Am I Taking Too Much Risk With My TSP? | FedSmith.com (2024)

I’m 73 years old and I’ve got this TSP account. I’ve really been feeling the ups and downs, but overall, it’s been doing well and making me money. I’m not sure how much longer I want to put myself at risk.

This was part of a recent conversation I had with a lovely retired federal employee about her financial situation.

At the same time she was having these feelings about her TSP, we were discussing what to do with a sizable amount of bank CDs. She was interested in an investment that would potentially yield a higher return.

Background

A little backstory. She retired 11 years ago with a CSRS pension that has been more than enough to cover living expenses in retirement. Her TSP is worth around $900,000, she has a good amount of money in CDs and savings at a credit union as well as a paid off home on her balance sheet.

Consistent contributions and growth-oriented investment options helped grow these retirement assets over a long career, and the benefits of not needing to take withdrawals and keeping stocks in the portfolio mix have allowed the funds to continue to grow.

She does not have children and plans to leave the assets to her siblings and most of her money to the university she attended as her legacy.

“I don’t have any children, and I’m planning to leave money to certain family members and the college I attended,” she said.

Without any prompting, she also offered, “I haven’t been comfortable moving my TSP. I feel like someone is watching over it for me while it’s there.”

Investment Considerations

What may be the right approach, and how should she be thinking through this?

First, based on her comments, she has an emotional attachment to the Thrift plan. The TSP board administers the plan in the interest of participants and their beneficiaries, working to make the plan functional and monitor the funds within the plan, but it’s not accurate that anyone is watching over individual participant accounts.

Let’s look at her account and see what we can come up with.

This TSP account was currently invested 50% in C Fund, 25% in G, and 25% in F. Certainly, the allocation feels like it could be suitable based on the details of her situation.

  • 50% allocated to a growth bucket in the C Fund which tracks the equity-based S&P 500 Index
  • 25% allocated to a very conservative bucket in the G Fund – the fund’s objective is to ensure the preservation of capital and generate returns above those of short-term US Treasuries
  • 25% allocated to a conservative/income-oriented bucket, although the F fund has some sneaky risk factors that should be considered closely before using

If something changes in her situation – unexpected expenses, life changes, etc. – the conservative buckets hold 50% of the account balance to fall back on. For instance, if a stock market downturn occurs when capital is needed, she wouldn’t be forced to take money from the stock portion of the account.

A person’s age isn’t the best way to determine an investment mix, and portfolio construction isn’t an exact process.

A few things to consider may include:

  1. Goals and objectives
  2. Time horizon
  3. Risk tolerance
  4. Need for income

“Overall, the account has been making me money, but I’m not sure how much longer I want to put myself at risk.”

When emotions start to play into the thinking, it’s time to step back and create perspective. Understanding expected returns and the risk involved may be useful to that end.

A portfolio’s expected return can be calculated by multiplying the weight of each investment by its expected return.

Finding an individual investment’s expected return is a little trickier. One piece of information that can help are historical returns for various broad asset classes – while future performance may be very different, we can learn from historical market trends.

The historical data for TSP funds is available on TSP.gov for use in providing context. Historically, stock-based investments have returned significantly more than their bond-based counterparts. Forecasting investment returns is a complex process that can be done using several methods–cash flow, risk premium, or statistical models—however, is an overly simplified example for the sake of our conversation.

Putting portfolio risk into context may be even more helpful in this situation.

Morningstar put together a study looking at investment recovery times–they looked at all time periods with negative returns for each investment category in their fund classification system, with the majority of return data starting in 1990. Then they measured the time to recovery after a downturn–the average time and the maximum time.

Within the study, they track a category allocation of 50% to 70% equity. With our example portfolio consisting of 50% equities, this may serve as a reasonable benchmark; not perfect by any means but still helpful.

This category showed an average recovery time of 0.4 years and a maximum recovery time of 4.3 years, tracking data over 55 total recovery cycles during the study’s time period.

Again, there is no guarantee that this data will hold true in the future, but it gives us some information to work from and helps put market risk in perspective on a historical basis.

Conclusion

Discussing risk and return is an involved process that should include concepts like these and more, ultimately having a broader conversation than we are permitted in this short text.

Maintaining a balanced portfolio allocation like she has will allow her funds the opportunity to continue to grow for her legacy goals, while providing money to fall back on if something unexpected happens or her situation changes substantially.

Her next steps are deciding what she is comfortable with.

P.S. One planning note: She may also wish to consider is using a Qualified Charitable Distribution to satisfy the Required Minimum Distribution amount. Giving is a big part of her legacy plan, and using a QCD avoids the income tax due on the RMD amount for her.

I hope you find this information useful. I also publish a biweekly newsletter with insights into topics like this and more. If you’d like to join the list, please subscribe here.

Don’t be afraid to ask questions. I’m here to help.

