is the same - diversification among different asset classes but I'm being a little more specific than Dave is. And trying to ensure that as much after-tax growth remains in the hands of the INVESTOR as possible.

When it comes to lump-sum planning, Dave's so far off base he's not even in the stadium. Here's why:

Here's Dave Ramsey on his page for Endorsed Local Providers:

"Q: My factory just closed. I am being asked to choose between a lump sum settlement and a lifetime pension. Help!

A. The short answer is that the lump sum usually makes more sense. The more thorough answer is that the stream of pension payments must be weighed against the value of the lump sum invested in good mutual funds over time. Typically, the stream of pension payments equates to somewhere around a 7 percent annual return. If you take the lump sum, it can be invested into good mutual funds that have a history of earning closer to 12 percent annually."

Frankly, Dave is wrong as a football bat. Mutual Funds don't have a history of earning 12 percent. The INDEX does! Mutual Funds have a history of failing, of lagging returns by fees, costs, and taxes. Watson Wyatt Worldwide notes that the average individual investor trails the average pension fund by 2 percent per year. That's huge! Barclays notes that defined contribution plans like 401(k)s, in which investors choose their own asset allocations, drag traditional pension plans by .56 percent annually.

There is simply no evidence that Dave's readers will, in practice, be able to net better returns - especially adjusting for risk - than the professional pension fund managers.

And DALBAR's annual quantitative investor behavior study finds that investors get, on average, only 25% of market returns, when cash flows are taken into account: Meaning that investors buy and sell at the wrong times.

Dave's information is flatly and dangerously wrong.

And if a fiduciary professional such as a CFP gave that advice, and took a commission or asset-based fee from any moneys resultant from the lump sum, it would be a lawsuit waiting to happen.

On the insurance side, Dave gives short shrift to whole life and other permanent forms of life insurance. Yes, they generate higher commissions than an equivalent amount of term insurance. But Dave has no problem with commissions to good advisors in other financial fields like mutual funds and real estate. Dave also understates the estate tax planning benefits of permanent life insurance plans, and the biggest drawback to term insurance - the possibility that the insured will become uninsurable during his or her term - is generally ignored. Yes, if we all got 12% in our mutual funds every year, we could all eventually self-insure. But we'd also all be subject to estate taxes, too. I think a permanent life insurance policy sufficient to cover any estate settlement costs, probate, and estate taxes for high net worth individuals just makes good sense.

A universal policy also might make sense for someone with a highly irregular income, like a yacht salesman or seasonal business owner or farmer, because it allows him or her to choose when and how often to pay premiums. And no, I'm not an insurance salesman. I have no vested interest in permanent product commissions whatsoever, and nobody advertises on the blog. Term insurance is great - for temporary needs, like funding college or paying off a home mortgage. But for most successful people, I think the solution will involve a combination of term and permanent insurance policies taylored to match temporary and permanent insurance coverage needs.

Them's my thoughts. Take them for what they're worth. Dave understands families and consumer psychology much better than I do - he's got a family himself, including a couple of consumer daughters. Now THAT'S got to be a lesson in and of itself! And I cannot compare with his knowledge of real estate and bankruptcy-related topics, because he's been there and done that himself. But I think I've got a better handle on a few things than he does now, and I think there are a lot of people who are ready to take the Baby Steps to the next level, and really refine their asset allocations, and match their means to their goals more precisely.

But you know, if it wasn't for Ramsey, hundreds of thousands, if not millions of listeners would never have gotten to the point where that was possible. So I can't overstate how much many in the heartland owe to him.

Well, unless they cashed out their pensions thinking they could do better with Dave's advice.

Splash, out

Post Sat Aug 05, 2006 5:49 pm
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The Federal Retirement Thrift Investment Board is trying to simplify how courts can divide Thrift Savings Plan holdings during divorces.

Currently, divorcing TSP enrollees can split benefits based on a specific amount, percentage or formula with readily ascertainable variables. Proposed regulations in Wednesday’s edition of the Federal Register would eliminate the courts’ formula option.

According to the FRTIB’s proposed regulations, “formula-based court orders are overly complex and often are not acceptable by the agency or, if acceptable, would result in payments that were not anticipated by either party to the order.”

The unintended consequences, FRTIB argues, leads to the parties returning to court and “considerable administrative expense.”

In removing the formula option, FRTIB also published model paragraphs for attorneys drafting orders.

FRTIB will accept comments on the proposed regulations until Sept. 8.

The regulations can be found at http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/E6-12895.htm.

If you can't handle a man that tears up at sad movies, you should probably look elsewhere. Don't be fooled though, I can be quite "manly" also. - mlkman
Post Thu Aug 10, 2006 12:57 pm
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Bulls on a beach
After one of the busiest, best weeks of the year for stock gains, investors gear up for a calmer period on Wall Street.

By Alexandra Twin, CNNMoney.com senior writer
August 20 2006: 9:25 AM EDT

NEW YORK (CNNMoney.com) -- Wall Street, you just enjoyed one of your best weeks of the year. What are you going to do next? Why, go on vacation of course.

