CD Financial March 2019

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MARCH 2019

STRATEGIC WEALTH

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TSP Promises and Pitfalls

WHY SIMPLICITY IS NO EXCUSE FOR COMPLACENCY

Every federal employee has the option to enroll in the Thrift Savings Plan (TSP), and they are also automatically enrolled as part of the Federal Employment Retirement System (FERS). The TSP is designed to work like 401(k) plans do in the private sector. It’s a great option to help federal workers grow their nest eggs for retirement. However, many people fail to take advantage of everything the TSP has to offer. While the promise of the TSP is great, it’s not without pitfalls. All FERS employees receive an automatic 1 percent match of their pay at 100 percent, with no action required on their part, and it is their obligation to put 5 percent of their pay into the TSP to receive a match. I’ve met hundreds of employees who’ve never funded their TSP, yet it is an essential part of their benefits and retirement package. I’m convinced this is the reason why, on July 31, 2010, the federal government made it mandatory for new hires to be automatically enrolled for 3 percent of their pay, matched at 100 percent. The final 2 percent (totaling 5 percent of pay) is matched at 50 percent. A 50 percent return on your money is fantastic, yet some employees still point out that they can’t afford the last 2 percent. If you are a FERS employee, don’t ever make the mistake of funding less than 5 percent of your pay across 26 pay periods annually. The full 26 pay periods allows all the matching dollars from the government to come into play. At most private companies, there’s someone on staff to assist employees (usually in HR) who helps guide you through the 401(k) process and the maximization of your benefits. Public servants typically have no such internal resource, which means that they must seek advice on their own or on the web, which is where they are most often directed. You may agree that when starting a new job, you’re mostly chasing after learning your duties, assuming that the rest is handled. Also, there are many who don’t learn by reading but rather through instruction. The problem is, their investments may not be examined for years. If you make no fund election yourself, you will default to the G Fund. This fund invests exclusively in a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP, and the earnings consist entirely of interest income. The promise of a no-loss G Fund with steady returns sounds attractive, but years may pass before you find — after a decade or more — that this fund may have been too conservative for your early earning years. I can’t tell you how many times I’ve heard, “Charles, I wish I would’ve known this years ago.” Unfortunately, G Fund returns are modest in comparison to market averages over longer periods of time. It may feel like you’re making

money from the G Fund — technically, you are — but in the grand scheme of things, you’re missing out on the improved returns you’d see from a more diversified portfolio. These problems have not gone unnoticed. In a July, 2011 letter to investors, the TSP stated that one of their major problems is that workers “invest money too conservatively in [their] early saving years.” It’s conventional financial wisdom to gradually move from riskier investments to more conservative investments as you near retirement. You can do this automatically through the TSP’s lifecycle funds as well as other financial products not exclusive to the TSP. You can even find some smartly designed ETFs in the private sector managed by Blackrock — the same company that manages the TSP’s funds. Another pitfall with self-managing the TSP is the simplicity of having just 5 funds. This allows a quicker understanding of the investments but creates a tendency to want to alter them in the event of a market downturn. When the market recovers, you may fail to recoup those losses. As such, what seemed like a prudent financial maneuver ends up costing you money. Fellow co-workers may be sincere, giving you what they believe is good advice. The recent stock pullback of late 2018 caused many to move their assets to the G Fund in January, only to see the C, S, and I funds rebound drastically. When I asked a handful of federal employees why they did this, the answer was always similar. “A co-worker told me to do it,” or, “I was afraid of sustaining any more losses.” A thoroughly analyzed retirement income plan may help overcome these emotional reactions. You can avoid the pitfalls inherent in the TSP by following advice from that same letter to investors. “Don’t just wing it; consult a financial planner if necessary.”The precise strategies that could benefit you the most will depend on your goals and circumstances, but everyone can benefit from having a well-defined strategy in place. Your financial future is too important to leave to chance or emotional investing. It’s essential to examine what you’re doing and assess whether it’s the best plan for you. It’s a shame that the government doesn’t provide more help in this regard, but that’s exactly what we’re here to do. Creating a written retirement income plan is of utmost importance, so that, whether the market is up or down, your income is secure. -Charles Dzama

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