TIP: TSP Survival under the Corona Virus
I use the word "Survival" because that is the condition the TSP is in now. Thousands of Federal workers are trying to figure out what to do during this unimaginable crisis. Many people are living in fear. Many people don't know where to go from here with their TSP and their retirements. Fortunately, with some financial analysis, there are alternative strategies to deal with this crises.
Last year, on August 9, 2019, I wrote an article titled, "The Danger Zone." This article outlined what people close to retirement could do to minimize the risk from Stock Market crashes. This article is still valid and for those of you who haven't read it or forgot its contents, go back and read it! It's on my website and I posted it on LinkedIn as well.
In summary, the article outlined what a large stock market crash could do to your TSP and some strategies on how to reduce the risk of catastrophic TSP failure. The Stock Market crash was not a surprise to many people. Many economists had predicted that it would arrive sometime in 2020. What no one could say was exactly when it would happen and how bad the crash would be. What no one could anticipate was how fast and brutal this crash would envelop us and that a virus would be the cause!
Regardless of the cause, there have been some opportunities to study the crash and test various "Doomsday" TSP scenarios for validity and realistic expectations. Some interesting issues have come up with this crash and while I believe my scenarios were valid, I realize now that with any theory or modeling, it really takes a real-world experience to really put the theory to the test. By using the real-world events with the scenarios, I have been able to come up with some relief for your TSP from this economic madness, even though this CoronaVirus is not over and the economic situation is far from over.
Hopefully by now, many people are in the G Fund and at least not continuing to expose themselves in the C, S and I funds. For those of you that are still in the G, S, and I Funds exclusively, I don't have a good option for you. The analysis of being in those funds at a time of financial crises was in my "Danger Zone" article. Those funds have now approached the following losses as of March 20, 2020:
C Fund: -31.83%
S Fund: -40.27%
I Fund: -31.19%
L Income Fund: -8.16%
L 2020 Fund: -9.22%
L 2030 Fund: -21.32
I have said in my last article, the emphasis for employees at or near retirement is not to make more money but to not lose what you have been working for during the last 20 - 30 years! I included some of the L Funds to put some content on some of my strategies and assumptions. Lets be clear. During an event like the CoronaVirus and the economic crash, no one will come out unscathed but there are ways to lessen the financial pain for your TSP.
Fact #1: If you are at or near retirement, you will no longer be putting contributions into your TSP. The contributions acted as a buffer to any financial crashes and the injection of cash into your TSP could help the TSP to grow back to an acceptable level. This is what happened during the Great Recession of 2008. During that time, I was still 10 years out from retirement and I was still able to double my TSP to six figures before retirement.
Fact #2: There is no such thing as zero risk for your TSP. Yes you can put your TSP into the G Fund for your entire working and retirement life but the TSP will not grow enough for you so that you can be comfortable with your retirement.
I like to use the example of driving your car. No matter how good a driver you are and no matter how well you pay attention to all the traffic laws, you can have an accident in your car at any time and any place. There is no such thing as perfect safety in your car. But that doesn't mean you have to drive recklessly either. The same goes for your TSP. If you follow some basic rules and assumptions, the odds of your TSP getting in trouble are cut down dramatically.
Rule #1: If you put your TSP in a conservative account like the L Income Fund, what this does is it keeps your risk at a minimum level for most of the time and when a super event or "Black Swan" event comes about, it gives you a buffer or time to make a major decision like to retreat to the G Fund if necessary. Look at the difference between the L Income Fund and the C, S, and I Funds above. From an 8% loss to 31% - 40% losses. That is a huge difference in losses and can make or break your TSP investments.
I say retreat to the G Fund because going to the G Fund is a major decision and should not be done except in times of dire emergency, like the CoronaVirus. The G Fund is a very important fund and keeps your money from imploding. Even if you keep the money in the G Fund for a full year, the affect on your TSP will not be a major issue, especially if your money is in the TSP for 30 years before retirement and another 30 years after retirement. It will be a speed bump for the TSP, as long as you transfer the money in a reasonable time once you find a super event about to consume the financial system.
So just to recap this first strategy. Once the super event starts, there is no safe place to go except the G Fund for 3, 6, 9 or 12 months. You stay in the G Fund until the financial crisis is over and you will not be affected too much. By too much I mean maybe a loss of $10,000, $20,000 or $30,000. It's very hard to transfer your account to the G Fund in time to stop any losses to your account unless you are very lucky and your timing is perfect. Very few of us are. But you can make up the $10,000 - $30,000 loss. I know that hurts your TSP but what you can't make up is the $200,000, $300,000 or $400,000 loss you will incur if you stay in the C, S, and I funds during a super event.
So once the super event is contained and the financial system coms back to normal, and it will, then you can do one of two paths to keep you on track for your retirement and continue to protect you until the next financial crash. Just remember, statistically, there will be a Stock Market crash every 5 - 10 years. So the idea is not to live in fear of the next crash, just be in a position to retreat to the G Fund if necessary. Some of the financial crashes were not so severe, so maybe you don't even have to move your funds. Some crashes did not last long. But be ready, always be ready and don't panic.
Path #1: You can go back to the L Income Fund and you can expect to get a return of about 4% - 6%. The L Income Fund is expected to get a little more aggressive over the next few years and TSP management has advised they want this fund to have a more competitive rate of return for the future. Not a bad idea if you don't like to move your money around during retirement. The only time you move is for a super event but otherwise you don't touch it. That is what the L Income Fund was created to do.
Path #2: Another idea is when the TSP introduces the L 2025 and L 2035 Funds in the fall of 2020, what you can do is stair step from the L 2025 for five years until the fund is ready to expire and then move into the L 2030 for five years, then the L 2035 for five years. This would give you a slightly higher rate of return, maybe 7% - 8%, with a higher risk but not too much risk because the five year window does not put you anywhere near a higher risk category compared to the C, S, and I Funds. It is just a way to boost your rate of return but you would still go back to the G Fund if another super event or crash started to appear. If you don't mind. moving your money every 5 years, this could be for you.
The question is do you see the glass half full or half empty? This is a personal choice and depends on how much you have in your TSP and what you want to accomplish with it. Remember, you are now in retirement mode and the objective is to PROTECT YOUR MONEY. These are just some possibilities for your TSP. During the following months, we will continue to analyze the TSP and try to come up with new ideas for your TSP based the affect of the CoronaVirus in our society. Nothing is guaranteed but if you just follow the basic rules, you should be okay. Your TSP will thrive once again and your life will return to normal.
Let me know if you want to talk about this. I am always open to new ideas. I certainly don't know everything but together we can find a solution to your TSP situation.