By Art Miller, Capital Preservation Strategies
Economist and entrepreneur Roger Babson once advised, “Let him who would enjoy a good future waste none of his present.” Babson understood the utility of time and the necessity of saving money in the present and consciously limiting expenses today, in order to retire tomorrow.
How we employ time to best serve us, as it pertains to saving for retirement, depends on our age. Baby boomers ages 55 -75 have less time to save and some may be retired, therefore tend to be more conservative investors with their savings. Gen Xers are between the ages of 40- 54 and have more time, between 8-27 years left to accumulate savings on which to retire. Gen Y’ers range in age from 23-39 and may work another forty to forty-five years, consequently they can be more aggressive because they have an even longer amount of time before they retire. The oldest Gen Z’ers are in their early twenties and may be employed for forty-five to fifty-five years. The advantage of having more time allows a person to accumulate more and to invest more aggressively since they have sufficient time to rebound from any loss they may incur. Those who continue to work also have the cushion of income contributions to offset losses in their retirement accounts.
Gen Y & Gen Z
If you are going to earn income for a period of twenty to forty-five years then you will work through six or seven market cycles. Economic markets tend to experience six positive years and one negative year. Having at least three market cycles (21 years) left before you retire will allow you to invest your retirement savings primarily in large and small company stocks.
If you have eight to thirty years of work left before you retire then you will experience one to four market cycles. Federal employees retiring in less than 14 years should keep a significant portion of their Thrift Savings Plan funds safe. That means one third to one half of it should be in more conservative funds like the F Fund or a target date fund that automatically rebalances investments, mixing in more conservative funds as you near retirement.
Anyone who plans to retire in one to seven years should make certain that the majority of their savings are shielded from potential losses. One approach would be to keep the balance in the G Fund which earns minimal interest but protects your principal from losses. Preserving the balance would permit you to invest your bi-weekly contributions more aggressively toward growth as in the C, S, and I funds.
The TSP offers eight funds, three of which (C, S, I) are designed for growth and the F fund was developed for income. The fifth fund is the G fund whose purpose is to preserve funds. Three target date funds each balance a mixture of the 5 basic funds (C, S, I, F, & G). These Lifetime funds begin with a more aggressive mix and gradually become more conservative as the target ie: end date approaches. Currently there are three L funds: L 2030, L2040, and L 2050.
Someone who is retiring in the next year to 11 years should consider the L 2020 fund. A person who will not retire for 21 years could benefit from the L 2040 fund. A Gen Y’er or Gen Z’er might dedicate some of their contributions into the L 2050 fund.
The C fund is intended to mirror the returns of the Standard and Poor 500 U.S. companies. The S Fund’s goal is to replicate smaller U.S. companies ie: small cap firms with greater growth potential and mirror the returns of Wiltshire 5000. It less stable than the larger firms listed in the S & P 500. The F fund is comprised of U. S. government securities and bonds as well as foreign bonds and meant to yield similar returns as the Barclays Capital US Aggregate Bond Index. The I fund utilizes stocks from the Asia and Australia and is like the Morgan Stanley Capital International Fund. The G fund mission is to preserve your investment, so it employs government Treasury Bonds with 7 to 20 year maturities and is based on Barclays Treasury Bond Fund.
In order to determine an optimum balance of growth, income and preservation, you must ask yourself the following question. How would you order the following core financial priorities with the retirement money you have accumulated and are continuing to save bi-weekly. Rank the following choices in order of preference from 1 to 5:
Once you have done that think about the funds you have accumulated versus your bi-weekly contributions. Should your investment mix adopt the same allocations for both?
Rule of 100
An old investing rule of thumb is called the Rule of 100. The rule is an age weighted methodology that simply suggests how much you should keep at risk as opposed to how much you maintain so that it is preserved. Subtract your age from 100 and the remainder is what you should use as a percentage to keep preserved.
For instance, if you are 35 years old (100 – 35 = 65) 65% is the minimum you should attribute toward growth and 35% is what you should maintain in preservation. A 60 year old should keep no more than 40% in growth and 60% in preservation because they have less time to rebound from a loss.
If your number one and two core financial priorities are the same for your TSP funds already accumulated as for your ongoing contributions, then that simplifies your decision. If not, then you may want a more conservative mix in the funds you have saved versus the funds you are contributing to.
Time on your side
Most financial experts agree that we become more conservative with our savings as we age. That is understandable considering that our life expectancy is shortening which affords us less time to recoup losses incurred during negative years in the economy. Your TSP provides the L Funds whose purpose is to reduce the risk in your retirement funds by becoming more conservative year by year. Adopting at least one of the L Funds removes the responsibility of constantly rebalancing the funds on your own, but that doesn’t mean that you should not monitor L Fund performance.
Years ago, a retiree saw me walking with my son who was just five at the time. He looked at me, smiled wistfully, and remarked, “Enjoy it while you can” then strolled away. At the time I wondered what the guy was talking about, but now more than 20 years later that lesson is clear, time is valuable. It is valuable in many ways, but in regard to investing you’d do well to let time work to your advantage by contributing the most you can to your TSP. Increase the contribution every year, and monitor your TSP’s performance. Everyone runs out of time eventually, but that doesn’t have to be the case with your retirement savings to plan it well.
Art Miller is a Milwaukee area representative of FFEBA (Federation of Federal Employee Benefit Advocates) and is the President of Capital Preservation Strategies, a retirement and insurance planning company dedicated to helping public and private sector clients preserve and grow their assets and generate sufficient income during their lifetime.