Note: This is a multi-part series on tips, tricks, and strategies for managing your TSP in uncertain times.
You can’t miss the headlines on nearly every newspaper and magazine these days. “For Stocks in the Developed World, It Was a Decade of Zeros” proclaims the New York Times “Adjusted for Inflation, Bad Run Looks Worse” from the Wall Street Journal and “A Flat Dow for 10 Years? Why It Could Happen” on the front page of Barron’s.
This does not bode well for you and your Thrift Savings Plan.
The watchword for the next decade will be personal responsibility. During the initial years of the Thrift Savings Plan, TSP participants were lulled into believing that they didn’t need to pay attention. A common strategy (if you could call it that) was to put it all in the C Fund until you were within five years of retirement and then start to diversify to the G Fund.
Let’s think back to what happened in the stock market in those early years of the TSP. For the first 12 years, from 1988 through 1999, the C Fund averaged 19.37% with only one year posting a negative return (-3.15 in 1990). Did you have to pay attention to your account? You got your annual statement, weren’t afraid to open it because there might be a loss inside, and thought you were a great investor. (See the TSP Corner for annual returns for each TSP fund.)
You got away without having to manage or pay attention to your TSP for over a decade and then…the first of two bear markets within a ten-year period. The last decade left you with a negative average return in the C Fund of -.94% and a measly 1.69% annual average for the S Fund and 1.10% for the I Fund. And all of a sudden there was dread when you received your TSP annual statement in the mail. Did you dare open it?
What will returns be over the next decade? Although there are a lot of opinions, no one knows for sure. That probably leaves you wondering exactly what you’re supposed to do to with your TSP.
The days of ignoring your TSP are over – at least if you want to have some hope of managing for positive returns. First, the most important thing you can do is continue to save. Your inclination might be to decrease or stop your contributions altogether when the funds seem so volatile. But here’s a realistic example that illustrates how detrimental that can be to your retirement plans.
Joe has $100,000 in the C Fund on January 1, 2000. He’s made double digit returns for years and decides that he’ll stop contributing to the TSP and put that money towards his mortgage instead (don’t panic – this is a hypothetical situation). By mid-December 2009, Joe has $89,072 and wonders, “What happened?”
But what if Joe doesn’t stop saving and chooses to diversify? He leaves 25% in the C Fund, puts 25% in the I Fund when it becomes available in May 2001, and 50% in the F Fund. I know, hindsight is 20/20, but bear with me for this illustration. He contributes $7,000 per year and gets matching contributions of $5,000 per year (total of $1,000 per month or $12,000 per year). Now, what’s his balance in mid-December 2009? $313,747!
It is human nature to consider stopping your contributions if you continue to lose a portion of what you’re saving, but the numbers tell us a different story. And saving paired with a well-thought out strategy can have your retirement plan intact when you’re ready to retire.
Don’t stop saving. And a trick to keep you saving – when you receive your annual TSP statement, don’t just look at the current balance. Take a look in the right-hand column where you’ll see your lifetime contributions. Compare this to your account balance. You may have had losses. Your current balance may still be less than it once was, but in most cases, what you’ve contributed will still be less than your current balance.
Watch for additional ideas on strategies you can use to take control of your TSP in subsequent columns here at FedSmith.