Your TSP and the Coronavirus [Webinar]

Watch the video or read The transcript of the webinar below:

Ryan Dunn:

All right. We are at the top of the hour, so we’ll go ahead and get started. Hello and welcome. My name is Ryan Dunn. I’m a Charter Federal Employee Benefits Consultant and financial advisor. And I specialize in working with federal employees and helping them plan their federal retirement and deal with their benefits and all that fun stuff. But today, I want to talk about something that’s on the top of all of our minds and that’s specifically the TSP and the Coronavirus. If you haven’t heard, the world is ending and it feels a little bit like we’re in the middle of a zombie apocalypse right now.

For me personally, I mean, this is probably one of the craziest things I’ve ever experienced. You know, I’ve heard about stories about gas lines and things like that, but never in my time have I experienced anything quite like this. And so I think it’s really important to keep perspective in a time like this. I mean, there’s a lot of unknowns, and I want you to know that if you’re in a place where you’re feeling panicked about the market, that is an absolutely normal feeling. It is perfectly acceptable to feel that way.

There’s a lot of unknowns right now. Again, this is unprecedented. We’ve never seen anything like this before where the global economy has shutdown in the way that it’s shut down. And we don’t know how long this is going to last. We don’t know how bad it’s going to be. And so a lot of that unknown is creating a lot of anxiety for a lot of people. So if you’re feeling that way, really it’s okay, that’s a normal way to react and it’s a normal way to respond. I want you to know that many people, I’ve been on the phone with lots of people, as you can imagine over the last week, they’re responding the same way that you are.

Again, there’s so many unknowns right now, and unknown creates fear and creates anxiety. And so as you well know, the market, it responds to emotion, the market, the stock market, the financial markets are really driven by emotion. And the primary emotions that drive the market are greed and fear, right? So in the greed cycle, things are going really well. The market is expanding. But when we hit a fear cycle, then obviously, the market drops and that’s where we’re finding ourselves right now as all these unknowns and lack of information, and people are uncertain, and they’re feeling anxiety and fear, obviously, that has caused the market to crash. And that’s kind of the way that the market works.

A lot of people, this is the way that they approach their financial strategy. In upmarkets, greed causes them to buy. Things are going really well, where have conversations with me like, “Why would I sell my investments right now? The market is doing so well, the economy is doing so well and we don’t foresee it slowing down.” But then when things tank, people react the opposite way and they panic and they start to sell. Well, this is obviously, probably the worst way to approach investing, but it’s the way that I’ve seen in my experience a lot of people go about this. And if this is your approach, buying when things are really high and selling when things are really low, well that’s a guaranteed recipe for going broke.

So the opposite is obviously true. You want to buy when things are low and sell when things are high. That’s how you make a profit. But let’s talk about a little bit about what’s going on right now. So the market moves that we see right now, these market moves are reminiscent of the financial crisis. So I’m not going to sugar coat it. The market has dropped and it’s dropped significantly. Very similar to the kind of market volatility that we were seeing in 2008 during the financial crisis. Having said that, we don’t think that this is the same thing. The economy right now is on much, significantly stronger footing, and our financial systems are on significantly stronger footing than we were back in the 2008 crisis.

So we here at Medallion, we feel like the expansion that we’ve been seeing is still intact. That is our opinion. But we do think that it requires policy makers to act decisively to prevent the Coronavirus from ending this expansion cycle prematurely and sending us into a recession. We don’t personally feel like we’re there yet. Granted, we’re not fortunate tellers but we’re just not seeing that at this point in time. So we’re really encouraging people in this time to remain level-headed. Remember that when you’re investing in the market, money that’s invested in the markets is and should always have a long term perspective.

And the analogy that I like to use is think about a long journey. Think about investing in the markets like if you are taking a long road trip. If you were taking a long road trip, it would be fully reasonable to expect on that road trip that you’re going to hit some traffic. There’s going to be some traffic along the way and you know as well as I do sometimes when you’re stuck in traffic it can feel like that traffic is never going to end. At least that’s how it feels for me sometimes, I start to panic and think, “I’m going to be stuck in my car in this situation for the rest of my life. This is my life now just sitting here in traffic.” And it really can lead to lots of anxiety.

