Planning on Retiring? Can You Sleep at Night?

The TSP returns are not looking good for October. Should you panic? Should you change your investment strategy? Should you dump stocks and put your money in the G fund? How can you sleep better at night by not worrying about your future retirement?

Planning on retiring soon? Most of us would like to do that–or at least work part-time at a job of our choosing.

Are you having trouble sleeping at night? Many Americans can’t sleep and more Americans are relying on pills to help them get a good nights sleep.

Perhaps the two topics are related. Retirement, in theory, is a time when you can sit back and relax and enjoy the fruits of your labor earned during a career spanning some 25-40 years.

But most people have not saved enough money to retire comfortably. Federal employees have several significant advantages over many of their private sector counterparts–especially those in the Civil Service Retirement System (CSRS). A defined benefit plan is becoming rare in American society and large numbers of retirees working for private companies who thought they had a secure retirement with a defined benefit similar to the CSRS system have found their retirement wasn’t so secure after all. Global competition, poor management, work practices or cultures or union contracts that created generous but unsustainable benefits, or changing technology have all combined to make many current and future retirees very nervous about being able to survive their retirement years.

For federal employees, the Thrift Savings Plan is a major part of their retirement planning–just as 401(k) plans are for many private sector workers. But a month like we have had in October can make anyone nervous.

The TSP funds have done very well over the past year. (See I Fund is Big Winner in September)

  • The I fund is up about 26% over the past twelve months (through September);
  • the C fund is up over 12% for the past year;
  • the S fund has a positive return of over 22% for the past year.
  • But if you look at the October returns, you may not like what you see. All three of the TSP funds are down for the month of October (through October 25th). No one likes losing money and if the funds were to continue losing as much 3% a month–as they have done in October– for the next few months, your investment in your future retirement could be a distant memory.

    So what do you do? Some investors take what they assume to be the safest option. They put all or at least even more of their money into the G fund. The G fund is the most popular among CSRS investors. These investors have more than 40% of their money in this fund. Employees in the Federal Employee Retirement System (FERS) have a little less than that in the G fund.

    At first glance, this makes sense. The G fund doesn’t go down. It consistently goes up a little each month so some investors are able to sleep better at night. And for some employees, this makes good sense depending on their ability to accept risk and their time frame for entering retirement.

    But putting too much of your money into the very safe and reliable G fund may not be a good choice for some investors. Over the long term, your money is likely to do much better in stock funds. As we have seen so far in October, that is not always true because stocks can and do go down–sometimes they go down fast. But keep this in mind: Stocks have gained an average of more than 10% a year since 1926–even including the stock market crashes of 1987 and the late 1920’s. Treasury bills (which are closely related to the G fund) have returned less than 4% a year during the same time period.

    Here is a rough translation: If you are depending on your TSP investments to fund your retirement, you need to have money in the stock market. Younger employees with a longer time to go before retirement should have more of their money in stocks.

    But there is more to it than that. All of us tend to have a limited perspective. We live and work in the United States. Most of us would not live anywhere else. Why put your money into foreign stock investments?

    Most TSP investors don’t invest in the I fund. That can be a big mistake.

    America has a mature economy. We live in a global marketplace. There is a good chance that the foreign stocks will outperform domestic stocks in some years. To take advantage of this potential, you need to have money in the I fund as well. TSP investors only have between 5-6% of their money in the I fund.

    As you can see from the figures quoted above, the I fund has done better than any of the TSP funds. If you have $100,000 in your TSP fund, the 14% differential return between the C fund and the I fund would be approximately $14,000. And, to put the point into better perspective, a return of 4% in a year (the approximate G fund return) would give an investor approximately $4000 on the hypothetical $100,000 investment instead of the $26,000 that is now in the TSP fund for the I fund investor. (These figures are rough approximations as the rate of return varies from month to month during the year.)

    Based on past experience, here are the keys to a successful retirement according to some financial planners:

  • Invest as much as you can throughout your career
  • Start investing early in your career even though retirement may be decades away
  • Put money in stocks for the long term
  • Diversify your investments to include a variety of stock funds and bonds.
  • With this approach, you may actually enjoy your retirement and be able to sleep at night while you are still working!

    About the Author

    Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47