Ep #38: TSP and Market Volatility: Part 1 – Markets Go Down…Now What?

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How are things going to unfold when it comes to your Thrift Savings Plan (TSP) account? Tammy and Micah have been getting a flood of questions related to this lately, so today—and for the next few episodes—they’ll be giving you access to a webinar they did on this topic. Over this 4-part series, you’ll learn about how the TSP works, what to do when it goes down in value, and more.

In this first episode of the series, listen in to hear about the 3 parts of the FERS retirement system and how it will affect your retirement and benefits. Tammy and Micah discuss how you have control over your TSP and share insight on how you can manage it wisely. They also break down more basic information on diversification, understanding the funds and the options available, and how to learn from similar situations so we can plan better.

What We Cover:

  • The common questions about TSP for retired and non-retired people.
  • The 3 parts of the FERS retirement system.
  • How the new stimulus package affects your retirement plans.
  • How to avoid making the mistakes people made in 2008.
  • What the bucket strategy is and how it can help you.
  • The opportunities and up-sides to the situation we’re in.

Resources for this Episode:

Ideas Worth Sharing:

The TSP doesn’t only go up in value—it does go down, just like every other investment. – Micah Shilanski Click To Tweet

One of the things I think is important to do is to learn from history, learn from our behaviors in the past and say, 'how do we make better decisions going forward?'” – Micah Shilanski Click To Tweet

You have to have a plan and stick to that plan—really important. – Micah Shilanski Click To Tweet

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Full Episode Transcript
With Your Hosts
Micah Shilanski and Tammy Flanagan

 You can spend. You can save. What is the right thing to do? Federal benefits, great savings plans too. You can save your own way, with help from Micah and Tammy. You can save your own way. Save your own way.

Micah Shilanski:  Welcome to the Plan Your Federal Retirement podcast. I’m your co-host, Micah Shilanski, and we have a very special podcast series set up for you. Tammy and I have been talking recently, we’ve been getting a flood of questions, well several questions have been coming in about your TSP account, the Thrift Savings Plans, investments markets, et cetera, especially with all the that’s happened this year, then the volatility coming up to year end, how are things going to unfold? Tammy and I were chatting and thought it might be great to give you a special insight into a webinar that we did that was just on the TSP.

                           Now, this is going to be a very special four part series, and what we want to do is start it off talking about how the TSP works, but more importantly, what do you do when the TSP goes down in value? Now, we don’t guarantee investments. We don’t talk about any of those fun things at all, but we do want to talk about when reality is going to happen and the TSP doesn’t just only go up in value, it also goes down just like every other investment. But more importantly than volatility, is what is our plan when that happens. So, stay tuned for this episode when we’re going to break down, what happens when markets go down and when this wraps up, we got a very special next series for you as well. So, I hope you enjoy the TSP webinar talking about TSPs and market volatility.

                           So, we’re going to talk about the TSP and go through about 45, 50 minutes or so some great content. Then we’re going to talk about some what’s next steps, some things of how to take your education, your training to that next level. Then we’re going to be moving on to Q and A, which is one of my favorite parts of doing this.

                           All right. Couple of disclosures, I know a couple of you that are attending this webinar, besides that, I don’t know your personal situation, nor does Tammy. So, we are going to give ideas, we’re going to give concepts, we’re going to speak with a broad brush, but as you know, you need to take this information, apply it to your personal circumstances. We’re also talking about investments. We’re going to talk about the TSP. And when we reference something, whether it’s the C, S and I fund, or an L fund, we’re talking about it in concept, we are in no way telling you, in a general audience, what to go and invest and how to invest. I know you know that, but the attorneys make me say it, so there we go. All right, Tammy. So what are we really going to dive into today?

