“I have a lot of money in there [the TSP] Charles. What was I supposed to do!?”
“I moved it all to the G Fund, and just wanted to wait for things to calm down.”
These are phrases I have heard more than a couple of times recently.
Perhaps this was you, just a few short weeks or months ago, and that’s okay. What is in the past is just that: the past.
However, what matters most is what we can do today. The emotionally charged nature of stock market losses can cause all sorts of behavior. Making decisions about your retirement savings is a tough job in any market conditions, but nearing retirement with C fund and S fund performance pitching up and down while not knowing what the future holds can be nerve racking. Add to it a recession, rising unemployment, Covid and an election year. Talk about uncertain market conditions!
However, if you have a solid plan in place, suddenly these uncertainties look much less daunting. No matter what happens to the stock market, you could have already secured your first 3-5 years of income from the Thrift Savings Plan (TSP) or other retirement savings with a good plan.
Let’s examine what not to do during these times, and some factors to consider when formulating a retirement plan.
Buy On Sale
When the market is in turmoil, the most common mistake I see consistently in the TSP and in 401Ks of any kind is that many people stop buying riskier investments (i.e. TSP stock funds). They move both their balance and their future contribution allocations to G and F funds. However, it is when the market is losing money that it is a fine opportunity to buy the C, S, and I funds at a discount.
Every 2 weeks, you contribute to the TSP. If every 2 weeks the market is falling, this is a great time to utilize cheaper positions because over time those positions will ultimately rise in value. The habit of leaving a good portion of your future contributions in the 3 stock funds may be a good one; buy on sale when they cost less.
What percentage should be used to purchase future allocations? Rebalancing annually may be an essential thing with this sort of purchasing plan, particularly if you are nearing retirement. Nonetheless, buying TSP stock funds every pay period and leaving the balance unchanged may provide the needed growth you’re looking for.
The Stock Market is a Growth Engine
The stock market is a growth engine. It is NOT an income engine.
We hear it all the time: grow your money; risk, risk, risk will reap rewards. While this may be true, what about the money you need for income?
Retirement is different, if indeed you are counting on your TSP retirement savings to be just that, retirement savings.
There’s a July 2014 TSP newsletter to investors that was titled “Retirement Income Should Be the Outcome”. Your TSP savings were intended to be used to maintain your same standard of living in retirement just as when you were working. Isn’t that the whole point? Monthly income!
But can you rely on the monthly paycheck the accumulated savings should generate? If you have a plan that includes investments that serve the purpose of producing monthly income, you may succeed. These would naturally be stable and reliable. In other words, we are no longer talking about the C, S and I funds. Keep in mind, however, that this is for a portion of your savings to satisfy the income needs. A balanced approach is key here; never one solution, but a variety.
Look, your paycheck did or does not fluctuate according to the performance of the stock market, does it? Do you count on that same amount every two weeks? If the obvious answer is yes, then shouldn’t you have stable monthly paychecks in retirement? You better believe it.
This is not to say that you should leave the stock funds. It’s to say that income should be established for the first 3-5 years and before retiring. Then as you either near retirement or move to the next phase of your retirement, your goal is to have more stable and reliable income sources of investments. So after those funds get exhausted for income, you adjust new funds for the next 3-5 years of income, making those more stable. Wash, rinse, repeat.
When the former CSRS retirement system got phased out, and along came the new FERS retirement system, it was to put risk on the shoulders of the investor instead of the government. No more guaranteed big pensions, but instead Social Security and the TSP layered in along with your much more modest monthly pension. The government will give you a 5% match at 100%, so go get ‘em. This makes for a very healthy employer retirement plan.
But what if you are nearing retirement or already in retirement? It’s up to you to figure out what risk is appropriate, and how much income you’ll be needing. Or is it?
Have a Retirement Plan
It is a must that if you are planning on using your retirement savings for monthly income (we have established that the vast majority of federal retirees intend to utilize the TSP for this purpose) that you have some sort of plan.
How much are your monthly bills, and what does it cost you to live? How expensive are you? You want to know what you cost, and then consider all sources of income you will have in retirement. This is a short list of possible retirement income sources:
- Social Security (we like to have a maximization plan for Social Security to optimize lifetime income if possible)
- FERS Pension (Federal Employees’ Retirement System)
- FERS SRS (Special Retirement Supplement) (may qualify prior to age 62 but then it ends abruptly)
- Military Pension/VA Disability
- Other Pensions
- TSP Retirement Income/Discretionary Spending
- IRA 401K Retirement Income/Discretionary Spending
- Rental Income
How will you coordinate all of these sources of income? Perhaps you just have FERS Social Security and TSP retirement savings. How will these be taken?
Do you know what will happen if you are pulling money from the TSP or IRAs and what your recovery plan would be if there is a sudden market downturn? Can you afford to suffer losses and recover, and how long would the recovery be? Would you stop taking income from the TSP while the market recovered your losses?
If you experience financial troubles, how would your lifestyle be impacted? How would this look, say not turning on the AC or eating beans and rice for dinner? Although I jest a bit, these are serious questions, and you need to imagine the possible scenarios.
These are the kinds of reasons that caused people to panic and shift much of their TSP balance to the G fund a few months ago.
I hear frequently people saying not to make any changes to your TSP. That’s fine if you either don’t need the income or don’t have any pressing expenses, but if you are like most people, you need to make your money last a lifetime. Stop and consider what your plan is. Get a plan in place, something essential for those planning on retiring in 3 years or less. The ideas I outlined above are a good starting point when beginning to develop your personal retirement plan.
That same letter to investors from the TSP’s July 2014 newsletter said, “Don’t just wing it: consult a financial planner if necessary.” If you would like to discuss a retirement plan tailored for your situation, my team and I are here no matter where you are, since Zoom has made the world a much smaller one.
Charles Dzama is the author of FedWise, a free monthly newsletter focused on topics of importance and interests to federal employees. He has been assisting federal agencies and federal employees for well over a decade in fully understanding their benefits. Email Charles to request retirement training at your agency.
CD Financial is a Registered Investment Adviser. CA LIC #0G46793. Investing involves risk, including the potential loss of principal. Any references to security or guaranteed income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. CD Financial is not affiliated with the U.S. government or any governmental agency.