Gain Confidence in Your Retirement - Rule Your TSP! (Part 2)
Thursday, June 3, 2010
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by
Carol SchmidlinAnn Vanderslice
(Editor's Note: This is part 2 of a 2 part article)
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Last week, we wrote a fairly detailed account of the challenges presented in managing your own Thrift Savings Plan. With such a significant portion of your retirement income destined to come from the TSP, taking an active role in allocating your TSP funds is more important than ever. Which brings us to the second part of the article.
There is no one solution that can assure your TSP will perform in a way to assure a carefree retirement. You are responsible for making that happen, and you have to do your due diligence in researching the tools that are available. The challenge is to understand not only what each of the TSP funds invest in, but the risks involved in each fund or combination of funds. Finally, you must determine that your investment approach is suitable for your individual needs and risk tolerance.
We have all heard the importance of diversification – "Don't put all your eggs in one basket!" The Lifecycle Funds were designed to provide just such diversification. In fact, even better—Lifecycle Funds get progressively more conservative as you approach your retirement date.
There is an issue with this approach, however. The Lifecycle Funds are built on a "buy and hold" strategy, which doesn't always bode well if there are significant changes in our economy. Looking back at what happened in the stock market during 2008, if you were retiring in 2010 and were in the L2010 Fund, you would have experienced a (10.5%) return—two short years before your retirement!
This might not have been a suitable portfolio for someone within one year of retirement. This illustrates the importance of using more tactical or dynamic strategies that take into consideration not only your proximity to retirement but the changing economic environment and market conditions to allow your portfolio to adjust to current market conditions.
Understanding your true risk tolerance begins with being honest with yourself. We do not live in the 80's and 90's anymore, where being aggressive was equivalent to getting a large return. Ask yourself, how much of a loss could you truly sustain and not have to change your retirement date or standard of living during retirement?
During a recent meeting with a prospective retiree, he shared his story of how 7 years ago his retirement dreams were destroyed with the downturn in the market. His TSP was nearly $500,000 and by January of 2003, his original retirement date, his value had dropped to under $300,000. He decided to delay his retirement and moved all of his TSP to the G Fund, which unfortunately did not allow him to participate in the strong gains the equity funds experienced in the following four years. The moral of the story is that you have to understand the downside risk in your portfolio in terms of dollars and cents.
Looking back on the two years from September 2000 through September 2002, the C Fund dropped by 44.7%. It didn't recover to its September 2000 level until October 2006. What is the effect in real dollars? If you had $100,000 invested in the C Fund in September of 2000, a 44.73% drop would have brought your account balance to $55,270, and you would have needed a positive return of 81% to get back to your $100,000.
And what if you had been retired during this downturn and were taking $500.00/month in distributions from your TSP to supplement your FERS pension and Social Security? How would that have affected your account value? If you had remained in the C Fund, your value would have been $42,770, and in order to get back to your starting point of $100,000 you would have needed a positive return of 133% - highly unlikely!
If you are trying to go at this alone, good luck! While there is no shortage of information and opinions on allocating your TSP, it's difficult to sift through it all to find practical information you can implement immediately. We have found that the website, can be extremely helpful in putting this all together.
It is designed to assist TSP participants in understanding the funds they invest in and create portfolios that are suited for their personal risk tolerance. The portfolio models differ from the Lifecycle Funds, because the analytic methodology includes real time information providing the ability to change as the economy and markets dictate.
The emphasis is on protection first and growth second, so if you are looking for a strategy that tries to time the market, this is not for you. Good luck in pursuit of ruling your TSP.
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Carol Schmidlin is the President of Franklin Planning and has been advising clients on how to grow and preserve their wealth for over 16 years. She is a specialist in federal employee benefits, as well as an expert in retirement planning strategies. She holds a Bachelor of Science degree from Rowan University and is a registered financial consultant (RFC). She provides a variety of retirement classes to federal agencies and private companies, along with topic-specific brown bag lunch training programs.