I previously wrote about an investment strategy for government employees and military service members regarding their Thrift Savings Plan.
Thank you for your overwhelming responses and questions. Here are my responses to the most frequently asked questions that I received.
Lifecycle funds do not capture an individual’s tolerance for risk. Additionally, although professionally managed lifecycle funds cannot be easily reallocated during a financial collapse such as the bear markets of 2001 and 2008. It is far simpler to allocate a portfolio worth approximately $100k than it is to reallocate a portfolio worth $500 million!
As most of you know the government matches up to 5% for government employees only! The Thrift Savings Plan does not match military service member contributions at this time. Therefore my answer comes in two parts:
Government Employees: I personally believe that nobody cares more about your hard earned money than YOU! For this reason I recommend you educate yourself in personal finance, economics, and investing. With all this being said, in my opinion you should only contribute up to the 5% match and all of your other capital should be invested in a personal brokerage account.
Service Members: This is going to be tough to understand but I believe service members shouldn’t even contribute to the Thrift Savings Plan. Without matching any contributions there is little if any incentive to invest in the TSP. I believe the better alternative for service members is a ROTH IRA which can be opened with any of the popular brokerage firms.
I get this question a lot, especially with 401Ks. There is a common misconception that in order to retire you need a huge lump sum of money that you can make steady withdrawals from in order to fund your lifestyle. Unfortunately this couldn’t be any farther from the truth! In order to retire you have to ensure you do 3 things:
Eliminate Debt: As a retiree you will no longer have an active income therefore it is financial suicide to borrow any sum of money. In the last 5 years leading up to retirement, retirees should focus on paying off all debts. This includes houses, cars, credit cards, etc. Without any debt or mortgage payments, retirees significantly reduce their monthly expenses. The only common expenses they are likely to incur are food, transportation, utilities, taxes, medical, and entertainment. In order to understand this completely take a quick look over your personal budget right now and eliminate all your debts, then see how much money you need to make a month in order to sustain your current lifestyle.
Downsize Lifestyle: This is very tough for some but it is imperative that you downsize your lifestyle as you move into retirement. The kids are out of the house, that fast paced lifestyle you once had is now winding down, sure you may have grandchildren but you won’t be spending everyday with them. Therefore there’s no need to retire in some huge McMansion. Why worry about keeping all that space clean, doing yard work, and climbing mountains of stairs. Instead settle on a modest home, remember the bigger the home the more costs to upkeep.
Educate Yourself Financially: I understand that your career may have been very demanding and spending the extra time educating yourself financially may not have been feasible. Well you’re retired now and you have ample time to educate yourself. This is paramount because you now have a nest egg of investments to manage and the better you manage them the longer you will be able to stretch your money. I would highly recommend retirees educate themselves on selling options, it is a low risk and highly consistent strategy.
If you do all three of these things I guarantee you won’t have to rely too heavily on your retirement nest egg. Please make no mistake, it is still imperative that you contribute to retirement accounts as they offer great tax advantages.
I can only speak to this question for so long as it gets my blood boiling. Actually, I’m not going to say a thing, I’m going to let the numbers speak for themselves.
Below is a chart that shows how much stocks have to rise in order to recover from investment losses.
In short, if your portfolio loses 25% of its value stocks have to rise 33% just to break even!
Here is another chart for you to consider.
As of today stocks have barely ventured higher than the 2000 peak. Therefore a portfolio that was active in 2000 is just now breaking even again on the shares it held at that time. The only gains it has incurred would be from the new capital that was contributed to the portfolio. You can slice it up every which way you want, but it makes no sense to hold on when stocks are declining. Why not cash out and get back in somewhere near the bottom?
Do you have anymore questions? Leave them in the comments section and I will be sure to include them!
Here’s to our wealth!