Posted on Friday, 7th September 2018 by

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Fortunately, Federal employees are able to determine where they stand financially before retiring. When you evaluate your Thrift Savings, civil service annuity, social security and other savings and investment accounts you will discover the reality of retirement for you and your family. Will you have enough to not only live comfortably but to achieve your retirement goals?

 

 

Thanks to our annuities federal employees tend to fair better than most and this safety net offers us greater flexibility in retirement. Federal retirees may not need to withdraw as much from their retirement accounts to make ends meet as do those without pensions in the private sector.

The key to a successful retirement is having the funds necessary to pay your bills and maintain a comfortable life style. Retirees with sufficient savings and resources can relocate to escape high taxes or severe winter weather, travel extensively, pursue hobbies, start small businesses, and everything in between. Retirement can be anything you imagined if you have the resources to make it happen.

Most federal employees contribute to their Thrift Savings Plan (TSP) to maximize their retirement savings and those over 50 can and should contribute even more.  The younger you are the more risk you can tolerate because you have decades to recover. Plus, while in a recession your TSP contributions take advantage of dollar cost averaging, buying more shares at lower prices if you stay the course.

One of the reasons why federal employee’s Thrift Savings Plan (TSP) accounts are often less than anticipated is that many panic when the market drops and transfer everything to the TSP’s government bond (G fund). They lose the advantage of dollar cost averaging.  If you don’t take the time to learn basic investment principles investment decisions are often based on panic or gut feelings.

I worked with an individual who would transfer from the S&P 500 Index (C Fund) to the (G Fund) whenever the market dropped substantially. Then, after the market recovered and was near the top he moved everything to the (C Fund) only to watch it drop again!  If he would have kept a good portion in the C, Small Cap S, and International I Funds during the downturns and dollar cost averaged when the market went down, he could have retired with a significantly higher TSP balance.

The TSP’s target date (L Funds) are a good option for those uncomfortable with making investing decisions. These target date funds are adjusted every quarter to a more conservative fund mix as you approach your target retirement date. The L Income Fund is the most conservative of this group and focuses on capital preservation while providing a small exposure to the TSP’s riskier assets (C, S, and I Funds) in order to reduce inflation’s effect on your purchasing power. It’s important to note that it’s impossible to time the market and often if we try we lose out long term.

This is where the dilemma arises for retirees.  We don’t have time on our side and if you need income from your investments, risk of loss is a potential game changer. Plus, the current bull market is mature, just over 10 years running and the good times don’t last forever. It is said that bull markets don’t die of old age. However, interest rate increases, deteriorating stock market fundamentals, international tensions, political turmoil, terrorist attacks, natural disasters, technological changes or disruption all factor into the equation and can topple a stampeding bull market in its tracks.

During the last major financial crisis the S&P 500 dropped 57% from it’s high in 2007 to its low in 2009! It took the S&P approximately 14 months to hit its low and almost 6 years to recover to its previous high.

If you have sufficient assets for retirement and a healthy annuity there are ways to reduce investment risk and minimize retirement account fluctuations.  Thankfully, our annuity and Social Security payments are adjusted for inflation with annual Cost of Living Adjustments (COLAs).  However, our TSP and other investment accounts only grow through distributed dividends and capital gains.

So, how much is enough for you and yours to live on in retirement?  Can you withstand, or more importantly afford, to have your investments decline significantly during a major recession?

Request a Federal Retirement Report™  today to review your projected annuity payments, income verses expenses, FEGLI, and TSP projections.

When markets go up investors are exuberant yet when they fall we tend to have second thoughts and struggle with the decision to sell at a loss or hold out for a comeback.  As I write this article the market indexes on August 28th 2018 are at an all-time high and many pundits are proclaiming more highs to come.

What to do?

It isn’t a matter of what is coming down the road as much as your ability to accept or at least tolerate a loss with minimal disruption to your life.  In life we constantly accept loss, the loss of a loved one for example.  The fact is that we can avoid financial loses to a certain extent if we plan properly and that can make all of the difference to YOUR world down the road.

A financial planner will often ask who are you investing for to determine the amount of risk to take with your retirement portfolio. In other words, they want to know if you will need your TSP and other retirement accounts to live on or are you investing for your heirs.  If you reply “heirs,” they typically recommend a more aggressive growth portfolio. I question this because no matter who will eventually receive the assets I still don’t want to see what I worked a lifetime accumulating decrease 50% or more during a major recession or worse.  Secondly, if my heirs inherit during a market downturn they may be enticed to sell out and not wait for a recovery because they need the funds now or simply don’t trust the market enough to stay invested.

The older I get the more conservative I become with my TSP and other retirement accounts. Currently my TSP is invested 100% in the L Income Fund and I’ve adjusted my other retirement accounts to better weather a market correction that will inevitably come at some point in time. I don’t have decades to wait out a downturn, and market corrections can last for extended periods.  Plus, I don’t want my heirs to inherit a dramatically reduced portfolio during a down market.

I wrote several articles on ways to evaluate your personal situation and reduce market risk that may help you decide what is best for your situation.

I read an interesting article not long ago written by a retired finance magazine editor that struck home.  She decided on a course many in her field discourage, getting out of the market for the most part. After a thorough financial evaluation she determined she had sufficient funds and income to support her retirement with minimal stock market risk and worry. Instead of common stocks, she placed her funds in U.S. Treasuries, municipal bonds, short duration investment grade bond funds, and other fixed income investments. The yields were sufficient to still grow her account marginally and hopefully ahead of, or at least match, the inflation rate.

I haven’t gone that far but she has a point, especially for those who don’t have a fixed annuity to fall back on. She knows what her expenses are, how much she must withdraw each year, and can’t afford to suffer a significant loss through a market correction. Sure, she has Social Security which is inflation adjusted but Social Security was never meant to be your only source of retirement income.

This is a good time to evaluate where you stand, what you are invested in, and how much risk you are willing to take. It’s a personal decision and the time and effort you put into the process will help you avoid a potential funds shortfall when you may need it most.

If you need assistance seek out the services of a competent financial adviser to help you evaluate your personal situation. I attended several seminars offered by Hefren-Tillotson, a financial planning firm headquartered in the Pittsburgh area, several years ago and found them very informative. They will compile a free comprehensive Master Plan upon request for local area residents. There is no obligation for the review and if you are in the Pittsburgh area register for one of their free seminars. They also broadcast a weekly Sunday radio show, “Your Money & You” on KDKA radio from 9 to 11 am that you will find informative. Jim Meredith, executive vice president and ranked by Barron’s as one of the Top 100 Independent Wealth Advisors in America, provides a market overview each week and then answers questions from callers. Check with financial planners in your local area to find similar services and programs.

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Disclaimer: Opinions expressed herein by the author are not an investment or benefit recommendation and are not meant to be relied upon in investment or benefit decisions. The author is not acting in an investment, tax, legal, benefit, or any other advisory capacity. This is not an investment or benefit research report. The author’s opinions expressed herein address only select aspects of various federal benefits and potential investment in securities of the TSP and companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that retirees, potential and existing investors conduct thorough investment and benefit research of their own, including detailed review of OPM guidance for benefit issues and for investments the companies’ SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.

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