Protecting Your TSP Account amidst Present Uncertainty in Employment
Adjusting Thrift Savings Plan Strategies for a Shorter Retirement Horizon
Federal employees who find themselves facing a sudden shortening of their retirement horizon due to early retirement offers, potential reductions in force, or other unforeseen circumstances, should consider adjusting their Thrift Savings Plan (TSP) strategies to prioritize capital preservation, recalibrate risk tolerance, and plan for more immediate access to funds.
Key Strategy Adjustments
- Shift investment allocation: To reduce exposure to market volatility, it's advisable to increase allocations to the G Fund (Government Securities), which is very low risk, and decrease exposure to stock funds. This move protects the portfolio from short-term losses given less time to recover.
- Reevaluate contribution levels and catch-up options: Early retirement may reduce years of income deferral, so it's essential to maximize contributions while still working or during any extended employment period to help offset lost growth years.
- Consider the timing of withdrawals carefully: Retiring before age 55 requires careful planning, as the TSP Rule of 55 allows penalty-free withdrawals if separated from service in the year turning 55 or later. Those retiring earlier will face different tax implications and potential early withdrawal penalties.
- Adjust retirement income expectations: A shorter retirement horizon reduces the compounding growth period, which may necessitate being more conservative with planned spending or considering other income sources to supplement TSP funds.
- Review tax strategies: With a shorter investment horizon, Roth contributions might become more attractive if you expect to withdraw sooner and want to manage tax liability after separation.
- Use available TSP lifecycle funds cautiously: While these funds automatically become more conservative as the target date approaches, a sudden early retirement might warrant a manual adjustment to more stable options earlier than the fund's original target date suggests.
This approach balances the need to protect accumulated savings from market risks during a compressed timeline while maintaining flexibility for withdrawals and balancing tax efficiency. Consulting a financial advisor experienced with federal benefits can provide tailored guidance to individual circumstances.
Upcoming Workshops
For those looking to learn more about these strategies, the "Maximizing Your Federal Retirement Benefits" workshop offers two sessions: Aug. 19 at 6:30 pm and Aug 21 at 1 pm ET. The workshop includes sessions on "Unlocking the Power of Age-Based In-Service Withdrawals" and "Demystifying the Funds," focusing on what federal employees really need to know about C, S, I, F, and G funds.
Registration for the "Maximizing Your Federal Retirement Benefits" sessions can be done here.
It's important to note that the fixed income index F fund has not performed well recently, averaging only 1.88% over the past 10 years. This means that for a shorter retirement horizon, the G fund is the best option to protect prospective retirees' investments. However, the 10-year return to-date for the G fund is only 2.36%, which means it may not keep up with inflation.
The federal workforce is currently experiencing a state of flux due to the deferred resignation program (DRP), voluntary early retirement authorities (VERA), and potential reductions in force (RIFs) across dozens of agencies. In such uncertain times, it's crucial for federal employees to understand their TSP options and make informed decisions about their retirement plans.
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