And really, investors might as well, because after breezing through a five-session advance last week, the week ahead is likely to pose a lot more challenges.

It's not that inflation expectations are likely to be revised. It's not that big earnings disappointments loom. It's that the calendar is bare, it's the last week of August and more investors will be working on their tans than their portfolios.

"We've had a nice run up, so I wouldn't be surprised to see a little profit taking next week," said Tom Schrader, managing director of listed trading at Legg Mason. "But overall, I think it's going to be very quiet through Labor Day."

Stocks rallied last week, as investors welcomed strong earnings from Hewlett Packard and others and a drop in oil prices after a cease-fire in the Israel-Hezbollah war. But the main impetus for the rally was the collective sigh of relief after reports on both wholesale and consumer inflation showed pricing pressures were down in July.

This was good news for investors who were worried that if inflation didn't start to temper, the Federal Reserve might might have to restart its recently-paused interest-rate hiking campaign at the next Fed meeting.

Treasury bond prices rallied, sending corresponding yields lower. And stocks surged, too.

The Dow Jones industrial average gained 2.6 percent on the week and the broader S&P 500 gained 2.8 percent. For both averages, this marked the second best week of the year on a percentage basis.

But things were even better for technology investors. The tech-fueled Nasdaq composite gained almost 5.5 percent, scoring its best week on a percentage basis since October 2003, according to the Stock Trader's Almanac.

Next week is unlikely to be quite so rosy.

Follow the oil market?
One of the big factors that led the market advance last week was the decline in oil prices, with crude for September delivery falling by more than 4 percent.

The slide in crude prices and gasoline prices added to investor hopes that a slowing economy is taking the edge off of inflation, a scenario the Federal Reserve seems to be counting on.

Two weeks ago, the Fed opted to keep a key short-term interest rate unchanged at 5.25 percent after boosting it 17 times in a row since June 2004. One of the reasons the central bank paused was its concern about the slowing economy and its belief that such a slowdown will also reduce pricing pressure going forward.

Right now, investors are focused on the positive aspects of that equation - the potential for inflation to wane. But the focus could become more negative if investors start to worry more about the slowing economy and its impact on corporate profits.

Because next week is so light on news, those worries could resurface in the week ahead, particularly if the price of oil should decline more substantially than it did last week, said Ken Tower, chief market strategist at CyberTrader.

Oil prices have been declining since peaking near $80 a barrel in mid-July. Crude briefly dipped below $70 a barrel Friday before inching back up.

Should the price fall through $68 a barrel next week, that could be significant, Tower said. That's because oil has bottomed out at around $69 per barrel in both May and June before bouncing back.

Oil prices have been surging for more than 3 years due to the rising demand of a growing, global economy. So the reason behind any potential slide in oil prices now will be key for stock investors.

A slide in the price of oil is a positive for stock investors "if it helps the inflation and consumer spending outlook," Tower said. "If it's a precursor to a larger-than-expected slowdown in the economy, then that's not a good thing."

Key events in the week ahead
Monday: Lowe's (Charts) is expected to report earnings of 61 cents per share, versus 52 cents a year ago, according to a consensus of analysts surveyed by First Call/Thomson Financial.

Tuesday: Toll Brothers (Charts) is expected to report earnings of $1.05 per share, according to analysts, versus $1.27 a year ago.

Wednesday: July existing home sales are expected to have fallen to a 6.58 million unit rate in the month from a 6.62 million unit rate in June.

Thursday: July new home sales are expected to have fallen to a 1.10 million unit rate from a 1.131 million unit rate in June.

Thursday: July durable goods orders are expected to show no change after rising 2.9 percent in June.

If you can't handle a man that tears up at sad movies, you should probably look elsewhere. Don't be fooled though, I can be quite "manly" also. - mlkman
Post Mon Aug 21, 2006 1:36 am
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Bernanke: Fiscal action needed as America ages

By Mark FelsenthalThu Jan 18, 10:43 AM ET

Federal Reserve Chairman Ben Bernanke warned the U.S. Congress on Thursday that failure to take action soon to deal with the budgetary strains posed by an aging U.S. population could lead to serious economic harm.

"Unfortunately, economic growth alone is unlikely to solve the nation's impending fiscal problems," Bernanke told the Senate Budget Committee.

Bernanke acknowledged that official projections suggest the U.S. budget deficit could stabilize or shrink in the next few years, but cautioned: "We are experiencing what seems likely to be the calm before the storm."

Left unchecked, the costs of so-called entitlement programs, such as Social Security and Medicare, are set to soar as increasing numbers of the baby boom generation retire.

"Dealing with the resulting fiscal strains will pose difficult choices for the Congress, the administration, and the American people," Bernanke said.

"However, if early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost," he added.

Bernanke cited projections by the Congressional Budget Office that showed spending on entitlement program would reach about 15 percent of U.S. gross domestic product by 2030.

He said a worrisome implication of such projections would be the much larger national debt and related higher payments to bondholders.

