TSP Drops Fast; 2009 COLA Rate Also Drops
By Ralph Smith
Thursday, September 18, 2008
The American financial system is in dangerous, uncharted territory. The TSP funds reflect this strain and uncertainty. For the year to date, the I fund is down almost 28%. The C fund is down almost 20%. The S fund is down over 15%. Here are the daily rates for each TSP fund.
The F fund has also taken a hit this week and it was down 0.0258 yesterday although it is still up almost 3% for the year-to-date.
With the stock market falling fast in the past few days, we have had emails from readers asking how retirees are likely to fare in 2009. Many current retirees are less dependent on the Thrift Savings Plan than those in the FERS retirement system but, obviously, depend primarily on their monthly pension payment to live comfortably.
As we reported last month, the cost of living adjustment (COLA) for federal retirees was standing at 6.2% with a couple more months to go in the period that determines what the increase will be in January. Here is a surprise: the rate dropped from 6.2% to 6% due to a decline in the inflation rate. That be hard to believe as some retirees may be sitting around watching the news about hurricane devastation in the Gulf Coast, a dropping stock market and how the federal government is jumping in to bail out some firms that are in trouble.
But put the most current news out of your mind and think back a few weeks. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) decreased 0.5 percent in August 2008 according to the Bureau of Labor and Statistics. As a result, the inflation figure for retirees dropped as well.
The final figure for the COLA payment increase will be released in the middle of next month. With the incredible turmoil in our country now as a result of the hurricane devastation along the Gulf Coast, the temporary shutdown of some of our oil refineries in this area, the falling stock market and uncertainty about the safety of America's financial system, predicting the final figure would be foolhardy. The safest prediction is that those retirees receiving the maximum COLA increase in January will be getting about 6%.
But, for those who do not spend much time worrying about how your annual pay increase is determined, remember this: The annual COLA increase for retirees is not directly relevant to how much of an increase will be received by active federal employees. In fact, we don't even know when a decision will be made on how muc of an increase active federal employees will get next year. In this year's political climate, and with national elections taking place in November, it is possible that federal employees will not know how much they will receive in 2009 until after the start of 2009.
For the reasons explained in this article, a good guess for next year will be an average pay raise of 3.9%.
As far as your TSP goes, should you dump your stock funds and put all of your remaining money into the G fund? Some TSP investors did that in the past month as another $49 million was pulled out of the C fund and $423 million was pulled out of the I fund. That was on top of the $826 million was pulled out of the C fund in the previous month. This chart displays the transfers into the G fund from the C and I funds for the past two months.
Of course, if the stock market continues in a free fall, safety is certainly better. As always, the problem is that no one knows when the market has reached a bottom. Certainly the current market atmosphere is one of fear and uncertainty.
Here is a quote from Jason Zweig, a well-known financial columnist, who wrote earlier this week:
"If you truly cannot sleep at night, sell off some stocks, or move some of your money to bonds or cash. But do so a little bit at a time, and talk to your tax adviser first in order to maximize the considerable tax benefits you may be able to get out these incremental moves. By the time you get any money moving, the panic may already have passed."
For those with money in the TSP and who have a greater tolerance for risk and, perhaps, a longer time until retirement, here is some food for thought. The late Sir John Templeton who became wealthy by taking risk during a time of market uncertainty, said that investors should buy stocks at the "point of maximum pessimism," when market sentiment stinks and no one wants to hold anything but cash.
Take that advice for what you think it is worth and act accordingly. We will update readers next month on how those in the Thrift Savings Plan have acted during this time of market uncertainty.
© 2009 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.
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