In the past month, the stock market dropped into bear market territory. During that time, the Dow Jones Industrial Index suffered its largest single-day drop ever, but also its largest one-day gain since 1933. Needless to say, as the world works to contain the coronavirus and faces the likelihood of an economic recession, the market has become highly volatile.
For federal workers, this market whiplash may have you wondering what should I do with my Thrift Savings Plan (TSP) account?
Here are some tips for managing your TSP that’ll help you get through this difficult time and keep you on track toward your long-term financial goals.
Stay the course
The best thing most federal employees can do with their TSP accounts is to just take a deep breath, and then do nothing at all. Though the reason behind the current market fluctuations is unprecedented, wild market swings over short term time periods are normal.
Since 1980, the average intra-year decline of the S&P 500 is around 14%, but annual returns have been positive about 75% of those years, according to JP Morgan. That means a significant market loss is probable in any given year. However, the long-term trend is that the market goes up more often than it goes down.
Even among global financial collapses and world wars, the stock market has historically recovered. Therefore, you will likely benefit if you stay invested long enough to see the market – and your account – recover.
Hopefully, you have an established asset allocation (the mix of investments in your account based on your future needs and goals), of which stocks will have to play a part. If nothing else, stocks help keep your account above the rate of inflation in retirement.
If you don’t, you should meet with a financial adviser and get an investment plan in place.
With that said, you should keep contributing. As you add money to your account when the market is down, you’re essentially buying stocks on sale.
Since the first 5% of your basic pay that you contribute is matched 100% by your employer, you should save at least 5% of your paycheck. You essentially receive an immediate return of 100%, notwithstanding how the investments perform.
Furthermore, both your contribution and employer contribution grow tax-deferred, which means every dollar that you contribute lowers your taxable income by a corresponding amount.
Rebalance, if necessary
Market changes will affect each of your funds differently. That’s because each fund contains different investment mixes. For example, the S Fund is comprised of small and medium sized U.S. company stocks. That makes it riskier than the G Fund, which holds low risk, low return government bonds.
When markets turn volatile, some funds may move outside your desired asset allocation. So, it may be time to rebalance.
Rebalancing – generally, selling what’s up to buy what’s down – helps you do two things. One, it allows you to reap your earnings. Two, and most importantly, it helps you reduce risk and return your portfolio back to the investment levels you’re comfortable with.
Reevaluate your withdrawal rate
If you’re retired and withdrawing from your TSP for income, you may want to close the tap a bit. Spending down in a bear market can leave less of your portfolio in place to recover once the market does.
This is a good time to turn toward your emergency fund. After all, that’s what it’s there for.
But you may want to also temporarily lower your withdrawal amount for your TSP while relying more on other sources of retirement income (pension, Social Security, etc.) and/or reducing your expenses. As market conditions improve, you can then raise your withdrawal amounts.
Consider an IRA rollover
If you planned to keep your retirement savings in your TSP account, you may want to take this time to reconsider.
Transferring TSP funds into an IRA is often a better option for most retirees. This can be done as a full or partial rollover. Although the TSP offers solid investment options to grow your assets as you’re working and saving, it doesn’t offer the diversity, tax efficiency, investment selection and flexibility of an IRA, which can provide a more reliable and sustainable stream of income throughout retirement.
Most of all, it’s important to remember all past periods of market volatility and financial crises came to an end. If you focus on the things you can control, you and your TSP will get through this one, too.
Learn more about government retirement benefits, including the FERS basic benefit, the Thrift Savings Plan and other retirement planning steps, by downloading our free, easy-to-understand guidebook, FERS Made Simple: Understanding and Maximizing Your Benefit. (click the button below)