Invest Your TSP Like A Pro - 7 Ways For Federal Employees To Maximize Retirement

[Music] waking up to a tsp balance that's lower than you expected can be really hard but it doesn't have to be this way you can feel comfortable with how you're doing by using some simple principles that we use as professional financial planners and here's the thing you probably already know what to do you just have to learn how to do it knowing how to properly use the tsp is critical to the financial success of your retirement how many of you reduced your C fund investment last year what about increased the G fund we talked to a lot of federal employees and we see all kinds of tsp mistakes made along the way the internet is full of tsp experts that are telling you which funds are better and when to use certain funds and which mutual fund window Investments you should be using but the problem is that seldom do a lot of these people have the experience in training necessary for creating an investment strategy for a family and this is where we see the first big mistake and that's going by what the the tsp's risk rating is for each one of their funds when you visit the tsp's website they have a table that lets you compare different tsp funds it doesn't look exactly like the one that we have on the screen right now simply because right now you can only compare three at a time on the tsps website but these risk ratings here were taken as screenshots directly from the tsp's website one major problem with this is that there's no context for any of this risk the tsp offers these risk ratings but they don't mention that it's in relation to one another so the G fund is low risk it's also the first out of five funds on the risk scale whereas the I fund is number five all the way down International being the riskiest but when we take the C fund which falls in the middle they rank it as medium risk because it's right in the middle of these five funds now the C fund represents the S P 500 and how many of you think that the S P 500 is a medium risk investment not me it certainly not the most risky investment but it's definitely not a medium risk kind of investment they're comparing them to one another and the challenge is that too many people make decisions based off of just these risk ratings without fully understanding the context of each individual investment index that the fund represents before we go to the next one if you want to stay up to date on more financial tips for federal employees consider subscribing to our channel to get weekly video updates in the next mistake we see federal employees make I can't tell you how many times I talk to feds who tell me about the tsp being managed guys BlackRock and State Street which are the main managers that create the tsp funds they don't manage the tsp and so when they create a tsp fund that's merely an index fund for you to use as you see fit so for instance the C fund could be all kinds of volatile and technology companies could be going out of business if they're in the S P 500 the tspc fund will still be invested in them the tsp is not making changes inside the funds based off of what's going on in the markets they're making sure it still meets the goal which is to replicate that index and by the way that's fine there's nothing wrong with this in fact for many of our clients we use index funds for their portfolio as well now a lot of you are going to say well what about the life cycle funds even the life cycle are not considered managed the life cycle are what we call retirement Target date funds which means you pick a date in the future and over time the tsp is going to allocate a comment nation of the five core funds according to how far out the life cycle fund is the important thing to know again it's not adjusting to the markets it's not adjusting to your life it's adjusting to time fortunately you travel time forward just like everyone else does so that can be a good way of at least having some movement in your tsp if you don't even want to look at it at all the only challenge that we found is sometimes if you're picking the date in which you're gonna retire or be close to it we've found personally it tends to be a little more conservative than we might find appropriate for some families and not being appropriately invested causes the next problem which is called portfolio drift every family has an asset allocation that is most appropriate for them to meet their goals and so that's going to be different for every single family but over time as the markets go up as the markets go down your investment makes the allocation begins to change over time as stocks become bigger and bigger they make up bigger portions of your portfolio and not addressing this portfolio drift can mean that your portfolio is either too aggressive or too conservative than what it should be so for instance let's say you have an allocation of about a 60 40. with 60 being stocks well the Cs and I funds would make up the stocks and they're much more volatile so if stocks go up that means they might make up 75 percent of your overall tsp where your Jeep and F funds make up only 25. well if this is the case you're now more aggressive than you were before which means you have more volatility and that can be more risk so rebalancing your tsp is important maybe you want to sell some of those funds or stocks and move yourself back down to to a 60 40. in the Converses just as true as well where stocks go down maybe now you might not actually be aggressive enough to be continually meeting your goals your future income is dependent on how quickly you can grow your money to make sure it's inflation adjusted now again one way to help with this like I mentioned earlier is to use the tsp lifecycle funds I've always had mixed feelings about the life cycle because like I said earlier they tend to not be the most appropriate given the time frames is that volatility going to give you a lot of anxiety and cause you to back out of the markets that can create worse problems for you than just having less growth along the way something you need to understand is that the tsp builds the life cycle funds say 2025 exactly the same for everyone that uses the 2025. it makes no consideration for what's going on in your life how much you have saved where you live what your taxes are everyone in the 2025 is invested exactly the same way and so again you just have to make sure you understand this this next graph on the screen is a stacked bar graph that shows the allocation of each one of the life cycle funds so you can see the further out into the future we are the more Cs and I fund is made within that allocation I know it's kind of hard to see but if you look here there's a really small portion of the FNG Fund in those three furthest away funds and of course as you begin to dial the date back we start to see more and more G fund and F fund this is another nice graph for you to take a screenshot as you're looking through your portfolio okay the next big problem we see is federal employees not considering assets outside the tsp one of the ways that feds can really strengthen their financial position is by utilizing all kinds of other Investments saving in your bank saving in a brokerage account those are other ways that you get to have further diversification away from the tsp funds but also in terms of tax status we often tell our clients diversification of Investments is important but also of taxability in their Investments because as you look at your overall wealth you'll begin to see that you know what maybe the tsp