February 7, 2020
You know, it seems in a span of a few years Jill and I will have gone from a house of energetic adolescents to being empty-nesters. I am not going to lie to you; I am going to miss all of them. Over the years, our advice to Maeve, Phoebe, and Sophie was to always work hard in school, be a good friend, always be humble, say your prayers, and practice gratitude. But this will change as they move into adulthood. While being a good friend, staying humble, saying prayers, and having gratitude won’t change over time, our advice on the pursuit of good grades and academic success will be replaced by advice on their careers, and eventually, on starting their own families. If Maeve calls me ten years from now, telling me she’s considering buying her first home, it’s likely I’m going to be asking her about her credit score and not her GPA.
It is no secret that life changes, and while our core values usually stay the same, our emphasis on many important things change in relation to where we are in our lives. This is definitely true of how we are investing and saving for retirement. I was reminded of this last week as I read an article about retirement savings for one group of individuals that face a unique set of circumstances – federal employees who utilize the Thrift Savings Plans (TSPs) to prepare for retirement.
Let’s start with a little background here. TSPs are the retirement savings plan offered to federal employees and military personnel that somewhat mimic the 401K offered by private corporations. Like the 401k, they can be an excellent way for federal employees to save and invest towards their retirement goals and include a powerful matching component on the first $5000 contributed annual by the individual. Like other regulated retirement plans there are various rules regarding loans, withdrawals, and taxation. But TSPs have a few core investment opportunities that allocate at different risk tolerances or can be targeted towards future specific “life cycle” dates.
You see, in 2017 a new law was enacted called the TSP Modernization Act. Under the new rules, federal employees who reach age 59 ½ can take up to four withdrawals per year. In addition, federal retirees are no longer required to make a full withdrawal or annuitize their TSPs upon the year they reach age 70½, though they will still be subject to Required Minimum Distributions (RMDs).
Folks, this is tremendous opportunity because as one approaches retirement, two key deficiencies of TSPs include limitations on investment choices, limited if any downside risk mitigation opportunities, and a lack of direct professional advice for the retiree. Not having the ability to access a wider variety of investment choices designed specifically for your distribution years, well, may not put you in the best position for financial success. The TSP was built around the accumulation investment philosophy of buy and hold. So, leaving your funds partially or wholly in a TSP will leave you in the same buy and hold accumulation strategy, which may seem wise in your active career years, but offers no downside protection, protection a distribution strategy must have.
In our practice, we teach TSP participants how to mitigate the lack of downside protection in a TSP by rolling it into an Individual Retirement Account (IRA) in their name. We help these folks come to the understanding that by transferring out of an TSP accumulation strategy and into a personally held IRA, they open themselves up to a much greater array of investment opportunities. Such opportunities may include those type of investment systems designed specifically for your retirement, or distribution, years. A system that institutes downside risk mitigation techniques using quantitative data that’s usually not found in a TSP.
Let’s break this down a bit further. Think of buy and hold strategy as an offensive-only strategy. It tends to work well early in the game of investing and saving when we have plenty of time before retirement. But later, as we are approaching or have come to the end of our active income earning years, all of us must add more defensive measures to our investment strategy through risk mitigation. For example, if you have $200,000 in a TSP and lose 25% of the value due to a market correction, you will need to make a gross return of 33% on the remaining $150,000 just to re-coup what you lost. And if you lose 50% like so many have experienced, well, you better plan on earning 100% on your money before you even break even.
Hmmm . . . we need to think about this.
What if we rolled these funds over to an IRA, and incorporated quantitative risk mitigation strategies that may reduce or possibly eliminate significant losses? What you just might find is that your need for higher returns – and the accompanying risk involved – are mitigated helping to smooth out your returns. You know, implementing downside risk mitigation strategies may even give you sleep better at night.
While the Thrift Savings Plan is not as common as your typical 401(k), it presents some of the same challenges regarding the preservation of your assets as you prepare for retirement. Federal employees need to take special care to recognize their circumstances related to TSPs. So, what’s your downside risk strategy? Have you tested it? Folks, if we do not have one . . . we all need one.
So be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reache at email@example.com.
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