Tip Of The Month: Don’t Worry About Your TSP. It will be fine!
In our last Tip of the Month, I tried to give people some ideas about different adjustments to your TSP that could help you decide how to invest in the TSP. Now we have to review some basic Stock Market investment principles that will help your TSP survive this current turbulent period.
First of all, your TSP will not run out of money. The TSP is composed of Index Funds, which means the funds have many stocks and they will not all implode. All of the TSP funds: G, F, C, S and I, have many funds within them, as well as the L Funds which are a combination of all those funds.
This means that you are quite diversified and you will not lose all your money. The Stock Market periodically makes corrections, sometimes based on irrational fears, sometimes not. You cannot stop these corrections no matter what. There is nothing you can do except wait it out. The corrections will stop, but no one knows when. So the key is be in a place that you can feel comfortable during that period. This is a very personal decision and each person has to decide how much risk they can sustain.
I recently created a chart that I use to help explain these decisions to my clients. It’s sort of a “cheat sheet.” It shows several different options that go from conservative to moderate to aggressive and gives examples of a C Fund/G Fund mix, expected rates of return, potential gains and potential losses, and L Fund equivalents.
You can choose any option you want, it just depends on your risk tolerance. They are all good options but risk tolerance is the overwhelming priority. It’s an emotional choice. All the choices will make you money and give you a comfortable retirement. All the choices will also lose money eventually, but you will get it back over time. You might have to wait 3-5 years or 10-20 years, but you will get it back. It doesn’t matter whether you are Pre-Retirement or Post-Retirement. All that matters is your ability to sit back and wait for the Stock Market to bounce back.
If you try to move your money after the Stock Market goes down, you will lose money and sell your TSP funds at a loss, which is not good. Remember the old adage, “Buy low and sell high.” Well if you move your funds, you will be following the opposite rule, “Buying high and selling low.”
It took me 10 years to study the Stock Market and evaluate the different strategies available to TSP users. I finally realized, if the Stock Market makes a correction and things look bad, all you have to do is leave your TSP funds alone and they will bounce back. Doing nothing actually works!
It doesn’t matter what the market is doing. It goes up and down for many different reasons, but you have to learn to stop looking at the Stock Market, especially during retirement. It won’t help you. In fact, it will probably make you frustrated, nervous, and depressed. That’s no way to go through retirement. You have to learn to trust the process and your decisions.
In my last post, I explained the difference of investing in Index Funds versus individual stocks. The biggest issue for the TSP is that there are no individual stocks yet (new TSP rules may be changing that very soon). So you are not going to lose all your money, unless all the companies in the C Fund, which is 80% of the Stock Market, and the S Fund, which is the remaining 20% of the Stock Market, go bankrupt. That amounts to over 625 companies that have to go bankrupt. That is statistically impossible unless all of our society as we know it disappears. That means there will be no Apple, no Chevron, no United Airlines, no Verizon, no grocery stores, no taxes, no money. Your money would be worthless since there are no companies and there would be nothing to spend it on. The only way I see this happening is if a meteor falls on Wall Street but if that happens, I think all of us will have a lot more to worry about than our TSP!
That doesn’t mean you will feel good about the big drops in the Stock Market we have been seeing for the last three months. Nobody feels good about this but it is an adjustment time that you have to go through. If you are in the Stock Market, this is what happens. The Stock Market goes up and down in many different combinations and for many different reasons but that activity never stops.
The main principles of the Stock Market have never changed. Following these principles will get you through this unstable time and will continue to help your TSP grow for your retirement:
1. Put your funds in a place you will feel secure enough to sleep at night. I don’t care how much money your funds make you. If you can’t handle the drops in the Stock Market you will not be able to sleep and that is very unhealthy.
2. The decision whether to put your funds in the C Fund, L Funds, G Funds, etc., is yours alone and should reflect your ability to withstand any Stock Market corrections. It doesn’t matter what everyone else is doing with their TSP. You have to feel comfortable.
3. Leave your funds alone. The more you move your funds, the worse your rate of return on your TSP. You can’t time the market. Plus you pay fees every time you move your money around.
4. If you are Pre-Retirement, keep maxing out your TSP. This will help your TSP recover from this turmoil. The goal here is to attempt to max out your TSP up to the $20,500 annual limit up to age fifty and the $6,500 additional annual limit for age fifty and above.
5. If you are Post-Retirement, you can decide to keep making withdrawals to your TSP or leave it alone and wait. Waiting to withdraw your TSP funds is fine as long as you can get along without the funds. Otherwise take the money out like you planned or maybe take out a little less. You have flexibility here. There are multiple ways to take out money from your TSP without hurting yourself, even during this chaotic time.
6. Don’t watch the Stock Market or the TSP every day. In fact, try to not watch the TSP for a while. It’s not going anywhere and there is nothing you can do with it. You are not a day trader. This is a marathon, not a sprint. The TSP is to be viewed in a 40-50 year window.
7. Don’t give your TSP funds to anyone. That is one of the surest ways to lose your money. If you want to move your TSP to an IRA or convert to a Roth IRA, or something similar, that’s one thing. Giving your TSP to some slick talking sales person, who promises you the world, is quite another. There are lots of con artists and just plain incompetent people out there who want to gain access to your money.
8. Learn to trust your decisions. It’s pretty hard to mess up your TSP unless you do something incredibly reckless or irresponsible. Think out your investment plan and pick one of the options I talked about: Conservative, Moderate, Aggressive. Figure out where you fall in this spectrum. Being honest with yourself and knowing your risk tolerance is probably the most important thing you can do.
9. Don’t be afraid to change your risk tolerance as you get older. Maybe you get more conservative as you age or maybe you get more aggressive. I’ve certainly changed. I have actually become more aggressive in my TSP funds as I’ve become more educated as to how the Stock Market works. The more you can educate yourself about the TSP or the Stock Market, the more comfortable and confident you will be about your decisions.
10. Talk to someone you can trust. Whether it’s a relative, your spouse, a friend, a coworker, anyone who can help you with the numbers and talk you through your TSP and retirement decisions.
These are just some of the basic ideas to help you with your TSP. The main thing is not to panic over inflation, the state of the economy, or wars in foreign countries. They may or may not affect your TSP but either way, there is nothing you can do about all the problems going on in the world. All you can do is stay calm and stick to your plan. The first rule of business is don’t get emotional. Try to base your decisions through research and analysis. You will be fine.
Good Luck!