When you retire, will you be financially secure? Here are a couple of possibilities that will make you lose sleep.
If you are under the Civil Service Retirement System (CSRS), you are assured of a steady income for the rest of your life. For those already retired under this system, your insurance premiums have been rising faster than your annual adjusted income, but fluctuations in the stock market won’t make a huge difference in your financial outlook since you have a steady annuity coming in.
But most people have other investments, often from contributing to the Thrift Savings Plan during their federal career. These investments will enable you to do more in your retirement than sitting around and going to the senior citizens center. And if you are retiring under the newer FERS system, you are even more dependent on these investments to provide you with a comfortable standard of living in retirement.
If you have planned carefully, you have enough money to live well, and you know how much you will draw down your accounts each month to preserve your income for the rest of your retirement. What can go wrong?
One Real Nightmare Scenario
If you retired in January 2000, you have a good idea of what can go wrong. After a booming stock market for several years, perhaps you finally had enough money to retire so you submitted your paperwork and left your secure government job, smiling all the way home.
If you put most or a lot of your money into the TSP’s C fund, you were in for a financial shock. If you had $100,000 in your TSP fund when you retired in 2000, you would have had about $91,000 at the end of the year–even if you didn’t touch your money.
If you left it in the C fund so the funds would build back up again, your financial pain wasn’t over. It went down another $11,000 or so in 2001. That left you with about $80,000 in your fund. But, confident that America’s economy would bounce back quickly, you sucked it up and left the money in the fund, waiting for the inevitable bull market to pull you out of the doldrums.
Unfortunately, in 2002, you had a worse year than before. If you did not touch the money at all in hopes it would start going back up, at the end of 2002 you would only have about $63,000 in your account.
These figures are rough approximations. Most retirees would panic at this point. Their $100,000 nest egg that was going to take these hypothetical former feds on their long planned trip to Europe or guarantee a safe nest egg for the next 25 years or so was dissipating rapidly.
So what should they do? In reality, this type of situation occurred. Many people decided they could not stand the pain anymore. They sold their C fund and put the money into the G fund where it wouldn’t go down anymore. In effect, they took their lumps and accepted their losses and settled for a smaller but safer return by investing in government securities.
Of course, the stock market then started going back up, but our hypothetical investors didn’t get the benefit of the new bull market because they had already pulled out their money.
In short, it could be a nightmare if you are not careful.
(More) Nightmares To Ruin A Good Night of Sleep
Here are a couple of other nightmares to keep you awake.
You put all of your money into the TSP bond funds (or other similar investments outside the TSP) in order to keep your money safe. A stock market crash won’t hurt your investments, but inflation could take a big toll so that your money has less purchasing power because the rate of inflation exceeds your return.
You and your spouse are worried you will not have enough money to live comfortably so you cut back on your spending dramatically. You don’t go to restaurants, you don’t travel, and you don’t spend the money to visit your children and grandchildren who live in a different state. You spend your “golden years” scrimping and saving and wake up in your late 80’s with plenty of money but having missed the advantages of having the time in retirement to do the things you always wanted to do.
How to Sleep Better
So what do you do to avoid these possible nighmare scenarios?
First, keep a good portion of your portfolio in a mixture of stock funds. This includes small company stocks, large company stocks and foreign stocks. The market will continue to gyrate but in the long run you are likely to keep up with inflation. If you sit around and watch the daily and weekly gyrations it will drive you crazy. But remember you are likely to be in retirement for 20 or 30 years or more. Inflation may destroy your retirement nest egg if some of your money is not invested in a way that you can keep up with the ravages of inflation.
Second, keep some of your money in cash and short term bonds. You don’t want to have to sell your stocks at a time when the market is depressed because you will miss the upswings of the market.
Determine in advance how much of your portfolio should be in stocks and how much in cash and bonds. Readjust your investments each year to take advantage of the market swings. In other words, if your stock investments have increased a lot, sell some of these shares and put the money into cash or bonds.
Finally, prepare to be flexible. If inflation takes off and the stock market tanks, you are going to have a problem. You may want to consider cutting expenses if this happens. You may want to consider selling a larger house and trading down to a smaller one to cut expenses.
Also, during the first years of retirement, remember that money you withdraw for expenses will be gone. Set a limit on the percentage you will withdraw from your investments in a year and cut your spending if your portfolio heads in the wrong direction.
A little planning will go a long way toward helping you sleep better and avoid the retirement nightmare.