If you are planning to be able to retire in some degree of comfort (i.e., have a similar lifestyle to the one you have when working), you need to have a plan. For many future retirees, especially those under the FERS system, having a plan may be the difference between being able to retire or having to work well beyond the normal retirement age.
Having said you need a plan, what should be in it? While each person’s plan will be different because of your age, income, health and future plans, here are some suggestions any federal employee should follow in planning for future retirement.
First, set your investment goals and objectives.Are you more interested in long-term growth of your investment money? This might apply to you if your retirement is a few years in the future.
Do you need current income? While all of us would like more income, this is more relevant for those retiring in the near future.
Are you primarily interested in preserving your capital investment in the TSP? This may be particularly appropriate if you think you have enough saved for your retirement already and want to make sure you don’t lose your capital in the ups and downs of the stock market.
Second, what is your tolerance for risk and what most concerns you?Are you primarily afraid of losing the money you have already invested, outliving your assets after you have retired, or that your investments will not keep pace with the stock and bond markets?
Third, how much income will you need after you retire and what are your spending plans? What spending level are you planning to have when you walk out of your agency’s door for the last time as an employee?
Fourth, you need to decide how you want to allocate your assets. The Thrift Savings Plan gives you a number of choices. How much do you want to put into the bond funds and how much into stocks? Once you have answered this question, you need to decide how much will go into each class of assets (For example, how much will you put into the G and F funds for your bond allocation?).
Some federal employees who have written to us at FedSmith.com tell us that they like to invest their money into the funds that have performed the best in recent months.
This may not be a good idea. Often, the funds that have performed the best in recent months will quickly become the funds that provide the poorest rate of return in coming months.
You need to decide what investment mix you want to have and make your investment decisions based on your plan. One piece of advice: based on historical returns, even retirees need to have some of their investment in the stock market. We often hear from our readers that they are putting virtually all of their money into the G fund because it is the safest investment.
That is true but an investment in the G fund should only be part of your portfolio. The G fund is not likely to bring you a sufficient return to allow you to live comfortably in retirement because, over time, its rate of return will be less than stock investments.
Finally, once you decide what percentage of your assets to put into stocks, you should consider putting some of your money into small company stocks (the S fund) and some into international stocks (the I fund). While this allocation will vary for the reasons mentioned above, some investment advisors suggest putting up to 20% of your stock investment into international stocks and up to 20% of your stock investment into the S fund.
This will balance your portfolio and the diversity of your investment is likely to give you a better return over the duration of your career. See the recent returns from FedSmith.com’s TSP charts for a good example of how these funds can help you have a better rate of return in your TSP.
And to keep your retirement investments on a solid footing, and consistent with the plan you have developed, you should take a good look at your portfolio periodically and shift your investments around to reflect changes. For example, if your investment in the S fund has gone up dramatically, you may want to consider moving money out of the S fund and into the C fund or even into the bond funds in order to maintain your ideal allocation between the funds.
Remember that your ability to retire is only up to you. There is no magical investment allocation that will guarantee you living well or even guaranteeing a specific level of income. Any investment you make in the TSP involves some risk and it will fluctuate. You need to accept that there will be years your account will decline in value. But, in the long run, if you don’t develop a plan for your retirement and stock to it, you could find yourself working at the same desk while your colleagues are enjoying a more leisurely lifestyle without having to go to work every day.
And, if you have no choice because you don’t have enough money, or if you want to continue working, here are the hottest jobs for retirees according to Retirement Weekly.