November was a volatile month for stocks but, in the end, those invested in the Thrift Savings Plan stock funds came out with favorable returns for those who kept their money invested.
The I fund was the biggest winner for the month with a return of 2.41%. It is also up 14.04% for the year. The S fund had a return of 1.53% (15.46% for the year so far) and the C fund provided a return of 0.57% (15.03% for the year). All of the monthly rates are available at TSPDataCenter.com. The G fund has returned 1.35% to its investors so far in 2012 and the F fund has had a year to date return of 4.43%. Both of these funds had a small positive return in November.
The lifecycle funds also all had positive returns for November. The L2050 fund had the best return at 1.19% (13.65% for the year). The L2040 fund provided a return of 1.06% (12.35% for the year) and the L2030 fund also has a year to date return greater than 10% (10.97%) and a monthly return of 0.93%. The L2020 fund provided investors with a return rate of 0.77% for November (9.12% for the year) and the LIncome fund beat out the G fund with a return rate of 0.34% (4.28% for the year).
For those who want to compare the annual rate of return for all of the TSP funds, the information is available at TSPDataCenter.com.
TSP Investors and the “Fiscal Cliff”
The biggest concern for many investors wondering what will happen to their investments in the near future is concern about the so-called “fiscal cliff” which is now dominating the headlines in financial news.
We do know that many companies are paying out large dividends before the end of year. In fact, some of them are borrowing money in order to increase the dividend payments. This should provide a flood of revenue for the U.S. Treasury as investors strain to avoid the new tax hikes that we can see coming. To preserve as much of their assets as possible, investors are making moves they think will help retain some of their capital instead of giving it up to Uncle Sam next year. The rationale for paying out large dividends this year is that while we do not know what the tax rate will be on dividends in 2013, everyone assumes the rate will be higher, perhaps much higher, than the 2012 tax rate.
For those who want to sell their stocks and stock funds which may be selling for a higher price than their purchase price, there are plenty of tax traps which can complicate any financial decision. The alternative minimum tax (AMT) can quickly eat up many financial gains for some investors. Also, we do not know what the tax rate on dividends will be next year. For some investors, they do know an extra 3.8% tax will hit their wallets as a result of the ObamaCare legislation that is now unfolding with hundreds of pages of new regulations regurgitating from agencies such as Health and Human Services and the Internal Revenue Service. But, will the dividend tax rate next year go from 15% to 20% or will it be a higher rate? Or will the elected leaders decide that a higher rate on capital gains is not a viable solution to increasing the growing desire for more revenue for the government?
We do not know the answers and many not know the answers until after the start of 2013 which makes financial planning requiring even more guesswork than usual.
The Debt Ceiling and Your G Fund Investments
One other factor that some readers may have missed: The existing debt ceiling is probably going to expire late in December. The last time this happened was in August 2011. As federal spending continues to grow, the debt ceiling limit continues to grow as well and, obviously, many in Congress are concerned about the rate we are spending money.
No one knows how this will play out in the political arena but, one thing is fairly certain: Federal employees will again be involved in the process. For those with a short memory, you may recall that the Thrift Savings Plan and funds from the federal retirement system have been used in the past to pay federal expenses until a resolution is reached on the debt ceiling.
We know from past experience that the Treasury Department can use some retirement funds of federal employees to avoid increasing the debt limit which is capped by law. That is likely to happen again in the current political environment if the debt limit is not raised.
When this is done, here is what happens to some of your retirement funds:
“In these circumstances, the Secretary of the Treasury is authorized to
- suspend the investment of amounts in the Civil Service Retirement and Disability Fund that normally would be invested in interest-bearing Treasury securities;
- sell or redeem Treasury securities held by the CSRDF prior to maturity; and
- suspend the issuance of interest-bearing Treasury securities to the “G” fund of the Thrift Savings Plan.”
So, in effect, the G fund in the Thrift Savings Plan is impacted and the Civil Service Retirement and Disability Fund is impacted as Treasury securities are not issued for these funds when there is an on-going debate and Congress has not raised the debt ceiling again.
There is no long term impact on federal employees or investors in the Thrift Savings Plan. But, despite the history of everything coming out well in the end, the fact that the retirement investments are used as part of the political negotiating process makes many current and retired federal employees uncomfortable.
While no one knows what will happen this time around, those who may be nervous about this scenario can be prepared to become nervous once again at the end of the year as Congress and the administration negotiate on the debt ceiling, tax rates, and government spending levels.
If you are wondering why the G fund is treated differently from the other TSP funds, check out the article What Happens to Your TSP Funds If the Debt Limit is Not Raised?.
With all of this as a background, best of luck in rebalancing your TSP portfolio and in making your investment decisions as you do your financial planning for 2013.