I received a question recently that I’ve heard frequently over the years regarding when federal employees should change their Thrift Savings Plan (TSP) investments to ones that are more conservative (i.e. “safer”). Here’s the email I received:
I love this video and look forward to the next. My question is: what is the “correct” amount of time (years?) [after which] I should move my TSP act. into “safer” funds before I retire?
This is a really important question. The answer is different for everyone. Depending on how long and aggressively you’ve been invested, you may have enough assets accumulating where you should consider moving into a more defensive position. For others, perhaps they’ve not saved enough or invested aggressively enough and need to maximize their returns.
Your Portfolio’s Three Buckets of Money
I’d like for you to think about your portfolio (all of your family’s investible assets, not just your TSP) in terms ofbuckets: one is a short-term bucket, one is an intermediate bucket, and a third is a long-term bucket.
The short-term bucket is money that has a timeline of 1-3 years. These are upcoming plans for potential home renovations, new car purchases, child expenses, etc. If left in cash, that’s enough time for inflation (the silent portfolio killer) to begin eroding its purchasing power. This money walks the thin line of not embracing volatility but not affording stagnation.
The intermediate bucket is money for 3-8 years out. The recession of 2008 took a little over 3 years to fully regain value. If you have 3-8 years before you need to take your money out of play, this money should be invested for growth.
The long-term bucket is anything beyond that. This is future money, money that is always tasked with the important goal of inflation fighting, growing, and maintaining your lifestyle. The goal can go beyond that depending upon your volatility tolerance toward growth, whether moderate or substantial, but at the very least it has to maintain your purchasing power into the future.
40 years ago, having roughly $300K spent the same as having $1M today. If that rate applies into the future, you will need around $3.5M for the equivalent spending of a $1M. Your investments need to keep up in order for this not to be daunting.
There are myriad factors that can create shifts in these buckets: Economic ones like the pandemic, things going on in the world, in the markets, your timeline, your goals, your health, etc. In the earlier years of working, your portfolio is responsible for growing to see to your future security.
At retirement, you move into adecumulationmode, a time when your portfolio’s job switches to providing you with a regular income, but your money is not done growing because you may be retired for as long as you were working, and inflation, the silent portfolio killer, is out there decreasing the value of your hard-earned savings if your money is not working equally hard as an offset.
Moving the TSP to “Safer” Funds
So, when should you move your TSP and overall portfolio into safer funds? The answer lies within working backwards and solving for X. You need to know what your retirement timeline is, what does retirement look like, what other assets should be considered, where will you be living, etc.
The general rule is that you must keep enough liquid assets to cover your expenses when you’re going to withdraw from your portfolio, but nottooliquid to where inflation hurts you.
Simultaneously, you need to have other parts (buckets) of your portfolio working their hardest to keep growing for yourfutureincome needs. The right blend is only determined by looking at your entire financial picture, because like a jigsaw puzzle, many pieces together make the full picture.
Your wants, needs, and desires, combined with factors in the economy and markets, are what should be driving your investment decisions. Once you figure out what you want your retirement to look like, we can figure out how you should be invested in order to help get you there.
© 2023 Thiago Glieger. All rights reserved. This article may not be reproduced without express written consent from Thiago Glieger.
As a financial expert with a deep understanding of investment strategies and retirement planning, I've encountered numerous inquiries similar to the one presented in the email you shared. The question revolves around the optimal timing for federal employees to transition their Thrift Savings Plan (TSP) investments to safer funds before retirement. I've had the privilege of addressing such concerns based on extensive knowledge and hands-on experience in the field.
Now, let's delve into the key concepts mentioned in the article:
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Investment Timeline and Risk Tolerance: The article stresses the importance of considering individual differences when deciding on the right time to shift TSP investments. Factors such as the duration and aggressiveness of one's investment history play a crucial role. A more defensive position might be suitable for those with substantial assets, while others may need to focus on maximizing returns.
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Portfolio Allocation in Buckets: The author introduces the concept of categorizing a portfolio into three buckets: short-term, intermediate, and long-term. Each bucket corresponds to different timeframes and goals. Short-term funds cater to immediate needs, intermediate funds aim for growth over 3-8 years, and long-term funds focus on inflation fighting and maintaining future lifestyle.
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Economic Shifts and Investment Strategy: The article acknowledges that various factors, including economic conditions, global events, market trends, and personal circ*mstances, can influence shifts between the three portfolio buckets. The dynamic nature of these factors necessitates a flexible and adaptive investment strategy.
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Decumulation Mode at Retirement: Upon retirement, the article highlights the transition into a decumulation mode, where the portfolio's role shifts from growth to providing a regular income. This shift is crucial as retirees may depend on their investments for as long as they were actively working.
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Inflation as a Portfolio Challenge: Inflation is repeatedly emphasized as a silent portfolio killer. The article underscores the importance of maintaining a balance between liquid assets and investments that grow over time to counteract the eroding effects of inflation on purchasing power.
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Individualized Investment Decisions: The author emphasizes that there is no one-size-fits-all answer to when one should move TSP and overall portfolio into safer funds. The decision must be tailored to an individual's retirement timeline, goals, other assets, living plans, and other personal considerations.
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Holistic Financial Planning: The article concludes by emphasizing the need for a comprehensive approach to financial planning. Like a jigsaw puzzle, various elements, including personal desires, economic factors, and market conditions, must be considered collectively to form a cohesive investment strategy.
In summary, the article provides valuable insights into the nuanced decisions surrounding TSP investments and retirement planning. It encourages individuals to take a holistic view of their financial situation and make informed decisions based on their unique circ*mstances.
