Federal employees are similar to their counterparts in the private sector who have 401 (k) retirement plans that are similar to the Thrift Savings Plan. The common denominator in these plans is that the individual employee has the personal responsibility to ensure the success of his or her own investments.
And, if you are planning on using Social Security as the primary source of funds during your retirement, you may already have a problem. Congress is already being urged by Federal Reserve Chairman Alan Greenspan to fix the budget deficit by cutting Social Security benefits for future retirees. With the number of baby boomers nearing retirement age, the government can’t realistically afford to continue paying the same benefits currently available to retirees. This may mean you will have to rely on your TSP investments to be able to retire, particularly for those employees under the FERS retirement system.
If you invest wisely during your career, you can have a comfortable retirement. If you don’t invest wisely or, if you don’t invest any of your income in the TSP, you won’t be able to retire. Uncle Sam is not going to take responsibility for your investments and whether you will have the financial freedom to retire or not is your problem. With the government not taking responsibility for your retirement future, you get the freedom to take your retirement investments elsewhere if you choose to leave government service.
Based on the number of e-mails we see at FedSmith.com, many readers are uncomfortable making their own financial decisions. They are not sure whether they should invest in the TSP, how much they should invest, or how they should invest their money. There is also a lot of confusion over how the TSP program works and how it will impact your future.
If you are one of these federal employees who is not sure where to turn, it won’t surprise you to learn that you are not alone.
In a recent survey, the American Association of Retired Persons (AARP) found that many Americans age 45 and older are relatively uninformed about some aspects of financial planning.
Our guess is that many younger employees also fall into the category of “relatively uninformed” but the situation can be harder to correct as older employees are closer to retirement–or at least the age when they would like to retire–and they have less flexibility in correcting investment decisions they may have made earlier in their career.
In the AARP survey, only half of the respondents could correctly answer the question “Does diversifying investments decrease risk?”
The correct answer to this question is “yes.” Diversifying investments does decrease risk.
That answer does not seem right to many investors who are hestitant to invest in any TSP fund other than the conservative G fund. Their idea of a risky investment is putting 5-10% of their investments into the F fund. In their view, the TSP stock funds are too wild and crazy to consider for retirement funds. But, while the G fund is an excellent way to ensure no loss of your original investment, your investment in the G fund is unlikely to grow enough to be able to retire comfortably.
So, the question “Does diversifying investments decrease risk” entails a broader issue. How do you need to invest your money so that you can eventually retire? If you only invest in the most conservative funds, you are taking a risk that you will not be able to retire. Spreading out your investments into different funds will give you the possibility of creating wealth by getting a higher rate of return. Or, stated differently, you actually reduce your overall risk by having your money spread out between different TSP funds.
The amount you should have in different funds depends on a number of factors including how far away you are from retirement and your ability to withstand watching the ups and downs of the stock market. Using a good financial planner or adviser can be a sound investment as you determine how to invest for your financial future.
Christine Donohoo, associate executive director of AARP says that “Without expert planning many will have a hard time preparing for the future.”
Investing all your money in just one TSP fund may mean that you are taking too much risk with your TSP investment. It’s your money and your retirement. You want to make the right decisions. If you are unsure where you are going with your investments, you should seek the assistance of someone qualified to help you make the right decisions.