In other words, the lower the interest rates drop, the truer this becomes. Have you any advice for the right mix of the 30% of stocks. It often makes sense to attack debt while also saving in the TSP. What is the ideal retirement portfolio allocation in the retirement years? But you can look a tad deeper into what you are really buying in terms of sectors, and where the revenue comes from or valuations you are getting. The major cons I see in the rising equity glide path is the discomfort you may have with an increasingly high exposure to equities as you age or if in the first ten years, there is a Bull market, you may miss out on some gains. Once you start receiving a distribution from TSP you cannot stop receiving distributions. The reasons to make a conversion can include maximizing a lower tax bracket or reacting to a drop in the market. Help us tailor content specifically for you: Senate on Track to Avoid a Shutdown, Schumer Says, Hope for Better Labor Relations at Social Security, Tom Hanks Thinks He'd Be the Best Ever at This Federal Job, The Biden Team Now Lacks a Confirmed Ethics Czar, The Cybersecurity Talent Famine Has a Surprising Solution. Is it 1% or 2% or is it 5% or 6%? Last year, with the 10-year treasury yielding above 3%, that seemed to be doable with virtually no risk. Social Security The Perfect TSP Allocation | Plan Your Federal Benefits Roth Even though the TSP is an excellent savings plan, it does have some limitations when it is time to make withdrawals. If you retire between the ages of 55 and 59 , withdrawals from TSP are not subject to the 10% early-withdrawal penalty that would apply to the same withdrawals from an IRA (without having to follow a 72(t) program). The remainder 30% I would invest in risk assets. Unlike mainstream advice, I do not define risk as static throughout time. It is a different issue if you need to pick the allocation between growth and fixed income investments, whether they should be in traditional or Roth IRA accounts, and which one you will draw from over time. One of the most common questions I get after a federal employee retires is what to do with the TSP after retirement. There are many different combinations of an immediate annuity such as: Life only FedSmith Polls The Ideal Retirement Portfolio Allocation All rights reserved. In other words, the G Fund cant lose money while all the other funds have suffered losses.Therefore, just from market performance, the other funds sizes have wavered compared to the steady G Fund. That could include doing the research and picking long term investments for yourself or even day trading your favorite stocks (which I do not recommend). Withdrawals must begin from Roth TSP at age 70 Using a beneficiary IRA allows the subsequent beneficiaries to withdraw the funds over the course of their lifetimes, potentially greatly reducing the tax burden by spreading it out over many years. 2023 FedSmith Inc. All rights reserved. Annuity I have had some retirement gigs where I just reinvested my income and even paid off my just short of $100K mortgage but I find I sleep better with 4 years retirement funding in cash plus a $25K emergency fund. Academia came up with portfolio theory which says split your allocations with a 60/40 mix of stocks to bonds or a more aggressive 70/30 mix and re-balance to "reduce volatility" of your balances. Data Breach IRA Employee Relations I could also purchase equities at low valuations as I did when we received regular paychecks. The size of the TSP balance needed to last throughout their retirement would still depend on other things, such as inflation. This article may not be reproduced without express written consent from Jason Visner. In other words, taking money out of your TSP periodically is not an option. Someone who wants access to a broader selection of investment types or products, such as commodities, real estate, annuities, etc. You will understand in a few minutes. Suspending withdrawals is not an option once you start taking them First, the other funds are struggling. I agree to the use of my personal data by Government Executive Media Group and its partners to serve me targeted ads. Because we do not track you across different devices, If you do move it, should you pay someone to help you manage it? 2023 Jason Visner. Let's look under the hood of these 3 TSP equity funds and see if we can find reasons for their different performance at different times. An IRA is a great tool and has a lot of great uses. Limited investment and withdrawal options. Rights link. Otherwise, the TSP follows the rule of simply distributing the funds from each fund proportional to their balances. Wir verwenden Cookies um Inhalte und Anzeigen zu personalisieren, um Social-Media-Funktionen zur Verfgung zu stellen und unseren Traffic zu analysieren. technologies for the following purposes: We do not allow you to opt-out of our certain cookies, as they are necessary to What Does Dave Ramsey Recommend for the TSP? - FedSmith Subscribe to our free email list to get our news updates in your inbox. Very helpful. I waffled back and forth about the 30/70 and the 70/30 allocation. The answer to this question boils down to two more questions: 1. Independentallocation advice grounded in history not hype. Certain economic developments signaled a softening of the economy, the Fed turned dovish and reversed course again. Labor Relations Visit www.allaboutcookies.org Annuity Inflation I figured 70% of my portfolio would be sufficient. The Thrift Savings Plan (or TSP for short) is a defined contribution retirement plan, similar to a 401 (k), for federal employees and members of the uniformed services. So