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Note:
This is a multi-part series on tips, tricks, and strategies for managing
your TSP in uncertain times.
You can't miss the headlines on nearly every newspaper and magazine these
days. "For Stocks in the Developed World, It Was a Decade of Zeros"
proclaims the
New York Times "Adjusted for Inflation,
Bad Run Looks Worse" from the
Wall Street Journal and "A Flat Dow
for 10 Years? Why It Could Happen" on the front page of
Barron's.
This does not bode well for you and your Thrift Savings Plan.
The watchword for the next decade will be personal responsibility. During
the initial years of the Thrift Savings Plan, TSP participants were lulled
into believing that they didn't need to pay attention. A common strategy (if
you could call it that) was to put it all in the C Fund until you were
within five years of retirement and then start to diversify to the G Fund.
Let's think back to what happened in the stock market in those early years
of the TSP. For the first 12 years, from 1988 through 1999, the C Fund
averaged 19.37% with only one year posting a negative return (-3.15 in
1990). Did you have to pay attention to your account? You got your annual
statement, weren't afraid to open it because there might be a loss inside,
and thought you were a great investor. (See the TSP Corner for
annual returns for each TSP fund.)
You got away without having to manage or pay attention to your TSP for over
a decade and then…the first of two bear markets within a ten-year period.
The last decade left you with a negative average return in the C Fund of
-.94% and a measly 1.69% annual average for the S Fund and 1.10% for the I
Fund. And all of a sudden there was dread when you received your TSP annual
statement in the mail. Did you dare open it?
What will returns be over the next decade? Although there are a lot of
opinions, no one knows for sure. That probably leaves you wondering exactly
what you're supposed to do to with your TSP.
The days of ignoring your TSP are over – at least if you want to have some
hope of managing for positive returns. First, the most important thing you
can do is continue to save. Your inclination might be to decrease or stop
your contributions altogether when the funds seem so volatile. But here's a
realistic example that illustrates how detrimental that can be to your
retirement plans.
Joe has $100,000 in the C Fund on January 1, 2000. He's made double digit
returns for years and decides that he'll stop contributing to the TSP and
put that money towards his mortgage instead (don't panic – this is a
hypothetical situation). By mid-December 2009, Joe has $89,072 and wonders,
"What happened?"
But what if Joe doesn't stop saving and chooses to diversify? He leaves 25%
in the C Fund, puts 25% in the I Fund when it becomes available in May 2001,
and 50% in the F Fund. I know, hindsight is 20/20, but bear with me for this
illustration. He contributes $7,000 per year and gets matching contributions
of $5,000 per year (total of $1,000 per month or $12,000 per year). Now,
what's his balance in mid-December 2009? $313,747!
It is human nature to consider stopping your contributions if you continue
to lose a portion of what you're saving, but the numbers tell us a different
story. And saving paired with a well-thought out strategy can have your
retirement plan intact when you're ready to retire.
Tip #1 – Don't
stop saving. And a trick to keep you saving – when you receive your annual
TSP statement, don't just look at the current balance. Take a look in the
right-hand column where you'll see your lifetime contributions. Compare this
to your account balance. You may have had losses. Your current balance may
still be less than it once was, but in most cases, what you've contributed
will still be less than your current balance.
Watch for additional ideas on strategies you can use to take control of your
TSP in subsequent columns here at Fedsmith.
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agency.
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TSPtalk.com assume any liability for any loss that may result from reliance
by any person upon any such information or opinions. Such information and
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