Am I Taking Too Much Risk With My TSP?

“I’m 73 years old and I’ve got this TSP account. I’ve really been feeling the ups and downs but overall, its’ 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 back story. She retired 11 years ago with a CSRS pension that has been more than enough to cover living expense 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”

 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 - tracking the equity-based S&P 500 Index.
• 25% allocated to a very conservative bucket in the G Fund – the funds 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 persons’ age isn’t the best way to determine an investment mix, and portfolio construction isn’t an exact process.

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—this 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.

Conclusion

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.

 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. A QCD must be completed from an IRA, and cannot be performed at this time within the TSP. 

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

 -Justin

*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