That anxiety can lead to a feeling of maybe I just want to get out of my car and run. Maybe that would be faster. Maybe that’s the best decision, but obviously that’s the worst decision because in reality, you’re not going to be stuck in traffic forever. Eventually that traffic is going to clear up and everything is going to be on its way again and you’re going to be really glad that you stayed in your car because you’re going to be able to get to your destination much faster. And that’s kind of the situation that we’re in right now. If you’re invested in the market then that money should have a long term perspective. That should be money that you don’t need for the next 20 or more years.

So again, we’re really encouraging people to keep that perspective and remain level-headed. Remember that when it comes to the market, volatility is absolutely normal, and it’s something that should be expected. It’s something that should be anticipated. This is not the first time that we’ve seen these type of crises before. We can go back just as recently as 2008. We’ve seen the tech bubble burst, 9/11. There’s all sorts of events that we’ve seen that have impacted the markets. In fact, we’ve seen epidemics impact the market before. So here’s a chart going all the way back to 1970. I’m talking about the various different epidemics that we’ve seen in the past. So we’ve seen HIV, we’ve seen AIDS, we’ve seen swine flu, Ebola, we’ve seen many different financial markets, different epidemics and plagues before in the past. And so we have some data.

Now, the thing is, and the thing to keep in mind is that this is significantly different. We’re responding in a significantly different way than we’ve responded with these past epidemics. So in the past maybe we’ve seen one month recoveries, three months, six months. Recovery is usually until things are back to normal. Now, I don’t know if that’s going to be the case. Again, I’m not a fortune teller, nor do I pretend to be. And I do feel like the markets, like this a much different situation because we’ve really kind of shut down the global economy in many ways and we’ve never done that before. So we don’t know how long, once things get rolling again, how long it’s going to recover.

But just keep in mind that it will. We will get through this and things will return back to normal. It may not feel like that right now. It may feel like this is how things are going to be forever, but it’s not. Especially, being here in the United States, we have a lot of smart people. We have a really good support system, we have a very strong economic structure, and we’re a very resilient population. So we will continue to persist and get through this.

So let’s talk about a good financial plan, because a good financial plan requires preparation. It requires looking at the worst case scenarios and planning for those. The time to get snow tires is before it snows, not during the snow storm. And so that’s one of the things that you want to look at, and one of the things that might be exposed by the current situation that we’re in. So a lot of you have had the question, should I buy, should I sell? Should I take everything and move it into the G fund right now? The answer to that is it depends. If you have the correct plan, then what’s happening in the markets right now, you probably shouldn’t really be feeling worried because remember the money that’s in the market is for the long term.

You don’t need it anytime in the near future and things will continue forward. Just like we talked about with that traffic analogy. And so if your plan is good, stick to your plan. If you don’t have the correct plan, if you assess your plan and your plan is wrong, well then maybe now is the time to look at correcting your plan. You know, it’s better late than never. Don’t make the same mistake twice. You know, Warren buffet has a quote and it’s admittedly kind of a weird quote, but he says, “Only when the tide goes out do you discover who’s been swimming naked.”

And that’s kind of what we’re seeing now, right? When the market drops, it really exposes who has been invested the correct way and who has not been invested the correct way. So that’s kind of where you’re seeing now. So let’s talk a little bit about how do you assess your plan. How do you put together a plan that is the correct way so that you don’t find yourself panicking? So that when you find yourself in a situation like this, you think this is fine, this is what we’ve been prepared for. When it’s snowing and you have the snow tires and you have the shovel and you have all the equipment, you’re not worried because you prepared for it.

So let’s talk about how you properly plan and how you make sure that you’re prepared for situations like this. The first thing that we look for is what is your risk number? So we score this on a scale of one to 99. So one would be you’re ultra conservative. Think like money in a safe at home with an armed guard, 24/7 protecting it. You’re very conservative. 99 would be, you’re really aggressive. So think I’ll just take all my retirement savings, put it on black and see what happens. Where most of us find ourselves is somewhere in the middle of that, but it’s important to just figure out what your risk number is.

