You are probably looking forward to a retirement where you have enough money to travel, live comfortably and not have to work unless you choose to do so. Will you have enough money to do that? Many people cannot. If you have delayed your retirement waiting for your TSP investments to increase so you will have more money at your disposal during retirement, you are not alone.
If you are like most federal employees, you are planning on using the Thrift Savings Plan for much of your retirement income. And, if you are relying on the TSP to fund your retirement, you may be feeling pretty good again if you have invested in the TSP stock funds.
Hindsight is always more accurate than predicting the future and in this instance hindsight will make you happy about your retirement prospects-at least happier than you were a year ago. The stock market hit a bottom on October 9, 2002. Last October, anyone looking at a TSP or mutual fund statement or brokerage account summary was depressed or at least feeing broke.
But since that time, the financial markets have turned around. The Dow Jones Industrial Average is up about 34%. The Standard and Poor’s 500 index (the basis for the TSP C fund) is up about the same amount. As of the close of business on October 13, most major indices are at the highest point they have been in the past year.
There isn’t a big secret for the increase in stock prices. The economy is picking up. Companies are releasing their earnings reports and the news is generally pretty good. Moreover, there has been a lot written about the “jobless recovery” that is occurring. Companies have been able to increase productivity without hiring many new employees which is leading to expectations of more profitable growth for many companies.
A few days ago, FedSmith.com ran a news item about the favorable returns for the TSP stock funds over the past twelve months (See the link on the side of this article.)
This led a couple of readers to inquire about the future. Here is the gist of these comments:
“My TSP stock fund has been going up for the past year. I am thinking of selling these funds and putting most of my investment funds into the G fund to preserve these gains and prevent any further losses. Is this a good time to sell my stock funds?”
Another reader wrote:
“I am in my late thirties and would like to retire in my late 50’s. I am willing to take some risk with my TSP and have put about 60% in the G fund and the other 40% in the common stock fund. Is this a good split for my TSP investments?”
We are not financial advisors so we can’t give any reader specific advice on how to invest your money. We can’t predict the future and each investor has a different situation that has to be taken into account.
Here are a couple of points for investors to consider. In the past five recessions, the S&P 500 index fund has gained more than 40% in the first year after the stock market has bottomed. Since the gains for the past year are less than that, the recent bull market is within normal expectations as the economy rebounds.
Combined with rising productivity, companies beginning to post significant profit increases, and interest rates at lows we haven’t seen in the United States for years, there is plenty of room for optimism. Moreover, the year of a presidential election leads to a higher stock market more than 70% of the time.
On the other side of the argument, stock market pessimists argue that the low interest rates have artificially pumped up stock prices and that the current strong market is reminiscent of the market just before it started falling in 2000.
Cashing out the recent gains is a safer approach as the first reader quoted above has suggested. But that doesn’t mean that putting your money into the G fund is without risk. Cashing our your stock funds now may mean you will miss a rise in prices if the bull market continues-a strong possibility. Investors who are too conservative often do much worse than investors who are willing to take a little more risk in stocks.
The safest approach for many TSP investors is to decide what percentage of your investment to put in stocks and how much in bonds. (Typically, younger investors will put a higher percentage in stocks and a smaller percentage in bonds.) Once you have decided the allocation that best fits your situation, periodically adjust your investments to fit your predetermined allocation strategy.
For example, assume your stock inestments have gone up 35% in the past year. You have an allocation strategy of wanting to put 60% of your investments into stocks and 40% into bonds. With the rise in stocks, this may be a good time to reduce your stock investments and put the money from this sale into the TSP bond funds to maintain your allocation.
In short, don’t react too quickly to the short term moves in the markets. Have an investment strategy and follow it with periodic reviews. Your TSP account is an investment in your future. Give it at least as much thought and consideration as you would when spending your money on a car or a house.
With regard to the second reader who wants to be more aggressive and is still in his thirties, 40% of the TSP in stock funds and 60% in the G fund is a conservative investment. The G fund returns are dependent on interest rates and, while there isn’t much risk in the fund, there is also not much room for significant earnings above the rate of inflation. If this investor considers himself to be more aggressive, for someone in that age group with that much longer to work, he should reduce his G fund investment and put more into the stock funds. Many people in this stage of their career put as much as 70-80% in stock funds. That percentage of stocks would, in turn, be divided in some fashion between the C fund, the small company stocks (the S fund) and international stocks. (Keep in mind the small company stocks are more aggressive than the other stock funds. The S fund can bring spectacular returns or losses that are just as spectacular at a different point in the market cycle.)
The only certainty is that there will be volatility with this mix of funds. Unlike the G fund which does not have significant up or down movements during a short period, the stock funds will move up and down at a faster rate. But a long-term investor who wants to retire at an earlier age is more likely to end up with considerably more money for retirement by investing in the TSP’s stock investments than with a conservative bond fund.
This investor needs to consider whether he really is an aggressive investor who can accept the stock market swings. Some people cannot psychologically accept the market volatility. As with all investors, this person needs to honestly evaluate his appetite for the risk that may be necessary to meet long-term retirement goals.