Protecting Your TSP as You Approach Retirement sponsored by: Todd Carmack

Financial advisors will always tell you to invest aggressively when you are young and change to a more conservative investment strategy as you grow older. But most people don’t know what this means in practice. This article will show you an effective strategy to help you take enough risk while also being conservative enough to ensure you have access to your money as you approach retirement.


Timing Matters

Time is an essential element in investing. Typically, the more time you have to invest, the more risk you can take since you’ll have time to recover from any market swing. As you get closer to transitioning to retirement, you’ll need to ensure that you can access your money to meet your short-term needs regardless of how the market performs.


To address this, most people put all their TSP money in the G fund. But while this provides stability against market volatility, it also increases the chance of your money running out in retirement.


So it makes more sense to take a more balanced approach that provides short-term stability while also growing your retirement income. The challenging part of this strategy is determining your TSP’s amount to invest aggressively and how much to invest conservatively.


To get this, you need to determine how much of your TSP you will need in the short term and when you’ll need it. Calculate your income after taxes (net income) and get an estimate of what your expenses will be in retirement.


For instance, let’s say your net pension is $2,000 monthly and your net FERS supplement is $500 monthly. This implies that your net income before you file for Social Security will be $2,500 monthly. If your retirement expenses are estimated at $3,700 monthly, you’ll need an extra $1,200 monthly or $14,400 yearly from your TSP to live comfortably in retirement.


Keep in mind that if you saved to a traditional TSP, you’d need to withdraw more than the $1,200 monthly because you still owe taxes on the money. So you may need to take out up to $16,500 yearly so you can have $14,400 after taxes.


A Unique Approach

A rule of thumb to go by when determining how much to save conservatively to your TSP is to calculate three to five years of expenses that aren’t covered by your fixed income and save it to the G fund or F fund.


This ensures that your short-term needs are met. It also provides you with enough cash to ride through market swings. Next, calculate five to seven years of your retirement savings and put the money into long-term bonds and selected stocks. These investments will provide growth and dividends to replenish the low-risk investments. Any funds that you won’t need in the next ten years should go into longer-term investments that will provide growth and coverage against inflation over time.


How to Adopt This Strategy

As you approach retirement, look out for your projected income and expenses. Ensure that you have ample income to cover your expenses after taxes and deductions. That will give you an idea of how much to save to your TSP and the investment strategy to adopt.

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