it is not impossible to observe risk and see the signs of it about to be released on the stock market. Lifecycle Funds | The Thrift Savings Plan (TSP) Bill Bernstein: Basically, the person who is approaching retirement has to ask themselves four questions. For more information about the First and Third Party Cookies used please follow this link. I will give some of the reasons and deciding factors to consider here. However, you Strictly Necessary Cookies - Always Active. I highly recommend Ashley for all your website needs. I'm a FERS retiree and one of those TSP investors who have accumulated at least $1,000,000 in their TSP account while working as a federal civilian employee. internet device. Consequently, that advice may not always be very specific or tailored to your situation, but if I was in Daves shoes and spoke to millions of listeners a week, I would have to make my advice generic as well. 50/50 is obviously a more aggressive allocation, and I like you waffled back and forth but I decided on a lower allocation. OPM This may make sense to help maximize the utilization of lower tax brackets. Roth Look at how most of the Lifecycle funds caught the TSP G fund at the same time as the TSP C fund. Academia and marketing does not seem to question it. Using a conservative 1.5% yield for bonds/cash, Otars retirement calculator said that in the worst-case scenario, I would run out of money at the age of 90, and in an unlucky scenario, I would run out of money at the age of 94, with 30% in stocks and 70% in bonds. FERS The author lists his most common advice to federal employees and also provides some of his own thoughts. This type of strategy is a bit more complex, though, and would require you to look at your fund balances just before and after each distribution, and reallocate according to your desired strategy. performance. The Lifecycle funds today are allocating LESS in the stable funds than they did during the 2008 bear market seen in the chart above. A spouse can leave money in TSP at the death of a federal employee, however, a non spouse beneficiary must take all money out of TSP. Many people also hire an advisor to assist with the overall financial planning. In the TSP, every withdrawal comes proportionally from every fund and the Roth account, sacrificing some of the planning ability. Best TSP Strategy for 2023 One Change to Make in 2023 TSP INVESTING GUIDE - THE FUNDS The G Fund - The Government Security Investment Fund The F Fund - The Fixed Income Investment Fund The C Fund - The Common Stock Index Investment Fund The S Fund - The Small Capitalization Stock Index Investment Fund Can I take money out of my Traditional TSP and not my Roth TSP? It does reduce the amplitude of losses as well as gains, but over the full market cycle it has little impact on total returns. Nice article, Im 43, and from Sydney Australia and have cashed in a property development and now semi retired in Spain with Spanish wife and 2 kids. Examples of people who may be better off managing their own accounts, Examples of people who may be better off hiring an advisor. There is also the opportunity for much more frequent trading. For example, how will they react in a rising interest rate environment? The Life Cycle Funds simply allocate to the five basic funds for you, but as you will see this has not been beneficial to your risk-adjusted returns. may not be reproduced without express written consent from Dallen Haws. How to Invest in the TSP 2023 - 9 Strategies - Rich on Money Buying a car might have an initial purchase price, but will have ongoing expenses for gas, insurance, maintenance, eventual replacement, etc. We will do this. Talk about uncertain market conditions! Thats a good amount. So, the longer that money sits in the Roth TSP the more time it has to compound income tax free. I will not disclose my age. They are all doing very well and will likely have more for retirement than I have. In a research paper authored by Michael Kitces and Wade Pfau, it was noted that a portfolio that begins and ends with a 60/40 (stocks/bonds) split with a 4% withdrawal rate ended with a 93.2% probability of success. Factors such as inflation and a slowing economy will affect yields on bonds differently. At age 70, both my wife and I will be receiving social security and we will have a small pension. It just depends on what you care about the most and what you want to deal with in retirement. Why would you want to give up 10+ years of returns and have to wait to break-even. Best of luck to you. Allocation Based on Age You can allocate your retirement plan using your age. FedSmith Polls The market volatility has got many people spooked and many are jumping out of the more aggressive stock funds C, S, and I in favor of the G Funds safety. Similar to the decision on which investments should go into which account (pre-tax, Roth, taxable), the same consideration should be given to which type of account withdrawals should come from. When you hear about diversification the academic definition includes buying several diversified funds in equities and bonds. The Thrift Savings Plan (or TSP for short) is a defined contribution retirement plan, similar to a 401 (k), for federal employees and members of the uniformed services. You want to make sure you are comfortable with the path you are on, because its very hard to recover if youve been withdrawing too much for too long. And it cycles more in terms of valuation or what people are willing to pay for a $1 of SP500 revenue or earnings than how much the SP500 revenue cycles. Joe Smith has 70% C fund and 30% G fund Published: June 17, 2023. Suffice to say that 45% of stock allocation at my age seems a bit high for me, especially when there is no paycheck. Unions She will retire in 4-yrs. TSP does not allow lump sum distributions. 