The content is developed from sources believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

© 2024 Justin Holtz. All rights reserved. This article may not be reproduced without express written consent from Justin Holtz.

Am I Taking Too Much Risk With My TSP? | FedSmith.com (2024)

FAQs

Can TSP lose money? ›

Unlike TSP G Fund, TSP F Fund comes with credit and price risk and the accompanying risk of loss. Over long-enough time periods, though, investors should expect greater returns from TSP F Fund, which the exhibit below demonstrates has generally been the case.

Should I keep my money in TSP? ›

Many participants choose to keep their money in the TSP because of the TSP's low-cost funds. And you can always move money into your TSP account by making rollovers from eligible employer plans and from traditional IRAs. You always control how your money in the TSP is invested, even if you aren't making contributions.

Where should I put my TSP funds? ›

Your best bet is to stick with the C, S and I Funds. Here's the ratio we recommend for your portfolio: 80% in the C Fund, which is tied to the performance of the S&P 500. 10% in the S Fund, which includes stocks from small- to mid-sized companies that offer high risk and high return.

Is TSP a good retirement plan? ›

Advantages of your TSP account

Regardless of your retirement system, participating in the TSP can significantly increase your retirement income, and starting early is important. Contributing early gives the money in your account more time to increase in value through compound earnings.

Is it bad to withdraw from TSP? ›

For TSP participants who are still working for the federal government or members of the uniformed services, an in-service withdrawal can have a serious impact on your ability to accumulate enough savings to support your future goals.

Why is my TSP losing money today? ›

There is a risk of loss if the Dow Jones U.S. Completion TSM Index declines in response to changes in overall economic conditions (market risk) or if S Fund investments do not outpace or grow enough to offset the reduction in purchasing power (inflation risk).

What are cons of TSP? ›

Here are some of the cons of TSP plans:
  • In order to receive the maximum employer match, employees need to allocate at least 5% of their salary to their TSP.
  • Some employees may not be aware they are contributing to a retirement account through automatic enrollment, which could lead to misunderstandings about their pay.
Feb 4, 2024

What does Dave Ramsey say about TSP? ›

Dave Ramsey's advice is to save 5% into the TSP to get the full match, then max out a Roth IRA, and then put more into the TSP if you are able to save more after that.

Is money in TSP safe? ›

Payment of principal and interest is guaranteed by the U.S. government. Thus, there is no “credit risk.” Although the securities in the G Fund earn a long-term interest rate, the Board's investment in the G Fund is redeemable on any business day with no risk to principal.

What is the best thing to do with your TSP when you retire? ›

Where should I put my TSP when I retire? In most instances, the best options are to transfer your TSP assets to your new 401(k) plan, your IRA, or leave the assets in your TSP account. It's best to consult with your financial advisor to make sure that you make the right choice for your situation.

What is the average TSP balance by age? ›

The TSP average balance for those aged 55-59 is $198,034. TSP participants aged 60-64 have an average balance of $220,497. TSP participants aged 65-69 have an average balance of $245,419.

How much should I have in my TSP? ›

There's a one-word answer to that question: More! There is no such thing as too much money in the Thrift Savings Plan. If you want your TSP balance to be able to generate an inflation-indexed annual income of $10,000, most financial planners will suggest that you have a $250,000 balance at the time you retire.

Do I need to report my TSP on my taxes? ›

With traditional TSP, your contributions go into the TSP before tax withholding, which can potentially lower your current income tax rate. But when you take money from your traditional TSP, you'll pay taxes on both your contributions and earnings at the income tax rate of the year you make the withdrawal.

Is a TSP better than an IRA? ›

Basically, your agency will contribute money into your TSP account based on how much you are contributing. There is no match when you invest in an IRA. Another big difference between the TSP and IRAs is how much you can contribute every year. As of 2021, you can invest significantly more into the TSP compared to IRAs.

Should you max out your TSP? ›

Do Not Max Out to Soon. If you are maxing out TSP contributions, make sure you are not meeting the maximum contribution limit too early in the year or it can result in missing the TSP match. Make sure to take the maximum amount of $23,000 or $30,500 and divide it over the amount of pay periods you receive for the year.

What is the safest fund in the TSP? ›

The G Fund is invested in U.S. Treasury securities specially issued to the TSP. Payment of principal and interest is guaranteed by the U.S. government.

What happens if you pay too much into TSP? ›

What are the tax consequences if I contribute more than the annual limit in any tax year? Excess deferrals are treated as income in the year in which you made the contributions, whether or not they are refunded to you. The total amount of deferred income is reported by each employer in Box 12 on your IRS Form W-2.

How long can you keep your money in TSP? ›

When you separate, you can leave your entire account balance in the TSP if it is $200 or more. Your account will continue to accrue earnings and you can continue to change the way your money is invested in the five TSP investment funds by making interfund transfers. You can make an interfund transfer at any time.

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