Tammy Flanagan:        Well, we were talking about all the different things we could cover in this seminar today, or webinar as we call it. And we were thinking of our audience being in probably three different groups. We have those of you listening, who are still accumulating money, your retirement’s still out in the future, maybe five years, 10 years from now, maybe farther. So for you, you’re wondering, “How do I react to this? Do I still put money in the TSP? How do I invest it? How do I diversify between the different funds?”

                           Then there’s those of you who have saved up. I know there were 50,000 of you who had a million dollars or more at the end of last year, and now half of you have less than a million dollars, right now. So, things have changed just in the last few weeks and you want to preserve what you’ve saved. And you’ve noticed maybe if you’re in the stock market, that you’ve taken a hit. So what do you do?

                           And then those of you living out your retirement, you’re trying to withdraw money and it’s hard to withdraw money when things are going downhill. So, how do you react to this? So, we’re going to cover those different stages of your career as far, as how does the new stimulus package help you or hurt you in your retirement plans? How do I avoid making mistakes that some people made back in 2008 when we experienced a similar, quick drop in the market and what happened then and how’s that relate to what’s happening now?

                           Bucket strategy is one way for dispersing your retirement funds, and Micah is the pro at really understanding that concept and explaining it in a way that we can all understand. So, we’re going to cover that withdrawal distribution strategy today, a little bit in this discussion.

                           Then finally, we always want to find the silver lining in the cloud. What good can come out of this whole situation? Are there some ways we can take advantage of the fact that markets are down and we’re at various stages of retirement planning, how do we make the most of a bad situation that we’re in right now? So, that’s basically what we want to cover in the next, what 45, 50 minutes?

Micah Shilanski:  You got it. Well, let’s push out a quick little poll real fast, and just to find out where people are in retirement. Where are you at in the process? How soon were you thinking about retiring? So if you guys would go ahead and take a second, a poll should be popping up over that chat bar. If you just respond to us, it’ll give us a better sense of where you’re at, and so we can customize this information a little bit more for you.

Tammy Flanagan:        Looks like we have a lot of newer hires with more than 10 years and a lot of people already retired or recently retired. That’s a big segment of our audience as well.

Micah Shilanski:  Nice. Well, good news is we’re going to talk a little bit about both, right, Tammy? So, give some ideas on both sides of it. So, that’ll be great.

Tammy Flanagan:        Absolutely.

Micah Shilanski:  All right. So we got the polls that came in pretty much across the board. 91% of you guys participated, that’s great. So, we know the nine that aren’t, so go ahead and click in the polls too, that would really help us. And so Tammy, let’s talk about the three parts of the first retirement system and then let’s start diving down a little bit more to that TSP.

Tammy Flanagan:        Right, so as most of you probably know, this is just a quick overview. Your retirement is really made up of three different potential streams of income. So, as you work throughout your federal career, you have been accumulating this first basic pension benefit or first retirement. Sometimes we even call it the first annuity benefit. That’s the one that’s based on your salary, your length of service, and a percentage, whether it’s 1%, or 1.1%, or some of you might be even law enforcement getting 1.7%. But the nice thing about that is that’s not affected at all by what’s going on right now. That’s still accumulating credible service, your salary’s still being used. Most of you, if not all of you are still working. In fact, some of you are working overtime to manage what’s going on, if you’re with FEMA or some of the other agencies really directly involved with this HHS and so forth.

                           So, that basic benefit’s going to be pretty much unaffected. You still can count on that. The government has not gone belly up yet, so that’s going to continue for the rest of your life. I have full faith in the government to continue paying those benefits in the future. We always hear proposals in Congress where they might want to take away the cost of living, or take the first supplement, or reduce the high three to a high five. And those things will continue to be proposed. They’ve been proposed continuously for the last 30 years and luckily, federal employees have pretty strong lobby in Congress to prevent those proposals from actually becoming law, and let’s hope that stays solid and secure for the future. So we have our first benefit and most of you, that’s going to replace about a third of your income in retirement. If you’ve worked a full career in federal service.

