There’s a small detail about Thrift Savings Plan (TSP) that needs more attention:
TSP does not let you select the funds to sell when you request a distribution.
This is a BIG deal. When you are retired and taking money out of TSP, if there are times of economic difficulty, losses in your account can get locked in. This is because you can’t choose which shares to sell—and which ones to hold onto in hopes of a market recovery.
“Save, save, save.” That’s the name of the game while you’re working. But in retirement, there’s a change that takes place. It becomes: “Spend, spend—but also, don’t run out of money.”
The problem is that most people don’t know how or when to make this shift. Here at FERS Blueprint, we’ve named this shift The TSP Retirement PivotTM. Here’s a quick introduction:
WHO: The TSP Retirement PivotTM
WHAT: A point in time at which a TSP investor switches their strategy from investing during the savings phase (pure growth) to preparing for/living out the withdrawal stage (growth + preservation)
WHEN: It’s different for everybody, but employees typically begin considering it about 5-7 years before retirement
WHERE: This idea is centered around the funds in your Thrift Savings Plan (TSP) account but could apply to other retirement savings vehicles as well
WHY: Read further in this article for why it matters
HOW: Learn about how TSP works in retirement, paying special attention to the limitation on selling your investments to fund withdrawals that can lock in losses in your account during times of economic difficulties
We teach you how you can approach this shift during our online retirement training about TSP in retirement, designed specifically for those retiring within the next 10 years
Withdrawals stress an account balance, but that’s what retirement savings are for: spending in retirement. Spending in retirement, however, is where the game is won or lost.
Whether your fund has gained or lost value, a SELL locks in the price of your shares, forever, for that amount.
TSP will need to SELL your shares in order to send your distribution in cash to your bank account. When you think about it, this service is mighty convenient since you can’t buy groceries with shares of the G, F, C, S, I, or L Funds.
The bummer part is that the shares can only be sold pro-rata, which means in equal proportions to the exact investments in your account. You cannot select which ones they sell. In normal circumstances, this standard approach can be just fine.
However, it’s in a down market (economic difficulties) where this can lead to major losses in the account that are more difficult to recover from.
Let’s keep things simple and look at just two different funds: G Fund and C Fund.
GOVERNMENT SECURITIES FUND
The G Fund never loses money. If the market goes down, or the market goes up, it doesn’t change. It operates independently and it will continue to grow at its declared interest rate, rain or shine. In other words, if the market is down one year, the G Fund stays the same. And then the market could come roaring back, and the G Fund will still remain the same.
COMMON STOCK FUND
The C Fund can absolutely lose money, and gain it, too. If you want to know how the C Fund is doing, go to any reputable financial reporting site and look for the S&P 500 Index because the C Fund mirrors it (meaning the results are just about the same). Even when an account has sustained some losses in the C Fund, long-term investors know that the market moves in cycles. What goes up must come down, and vice-versa. As long as you still own the shares, when the market comes back up, you’ll be coming with it.
SELLING YOUR FUNDS
You will no longer own your shares if you SELL them, which TSP will do for you when you request a distribution (a withdrawal from TSP deposited in cash in your bank account). A bit of each fund you own will be sold to cover your request. If you’ve had stock market losses, it’s locked in for that amount, because it’s coming out in a proportional mini version of your TSP account’s investments.
DIY Investor Dan
Meet DIY Investor Dan. Dan keeps a close eye on the stock market. He’s got a few outside investments as well. He doesn’t mind a riskier approach in hopes of getting those sweet, sweet C Fund returns.
Dan thought he had it all figured out. He wasn’t really considering slowing down on his investment risk as retirement approached. In the event that he had some losses in his C Fund in retirement (hey, it happens, it’s the stock market), he planned to instead sell only shares of his G Fund if he needed to take money out of TSP. That way, he could hang on to his C Fund shares for when the market recovers.
But Dan took our online retirement training about TSP in retirement, where he learned that TSP does not let you select the funds to sell when you request a distribution. Dan made a conscious, deliberate decision to re-evaluate his investment strategy for any money that he decides to keep in TSP. Dan likes TSP a lot due to its low-cost structure, and he was grateful not to learn the hard way of this limitation.
If retirement is in the near future for you, our class could be very helpful in your TSP retirement strategy. As retirement approaches, the same investment strategy you’ve used to grow your account during the savings phase might not be the same one to keep forever.
This class helps you look into the future and strategize how to maintain your account during the withdrawal phase (which could last 20-30 years or more). Ask unlimited questions. Bring your spouse or partner. This is a lively, engaging retirement training conducted live online by people who care. The entire session is recorded, and you’ll have access to the recording and all course materials for 90 days afterwards—join us for our next TSP in retirement class today.
© 2020 The Monroe Team, Inc.
FERS Blueprinttm is an educational division of The Monroe Team, Inc. DUNS Number: 032 057260. CAGE Code: 735L3. NAICS Code: 611710 Educational Support Services. Woman-owned, small business.
FERS Blueprinttm is not affiliated with, endorsed or sponsored by the Federal Government or any US Government agency. FERS Blueprinttm is educational only. No specific financial, retirement nor tax advice is being offered. The material presented is as current as possible, but is necessarily generalized. Facts and opinions are based on research and experience, but are not endorsed by the Federal Government. It is recommended to consult with your personnel office and/or the Office of Personnel Management (OPM) Retirement Office, Thrift Savings Plan, Social Security, Medicare, Internal Revenue Service, your legal, tax and/or other advisor(s).