The pandemic that erupted from China’s city Wuhan in the third week of December 2019 has now spread worldwide. The epidemic does not only carry health threats, but it is even worse when it comes to the global economy. The whole world is facing lockdown, people are confined to their houses, and all types of business activities have been suspended.
In the wake of COVID 19, medical emergencies have been implemented all over the world, and economic growth has stalled. COVID 19 has had an overwhelming effect on every sector of the world. Therefore, it’s the same situation with employee retirement plans, whether their retirement is associated with annuities or TSP saving plans; all of them are facing a severe crisis.
How are retirement plans affected by COVID 19?
You might have heard the statement that there are decades where nothing happens, but there are days where a decade happens, and the past few weeks is a real manifestation of these statements. Investors are nervous and afraid of pouring their money into stocks in any other fund, as the market has been facing swings that span from 5% to 20%. So, this uncertainty in the stock market has genuinely broken the backbone of investors.
If we have a look over the statistics, last week, the daily returns of the S&P 500 index were as follows: -9%, +5%, -5%, -10%, +9%. If we implement this figure on the TSP funds, the S&P 500 works in the same as the C fund works in the TSP. So, now you can better understand the swings that are being faced by the TSP saving plans.
It’s necessary to discuss the Federal employees who are vulnerable to the situation. Most of the Federal employees set a specific market pattern in their minds and believe that the market will go at the same pace. But, now, in these circumstances, the situation is entirely different, and no federal employee expectations will occur. So, they must not keep their hopes high.
The reason behind this is the behavior of the investor, which is driven by two primary forces: fear and uncertainty. So, unless these factors exist in the market, Federal employees must not expect much more from the market. Here is one more important thing: If you are seeking early retirement, forget about this idea right now, as there are many issues attached to the early retirement in this time of COVID 19.
How would TSP saving plans behave in the future?
It’s too early to predict anything right now because the uncertainty is at its peak, and it will not be a prudent choice to draw an impractical expectation. But we can estimate the pattern of the market in the coming future. In the past, we’ve had pandemics like SARS, Ebola, and Swine flu, so that we can predict the pattern of the market for this specific situation.
At the start of these pandemics, the market experienced a downturn. Sometimes, this downturn became severe, and sometimes it was minor enough to be neglected. It wasn’t easy to deal with these crises, as the value of account value constantly changed, similar to what we are experiencing now.
In the first couple of months, when SARS spread in countries, the S&P 500, which is similar to the TSP saving plan’s C fund, faced a decline of 14%.
These pandemics are not new in the world, and it is not a new thing for the global economy to experience a situation that’s going on now. However, the crisis was never as hard as it is this time, and, of course, its effects will be even worse than any of its predecessors.
Still, we cannot predict the patterns through which the economy will come back to its previous position. Once the markets are open, lockdowns are lifted, and people start their business, only then can we predict how much damage needs to be repaired. So, it means we will tap into our TSP saving accounts in the future, and we will know that our behavior had a lot of things to do with our TSP saving plans.
Should you switch to another fund in your TSP saving plan?
Well! This has always been a hard question to answer, as the requirements for the TSP saving plans vary from person to person. We have estimated that even after facing this much severe economic crisis, the world economy would not collapse. However, there is still a question in the minds of people as to whether they should move to other TSP funds or not.
There’s no hard and fast rule in determining whether you should move or not because each Federal employee has its own circumstances. Still, some general principles could be followed to maximize the chances of success.
How much risk can you take?
Risk tolerance is an important thing that can relate to how successful you will be in your TSP saving plans.
#1. How many fluctuations in the market can you bear?
This is not that simple to answer whether you should move to another savings fund or stay where you are. One of the most significant factors is making a self-assessment about whether you can bear the market’s volatility. In simple words, you have to determine whether you can deal with the swinging of the market, especially when the whole world is facing an economic crisis.
#2. Can you take on a higher risk?