                           Next here is your social security benefit. Like I was saying to Micah before we started, I just saw the trustees report that came out yesterday for 2020 social security trustees. This is the one where they tell us how long it will be before social security runs out of money. Somebody, I saw Christina, had asked about that already and how is that going to be affected by what’s going on? Well, the truth of the matter is the trustees don’t know yet because we don’t know what’s going to happen from here until the end of 2020. So, the report that was released yesterday was the state of the union or the state of social security up through the end of 2019, which was a good year. The revenues were coming in, everybody was working, unemployment was an all time low. So, the trustees report showed no change from the previous year, which means we’re still good to pay full benefits till 2035. At that point, they will only be able to pay about 79% of the promised benefits.

                           But what that really means, it doesn’t mean that you’re going to all of a sudden get a drop in social security in 2035. What it means is that Congress has about 15 years to figure out how to fix that problem, by either raising revenues or paying less in benefits. The reality is, based on past changes to social security, it’ll probably be a combination of both and that’s yet to be determined. I guess they’re going to probably now wait to see what happens as a result of the unemployment and the problems we’re having this year with the economy. But I don’t think you’re going to see a drastic change in that. It’s just going to have to be considered in the overall picture of the future.

                           But what we’re really here to talk about today is that third tier, that you really have a lot of control over in your future and that’s your TSP, because you control how much you put into it. You control how you invest it, and then you get to control what you do with it after you retire. So, that’s what we’re really going to dig in deeper to today.

                           Then the other thing I wanted to mention as we’re talking today, because some of you might be thinking, “Man, I wish I had been hired before 1984 and could have been under that old system that had nothing to do with the TSP.” But I want to assure you that because you’re under first, this three tiered system, that’s based on some of your input, a lot of your input with the TSP, I still think you’re in a good place.

                           Number one, social security benefits follow throughout your lifetime. So whether you worked in the federal government, served in the military, worked in the private sector, you have a social security record that probably started in high school with no break, throughout those years, unless you left the workforce, your social security has a whole career of lifetime earnings. Hopefully we all live to be at least age 62 through 70, and we’ll be able to claim that benefit and receive it for many, many years.

                           Now, in addition to that, your TSP account, that’s something that you can choose when to take the money out. You can choose how to take the money out. You can choose whether or not even to leave it in the TSP after you retire. So, having that control over a large bucket of money is really advantageous if you know how to manage that control. So, that’s one of the things we want to help you with today, is understanding how to manage that responsibility you have with your retirement in the future. So, how do you do that wisely and with some education behind it, not just emotions?

                           Then within the TSP, the government gives us five nice, simple funds that round out the stock market and the safe, or the cash investments that we have. So initially, when the TSP first started, we only had three, we had the G, F and the C fund. I remember, I was some old enough, to remember those days when this first started, and I remember we called it the safe fund. The G fund was safe, it never had a negative return. And we called the C fund, the risky one because it was the stock market and most federal employees had zero experience investing by 1987 when this all started. Then the F fund, we really weren’t sure what that was and most of us stayed away from it because we didn’t have any clue to what bonds were other than the savings bond allotment that came out of our paycheck every two weeks. So, federal employees as a whole, myself included, back in 1986, ’87, really didn’t have a clue as to how to invest for retirement, how to manage money, how to make sure it’s going to last and how to take educated risk, how to understand how risk and volatility and diversification is necessary to get the results that we have today.

                           Now, later on in time, the I fund and the S fund was added to the TSP to allow us a more diversified stock market portfolio. Now, of course in the private sector, you might have 50 to a hundred different stocks to choose from, or mutual funds to choose from. But the government, I think, played it smart. They only gave us five choices. If you think about this in terms of your federal health benefits elections, and you have at least 30 different health plans to choose from every open season, what do most of us do? We just stay with the same health plan we had last year because to read 30 different health plan brochures, our eyes would cross and we would just not know what to do. So, sometimes it’s just paralysis from too much analysis.

