Managing your Thrift Savings Plan account and other investments to produce the retirement income you’ll need is a challenging and, sometimes, fearsome responsibility. One of the things I’ve noticed in working with investors is that often the most basic elements of the financial planning and management process are overlooked.
Trying to make investment decisions without the necessary understanding of your goals, resources and constraints is like worrying about which way you should turn next without knowing where you’re trying to go next, how much fuel you have and how fast your airplane can fly.
This “seat-of-the-pants flying” is the norm for many investors, and it’s a big mistake. Making investment decisions based on someone else’s objectives or without considering all of your needs and available resources is not really management by objective. In other words, you’re managing your investments arbitrarily and you’ll wind up where that leads you, like it or not. Instead, I recommend that you diligently manage your investment decisions purely for their value in achieving your goals with a minimum of risk, using all of the resources at your disposal and within any constraints that might be imposed.
Before you can even begin to consider doing this, you must clearly identify and understand where you want to go, what resources you have to work with and any limitations that apply to your investment actions along the way.
The goals I’m talking about here are your life goals — your objectives for how you will live. Goals can also include how much you’d like to leave behind, but in general, they should be specified, at first, in terms of your lifestyle, rather than your wealth.
Investors sometimes tell me their primary goal in investing is to “make as much money as possible.” This isn’t an appropriate goal unless you don’t need the money for anything other than gambling. The problem with this goal is that it will lead you make highly risky decisions at the expense of your true goals, like paying for housing, food, clothing, transportation, entertainment and the other things that contribute to your quality of life. True planning goals are things like retiring at a certain age, maintaining certain living arrangements, driving a particular car, traveling to certain places at certain times, and many others.
In addition to establishing and understanding your goals, you need to identify and understand your resources. For retirement planning, the relevant resources are those that either produce or can be converted to spendable cash, now or at some time in the future. While the equity in your home is an asset, it’s not a retirement resource unless it can be reliably converted to cash if and when needed to pay your bills. When sizing up your resources, you’ll need to consider any constraints on your resources that may affect their liquidity or the timing of their availability.
You’ll also need to estimate the cost of your goals, year by year. By calculating your spending needs and then subtracting from that the amount of income you expect to have each year from guaranteed sources like a federal annuity, Social Security and other pension sources, you’ll know, year by year, about how much you’ll need to extract from other investments to fund your goals.
This estimated sequence of needed annual withdrawals is essential to the investment decision-making process you’ll need to support your plan with minimum risk. You’ll also need to consider any constraints that may be imposed on your investment activity, and adapt your investment strategy to minimize the impact of these constraints on the performance of your investment portfolio.
The TSP imposes certain constraints that you must take into account: You have a limited number of funds from which to choose. You are limited in the frequency of certain trades and also in the way in which you may withdraw your money. While I don’t think these constraints are good reasons to leave TSP, they must be factored into your plan for their effect on both investment and cash flow.
Bottom line: Any financial planning or investment management program that doesn’t accurately identify and take into account your personal goals, resources and constraints isn’t really a plan at all, and certainly not something on which you should rely.