Don’t ruin your retirement! Jen continues her series with items 4 to 7 from her top 10 ways to ruin a federal retirement.
Hello readers. Welcome back to the third article in my series “Ten easy ways to ruin a Federal Retirement.” I know, I know it’s a glib title for a serious topic. Nevertheless, I hope you find my points to be helpful.
(Once again, to clarify, I’ve written this list with FERS, FERS RAE, FERS FRAE, and CSRS-Offset in mind. But the ideas also apply to CSRS.)
I will cover numbers four through seven in this piece:
- 4. Silo Save
- 5. Underfund TSP
- 6. Lose your balance
- 7. Bad TSP strategy
In my last article I talked about important habits like eliminating installment debt and creating a wedge between income and lifestyle. These two speak directly to the four topics I will expand upon here. But I want to throw in a plug for the third attribute of mental capital. To be sure, I mean investing in yourself. But no less important, build your base of knowledge about your benefits, best strategies to maximize them, and financial planning and wealth building in general.
I will write more about this in upcoming articles, but I wanted to mention this key attribute before diving into the meat of this piece.
I can sum up my thoughts on 4-7 in a few words. Save, Invest, Save WELL, and Invest WELL. Doing it is important, doing so with a sound strategy can have multiplicative impact. Now, let’s jump in.
4. Silo Save
Ok, Jen. Cute alliteration, but what does it mean?
Now I want to be very clear, 80 to 100% can be reached. However, it will require strategy, discipline, and habits. I say this because the FERS system has more moving parts. More parts mean more decisions. More decisions allow for a margin of error.
It means that all too many times, Feds rely solely upon the TSP for all their wealth building. Let me be clear, I consider TSP to be a very solid defined contribution plan. But it’s not perfect. And it is certainly not “the only plan you will ever need.”
Whoa, Jen, you’re coming close to the third rail.
Maybe, but let me elaborate. TSP has a long history of offering Feds a low-cost option for accumulating retirement assets. A traditional TSP account allows you to do so on a pretax basis and the assets grow tax-deferred until you draw them. Roth TSP contributions are made after tax, and they grow in a tax-free environment. These are good features, but they share the same limiting step as any other employer based qualified plan.
No-Cost Retirement Webinars for Federal Employees:
Rules and restrictions: To access the money, you have to know and follow the rules if you want to avoid penalties. Now I emphatically want to state that I am not advancing a “TSP or something else” argument. I am urging you to consider TSP AND something else.
For example, a plain old taxable investment account. You can work with a professional or set one up yourself, but doing so adds a dimension to your retirement wealth building that qualified plans lack - capital gains tax treatment.
In my career, I have observed that most Feds retire in a tax bracket that is much closer to the bracket of their working years than they might have expected. This usually comes as a surprise. I have no crystal ball to be able to accurately predict future tax rates - but I am sure of this; they will change over time. Having groups of assets that will feature different tax treatment over time can give you flexibility that sole reliance upon an employer plan cannot. I call this ‘Tax Diversification’ and it is your friend.
5. Underfund TSP
Wait, what? Jen, you just told me TSP wasn’t all that.
No, that is not what I said. TSP is a valuable tool for accumulating assets for retirement. However, you must use it correctly to do so, and the first rule for that is to maximize your contributions. Maximizing contributions does not mean contributing to get the full match and then stopping.
No, no, no, no. NO!
When I tell you to maximize it means to the FULL IRS limit each and every year. And that limit tends to go up over time. The problem as I see it is that the limit does not raise uniformly and in each and every year. For example, in 2015 through 2017, the cap was the same at $18,000 per year. In 2018 – 2022 it rose to $20,500. That’s over 19%. If you got used to $18,000 and the increases didn’t make it on your radar, you missed out on the increase, and that’s less for you in retirement.
Make it a point to contribute to the max or make it a goal to build to it over the next couple of years. I’m not saying it will be easy, I’m saying it will be worth it.
Oh, and don’t forget the catch-up contributions. If you are over 50, you can add another $6500. If you want more details on this, we have a number of columns on it in the FEDZONE. I also host a great webinar with Ed Zurndorfer.