                           So, I think having five funds to choose from was a smart choice, I think, but if you don’t know how to manage those five funds, they also gave us the Lifecycle funds, which were designed to put everything in the L 2020, or L2030 fund, or whichever one matches when you think you might start to be using that TSP money.

                           So, they’re diversified across those five different funds pretty simply, so they may not match exactly what your needs are, because you might have other money outside of the TSP. You might be retiring in 2030, but you might be a second career for another 10 years. So the L funds, you got to be careful to really understand how they were designed to work and you can start with tsp.gov, that gives you a lot of basic information on how those L funds or Lifecycle funds were designed to operate.

Micah Shilanski:  So one of the things Tammy, I know we did a webinar, boy was it a month and a half ago, when all of first started to happen. The market really started to drop and one of the things we started to see was people making the same mistakes that they made in 2008, they started to remake those mistakes now. So, one of the things I think it’s important to do is learn from history, learn from our behaviors in the past and say, “How do we make better decisions going forward?” Because there’s nothing we can do about 2008, that’s in the past, that’s done. It’s now about going forward and really, it’s about looking at your things emotionally versus logically in this.

Tammy Flanagan:        That’s right, Micah. You know, a lot of times we do react emotionally to a lot of things in life, not just our investments, but to anything happening, just this whole business of staying at home. Even though I’m always at home working, I’m still a little bit affected by the fact that I can’t go to a restaurant, or I can’t go to the movies on the weekend. So, knowing that we have these restrictions, there’s certainly an emotional thing that’s going on as well as affecting our pocket books and financially.

                           So, I think what happened in 2008, we did see an awful lot people who moved money once the market fell, over to the G fund feeling that would be safe and secure. But as we now know, I think most of us realize now that we shouldn’t do that, we shouldn’t move money at the bottom of the market, out of it because that’s selling low, we’re locking in our losses. And then the problem is not knowing when to move it back into the market, so that we’re not buying high like people did. So, I’m hoping that’s one of the lessons people have learned.

                           I was listening to a broadcast by the TSP director last week and luckily, he said that the majority of TSP participants as of last had not moved their money to the G fund. So, they pretty much stayed the course, kept it where it’s invested, although about 5% of the five and a half million investors did have a little fear in them and they did move money back to G. So, hopefully they did it before it fell all the way down as it has today. But yeah, emotions can affect us, so we have to keep that to the side. We have to really take that out of the picture. I know one of your pro tips, Micah, is to do what?

Micah Shilanski:  Is to have a plan, right?

Tammy Flanagan:        You have to have a plan.

Micah Shilanski:  You got to have a plan and you got to stick to that plan, really important. Tammy, just as you were saying, let’s go back to 2008 and let’s look at this. Now, we just grabbed these numbers right from the TSP’s website, is where these came from and look at that 2008 line, and we picked on the L funds, you could have done it with any of them. Look at that L 2040 fund. In one year, it dropped almost 32%, 31.53%. Now, if you were in the C fund, the S fund or the I fund, you went down more than 31% in that period in time. That’s what caused a lot of panic. But what people tend to forget is what happened next year? Market did 25%, the year after that … I shouldn’t say the market, the L 2040 fund did 25%, year after that it did 13.89%. Yes, we went down, but it came back.

                           What happens Tammy, as you were saying, is we get so fearful, “Hey, we’re going to retire. This is my retirement nest egg. I can’t afford to lose it.” When we start talking like that, we really start limiting our choices. We start limiting what decisions we should be making. We got to pause and we got to have a plan for how do we tolerate when the markets go down? Because they will, this is not the end. They will hopefully go back up, but they’re going to go down and it’s going to be a rollercoaster, so what’s your plan as we’re going through this in retirement time?

