TIP: Don't Give Your TSP Away!
I was at a seminar recently with a financial planning group and I couldn’t help but marvel at what they want you to do with your money. Give them your money and they will put it in high-risk investments that will get you 20%, 25%, 30%! Oh you might have a few years of bad returns, say -18%, -22%, -28%, but over time you will be okay. This group wants to give people the idea that you will come out of this in great shape. Don’t worry about the roller coaster this puts you in. Just tighten your seat belts and all will be well as long as you invest with them. This strategy plays on the greed factor.
So do you want to be part of this roller coaster of emotions for the next 30-40 years? Whether you are retired or not, do you want to have your money going through such massive ups and downs? Everybody is smiling and back slapping each other when you are at 30% but when it starts tumbling down to say negative -15% or -25%, everybody is ready to abandon ship and step on each other.
You have heard these speeches before. You get these very rosy estimates and everything sounds great. No problem. Just invest your hard earned money with this financial group or that financial group and everything will work out great. Only one problem; It is a very false sense of security. Maybe the guys you gave your money to are not con men but they were just wrong or incompetent or maybe the investments were just too risky for your financial profile.
I notice the biggest problems people have with their TSP is when they give the money to someone else to get a better investment. The question is, “How much better do you need to be?”
Some people have plenty of money in their TSP but they get convinced by someone else that they could do better. Better rates of return. Better service. Better variety of investments. So the question you have to ask is, “How much better will I be if I give this person my money?”
The answer many times lies in your own mind. If you have a very healthy TSP, lets say $700,000, $800,000, $900,000 or even $1,000,000, then you are in a very good place and this will sustain you for the next 30-40 years. Then why are you trying to get bigger returns when you are in such a good place? Because some slick talking salesperson said you should be doing better? How much better? What is the definition of better? An extra $20,000, $50,000 or even $100,000?
That depends on you. Some people need to get their TSP balances higher because they didn’t save enough during their time in the government. Time and consistent higher contributions to your TSP while employed for the government will help you get to your max out goals. After retirement, your TSP still grows even when you are starting to access the TSP for funds. Putting your money into a higher risk investment may get you those extra thousands of dollars or it may put you right back where you started with a whole lot of emotional baggage attached.
Maybe you don’t have the time or can’t put any more money in the TSP right now. Then putting it in a higher risk investment may sound tempting but do you really want to gamble with the money you are suppose to be living on for the next 30-40 years? Once you get to those higher balances and you have reached the age of 45-50, the main emphasis should not be to get more money but to protect what you already have. Protect yourself.
A lot of research points to a large downturn in the Stock Market around 2020. It’s no secret. Maybe 2019 or maybe 2021, but most likely around 2020. We are now at the end of the business cycle and the good times are about to end. The problem is nobody knows when exactly that will be. Nobody! It could happen next year, next month, or next week.
You can sit there and rationalize all you want about tax changes, tariffs, trade wars, and low unemployment but the reality is there is no known timetable to predict the actual date of this event. You have to start preparing NOW. That means think about some lower risk investments with slow and sustained growth. That is what the TSP is for. Maybe diversify some of your funds for an extra cushion of protection.
We are talking about 4% - 7% rates of return. That gets you to your max out goals and does not take you on a riskier adventure. (See my past Tip of the Month articles.) Any downturn in the Stock Market will not clean you out. You may lose some money but not a massive amount and you will be able to bounce back in a reasonable time, even during retirement.
By the time it happens, it will be too late to do anything with your funds. You will see people start to scramble and put their TSP into the G Fund but that won’t help. You will be better off leaving the money where it is and ride out the storm but most people won’t listen. It’s like a sinking ship and somebody yells, “Stay Calm.” Nobody listens to that. It’s every person for themselves at that point. The key is not to be on a sinking ship in the first place!
Pay attention NOW. Stop trying to get massive profits because everything looks great now. Remember, the TSP is for LONG TERM growth. Stop thinking you are going to make a big score from TSP if you keep it the C, S, and I funds for these next few months and then bring it back to a more conservative place, like the L Funds or even the G Fund before the big Stock Market dive takes place. You will never see it coming and you will now be in for an emotional and financial roller coaster ride that you can’t get off.
But wait. There is another financial planning group that I recently listened to and is waiting for the Stock Market to dive to justify their existence. These people live in a different place than the high-risk investment guys. Some financial planning groups say the TSP is the worst place to have your money. They will tell you how bad the TSP is and you can have total piece of mind with them. What do you have to do? Well, give them your money of course. They will put the money in a long-term annuity that will pay you a rate of return of about 3% but there is no more market risk. Tremendous. So this could be the way to protect your money from that roller coaster.
Only one problem, you don’t have control of your money anymore and you can’t get it back. Oh well, even though 3% isn't the greatest rate at least you are safe from the Stock Market. Oh and don’t forget the fees the financial planners will charge you for this great idea. Maybe 1%-2% of your assets PER YEAR. So if you have $500,000 in the TSP that you give them, it will be about $5,000 - $10,000 per year for their services. If you have $1,000,000, then it’s around $10,000 - $20,000 per year! That’s one way to beat the Stock Market. This strategy plays on the fear factor.
Look, I’m not saying don’t try to max out your profits in the TSP. I’m not even saying don’t try other types of investments, or IRAs, or other stocks or even other investment plans or groups. I would love to get 15%-25% and grab all the money I could but the problem is always the same. Timing.
Nobody knows the timing and all the great experts, economists, and financial big guys on Wall Street can’t tell you when the bad stuff will start to happen but it will happen. This is how the business cycle moves and you can bet it will happen throughout your working career and when you retire over a 50 year period.
No matter what the White House says, or the Treasury Department, or the Securities and Exchange Commission (SEC) says, they don't know. Nobody from Harvard Business School or Stanford Business School knows either. Nobody knows and you will be the victim of your own greed or fear. That’s what it comes down to. These are very insidious emotions and it will make you do things you would not normally do. We all have these emotions but you must keep them in check. Stop feeding into the greed or fear factor. Be smart and dial back your risk now before the Stock Market crashes and please, don’t give your TSP to someone else!
If you want to talk to me about these ideas please call me. I would be glad to discuss this. Maybe I missed something. Maybe I didn’t. I am not saying don’t listen to your financial advisors, financial planners, stockbrokers or investment counselors. I am saying look around, pay attention to what financial news is coming out and really think about it before giving your money to someone else. Maybe it’s a good idea. Maybe it’s not. Remember, you earned your TSP after all these years. Don’t be too quick to give it away.