Federal retirement expert Chris Kowalik discusses the financial impact the coronavirus (COVID-19) is having on federal employees who are investors in the Thrift Savings Plan (TSP).
The three main questions she addresses are:
- Is there a reason to panic?
- Should I rebalance my TSP because of this market downturn?
- Are there any weaknesses exposed in the TSP when we have a volatile market?
Hello and welcome to this episode of FedImpact: Candid Insights on Your Federal Retirement. I’m Chris Kowalik of ProFeds, home of the Federal Retirement Impact Workshop. Today we’re going to be talking about how the coronavirus has impacted federal employees’ views of how they’re invested in the Thrift Savings Plan.
I recently did an interview with Tom Temin of Federal News Radio on this very topic and it sparked so many great things that I wanted to do a deeper dive with all of our listeners who are thinking about maybe making a change in the TSP due to the recent market downturn, of course, related to this global pandemic of the coronavirus.
Here are the three main questions that we’re going to be addressing:
- Is there a reason to panic?
- Should I rebalance my TSP because of this market downturn?
- Are there any weaknesses exposed in TSP when we have a volatile market?
Okay, these are three great questions, so we’re going to dive into each one of these. But first let’s talk about why people invest in an account like the Thrift Savings Plan, (that can also be a 401k or an IRA). These are long-term retirement vehicles. Of course this is one of the three buckets of money that most people need. They need a now bucket for things that are happening today, they need a soon bucket, which are some of those medium range goals that will happen before they retire but they want to be able to have the money at that moment in time, and then of course we had the later bucket and of course TSP, 401ks, IRAs falls into the later bucket.
Now all too often the TSP is the only bucket that federal employees have. So it’s the later bucket. And then they become concerned and tend to overreact when the market is messing with their one bucket – because it’s all that they have. And so when we have things like this global threat of the coronavirus and we see a hit to the Thrift Savings Plan, regardless of all of the record gains that we’ve had recently and topping out the charts on all these indexes, when we have a backward step in the Thrift Savings Plan, it can cause some people to react in a way that’s not very positive with respect to being an investor.
Is there a reason to panic?
So is there a reason to panic? Well first I think we need to figure out what is it that causes the panic and is that warranted, and then I suppose what should we do about it? So we do have a pretty considerable pucker factor right now happening. And so a lot of people are nervous. Some of them are very warranted nerves and then others is truly an overreaction. None of this is about judgment here; it’s simply acknowledging where legitimate panic should happen and then where we need to maybe calm down.
We all know that fear and greed drive the market. We’ve heard that our whole lives, that fear and greed drive the market. But if you listen to most news outlets, goodness, they are … is absolute hysteria. When you watch what is happening and how everything is getting so blown out of proportion from an investing standpoint, not the health issues with the coronavirus, that’s legitimate, but the scary position that investors are in where they’re hearing that this doom and gloom is happening because of the coronavirus, it causes people to be very nervous of what they’re doing and then they start making knee-jerk reactions. We’ll talk a little bit more about that here shortly.
The only legitimate reason to panic right now is if you honestly believe that this is the end. Meaning, all of the investments that you have, so if you’re in perhaps the C, S, & I funds within the TSP (or similar funds out in the private sector,) if we legitimately believe that the American economy is doomed and it will never return, and that all of the companies that you are invested in within your individual investment portfolio, that they’re all going under, that would be a legitimate reason to panic, but we don’t believe that. I don’t think anybody listening here legitimately believes that.
It doesn’t mean there’s not a reason to be worried or to be nervous, but panic is a different kind of reaction that will tend not to yield the results that most people are looking for.
Let’s focus on the federal employees who have a while to go before they retire. They’re not stepping into retirement today. They’ve not been retired for five years. These are people that have a ways to go. When you’re a ways out from retirement, you’re likely expecting some volatility. In fact, we actually like volatility when we’re far from retirement because that’s where most of your money is made when you’re investing. We don’t always make a lot of money when the market’s really high. I know that seems bizarre, but when we’re in the wealth accumulation phase and we’re buying shares, we don’t want to buy them at the height of the market; we want to sell them up there, not buy them up there. And so everybody is say invested in the same types of funds, but their perspective on how those funds are performing and when they’re performing is going to be different based on when they actually need the money.