                           Now, let’s put these in dollars, because sometimes 31%, what does that mean? Well, if we look at this and let’s just say that at the beginning of this year, you had invested in the C, S and I funds, 50% in the C, 30% in the S, and 20% in the I. Let’s say you had $500,000, nice round number, and that’s where you were at December 31st. End of the quarter, at March 31st, your value, not contributions, just the value drop, was $385,000. You lost almost $115,000 and if you had more than-

Tammy Flanagan:        Probably more than you earned.

Micah Shilanski:  Yeah, possibly more than you earned, and if you had more than $500,000 in the account, that dollar drop is more. When people see that, Tammy, that’s when we start being emotional, we start reading those statements. We start freaking out saying, “Hey, I have to wait till the market settles. I can’t afford to take this loss.” By the time it shows up here, it’s already happened, we’re past this point. Now we got to be focused on that long term because if we miss out on that upside, you’re really going to be missing out a lot on recovery. So, we got to have a plan that we can to, to see how that’s going to come. And this is Tammy, a little slide, just talking about what you said earlier before March, there was 50,000 members of the TSP that were millionaires, right?

Tammy Flanagan:        Million dollars or more.

Micah Shilanski:  Million dollars or more.

Tammy Flanagan:        And add to that a 74,000 that were almost millionaires. They were in the 900,000 in range, they were just waiting for it to click over to a million, and now it dropped.

Micah Shilanski:  Just over.

Tammy Flanagan:        It just dropped down. But I think the other thing, Micah, before you go on, is the fact I hear people say all the time, “I lost so much money.” Did we really lose money if we are not using it yet?

Micah Shilanski:  That’s a great question. This is an emotional or a logical question, right?

Tammy Flanagan:        Right, exactly.

Micah Shilanski:  Emotionally, yeah, we lost money, because it went down. But logically, no we didn’t. I’m just going to steal Warren Buffett’s thunder, slightly famous investor and he’s not worried when it goes down because he doesn’t sell. When you sell is when you lock in that loss, you still have the opportunity for it to come back up. Larry asked a question, just to jump in right here. And he says the loss from 2008, he had 32% loss and it took two years to recover. Is that correct? Larry, it probably took two years to recover if you were making contributions. If you were putting money in the stock market, it took about two years, about two and a half to come back, assuming you let it ride. If you were not making contribution, it took closer to like three and a half to four years to get back to even, in that same time period, the power of contributions.

Tammy Flanagan:        Right, takes more returns to come back to even than it did when you took the loss. If you lost 30%, you can’t just gain 30% to come back to even, you got to gain more.

Micah Shilanski:  Exactly, right. So we had a hundred grand, it went down to $70,000. Now, if we get 30% of $70,000 is $21,000, right?

Tammy Flanagan:        Right.

Micah Shilanski:  So, that brings you back to $91,000. That’s not a hundred, we got to earn more than that in order to get back. So, what do we do when the market goes crazy? Do you stay the course? Do you rebalance and take advantage of the opportunities? Do you say, “Mess it, I’m moving everything to the G fund, I’m going to let this thing settle.” What do we do? And what I’ll say with working with feds one-on-one, I know Tammy, I think you feel the same way, also with talking to so many different federal employees across the world, the ones that don’t have a plan for what’s going to happen when the markets go down, the ones that don’t have a plan for how they’re going to access their retirement account, those are the people that are freaking out.

                           So, this is the importance of having a plan is because we’re going to plan for those markets to go down. So, how do we start that? We start it with what I call a retirement income timeline. This is really, really important for federal retirees to be thinking about because your pension starts, stops and changes over time. Let’s say you retired at 57, so you had 30 years of service. You retired at 57, you get a pension check coming in. You also get a supplement, a portion of your social security comes in early. That supplement stops at 62, regardless of when you take social security on or not. So, now your income dropped, how are you going to make up that gap? When do you turn on social security? All of those questions can be answered or can be addressed anyways, in what I call a retirement income timeline.

