Unless you were born rich, successfully rob banks when off-duty or you hit the lottery while working, your Thrift Savings Plan account will be the source of one-third to one-half the income you have in retirement. If you decide not to participate in the federal 401(k) plan, you may wind up working longer than expected or having a lot less fun when you do retire.
The TSP is important — but not a must — for workers under the old Civil Service Retirement System. The CSRS program has a much more generous defined retirement benefit and it is fully indexed to inflation. CSRS employees who max out in their TSP investments can expect more income in retirement than most American workers, especially those who depend entirely on savings and Social Security.
For the majority of feds, who are under the newer FERS retirement plan, investing in the TSP is a must for several reasons. First, they are eligible for a total match of up to 5 percent from the government if they invest 5 percent. That’s the equivalent of a 5 percent, tax-deferred pay raise. Secondly, their federal retirement benefit is about half that of the CSRS program, and finally the cost of living adjustment protection for them doesn’t begin until they are age 62, and then it can be as much as 1 percentage point less than inflation each year. Over time that can hurt.
So, investing in the TSP is a must for most federal and postal workers. During the recession it was painful to watch stock-based funds in the TSP shrink in value. Many people got nervous and bailed out of the C, S and I stock funds and moved money into the Treasury securities G-fund. Then, when the market started rising again, many shifted out of the G-fund back into stocks. What they did was sell low and buy high. Not the way it is supposed to work.
Last year, the C-fund (the biggest 500 companies in the U.S. stock market) was up 32 percent. Then last month, in just a couple of days, all the 2014 gains were wiped out as the market started its long-anticipated correction. Financial planner Arthur Stein says “significant corrections” of 20 percent or more happen every three years on average and that the last big one — which we all remember with pain — was in 2008. Stein was our Your Turn radio show guest last week.
He cautioned TSP investors to take the long view and not react to every rise or fall of the markets. Stein said the U.S. economy is doing fine but, as always, there is lots of bad news: Ukraine, Iraq, the Middle East, Ebola, Argentina’s default and gridlock in Washington. Some of those are standard worries, others will be replaced by equally troubling issues. But his message is to invest for the long haul and don’t panic.
Stein said that while July was a negative month for the TSP (except for the never-has-a-bad-day treasury securities G-fund), it is only one month. All but the G-fund were down for that month. But they were up by other measurements, whether year-to-date, 12-month, or 3, 5 or 10 year performance, he said.
For long-term TSP investors he suggests you:
Determine your “risk profile” based on needs and temperament to decide the mix (stocks, bonds, treasury securities) for your portfolio.
Diversify your portfolio among different types of stock and bond funds.
Be tax smart: One possibillity, “concentrate stocks in taxable accounts and bonds in tax-deferred accounts because interest is taxed at a higher rate than dividends and capital gains.”
Stick with low cost funds (like the TSP).
“Don’t act or invest with emotion. Don’t buy high and sell low.”
Consider getting professional help to manage your investments.
Correction: Richard Patton of Harrisburg, Pa., discovered an error in my math in the Aug. 7 edition of Nearly Useless Factoid.
A tire with a diameter of 23.7 inches actually turns 851 revolutions per mile [23.7 inches x 3.1416 = 74.46 inches per revolution; 74.46 inches divided by 12 inches = 6.205 feet per revolution. 5,280 feet (1 mile) divided by 6.205 feet = 851 revolutions per mile].
Today’s Always Useful Factoid: Double check your math!