is only one part of our wealth maybe we have individual brokerage accounts as well maybe we have backdoor Roth accounts as well or treasury direct eye bonds or all kinds of other places that you can begin to diversify your wealth in addition if you think about how many different investment categories there are there's roughly around a hundred different choices and the tsp gives you five now of course the tsp introduced the mutual fund window to help with this I'm still not really a fan of the mutual fund window it's not quite at a place where I feel comfortable telling people to use it yet the fees are high there's all kinds of restrictions around it stick to the five core funds for now but you can also begin to diversify outside using other Investments as well you probably don't need all a hundred different kinds of Investments but it is good to continually have a plethora of choices because as the economy changes so do the kinds of Investments that tend to do better and to continually meet your goals you have to be making sure you're using all the tools available to your disposal remember as you come close to retirement the Cs and I funds are really volatile and if these are your only stock choices then you don't have the time that you did like when you were working to ride out the volatility that comes from those funds in the tsp the other part of this we talked briefly about is taxes if you have to go out and buy a car and all of it has to come from a traditional tsp think about what that total cost might be to you when you factor the cost of a car which depending on your style can be pretty expensive but we'll go with 35 000 for now but you might also owe another 15 000 in ordinary income tax on top so these additional expenses cause further stress on your portfolio that hey if you just had some after tax money or maybe there's a Roth that you're going to choose to use although let this guy grow as much as you can for as long as you can now let's look at how these taxes are actually applied in the context of a portfolio most federal employees know the difference between a traditional tsp and a Roth tsp very few people understand how different Investments have different tax efficiencies or inefficiencies for example mutual funds has something called capital gains distributions that means at the end of each year whether you sold an investment or not they are going to be passing on those capital gains distributions to you as the investor so what happens if you hold those kinds of Investments inside an account that is taxable like an individual or a joint or a trust all of those capital gains are now passed on to you as the investor when they didn't need to be so you're paying taxes that you never had to if you're going to be using those kinds of Investments it's more appropriate to consider the assets location inside something like a tax deferred vehicle or a tax-free vehicle I cannot tell you how many feds we spoke to last year who had to pay taxes on losses that they had generated from their mutual funds and all of that was done because you held a tax and efficient investment inside the wrong account this is not to say mutual funds are bad but you can certainly put them in the wrong account and cause yourself more problems your retirement accounts are tax preference whether a traditional tax deferred or Roth completely tax-free so you're more tax and efficient Investments like mutual funds or high-yield bonds and others like that should be held inside those accounts the same is true about growth Investments keeping the most aggressive Investments inside the Roth component of the tsp or your other accounts makes a lot of sense growth on investments means taxes whether capital gains or income tax so why not go for the most growth inside the most tax efficient vehicle which is the Roth so I'm going to throw up a chart that has a list of different kinds of investments from order of most tax efficient to least tax efficient and this can be a really good one for you to take a screenshot of as well just to keep in your back pocket as you're going and creating your Investments [Music] the next big challenge that we see is people trying to time the markets this is when people say hey move all of your tsp to the G fund and then hey now move it all back into the Investments again as financial planners we tell people to go more conservative or more aggressive based off of their financial plan however going in and out depending on the economic news that's come or when Jerome Powell gives information about what they're doing with interest rates those things are influencing the overall strategy as they should but they should not be creating tactical moves where now you're going in and out of Investments simply because you see something on TV plus if you consider how emotionally challenging it is to try and go in and out of the markets just imagine what that emotion can do to your decision-making process about that money do you think that maybe it could be influencing your decisions we're going to throw a graph up on the screen that I absolutely love and I want to talk through a couple of factors just for you to get this so like I've explained in some other video this blue line represents your portfolio value going up and down as the markets move and if you think about 2022 which was last year or even 2020 when covet first hit there were masses of people that were moving to the G fund and they were doing this to try and preserve their wealth they were doing this out of fear that something bad could be happening how many of those people do you think successfully got back into the markets right before the markets took off again the second half of 2020. very few people were able to do that successfully they were not emotionally ready to deploy their Capital back into the markets again and this graph does a nice job of exploring some of the things that we feel as investors as the markets are going up we're feeling those feelings of excitement we feel good about the markets right but as things start to turn down we start to have feelings of denial and fear in others desperation and panic and sometimes we get to a place where we say you know what maybe the markets just aren't for me I I've got to get out of the sea fund I've got to get out of the S and the iPhones I need to go to the G fund because I just can't take this loss now again it's not to say that there are times you shouldn't be in the G Fund in fact there are it is appropriate for some families to be in the G fund these days especially if they're approaching retirement but if you're making these decisions based off of fear rather than a plan then you have to consider whether or not you'll be ready to make another move in time before the market reacts so if you found any of this helpful today please let us know by giving us a thumbs up putting something in the comments and letting us know that this is the content you'd like to see we can do more of this stuff if you guys are interested but only if you let us know if you need help with any of this stuff check out our website there's a bunch of free resources there for you and we hope to see you in the next video Until then stay wise and stay wealthy [Music]

Channel: The Fed Corner - Federal Retirement Planning

Views: 15,125

Keywords: the fed corner, tsp, FERS, OPM, Federal Retirement Planning, FERS Planning, FERS Retirement, FEHB, plan my federal retirement, plan your federal retirement, my federal retirement, SES

Id: MVJXvUlnMRI

Length: 14min 5sec (845 seconds)

Published: Sat Mar 11 2023