The Thrift Savings Plan has served you well over a long career but now it is time to retire. My retiring clients often say things like, “Is the TSP still the best option in this new stage of life? Some people talk about moving it to an IRA, but all I’ve known is the TSP. I’ve done well enough investing my TSP during my career but I really don’t know how I should invest in my retirement.”
Unfortunately, there is not one single answer solution that fits the needs of every single federal employee out there. Everyone, (that means you too) needs to educate themselves enough to know the basic pros and cons of this decision because it can make a big difference over a long retirement.
To get you started, here are some things to consider.
Should You Roll Your TSP to an IRA?
An IRA is a great tool and is widely used by those working in the private sector. It is less common among feds, however, because of their ability to access the TSP.
The main advantage of an IRA in retirement is the flexibility. You have much more wiggle room with withdrawal options as well as investment options.
The one potential problem that comes with more choices is the complexity. The TSP’s strength lies in the fact that it is so simple and easy to use. There are limited investment options, but they meet the needs of most feds just fine, not to mention the fees are incredibly low.
If you want to have more flexibility to withdraw and invest funds in more complex ways and you don’t mind paying a little more to invest in private sector funds then maybe an IRA is the right choice.
It is important to note that many financial advisors will tell you to roll your TSP into an IRA. This is not always a bad thing especially if you’d like your advisor to manage the account for you. Just remember that most advisors get paid to manage money. The more money they manage, the more money they make. Because advisors can’t directly manage your TSP they will often advise you to simply roll it out into an IRA so that they can manage it.
Now, I am not saying that all financial advisors will throw your interests aside just to make more money. There are many advisors out there who truly put their clients before themselves. As an advisor myself, I have definitely seen both the good and bad in the industry.
My advice to you is to not be afraid to ask your advisor when you don’t understand why he/she advises a certain way. An advisor that is worth their salt will be able to walk you through the reasons why a certain action makes the most sense for you in the long run.
How to Invest During Retirement
Investing during retirement is often crucial to ensure that your money lasts longer than you do. Not only are you trying to make your money last but you are also trying to beat inflation and maintain your standard of living.
Assuming an inflation rate of 3%, it takes about 25 years for the value of your money to be cut in half. Many retirements these days last at least 25 years.
Now I can’t say exactly what investment strategy is the best for you, but I can give some general advice. The major difference in investing strategies between feds depends on how much of your TSP you need every year, your other income sources (Social Security, Federal Pension, ect), and your timeline and goals.
The Bucket Strategy
A good way to approach retirement investing is to think about 3 different buckets.
The first bucket is your cash bucket. This is the bucket that you will be drawing from to fund your living expenses. You will always want 3-5 years of living expenses (whatever isn’t covered already from other income sources) in your cash bucket so that you can wait out any down markets without having to sell your investments when they’re low. This cash bucket gives you security and freedom.
The next bucket is your growth bucket. This bucket is where you invest in things that will have good growth over time. These investments will have up years and down years but over time they will do well. You have your cash bucket so you don’t have to touch your growth bucket in the years that these investments go down.
The third bucket is your income bucket. This bucket will invest in bonds and other income producing investments that we can use to replenish your cash bucket over the years. This bucket won’t grow as much as the growth bucket but it will be more steady.
Deciding how much should be in each bucket is a mixture between an art and a science. You will have to see what makes sense for you and your retirement needs, but thinking about your retirement investments in this way can get you on the right path.
Investing in retirement is an essential part of a good financial plan. Making wise decisions in this arena can have huge ripple effects throughout your life and retirement.