Q: A financial planner we met with was interested in moving a chunk of our investment in the TSP into a vehicle that “can’t lose money” – worse case it stays flat in a market downturn to preserve our investment. It didn’t strike me as such a bad idea – thoughts?
A: It sounds like the adviser is talking about an “indexed annuity.” Indexed annuities are investments that are marketed as participating in the gain on the market, but with none of the risk.
Here’s a simplified description of how they work. An indexed annuity will track a specific investment (e.g., S&P 500, gold, interest rates, etc.). In years with good returns, your gain is hedged in order to provide a cushion that will protect you in bad years. You will not get the actual gain that you would have if you were directly invested in the market, but the hedging will protect you from loss in bad years. Here’s an example using an indexed annuity that is tied to the S&P 500: In a good year like 2013, instead of getting the 32.45% gain that you would have if you were directly invested in the S&P 500, you might realize a gain of 16% or so. However, in a bad year like 2008, you would lose nothing, as opposed to the 36.99% drop that the S&P 500 suffered.
There’s a lot more than gain and loss to consider if you are looking at investing your TSP in an annuity. What are the fees associated with the annuity? How flexible is the annuity (what are your withdrawal options)? Are there any penalties if you get out of the annuity before its term ends?
Investing your TSP after you retire is a major decision and you will want to fully investigate all possible options.