Special TSP Planning Report March 2020

Facts before the Coronavirus meltdown:

  • Unemployment came in at 3.5%.
  • 4th Quarter GDP was 2.1%, according to the 2nd estimate.
  • PMI expanded, with the index reading to 50.1%.
  • The S&P 500 (C Fund) decreased -8.24% during the month of February.

Projections after the Coronavirus meltdown:

  • Unemployment range 9% – 30% !!!!!  To put in perspective, in March 2009 the U.S. saw its largest, single-month increase in unemployment claims to the tune of 800k.  Now, March 2020, there are expected to be an increase in unemployment claims to the tune of 2.25M – 6M!!!!
  • GDP – Projected to drop by 30%-50%.
  • PMI – Projected to contract to 42.8.
  • The S&P 500 (C Fund) – Already down 34%.  Projections range from -30% – -50%.

Assessment:
Hard to say which direction this will go.  We have competing forces – people want to get back to work but governments are fearful for the health repercussions.  We need to get much more data on the health-risk factor.  If the data doesn’t come soon enough, people will get restless and defiant.  But, even if some head out to work, business will not return to usual until a majority of people feel safe to engage socially.  If the government doesn’t provide this clearance, we may be in major trouble.  If people are unable to work or recreate as they once were, we will see an entirely new economy.  As sad as this may sound, a depression is not unthinkable.
Even if a depression occurs, like it did in the 1930’s, it will not last forever.  
The chart below should serve as a reminder of what happens in Bull & Bear markets in the U.S.

Bottom Line:
This is ugly stuff, and a lot of questions need to be answered.  Below I provide some guidance on how you should handle your TSP (and outside money):

1. I’m nervous.  Should I sell to preserve what I still have, or stay put?

The short answer – stay put!

Warren Buffett amazingly described the stock market as “a vehicle to transfer wealth from the impatient to the patient.”  There is a tremendous transfer of wealth going on right now. You want to be on the receiving end, not the giving end. Assuming your investments were correctly positioned, you should absolutely NOT sell out of the positions you have now.  Patience will reward you handsomely.

2. Should I sell some of my conservative investments (G fund, F fund) and buy into the market now?

You may think, based on my previous answer, that not only should you not sell, you should consider buying.  But, that’s not true for everyone.

The only ones who should consider selling G fund and F fund to buy into the stock funds are those who had too much G fund or F fund to begin with.

When determining whether you have too much G or F fund, I try to assess two things:

      • How much risk can your stomach tolerate?
      • How much time, mathematically, does your portfolio have until you need this money?

I won’t be able to address your stomach issues in this article, but I can address the math.

My starting point is that anyone who has 10 years of time before they need to tap into this TSP money will not have to worry about this downturn.  This is 100% true for people who are still working and contributing to the TSP. For retirees who are no longer making TSP contributions, this is true 96% of the time.

With this 10 year window in mind, I approach the question (of selling G or F funds to buy into the TSP stock funds) based on your stage in career and distance from retirement.

Below are 4 examples of people at different stages in their career – Retiree, New employee, mid-career, pre-retirement:

Retiree:  A retiree with a $500k portfolio, who needs $10k of investment income a year.

As a good general rule, a retiree should have at least 10 years of investment income set aside in G fund and/or F fund.  Anything beyond that can be used to buy into the stock funds now.

So, in this case, the retiree needs to already have at least 10 years worth of income set aside in the TSP bond funds (G or F).  10 years worth of income = $100k ($10k/yr x 10 years), and that $100k will buy them 10 years worth of time (and patience).

The remaining $400k can be invested in the TSP stock funds.  If their stomach doesn’t allow them, they need to speak to a financial advisor.  Their stomach may be costing them a lot of money.

New Employee:  A new employee with 30 years until needing their TSP, and $20k invested all in the G fund.
Such an employee really should consider a radical move of all their money into the stock funds right away.  If their stomach doesn’t allow them, they need to speak to a financial advisor.

Mid-career: A mid-career with 10+ years until retirement, a current portfolio of $350k, who likely needs $20k of investment income a year when they retire in the distant future.

Such an employee has 10 years (or more) before they even need income from this portfolio.  They don’t have to start transitioning their portfolio into a pre-retirement posture as of yet (see next case for transitioning).  As such, a mid-career employee with over 10 years until retirement should also consider a radical move of all their money into the stock funds right away.  If their stomach doesn’t allow them, they need to speak to a financial advisor.

Pre-Retirement:  A pre-retiree with 5 years until retirement, a current portfolio of $500k, who likely will need $10k of investment income a year.
Since they are 5 years away from retirement, they don’t need to already have the 10 years of income ($100k) set aside.  However, they should build toward that 10k starting now. This case should be discussed with a financial advisor, but an acceptable transition approach would be as follows:

Each year over the next 5 years they should gradually be moving $20k into the TSP bond funds.  This way, after 5 years they will have $100k in the TSP bond funds. The remainder of their investments should be invested in the stock funds.  So, immediately they should put $20k into TSP bond funds, and the remainder can be invested. This needs to be monitored and reevaluated on a year-by-year basis.

3. Which TSP funds should I be investing in now?

Future contributions should be purchasing the C & S funds now, until they return to their pre-drop levels.  I am comfortable recommending a 70/30 split between C and S funds on new money.  I am not confident in the I fund, so I currently do not advocate for it. Now is not the time to buy into the G or F funds.

4. I have cash in the bank.  Should I use cash now to buy into the market?

Good idea, but here’s one word of caution – make sure you have reserves to get you through a three-to-six month window of reduced income.   Especially if your income or your spouse’s income have been negatively impacted by this economic downturn. This is a rainy day fund, which you’ll need to cover basic expenses

In addition, you should not be investing money that you will need for short-term goals (within 3 years).

Anything beyond your rainy day fund and short term money can be invested in the market now.

5. How long do you think this downturn will last?

I don’t have a crystal ball.  It seems Wuhan – the epicenter of this whole Pandemic – has stabilized and returned to normalcy after 100 days.  If other countries, especially the USA have a similar duration, that projects us out to the end of April (The first US case was reported January 21, 2020).  This is a loss of about 3 months of full production. Painful, but not devastating to American economic infrastructure. If so, we may see rebounding as early as the beginning of May.  If the government lifts the public travel and social distancing requirements sooner, we may even see a market rebound start in April. The full market recovery may take 6-8 months.

6. I’m retired and need money now.  Where should I get this money from? 

Do not take a distribution from your stock funds!  They need time to recover.  A retiree needs to have 10 years of income set aside in conservative instruments (a conservative “bucket”).  This conservative “bucket” is where you should derive your income during this downturn.

I would suggest anyone who will be deriving income from their portfolio over the remainder of this year to proceed with caution. If you are on the brink of retirement, consult with me before you position your TSP too aggressively. Email me stephen@stephenzelcer.com

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