Of the questions I receive from Federal Times readers, the most frequent must be “How can I avoid the IRS penalty on early withdrawals from my Thrift Savings Plan account?” and “How should I invest my TSP money?”
The answer to the first question is straightforward and requires no more than an explanation of the rules. The second question is much more difficult to answer, and really can’t be answered properly without a fair amount of information, analysis and consideration. How you should invest your TSP account at any point in time depends entirely upon what the money is expected to do and when it is expected to do it.
At one extreme, you may have no expectations for your TSP account — no need for distributions to support your standard of living and no need for a residual balance to leave behind when you are gone. In this case, it doesn’t matter how you invest your account. Your investment allocation can fall anywhere between 100-percent S Fund — the most risky allocation available in the TSP — and 100-percent G Fund — the least risky option. And you can change the allocation among the various five funds whenever and however you like, because there is no consequence to the risk you take as you manage your account.
At the other extreme, you may have high expectations for your account and the standard of living that it will support, or the inherited value it will produce. In this case, risk is the threat that something either within, or beyond, your control will impair your account’s ability to produce the cash flow or ending wealth you will rely upon, or that it could produce if were better managed. At this extreme, how you manage your account is critical to the results, and any mistake will cost valuable standard of living or end wealth.
Your situation may lie somewhere in between these two extremes — in the zone where you are relying on your account to support certain financial goals, but there is room for error before your mistakes begin to negatively affect your standard of living. Before you can begin to figure out how to manage your TSP account, you’ll need to determine exactly where you are along the continuum. That’s the first step, and it can be a tough one to complete, often requiring extensive probability analysis and the development of a rigorous decision support protocol. After all, how your portfolio should be invested depends not only on where you are today, but what will happen, including the investment decisions you will make, in the future.
All of these factors — what you will do, what the markets could do, and what the economy could do — must be taken into account in calculating how much return you will need to support your goals, how much risk you can afford to avoid, and how much money you can afford to lose without jeopardizing your plans.
Only after determining where you are and where you want to go can you figure out how to use your resources, including your TSP account, to get there safely, and on time. The TSP is like a car — a very fast, safe and reliable car. But, even the best car can fail to get you there if you don’t drive it well. Investment management — how you manage your TSP account — is how you “drive” that car. Drive it carelessly; make wrong turns, drive too fast or too slow, or fail to maintain it properly, and you’ll run out fuel or it will break down before you get where you want to go.
You wouldn’t attempt to drive from Miami to Seattle without a good map, enough fuel, and a plan, would you? That’s what many investors do every day with their TSP accounts. They try to get where they’re going by guessing, or worse, taking directions from someone who doesn’t know where they’re going, or doesn’t care. Every time you make a decision involving your TSP account, you should consider how that decision could affect your journey.What outcomes are possible from that decision and how likely are they? How will the various possible outcomes affect your journey? If you don’t know the answers to these kinds of questions, then you’re speculating, rather than navigating, and you should do better.
Mike Miles is a Certified Financial Planner licensee and principal adviser for Variplan LLC, an independent fiduciary in Vienna, Virginia. Email your questions to firstname.lastname@example.org and view his blog at money.federaltimes.com.