COVID-19’s disruptions offer both challenges and opportunities – business shifts, where we work, how we spend our time and money, among others. Some of these are temporary but others are longer term. This article’s focus is on the planning opportunities for federal employees and military members who participate in the Thrift Savings Plan (TSP). It also includes key information on other retirement plans such as an individual retirement account (IRA) and a 401(k).
According to Fedsmith.com, TSP is the largest defined contribution plan in the world with around $621 billion for 5.8 million participants. Retirement benefits from defined contribution plans (including IRAs, 401(k) plans, deferred compensation, etc.) are based on how much you saved, investment returns and your longevity.
TSP Saving and Investing Opportunities
The contribution limits are similar to 401(k) plans. The 2020 limit is $19,500 plus $6,500 catch-up for individuals 50-years-old and older. Elective deferral limit might not apply to military members on active duty in combat zones. Your savings goal is driven by your retirement goals. The greater the need, then generally the greater the wealth required – the earlier you start saving the better. Also, you may need to save outside of retirement accounts because of plan limits, diversify retirement taxation and flexibility.
Choice in tax treatments are traditional (tax-deferred) or Roth (after-tax contributions). If you expect to be in a lower tax bracket in retirement, then consider traditional tax-deductible contributions. If vice versa, then consider Roth. Remember you’re making bets over long periods of time with the uncertainty of future tax laws and consult with your tax advisor.
There are six funds on the menu: Government securities (G Fund), fixed income (I Fund), common stock (C Fund), small-cap stock (S Fund), international stock (I Fund) and Life Cycle Funds (broadly diversified). Life Cycle Funds are gaining in popularity due to convenience and diversification. Investment allocation should be driven by your financial plan and not the market or your work buddy.
How to Generate Cash in a Down Market
Down markets tend to give retirees grief – the fear of running out of money or selling at a loss. Accumulators should be leaping for joy to buy things on sale; however, they too may hesitate. Here are some strategies to generate cash:
Have enough saved equal to three to six months of living expenses, more if your income fluctuates, and a year or two if you’re retired. Some of those “reserves” might be in the form of short-term CDs or bonds.
Rebalance Your Portfolio
Say your portfolio was $500,000, it declined in value, you need $10,000 in cash, and your portfolio allocation was 60 percent stocks, 30 percent bonds and 10 percent cash. Furthermore, assume the stocks fell 20 percent and bonds and cash were unchanged – the portfolio fell 12 percent to $440,000. Reduce the account by the cash needed ($10,000) then apply the 60/30/10 allocation. It tells you to sell $21,000 of bonds, buy $18,000 of stocks and add $3,000 into cash. This is buying low and selling high.
The CARES Act created special rules to allow for a new classification of hardship withdrawals. The rules are specific, read them and consult with your tax expert. Nevertheless, you still need to generate cash and think twice about accessing retirement monies. You’ll have to save more in the future and once you’ve early accessed retirement funds, it’s easier to do the second time.
We can’t always control what happens to us in life. However, we control our response. COVID-19, like other life changing events, forces us to revisit and refresh our financial and life plans. Often, it’s prudent to seek expert and objective advice for a second opinion for the sake of your future and peace of mind. Secure both wisely.