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One common question we are asked: “How much of my retirement money should I keep in the TSP stock funds (I, S and C funds) and how much should be in the bond funds (the F or G funds).” And, a closely related question: “Should I cash in my stock funds and put my investment money exclusively in bonds?”
A number of readers are now covered by the FERS retirement system. Even those in the CSRS system often have money invested in the TSP fund so the answer to the question is not an idle one. If you answer this question the wrong way, you may not be able to retire.
There is little doubt that the long bear market has already been the cause for millions of Americans postponing retirement. While this does not apply exclusively to Federal employees, a recent survey conducted by International Communications Research for Intuit, Inc. (the publisher of Quicken software), says that among households with $75,000 or more in annual income, approximately 2.3 million have delayed their retirement as a result of the current recession.
A similar thought process is also being followed by some Federal employees as projected retirements are running below estimates made by the Office of Personnel management.
The Bulls’ Argument
Here is the reason for the confusion. There is no consensus on how strong the economy is and how much impact a war in Iraq will have on stock and bond markets. If you are an optimistic investor (a bull), the current climate is an opportunity to invest in stocks and reap the rewards when the worry warts catch on and start to put their money back into the market-at which time you can sell and count your capital gains.
The bulls are optimistic because we are enduring one of the longest bear markets in history. Consumers are still spending, the housing market is roaring, mortgage rates are the lowest they have been in years, and productivity is high.
Moreover, the president is running for re-election next year and the stock market usually rises as the administration tries to ramp up the economy to assure re-election for the man in the White House. What president would not want to run for election as a war hero, a booming stock market and low unemployment? If it works, President George W. Bush will be unbeatable next year.
The Bears’ Argument
But what about the arguments made by pessimists (the bears)? While stock prices have dropped dramatically in the past three years, stocks are still not cheap by historical standards. Americans have taken on a lot of debt and businesses are still not spending because profits aren’t all that high. The United States also has a huge federal budget deficit and our gap in trade with the rest of the world is massive.
Moreover, the war may not go that well. We don’t know what weapons Iraq may have hidden and how many casualties we may have in a war. If we win, what role will we play and will it subject America to more terrorist attacks from fanatics who are getting even for intervening in another Arab country?
Finally, previous stock market bubbles have led to too much product and too few buyers leading to deflation and a weak demand for goods and services. The United States is recovering from a bubble of historic proportions and the market is not likely to recover for a decade or more.
You Need to Decide How to Invest
Who is right-the bulls or the bears? You need to decide which category you fall into and then decide what percentage of your money to invest in stocks and how much to invest in bonds.
The scenario doesn’t end there. Once you decide how to invest, review your allocation periodically. You may want to consider selling some of the assets that have gone up and restructure the percentage in each category. An obvious example, don’t you wish you had sold some of your stock funds in the late 1990’s and put that money into the F fund-just in case the stock market went down dramatically?
And, one final question: “Should I cash in my existing stock funds?”
If we could see into the future, it would be an easy answer. Since we cannot do that, an answer frequently given by financial planners goes something like this: “You rode the market down with your retirement assets. To sell now and put those dollars into more secure funds means that when the market turns up, which it always does, you will not be able to ride it back up.”
Of course, if you are getting ready to retire and the market does not make a significant turn up for another few years, will it do you any good?
Without a doubt, the Federal retirement program was easier when the only game in town was the Civil Service Retirement System and you knew in advance how much your annuity would be.
What are you planning to do with your retirement funds? Feel free to post your opinion here on the Fedsmith.com website using the form below.