When the market fluctuates up and down, and again, we’re not needing the money right now, we’re investors, we’re putting the money in and we’ve got a ways to go before we retire, when the market fluctuates up and down, we haven’t actually experienced a loss or a gain – yet. It’s not until we actually sell those shares that we get to find out if we made a good deal. Did we buy low and did we sell high (at least relative to how we’re investing and the timeline that that goes on)? You’ve probably heard this referred to as a paper loss, meaning you’ve got a statement that shows you that you’ve quote lost money, but in fact all of your shares are intact and when the market recovers, the value of those shares goes up. And so that’s why it’s called a paper loss. It’s not a real loss yet.
The thing I want to share and really drive home with everybody today is that knee-jerk reactions in a good or a bad market rarely favor the investor. They rarely favor the investor. So most often when people are scrambling to make a fast move in a down market, they end up regretting it because it wasn’t something that was rational for them to do. Again, the world is not ending, the US stock market is not ending, and so as long as you’re not needing the money right now, you’ve suffered a paper loss and the market will likely, if we look historically, the market will rebound.
Retirees and those close to retiring
Now, let’s switch gears a little bit here and focus on those feds who are close to retiring or maybe already retired. So feds who are close to retirement, or again already retired, should pay really close attention here. Again, not to panic, but to get a bit of a reality check.
Do you like riding roller coasters or do you like writing merry-go-rounds? I share that with you because oftentimes those who are really close to retirement or already retired are trying to make up for the performance that they didn’t get many years ago because maybe they started investing late, they stuck in the G fund for way too long and they didn’t make a lot of market gain and they’re trying to make up that ground now by being too aggressively invested. And that’s a roller coaster. Roller coasters aren’t bad; they’re just different. They’re different than a merry-go-round. They have a different pace. They have a different feel to them. And so most of the time when people are relying on money from an account, like the Thrift Savings Plan to actually live on now, they want to be on a more of a merry-go-round ride where it’s nice, predictable and we can weather most things.
Being on a rollercoaster, again isn’t necessarily bad; it’s just different. And so imagine needing the money right now from your TSP and presumably not all of it that you need right now, but you’ve got this rollercoaster that you’re on and maybe you didn’t realize you were in the wrong line, you got on the ride and now we’re about ready to take a drop or we’ve experienced a little bit of a dip in the market and you’re like, “Whoa, I want off of this.” You cannot jump off of the rollercoaster without serious consequence, which is what happens when people panic out of market-based accounts like the C, S, and I funds when you try to run to safety to the G fund.
And so if in fact, and this is the reality check that I want everybody to take away here, if in fact you are close to retirement or already retired and this was too big of a market swing for you, this is your wake-up call that you were not properly invested to begin with. We don’t want to jump off the roller coaster. We want to wait until we come to a nice safe stop and the market stabilizes, then we can be honest with ourselves about the adjustments that need to be made in our fund choices so that the next time this happens, and again, we still need money from the TSP, we’re not in a position where we want to jump off the roller coaster mid-ride.
This is a good reality check for anybody who actually needs money out of the TSP right now. And the whole reason is we don’t want to bail out of accounts when the value has gone down. Now everybody listen; we are not in a position where we’re experiencing a great recession where we have a sharp, drastic downturn of the market. It’s not to say that we like losses at all, but we were at record highs, this was a tiny step backwards and now we have to figure out what to do.
