Sponsored article by Tom Walker, ChFEBC, for Walker Capital Preservation Group
Most of the retirement industry is still focused on teaching you how to save towards retirement. There are many great resources on how your TSP funds work and the different budgeting techniques to help you increase your savings contributions, but many of these resources indirectly lead readers to think they should always view their TSP as lump sum total. During the Accumulation Phase when each dollar in the TSP has the same goal – growth – that is an understandable assumption. But too many federal employees enter retirement with the impression that if they can simply ‘hit their number’ prior to separating then they will automagically have enough money to ‘coast’ through their golden years.
In retirement, risks that simply weren’t applicable to your TSP while you were working get introduced to the equation. Too often these risks are not emphasized (or even mentioned) in pre-retirement literature but make no mistake, there is a dramatic difference in the decision making of someone who is saving towards the distant future and someone who is allocating their nest egg to make ends meet today. As such, it is important to recognize that the thinking that got you TO retirement is not necessarily the thinking that will get you THROUGH retirement.
Early Accumulation Phase
There are many different approaches to TSP growth, but the universal goal of each dollar in our TSP during this period of our lives is simply to accumulate for use at a later date. One singular focus for the entire account
During your career, your TSP allocations do not directly influence your standard of living. If you are 45 years old, fully employed, and your TSP drops by 7% on a Friday afternoon… are you forced to eat differently on Saturday morning? Most likely not, right? Your TSP balance changed but your income hasn’t so your standard of living would not have to either. This teaches us an important concept; you’re your standard of living is determined by your income, not your net worth.
Pretirement Accumulation Phase
The years immediately preceding your transition into retirement are when you need to start looking at your TSP and, more specifically, its ability to meet your personal retirement objectives. During this period our top priority is to manage our asset allocation based on how we project our retirement incomes and expenses to look. This requires you to begin identifying your ideal retirement and anticipating what it may cost. Then you can begin reverse engineering a retirement date and TSP allocation that minimizes risk while still helping you meet your budgetary needs in the long run.
The second point of emphasis during the Pretirement Accumulation Phase is to boost additional savings and catch-up contributions. Many people don’t realize that this process actually helps us in two equally powerful ways. First, it helps put extra money to work compounding towards creating your retirement income. More importantly though, additional savings coming out of your budget each month lowers your spending habits and helps acclimate you to a lifestyle that relies on a smaller percentage of your paycheck. Many of our clients view this period as a “Pretirement test drive” where they try a budget (or lifestyle) out for a while before making any final elections to separate from service.
It is extremely rare that a well-prepared retiree should ever need their entire nest egg as a single lump sum payment. So, in retirement, we must segment our money based on investment timeline. Some of our money needs to be safe enough to reliably pay the bills next month (regardless of what the market is doing) while some of our money needs to continue growing in order to keep up with inflation so that we can continue to pay the bills for years to come.
As such, the emphasis for your portfolio in this phase becomes income allocation – the positioning and laddering of your assets to ensure that you have enough income to satisfy your budget now while also ensuring your income keeps up with inflation. Reliable income is the outcome that matters most in your Golden Years!
In order to successfully pivot from Thrift SAVINGS to a well designed Thrift SPENDING Plan, your retirement plan must account for new risks such as:
1. Sequence of Returns Risk
a. Retiring into a Bear Market
2. Taxation Risk
a. Threat of higher future tax rates
3. Inflation/Interest Rate Risk
a. Outpacing inflation in todays interest rate environment
4. Policy Risk
a. Threat of reduced retirement benefits (FERS or SocSec)
5. Unexpected Healthcare Costs
a. Protecting lifestyle through possible medical expenses
6. Loss of Independence
a. The need for LTC type assistance in order to Age Gracefully
7. Longevity Risk
a. The risk that your long life leads you to outlive your assets
b. Longevity is also a risk multiplier – the longer you live, the greater risks 1-7 become
By Tom Walker, ChFEBC, for Walker Capital Preservation Group
Since 2012 we have strived to help make identifying and understanding these risks a little easier for Federal employees nearing retirement so that they can learn to design a Thrift SPENDING Plan that empowers them to retire confidently!