How to Utilize the Soaring TSP

By: David Chan

As we start to get comfortable with the summer of 2017, we reach a landmark; eight years of current market expansion within the US. Compared to the global financial crisis we all experienced in the years before this, it’s perhaps surprising that we’re all enjoying the third-longest period of expansion in nearly 250 years; if it lasts until 2019, it will surpass the only two standing above it.

Furthermore, unemployment is now back to the numbers we saw before the recession which is good news once again. If we break it down in a little more detail, the amount of US citizens employed currently stands at 60%; this is three percentage points fewer than in 2007, but it shows definite signs of improvement. However, we all know that the employment rate doesn’t always tell the whole story.

In other news, the stock market within the US is also performing very well. All adjusted so we can compare throughout history, the price to earnings ratio on the S&P 500 is actually at its second-highest point since the second world war; the only time this was higher was during the ‘dot com bubble’. With all of this taken into account, the US is in a sound financial position, but we should never take anything for granted.

According to Warren Buffet, we should always be fearful when others are greedy and vice versa. Therefore, we want to provide you with some good housekeeping tips so you can utilize the good times while being mindful of what could happen in the years to come.

Calculate Your Debt/Income Ratio

Firstly, we highly recommend calculating your debt to income ratio. In terms of the US, we currently sit at around 80% with debt to GDP, and this is well below the 95% seen during the recession. However, it wasn’t always this high as it only went above 40% for the very first time as we entered the 1960s. Compared to other countries around the world, we can be found somewhere in the top half; although others are enduring worse, there are certainly many doing better.

In the most recent proposed budget from the White House, all federal employees will end up paying more into the system if it goes through because they plan to remove the cost of living adjustments with the FERS system. Although this hasn’t been set in stone just yet, federal employee compensation is likely to be hit the hardest.

Considering we’re in a bull market, now is the best time for you to improve your debt to income ratio. If you can lower this somewhat now, you’ll be in a great position if another recession were to strike in the near future. Therefore, you can start with an audit of all your finances to see whether you can pay off any short-term loans while the money is available.

Of course, we aren’t saying you should clear every single source of debt you have because some will be keeping your credit rating afloat. By having a variety of different debts in your history, it shows you are responsible and can pay what you owe (assuming you’re paying all bills on time and in full).

Diversify Your TSP

Next, we want to prevent you from falling into the trap many beginner investors tend to make. As soon as the market is enjoying good times, they decide to invest before then selling as the decline comes.  An alternative to the all-or-none approach may be to consider TSP L Funds. If you’re unaware of what these are, they stay balanced to keep your portfolio diversified. When the market falls, stocks are bought, and bonds are sold and vice versa.

When you choose this option, you’ll have an opportunity to select your retirement age, but you don’t need to pick the one that matches your retirement. Although it hasn’t been confirmed, many believe the long-term funds to be too conservative so assess your goals and think about your current situation. If you like to have money in equities, now is a good time to invest in L Funds because equities account for over 80% of the fund; this is within the 2050 L Fund (the most aggressive fund).

If you already invest in L Funds or want to look elsewhere, we also recommend checking the rest of your portfolio balance. If your C, S, and I Funds have all improved, they will all be holding a higher balance so you might need to reassess and spread the risk a little more. For example, you might need to realign with your target by investing some into the TSP G Fund or consider options outside of the TSP if you’re older than 59 1/2.

Despite billions of dollars in investment, there has (and never will be) a guide showing the ‘best’ way to diversify so the main thing to consider is your goals. Depending on when you retire and how much longer you have left in employment, you might choose to spread your money differently to someone who has just started their career. As an impartial service and one that would never choose one technique over another, we’re only saying that chasing markets never seems to end well. If you want to see real progress, you should set up with your goals in mind and then rely on the cyclical nature of the market to help.  It is also recommended that you always consult with your chosen investment professional prior to making any investment decisions.

Boost the Emergency Fund

If we’re to listen to the Congressional Budget Office, the debt ceiling is likely to be hit by the federal government in October 2017. If Congress cannot come to an overall agreement, there could be potential furloughs or various other measures, so you need to be prepared for some form of change at the very least.

Often, we don’t need a cash reserve in the good times but, as we’ve said many times, you can’t just think about what’s happening right now. If you don’t prepare cash reserves when you don’t need it, it won’t be there when you do need it. In life, it’s important always to have some form of liquidity, and you can build this when all is well with the financial world. If you have any high-interest debt or multiple sources of debt, it’s now time to pay this off or consolidate it all into one, so you only need to pay one lot of interest.

If we’re predicting correctly, your next question is ‘how much do I need?’. Unfortunately, there is no definitive answer we can provide here, but you should always consider your own circumstances including your children, mortgage, sources of liquidity, job security, etc. Furthermore, you could also ask yourself how long you would survive if you were suddenly forced to take some time from work. If your money ran out in less than one week, we would suggest this probably isn’t enough. If you have between 3-6 months plus enough to cover unexpected costs, this is a much stronger position.

Summary

For now, we can all enjoy the good financial times in the U.S., but we should never be naive enough to think they will last forever. Therefore, now is the perfect time to get your finances in line, so you aren’t left worrying when times do change. As well as doing this yourself, please feel free to share this information with your friends and colleagues so they can do the same!

Contact David Chan:

Phone: (510)440-7110

Email: [email protected]

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