Now, in the event that you are already taking money from the Thrift Savings Plan or you’re about ready to, there’s a phrase that I want you to think very long and hard about and that is that “cash is king.” If you are going to be invested at least part of your portfolio in aggressive accounts that have the capacity to earn and lose a lot of money, being able to have cash accessible to you, that allows you to weather the storm and not take money out of an account like the TSP, that idea, that concept will serve you very well. Because if all of your money is invested in these market-based accounts and you don’t have anywhere else to go to get income and you need it, you will be forced to take money out of the TSP (or any other investment like it) in unfavorable market conditions. But having cash allows you to pivot a little bit for a short period of time while the market recovers, and then you can go back to selling those shares when the market is in more favorable conditions.
Again, knee-jerk reactions rarely favor the investor, so please keep that in mind.
Should you rebalance your funds in the Thrift Savings Plan?
All right, so the next question is if, when and why I should rebalance my choices within the TSP (the actual funds). Let me remind everyone that it’s really easy to be an aggressive investor when the market’s up. It’s really hard to be an aggressive investor when the market’s down, especially if you’re one that looks at the performance of your investments regularly. If you’re watching every day to see how the market performs, you likely have a lot of anxiety about how all this works. But to be a truly aggressive investor, a legitimate aggressive investor, we have to know how to behave in market downturns and upswings. And that is a muscle that a lot of folks have never really built with respect to investing.
And so I always share with folks it’s amazing how many aggressive investors have investor amnesia. And that’s the idea that we’ve forgotten what it felt like when we had a massive downturn last time, and so we put that out of our mind. We said, “Okay, we are going to forget that the 2008 happened,” that whole great recession, “and we’re going to pretend that that won’t ever happen to us again.” And we get back into the market and lo and behold, it happens again.
Now again, if you don’t need the money right now, that’s not necessarily a bad thing. In fact, people who have a long time before they plan to retire actually enjoy it when the market’s down because they’re buying shares at a much lower price and we know we’re supposed to buy low and sell high. But those needing the money right now, of course, don’t want to have to sell in that low market.
So I encourage everyone, if you’re thinking about rebalancing TSP (not only the money you’re putting in and where it goes, but all of the existing money that’s in the TSP), I would encourage you to think strongly about weathering the storm a bit. Let things get back to normal, then be honest with yourself about how scary that roller coaster ride was perhaps for you, and then be able to go in and realign your investment choices with more of your actual risk tolerance.
So while we’re on the topic of risk tolerance, let me actually share with everybody the two different parts of “risk tolerance”. The first is how much you can financially handle to lose with the idea that you want the upswing when it happens. So the first is how much you can financially handle to lose. The second is how much your stomach can handle to lose. And that’s just your gut reaction to loss.
Sometimes we’re in positions where financially we can handle to lose a little bit for the hope of a bigger gain, but our gut just doesn’t let us get there. We’re worried, we’re anxious, we’re panicking, and that’s no place to be. And so for that particular person, even though they could financially handle to put a little bit of money at risk, their gut just doesn’t let them tolerate that well. If you do a true risk tolerance assessment (and I would encourage you to consult with a financial professional that works with federal employees and understands the challenges that you might have in the Thrift Savings Plan), but I would encourage you to make sure once things level out that the risk tolerance that you actually have is what is reflected in your Thrift Savings Plan and that you’re not overly aggressive or overly conservative based on that risk tolerance.
If you’re looking at your investment choices in TSP and you feel like, “Gosh, these are out of whack,” or, “It makes me crazy to see this volatility,” then make the changes to get you on track, but again, wait for that stabilization of the market to not get those knee-jerk reactions and all of the regret that typically comes out of that.
Are there any weaknesses to the TSP during a volatile market?
All right so next question is, are there any weaknesses exposed to the Thrift Savings Plan when we have a volatile market? And the answer is yes. So I want everyone to pay very close attention. The TSP has made great changes at the end of 2019 that allowed investors to be able to have more accessibility to their money when they retire and even partially while they’re working. So I commend the TSP for making those changes and modernizing what it is that they allowed their participants to do with their own money.
And I stress the ‘modernization’ here because private sector accounts have allowed this kind of access to those funds for decades. The TSP just took a long time to catch up. So this isn’t some miraculous adjustment that the TSP has made to where they’re head and shoulders above the private sector; they just modernized the withdrawal options available.