"Thus, a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits," Bernanke said.

The Fed chief said that whatever decisions were taken to prepare for the budgetary pressures presented by an aging population, tax rates would need to achieve a balance between spending needs and necessary revenues.

Bernanke said advocates of lower taxes would have to accept lower spending on entitlement programs. Likewise, proponents of more-expansive government programs must recognize the need for higher taxes brought about by higher spending, he added.

Copyright © 2007 Reuters Limited.

If you can't handle a man that tears up at sad movies, you should probably look elsewhere. Don't be fooled though, I can be quite "manly" also. - mlkman
Post Fri Jan 19, 2007 1:18 am
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Hackers steal $35,000 from customers of federal savings plan
Linda Rosencrance

January 19, 2007 (Computerworld) Hackers stole $35,000 from two dozen users of the Thrift Savings Plan (TSP), a retirement savings and investment plan for federal employees.

In late December, the computers of several TSP participants were infected with keylogging software that allowed criminals to record all keystrokes made by participants without their knowledge. The hackers also retrieved the customers' TSP personal identification number and other account information, according to a statement on the TSP Web site. However, the TSP's system was not breached, the company said.

"We were able to identify approximately two dozen participants who had relatively small amounts withdrawn from their accounts and electronically forwarded to fraudulent accounts," the TSP said. "Although we are working with the financial companies involved for the return of the funds, the total amount of loss involved is approximately $35,000. All affected participants have been notified."

"External penetration testing has demonstrated that our system has not been breached," the TSP said. "There is no evidence of any successful attacks against the system to identify a PIN and thus obtain access."

TSP officials said the personal information was compromised when keyloggers monitored each keystroke made by the users while they entered their TSP information into their own computers. All cases that have been identified involve electronic funds transfers. As an added security measure, the TSP has discontinued making these electronic payments for online transactions.

The TSP said over the coming months, it will be introducing several enhancements to the Web site, including a new alert message, more robust Web passwords and TSP account numbers, which will replace the use of the Social Security numbers for most TSP purposes.

A TSP spokesman declined to comment beyond the statement.

If you can't handle a man that tears up at sad movies, you should probably look elsewhere. Don't be fooled though, I can be quite "manly" also. - mlkman
Post Tue Jan 23, 2007 2:17 am
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Uncle Sam's Super CD
Jan 17th - 4:00am

Are you a long-time fed, looking for a very, very safe place to stash cash? A safe harbor where your earnings can grow tax-deferred where the entry fee is as low as $25? If so, check out the Voluntary Contributions program, Uncle Sam's version of a certificate of deposit with muscles.

The Voluntary Contributions program has been around a long time but very few feds know about it, or how it works. Many confuse it with the Thrift Savings Plan, which is a mistake.

For one thing the VC program is open only to federal and postal workers who are under either the Civil Service Retirement System or the CSRS Offset plan. That's a fast-dwindling pool of people who were hired before Dec. 31, 1983 and who are still on the job. Most people in government today are under the FERS program. While both groups are eligible for the TSP program, only CSRS and CSRS Offset workers can put money into the VC.

Here's how it works:

* If you are eligible for the VC you sign up (you'll need a SF 2804, Applications to Make Voluntary Contributions,) using forms available at your agency HR office and online as a pdf. Once the Office of Personnel Management admits you, you can send OPM a check for virtually any amount, so long as it is in $25 increments.

* The amount you can put into the VC is staggering. You can put up to 10 percent of your lifetime federal salary into the account. Each year the Treasury sets the rate the VC will pay for the upcoming year. Last year it was 4.125 percent.

* You can put money (via check, in $25 increments) into the VC as often, or as infrequently as you wish. It's not like the TSP where your contributions are made via payroll deduction.

* In the VC program only the interest you earn on your account is tax-deferred. You've already paid taxes on the money you invested, so when you withdraw it only the earnings are taxed. For example if you put $5,000 in and your account had grown to $6,400 only the earnings, $1,400 would be subject to federal or state tax.

* You can use the VC two ways. The most popular is to withdraw it before you retire. Some people put it in another account, or spend it. Or roll it over into an IRA. If you don't tell OPM what to do, it will automatically set up an annuity which will boost (very slightly) your total CSRS retirement benefit.

* You can also set up an account as you are about to retire, using the same SF 2804 which you submit along with your Application for Immediate Retirement, SF 2801. Once accepted by OPM, you can start sending in contributions by check in $25 increments.

If you can't handle a man that tears up at sad movies, you should probably look elsewhere. Don't be fooled though, I can be quite "manly" also. - mlkman
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The federal government is particularly vulnerable to the coming baby boomer retirements. While the average age of the American worker has increased over the past decade, the federal civil service has twice as many workers over age 45 (60 percent) as the private sector (31 percent). According to the Office of Personnel Management (OPM), among all full-time permanent employees in the federal workforce as of October 2004, 58 percent of supervisory and 42 percent of non-supervisory workers will be eligible to retire by the end of FY 2010. 701-100 exam dumps
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