How to better manage your TSP-Part II

Your TSP is a vital leg of your retirement income plan. Combined with your CSRS or FERS annuity and Social Security (for FERS employees), your TSP plays a vital role in meeting your retirement income needs.

Notice, though, that the TSP is the only one of these components of your federal retirement that requires any input from you. Your CSRS or FERS annuity is determined by your earnings and years of service – there is no management required. For FERS employees, your social security is calculated using your wages through your working years and your age when you turn on benefits – no management required. Only the TSP involves any active role on your part – deciding how to invest your account.

The difference in your account balance, based on doing a good job or doing a poor job of managing it, could be significant – resulting in a big difference in your retirement income. Particularly if you go through a major market decline – like we have seen twice in the past 15 years – your TSP balance could be much smaller than you expected.

How do you manage your TSP? How do you approach the responsibility of investing your TSP so that it can make the most significant

contribution to your retirement finances possible?

In broad terms, there are three approaches you can take to managing your TSP account:

1. You can “not manage it” by keeping all your money in the G Fund – where you cannot lose money (short of a government default), but you do not have as much upside as you have with the other funds.

2. You can choose an allocation of the different TSP funds and then just ride out whatever the market delivers – perhaps rebalancing back to your desired allocation every once in awhile. This approach can be a conscious decision to stick to your allocation, or it can happen as the result of setting up your TSP allocation and then just forgetting about it and never doing anything with it.

3. You can move in and out of the different TSP funds based on which funds seem most appropriate in the current market conditions. This approach can be based on a specific method of analysis, or it can be based on your “gut feel” about the markets and the funds.

The first option is not really managing your TSP beyond making the decision that you do not want to take on any risk. This may be very appropriate for you if you are particularly risk averse. But over the long term, this approach may deliver lower returns, and if you want better returns than the G fund offers, this approach may not be best for you.

The second option is based on the well-known “buy and hold” approach to investing which relies on the market’s tendency to come back from declines and produce positive returns over the long term. If you have ever heard someone say, or thought to yourself “just hang in there, the market will come back” you have engaged a “buy and hold” mindset.

Alternatively, this second option can also result from a “default” mode of action in which you set up your TSP allocation and then just “forget about it” and leave it alone through thick and thin. This approach is really more neglect than it is a management style – but you might be surprised how often this is exactly what people do.

Finally, the third option is a more “active” style of managing your TSP. Some people are very successful navigating their TSP through the markets. But, truth be told, most people do not really have an aptitude for actively managing their TSP accounts. A lucky guess about getting in or out of a fund is not a repeatable process that you can rely on for ongoing results.

Interestingly, many folks think that the individual TSP funds are managed to respond to market conditions – so that by holding them, they are getting some form of active management. In fact, none of the TSP funds are managed to respond to market conditions. Instead, they are managed to match a particular market index or a pre-set combination of funds – and then to just take whatever the market delivers, good or bad.

Given the importance of your TSP in your retirement income plan, and its unique role as the only part of your federal retirement benefits that requires your management, it is important how you manage your TSP account. At a minimum, you want to make sure you don’t lose money in your TSP. At best, you want to maximize your gains.