8 Thrift Savings Plan Mistakes: What Not to Do With Your TSP Note: TSP does not invest in international bonds. The main reason to hire an advisor is that you think the value of the advice they bring to the table will outweigh the fees they charge. I lived in Segovia, Spain during the waning years of the Franco regime (whom I saw in person) but I love the Spanish people and I love Spain. privacy request at our Do Not Sell page. An advisor can assist in deciding whether you can afford to retire and when, and what your lifestyle will look like going forward. This is something I never really had to contemplate before, but now I must make sure my portfolio lasts until I moved on to the great beyond. The next "safest" fund is the TSP F fund (light blue) which tracks the Aggregate US bond index which has become dominated with Treasuries. You cant choose which fund you would like your distribution to come from Medicare Initially, I thought a 40/60 split might do the trick but somehow, I still did not feel comfortable with that. FLRA The Fed was going to begin to raise rates, a complete reversal of its former policy of easy money. So, diversification can reduce volatility of your total portfolio, but over the *full market cycle* you are simply riding the overall market volatility at slightly different amplitudes. The C, S, I and F funds have all lost money in 2022 while the G Fund has the inherent advantage of being guaranteed by the government. In general, Dave Ramsey has some great advice, but sometimes it doesnt apply perfectly to everyone. Current Portfolio Allocation: TSP Folio Strategy Note that these allocations may work for some . For many retirees, it can make sense to convert a portion of the pre-tax balance to a Roth account each year, and that is not possible within TSP. As ones human capital drops to zero, keeping volatility at bay and preserving the portfolio principal becomes the retirees primary focus. When you visit our website, we store cookies on your browser to collect These smaller companies account for 20-25% of the total US stock market *value*. Here are some of the pros and cons of keeping your TSP. Whether you keep your money in TSP, manage your own IRA, or work with an advisor, there are many different concepts and strategies that should be considered on an annual basis. Paying taxes earlier isnt necessarily bad if it is at a lower rate. Data Breach Does Dave Ramsey recommend rolling over your TSP to an IRA after retiring from federal service? A 30/70 portfolio has less volatility with the least risk. This rule says that if you divide 72 by your average investment return then you'll get how many years it takes to double. Yes, Government Executive can email me on behalf of carefully selected companies and organizations. One of the most common reasons to move money from the TSP to an IRA is the flexibility of withdrawals. COLA I hate missing gains too, but it is the losses that devastate accounts. For this reason alone, I often recommend taking either the traditional or the Roth balance out of the TSP before taking withdrawals. While you are working, down markets are an incredibly powerful time to buy low so you can sell high later. Travel On Oct 5, 2018, the ten-year treasury yield hit 3.34%. For example, the buffer account with five years worth of withdrawals in it starting in 2008 (before the market crash) could have been drawn down for five years before being re-filled, by which time the market had rebounded to all-time highs. Bargaining No, not a crystal ball, but the best strategies we found that can be employed in TSP for long-term investors (not traders). I looked at the analysis I got from Otars optimizer and got a worst-case scenario of 2.8 million dollars and a best-case (lucky) case of 18 million dollars. Social media cookies are set by a range of social media services that we have It can also be useful at a market downturn to reduce the taxes paid on a possible rebound. The yield on the ten-year treasury represents the risk-free rate of return. He hosts a podcast and YouTube channel all about federal benefits and retirement. All rights reserved. website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site Election The TSP S fund tracks what I call the non-sp500 companies which are the other 3500 US companies not in the SP500. Invest in the best performing fund during bull markets and sit in safest funds during the bear market. From a volatility point of view, these "safe" funds did not plunge and rally and so were less volatile and considered less risky in mainstream thinking. If you do not allow these cookies you may not be My spouse recently changed her TSP contribution because her friend told her to. Medicare Does geographically diversifying based on valuations provide a smart portfolio? Taxes These benefits also lead to the discussion of whether the management would be better done in the TSP or an IRA account. 