                           This is an example from someone I spoke to about three, four weeks ago. And basically they were looking at, “All right, we have where we are now.” I like to draw a timeline out from now all the way over to our COD. Do you know what your COD stands for?

Tammy Flanagan:        I was thinking date of death, but I can’t figure out the C.

Micah Shilanski:  Oh, the C. Crap out date, right?

Tammy Flanagan:        Oh, crap out date, okay.

Micah Shilanski:  That’s right. All right, so like the date of death, how long do we have, and then what changes in between? So, in this particular case, she has where she was now, about 62, 63. She wanted to retire at 65, they wanted to retire at 65 years young. So, we say, “Great, well, what happens when you’re 65? And then when’s the next change?”

                           And the next change would be when she was 70, because that’s when they wanted to start turning on social security. So, okay, now we have changes that are going to happen. Now let’s put some dollar amounts on here. They want to be able to spend $4,000 net a month in retirement, basically the same income she has coming in now, she wants to keep that going. So, how is she going to get this $4,000 a month? Where is it going to come from?

                           Well, we went through and looked at her first pension, with the math boils down, her take home pay her, net pension, so not gross, gross is what goes to the IRS, then we have health insurance, life insurance, taxes, other deductions, net is what hits your bank account. Her net pension would be about $2,400 a month. So, good place to start, but she wants $4,000, she’s only getting $2,400, so we have a little bit of a gap. So, that gap is $1,600 a month.

                           So, she has a $1,600 a month gap until she is 70 years young. So, let’s just make it easy. 65 she retires, 70 social security, that’s five years. That gap is $19,000 a year, she has to pull out from somewhere to make sure she can have income coming in and $19,000 times five years from 65 to 70 is $96,000. I’m going to round, a hundred grand. She needs $100,000 set aside just to make sure she can make it to 70 years young. Then at 70, now we still have your first pension coming in. Let’s not worry about inflation, so keep it simple. She still has her first pension coming in at $2,400. Now she’s going to have a social security check of $3,000 a month. This is great, $2,400 plus three grand, that’s $5,000 a month. This is more income coming in when she’s 70 years young than what she had at retirement time. This is a great plan that’s there, but how does she get there?

                           This is one of the things that I’m going to say our financial planning industry does wrong. We start looking at investments right away. And Tammy, as you know, investments is just one piece of the pie. So often we look at this and say, “Great … ” I get these questions a lot and I know you do too, “Tammy, what do I do with my TSP? How should I invest my TSP? What should I do with my IRA?” That’s not the first question. The question is, what does it need to do for you? Right?

Tammy Flanagan:        Right.

Micah Shilanski:  So what’s your income, what’s your gap? And then we start thinking of buckets of money. And I know there’s a question that popped up earlier, how do we use buckets of money?

                           Well, thank you so much for listening. As you can see, Tammy and I have a great time chatting about the TSP, about investments in markets and strategies, and we’re talking about that volatility. Now, we left it at a bit of a cliffhanger, talking about the next steps in planning, which is what we call buckets. Buckets of money or buckets of planning to have in retirement. Make sure you stay tuned to the next episode, where we’re going to get into the second part of the special insights that you are going to get in the TSP webinar. If you want more information like this, you can jump on our website at planyourfederalretirement.com/insight, to get more information on the special four part series. Until then, happy planning.


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herein are solely those of Shilanski & Associates, Incorporated, unless
otherwise specifically cited. Material presented is believed to be from
reliable sources, and no representations are made by our firm as to other
parties, informational accuracy, or completeness. All information or ideas
provided should be discussed in detail with an advisor, accountant, or legal
counsel prior to implementation.

Content provided herein is for informational purposes only and should
not be used or construed as investment advice or recommendation
regarding the purchase or sale of any security. There is no guarantee that
any forward-looking statements or opinions provided will prove to be
correct. Securities investing involves risk, including the potential loss of
principle. There is no assurance that any investment plan or strategy will be

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