There are a number of things that the TSP did not fix with that Modernization Act and one of them has to do with our topic today, which is are there some weaknesses when I need the money and we have a downturn in the market. So here’s the deal. The volatility in the market, whether it’s a 2008 scenario or a coronavirus scenario, whatever that might be, it exposes this very serious weakness in the TSP and that is that you can’t choose which fund you take your money from.
Let me give you an example. To make things easy for our listeners, let’s assume that you have half of your money in the G fund and half of your money in the C fund. Now, I’m not suggesting that everyone does this, but just for simplicity sake, I want to drive a point home. If you have half your money in the G and half your money in the C and we are in a downmarket, at least relatively downmarket, if we had a choice, you would likely want to take your money from the G fund. This is money you’re going to spend, so you’re retired, you’re ready to start using some of your money. You would want to take money from the G fund because the G fund did not suffer a loss. It also didn’t suffer any gains either in the upmarket, but that’s for another podcast.
With this particular situation where we’ve experienced a decline in the value of the shares, we ideally wouldn’t want to take the money from the C fund; we’d rather take it from the G, because again, in the C fund we’re going to sell low and we know we’re supposed to sell high. Now again, all of this is relative.
The challenge and the weakness that is really exposing the TSP in this situation is that the TSP does not allow you to have that choice. If you need $10,000 you can’t say, “Give it to me from the G fund only;” it has to come out proportionally from the funds in which you are invested. So in this scenario, this example, half of it would have to come from the G fund and half of it would have to come from the C fund.
Again, we’ve got to balance that in our own mind so that we can come to a logical conclusion of how we’re going to manage all of this in retirement. If you’re a little ways away, you’ve got some time to think about it, but for those of you that are needing money from the TSP right now, you may be forced to sell low even though you don’t want to.
So think about those three buckets. We’ve got the now bucket, the soon bucket, and the later bucket. And it’s really important to think about those buckets on that timeline when you’re thinking about where to invest, for instance, TSP is a later bucket. We might also want to be thinking about the now bucket in the soon bucket so that you have access to money when you need it, because once it’s in the TSP, it’s very restrictive in your access to it. Okay, so keep that in mind.
And next my big advice is think about the ride that you’re getting in line for. Do you want to be on the roller coaster? Roller coasters are fun and exhilarating and there’s some anxiety there, but it feels great, especially when you’re younger. When you get older, merry-go-rounds look more appealing. Where it’s just a little safer, a little bit more predictable of a ride.
And I’m not suggesting that one is better than the other; they’re just very different. And for most people, you don’t mind going on a roller coaster every once in a while, but maybe the majority of your rides, you want to be merry-go-rounds. That’s how most people are when they step into retirement. They’re not super aggressive where all of their funds are in roller coasters. Because again, we want predictability when we go to take the money out.
“All progress starts by telling the truth.”
Now, one of my great mentors, Dan Sullivan, a Strategic Coach says, “All progress starts by telling the truth.” And this is especially true when we have a market downturn that tends to highlight those risk tolerance truths that we’ve maybe not been willing to tell ourselves about how we feel about the possibility of losing money. Again, it’s always an easy thing to be an aggressive investor when the market’s rallying, it’s a completely different idea to be an aggressive investor in a market downturn.
Hopefully this has been helpful for everyone today. Of course here at ProFeds, we provide benefits and retirement training workshops to federal employees and agencies all over the country. We bring a very candid, no nonsense approach and offer really lively sessions that help inspire feds to take actions to go get the retirement that they want. If you want to see if there’s an open workshop that we’re having in your area, I encourage you to visit FedImpact.com and click on that green button that says, “find a workshop” and you’ll be able to see if we have one close by.
As always, great pleasure to spend some time diving into topics that are on the minds of so many federal employees. I’m Chris Kowalik of ProFeds. Stay tuned to the FedImpact podcast to get straight answers and candid insights on your federal retirement.