1. You may find that the cost of missed opportunities is higher than the cost of the advice. If you needed $100,000 a year to live on and received $30,000 in pensions and/or Social Security, you are left with $70,000. Managing your own assets is also appropriate if you want to maintain complete control. The oh so convenient TSP becomes not at all convenient TSP in a hurry. As you look at how to spend some of your savings, the distinction between one-time and ongoing expenses should be looked at closely along with your overall plan. He suggests that federal employees should always move their TSP accounts into an Individual Retirement Account (IRA) as soon as they are able to do so. Jason Visner is a financial advisor with Brook Federal Advisors, and works with federal employees to optimize their retirement benefits. Withdrawals in retirement | The Thrift Savings Plan (TSP) and analytics partners. Another strategic planning option not available within TSP is the ability to make Roth conversions. I speak fluent Spanish. I decided to side with John Bogle and go with 50/50. You are going to have to work for gains the next decade or so. COLA A TSP annuity involves turning the money in your TSP over to an insurance company (Met Life) in return for a guaranteed payment for the rest of your life. And the higher your . use third-party cookies which are cookies from a domain different than the domain of the website you are A look at the following example can help to understand how participants receive distributions. Let me start off by saying that there is no such thing as a bad TSP allocation, but there is not one or two allocations that make sense for everyone. OPM Protecting your TSP investment after retirement - Federal News Network History has shown that for a retiree, a 30/70 portfolio rising to a 70/30 portfolio has less volatility and risk than a portfolio that begins and ends with a 60/40 split. Hatch Act The good news is that this is an incredible opportunity to set yourself up for the future. It was established by Congress in the Federal Employees' Retirement System Act of 1986 and offers the same types of savings and tax benefits that many private corporations offer their employees under 401(k) plans. More specifically, we use cookies and other tracking The separation between US stock prices and revenue or earnings has NEVER been higher (Sept 2021) and it will take a secular bear market to fully revert to valuations that actually offer a price that comes with long term 8% returns you read about. Because when the market is down, you are able to invest at a huge discount. With that level of involvement, it can be cumbersome to have someone else involved with your account. More investment options and withdrawal flexibility. This was the amount in todays dollars I needed to live on no risk. Overtime, because those two funds grow at different rates your . He would have only sold the G fund that increased each year, and the C fund would have bounced back by the time the buffer was used up. How much access do you want to your money in retirement? It also had lower volatility and a lower average equity exposure during retirement. I began to explore the idea of a rising equity glide path. It would be difficult to match the same investments for lower costs elsewhere. The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. You can set your browser to block or alert you about these cookies, but some parts The C, S, Iand F funds have all lost money in 2022 while the G Fund has the inherent advantage of being guaranteed by the government. Government Shutdown The TSP is a defined contribution retirement account available to federal employees. It is that other 20% where the market loses most of the gains of the proceeding bull market that I am not on board with riding down. Your allocation looks about right for someone in the moderate risk category. Unless that person is also a fed and can transfer the money into their own TSP account, the subsequent beneficiaries are the ones that should be considered. You That being said, credit card debt and other high-interest debt should be attacked as quickly as possible. Review your options within the federal benefit system, including FEGLI, FEHB, survivor benefit elections, etc. That is particularly true of todays economic environment. Locality Pay Is this the best withdrawal method? The C Fund has lost about 20% since January 2022 which means that you can buy significantly more shares in the C Fund with the same TSP contribution as before. You dont want to be forced to sell investments when the market is down because something happens in your personal life. COVID performance, so that we may improve our websites and your experience. For those doing more strategic planning, the IRA allows you to select where withdrawals come from. You are familiar with it and know what the investment options are. Option 1 - Keep the TSP Active Often, federal workers nearing retirement start panicking because they believe that drastic action is required with their TSP. can set your browser to block or alert you about these cookies, but some parts of the site will not work as Usually, thats done by eschewing risk assets and buying more bonds or instruments that carry less risk. Well it's official. to learn more. The author offers some advice and considerations for federal employees who have reached this milestone in their careers. Evaluate which investments to liquidate every time a withdrawal is made. Are you making these mistakes with your TSP account? But many investors have followed the opposite strategy - buy, hold, then panic, then delay re-entry. For short term speculation - maybe. And because it would be impossible to talk to everyone personally, I thought I'd share the perfect allocation here. The top 100 companies in the Nasdaq lost over 80% from their 2000 peak. What will happen if I start with a low exposure of 30% in equities and 70% in bonds (30/70) and increased the equity percentage as I age? Historical TSP performance chartsand fund characteristics. So I thought if I dollar cost average back into the market, I could minimize those first ten years of sequence return risk. Telework The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve.