Posted on Thursday, 11th August 2011 by Dennis DampPrint This Post
A site visitor close to retirement wrote that his TSP was considerably less than it should have been because he didn’t understand the TSP options and mismanaged his account throughout his career. Don’t let this happen to you.
It feels like a rerun of the 2008 recession with the Dow at the time of this writing down 2,152 points, 19% in the past three weeks. The TSP C fund has dropped in line with the S&P’s 18% freefall and if you had $100,000 in your C Fund it would be down to $82,000, a dramatic drop by any standard. I mentioned in my February article that I converted my entire TSP to the G Fund because of the uncertainty in the markets and I was concerned that a major market correction was eminent. Nothing goes up forever, and with the meteoric stock market rise a correction was around the corner. Then when you factor in the unrest in the Mideast, the national debt crisis, S&P’s downgrade of our nation’s debt from AAA to AA+, and the banking crisis in Europe, you have the makings of a chaotic financial tsunami!
Our leaders will finally have to tackle the mounting debt crisis before it collapses our system and I believe they now have the mandate, will, and courage to do so. Even with all of this uncertainty America is still a safe haven, by comparison, to almost any other country. Yet, there is a rough road ahead and we all must be prepared.
First things first, DON’T PANIC! The sky isn’t falling even though our investment accounts are temporarily on a downhill trajectory. Remember Annie’s song in the musical by that name:
“The sun will come out tomorrow
So you gotta hang on ’til tomorrow
Come what may…”
The sun will come up tomorrow and thankfully it always does. Historically, all major market sells offs reverse direction over time. The ones who panic and transfer out of equity funds after the market has already dropped off appreciably suffer the consequences. They often wait to get back into equity funds after the market recovers and they enter into a vicious cycle that drains their accounts with each new market swing. I abide by the following principles that help me in times like these:
- Be prepared so when disaster arrives all of your eggs aren’t in the wrong basket
- Don’t make drastic changes during major market moves
- Invest conservatively when you are within 5 years of retirement
During the October 1987 stock market crash a friend of mine was on the phone until midnight with his broker selling all of his mutual funds. He lost 50% of his investments overnight. Had he stayed the course, his account would have fully recovered in less than six months! It’s hard to fight against the panic that ensues during a major market down turn when everyone is saying the sky is falling. It takes discipline to stay the course.
That being said, it all comes down to timing and what funds you should be in and when. Those anticipating retirement, that aren’t familiar with investment principles, would best be served by investing in one of the Life Cycle or the G Funds. The life cycle funds were designed for those who don’t have the time or inclination to follow and understand the markets and investment strategies. If you plan to retire between 2015 to 2024 the L 2020 fund may be right for you. Currently the L 2020 funds are invested 36% G, 7.4% F, 20.8% C, 9.6% S, and 16.6% in the I Fund. Each quarter the fund adjusts to a more conservative mix as you approach the year 2020. The largest investment is in the G Fund that is guaranteed to never decrease in value. This mix will fluctuate much less than the S&P 500 or Dow index.
The L Income fund or the G Fund may be a good fit for those within 2 to 3 years from retirement if you will need to start withdrawing your TSP when you leave. The L Income fund offers a conservative fund mix that allows for some growth. They invest 74% G Fund, 6% F, 12% C, 3% S, and 5% in the I Fund. With the majority of the L Income Fund in the G and F bond funds your exposure to the broader market is limited and the swings will be much less dramatic.
If you are mid career or earlier select a more aggressive fund such as the L 2030 fund to maximize your retirement savings long term. Remember, you are investing each pay and you will be dollar cost averaging your investments over time. When markets drop off your contributions buy more of the funds that decreased in value the most.
Visit our retirement financial planning section for additional helpful information. I’ll discuss ways to better understand the markets and your TSP investments in an upcoming article for those who wish to be more active with their THRIFT investments.
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The information provided may not cover all aspect of unique or special circumstances, federal regulations, and financial information is subject to change. To ensure the accuracy of this information, contact your benefits coordinator and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our articles are not intended nor should they be considered investment advice. Our reply is time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.
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