This is one of the most important factors that decide whether you should move or not. Most of the time, federal employees, whose retirement is ahead after 5 to 6 years, want to have a higher amount from their retirement plans. Therefore, what they do is try to move to other funds that offer better interest rates. For example, people quit the G fund whose stability is high, but the interest is low, and move to the C fund, whose volatility is higher enough, but the interest rate is also smart and attractive.
So, when federal employees move from lower risk to higher risk, they must keep themselves prepared for the consequences. Once you have transferred from the G Fund to the C Fund, you might get an unexpected benefit and going side by side, and this benefit can also turn into a loss. So, don’t act in haste and decide with great care.
#3. You might earn loss; rather than benefit:
If you are five years away from your retirement and have invested heavily in the stock markets, you’ll be more vulnerable to the situation. You might need to access your TSP accounts for extra expenses whenever you come across any need for the money. Therefore, in these times of high volatility, the stocks in which you have invested your money might lose their value.
Consequently, you might need to sell your stocks at a price lower than you spent in buying them. So, be careful in your choices; otherwise, you may face severe losses.
#4. Too young to retire:
This is the sole argument that supports the stance of switching from one fund to another. If you are too young to retire, and you are daring enough to sustain the fluctuations of the market, you can switch from one fund to another fund. But, bear in mind, if you are far from your retirement, you need not play aggressively. Especially for the time being, when the uncertainty has spread all over the market, it will not be a prudent choice to go with the switching option.
Still, if you are confident enough, you can plunge into it with liquid cash that you may spend on an unexpected need.
Therefore, now you can better understand the consequences of switching from one TSP saving fund to another fund.
Short-term plans vs. long-term plans:
So, what is the result of the above debate?
Of course, two things need to be considered when it comes to predicting the advantage and loss caused by the TSP saving plans.
If you’re going to wait for the long-term, you will be much safer than those who want prompt income out of its TSP saving plans. Because, in the longer time horizon, you have multiple occasions that can benefit you, and the risk factor decreases considerably in this regard. You will have a long time until you need to touch the money saved in your TSP account.
If we analyze the situation for an employee whose retirement is right after five years, he will be more vulnerable to the harsh environment of the stock market. If that employee switches from the F fund to the C fund, he/she might lose a significant amount that was on the table, but he/she may gain that amount which did not belong to him/her. It means there is a possibility of both things.
In the same way, if that employee possesses stocks in the market, he/she might lose the original value of their stock due to fluctuations in the market.
So, note all these points before making a final decision. Moreover, you may get yourself into financial problems.
How to make a proper TSP allocation?
There is a variety of factors that you need to consider while crafting the plan for allocation in your TSP saving accounts; here is the list of these factors.
#1. Consider the part from your spouse:
To have a more fruitful TSP saving plan, you must consider that part of the investment that should belong to your spouse. Moreover, if your husband or wife works in a private sector, you must see what he/she has invested too.
#2. Other Saving plans:
Of course, each one of you sets a targeted amount that you want after your retirements. So, consider the other saving plans like 401(K) too, along with your TSP saving plans, as all of these plans provide you with money that you want at the end of your retirement.
#3. Consider all sources of income you have:
You need to have a proper consideration over having income from other sources. This consideration will help you work out when you need to touch the money from your TSP account. Moreover, summing up all incomes, you might consider playing more aggressively, as you might have enough money to cope with any unexpected movement in the market.
Final words:
There are several factors that you need to consider when it comes to allocation into the TSP saving plans. COVID 19 is undoubtedly hurting the global economy, and for sure, this factor will also affect your choice of choosing your TSP saving plan.
Moreover, the important thing is that while deciding the allocation, be wary, as markets are driven by fear and greed, and you must maintain balance in both of these things to make sustainable growth.
No doubt, this is a hard time, but the market will recover as soon as the lockdowns are lifted from the country. Take an example from the past, where markets were down to the lowest but improved again with an even better position.
So, if you are concerned about this prevailing crisis, it won’t last forever.
Contact Information:
Email: [email protected]
Phone: 8139269909
Bio:
For over 30-years Flavio “Joe” Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
