Q: Am I invested in my TSP correctly? I am a 60-year-old FERS employee with over 28 years of service. I would like to retire within the next 2 years. My goal is to stick it out until I am 62 and can receive an additional 10% on my FERS annuity. However, I know I will ultimately need to use my TSP account to help with my income. With the instability in the world and in the markets, I am worried my TSP distributions are not set up correctly to withstand the (assumed) coming market plunge.
A: This is the most common question I hear from federal employees. I realized a long time ago that in an unconscious way they were asking me to gaze into my financial crystal ball and tell them how their TSP allocations will perform in the future.
I am sorry to say no one (that I know of) has such a magical device. Some are even moderately successful at making educated guesses, but in the end, it is still guessing. When you are this close to retirement, I would suggest that guessing shouldn’t be part of your retirement plan.
If crystal balls and guessing aren’t options, what would I suggest?
One choice would be to lower your risk/return approach. This means rearranging your TSP allocations to choices that are generally considered less volatile. In this way, you lower your exposure to a perceived higher amount of risk late in your career. Many feds gravitate to this option when they are more concerned with TSP preservation than they are growth.
Some even leave it in the TSP when they retire. If you are leaning in this direction, may I suggest you first read my recent article on FedSmith titled, “Is the TSP TOO Cheap?”
Other feds want to limit their TSP risk(s) yet still want the ability to grow their TSP’s value. They recognize the markets may NOT “plunge” before they retire, but instead may experience tremendous gains.
So, what can be done to mitigate risk and allow for the pursuit of gains?
Instead of incorporating clairvoyance into a retirement plan, they look for an acceptable balance. A concession is negotiated between their financial loss panic point and their desire for investment gains.
This middle ground is referred to as a person’s “risk tolerance.” Finding this comfort zone is (in my opinion) the most important aspect to developing an intelligent allocation. Once you find your balance point, you are likely better prepared to allocate your TSP to match your tolerance levels.
The goal of finding your individual risk tolerance is that when the markets are down, you don’t suffer enough losses to panic, yet when the markets are up, you receive enough gains to satisfy your wants/needs.
Good news – there are lots of places to investigate your risk tolerance levels. I offer a short risk assessment on my website. But, there are numerous other places to look as well, such as TSP.gov, which has a Planning & Tools section that you may find to be helpful.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risks, including the loss of principal. No strategy assures success or protects against loss. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com .