If you don’t MAX now you may end up with MIN in retirement.
6. Lose Your Balance
As tempting as it is to spoof the old ‘LifeCall’ commercials, that’s not what I mean.
Naturally, I’m referring to your asset allocation balance for your TSP and outside investments. Here is where I will make another plug for mental capital. When it comes to building and managing wealth, knowledge is power. I urge you to study up on building an asset allocation to meet your goals. I don’t have the space within this article to pen a “how to build an allocation” so I will use TSP for an example. Each of the core funds represent an “asset class”. The C Fund follows the S&P 500 (US Large Cap Stock), the S Fund tracks the Willshire 4500 (US Small and Mid-Cap Stocks), the I fund benchmarks the MSCI EAFE (International Developed Markets), and the F Fund mirrors the Barclays Aggregate US Bond Index (US Bonds). The G Fund is somewhat unique in that the underlying securities are only found within it and in Social Security investments but its asset class most closely matches fixed interest.
Your asset allocation should include all of the above. The percentage of each one will be influenced by your ability to tolerate risk (Risk Tolerance).
OK Jen, I’ve heard that term forever. What the heck does “Risk Tolerance” mean?
Great question, in my mind it comes down to your likely behavior across the changes that can happen in the market. Are you able to stay calm and on track when the market is flying up or sliding down? Or, are you likely to try to outguess or “time” the market. Is your default setting to react and pile all your TSP funds into G if the stock funds fall? Do you have a burning desire to throw it all into the S fund because your friend at work did it?
If any of these behaviors sound like you, putting in the time to determine the right allocation for your temperament and personality type can help you stay invested and have the opportunity for growth.
Once you have selected the right percentage mix of C, S, I, F and G, check it periodically and reallocate if the target percentages drift.
Jen, what about the L Funds? Don’t they do that?
Sort of. An L Fund will give you an allocation that will rebalance and moderate over time. But I don’t think this can take the place of putting in the work to figure out the best mix for YOU. This is part of Mental Capital and never forget, you are worth it!
7. Bad TSP Strategy
This part is a cousin of Lose your Balance and I’m taking a direct swing at some “strategies” that l believe lead to underperformance. Hopefully I made my point in the previous section that I strongly advocate setting up an asset allocation and sticking with it. Naturally, the allocation will evolve over time. For example, greater proportions of the mix will go to G and F the closer you get to retirement age. This is very different from trying to predict or guess the direction of equity markets in the near term.
I know of no academic support for the long-term success of so-called market timing strategies. In addition, there is absolutely no evidence, academic or otherwise, that points to investment success through hunches, anxieties, or gut feelings. In fact, much behavioral finance research points to these activities being wealth eroding.
Sure, it may be enjoyable and even affirming to discuss money and investing with friends and colleagues. But you need to be careful when it comes to making investment decisions based upon those conversations. “My buddy thinks a crash is coming,” or “ESG investing through the mutual fund window is going to be huge” can very easily end in tears as a TSP strategy.
Here are my tips for setting a strategy:
- Is it based upon sound economic principles? (Like asset allocation).
- Do you understand it? (Not based on obscure or overly complicated ideas)
- Can you easily follow it under stress? (When a bear market comes, can you do it?)
Investing for your future should not be an ordeal. But it also should not be an afterthought. Ben Franklin wrote, “Empty the coins of your purse into your mind and your mind will fill your purse with coins”. With deference to “Poor Richard” I offer the following derivation: Invest in your understanding of investing and your understanding can protect and grow your investments.
So, if my last column was “eat your vegetables,” consider this one to be “pick a sound fitness plan and stick to it.” No fad diets or weird workouts please. Up next, I will wrap-up the final three mistakes: forgetting your umbrella, ignoring long term care, and mishandling FEGLI.
Thanks for reading this and I look forward to continuing in my mission to help you have a great financial life.
**Written by Jennifer Meyer, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Meyer and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. *****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. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you're eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.***