And it’s not always related to your situation in life. Each of us has our own risk number, just like a fingerprint, right? So for example, I’m young, I have a long investment time horizon. The traditional wisdom is I should be very aggressively invested. But the fact of the matter is, is that I’m not. I am a very conservative person. I don’t like taking risks. And so you see people fall into all different sites, categories when it comes to their tolerance and ability to tolerate risk. So when looking at your entire portfolio, the very first place that you should start is first assessing what is your risk number? Where do you fall on a scale of one to 99.

And when you figure that out, you can then assess your portfolio and figure out what is your portfolio risk number, where does it fall? Are they aligned? And if they’re not, then changes may need to be made. You need to have a portfolio that is in line with your ability to take risks, and then you don’t find yourself panicking in times like these. Again, that’s part of the preparation. That’s part of putting the snow tires on. The second question that we ask is, so once we determine what your risk number is and is your portfolio aligned with that, the second question is when do you need the money? And the conventional wisdom is the longer that you’re going to need to access the money.

And notice that the question is when do you need the money? Not when are you retiring? The two are often correlated, but they’re not always correlated. Sometimes you may have a plan where you don’t require the money, you know, right when you retire. But the question is when do you need the money? So the further out that you need the money, assuming that you have an appetite for some risk, the more risky that your investments can be. The sooner that you need the money, the less risky your money should be. So here’s an example of kind of money segregated into four different buckets. The money that you’re going to need in the first five years, that money, you want to have really conservatively invested. Think money market, savings accounts, things like that.

You know, as you go further out, you can look to bonds and CDs and annuities and other things. As you go even further out, then you’re looking at stocks, and bonds, and mutual funds, and ETFs, and other financial investments like that. Or inside your TSP, you’re looking at C fund, an S fund, an I fund. So as the risks scales, I mean and as time goes by, so can the risk scale assuming that you have an appetite for risk. The other thing that you want to look at is, is if you’re going into retirement is what is your income plan look like? You know, luckily as a federal employee you have a couple of guaranteed income sources, one being your social security, and the other being your pension. So you’ve got those secured income sources and you may look to see, do those cover your essential expenses.

And if they don’t, well then you might want to put a plan into place to look to create some more guaranteed income to remove some of that anxiety. All right, so time horizon plays a really big part of this, and this can get tricky, especially if you’re getting ready to retire and the markets are doing really good. Your psychology can mess with you and you can start to think, “Well really, should I move my money to a more conservative position when the market is doing so well? I mean I just earned 20% on my money.” And the answer is yes. To be good at investing you have to follow a disciplined strategy that is agnostic of what’s going on in the market. And if you need the money soon, then that money should not be invested in the market. Money that’s invested in the market should be long term money.

So why is that though? Why is this time horizon thing so important? And the answer to that is something called sequence of returns risk. All right, so I want to explain to you what sequence of returns risk is because it really matters as you enter into the withdrawal phase, the distribution phase of your retirement plan. So what we’re looking at here is we’re looking at two investors. We have investor A and we have investor B. They both start with $100,000, and over a 25-year period of time, their investments grow, but their returns are actually exactly the same. They’re just flipped. So if you notice, this investor starts with 29%, 18%, 25%. This investor is just the opposite.

So the average is the same and they end up at the end of the 25-year period just as we would expect with the same exact amount of money. Different paths to get there but it all ended the same because they just let … In this example it assumes that they stuck to their strategy in the bad years and in the good years, they just kept it, their money invested. So their return was 8% over that period of time. Now, let’s look at retirement. We’re going to take the same two investors. Now they’re at retirement. They’ve started, they’ve saved up a bunch of money. They now have $685,000 in their portfolio except their outcomes this time, even though the returns were the same, just flip, just like in the previous scenario, the outcomes are very different because they introduced this new variable that they’re now taking 5% withdrawals out of their portfolio.

So investor A ends up at the end of the 25-year period with a bunch of money. Investor B, on the other hand, is broke by year 13. Why is that? Well, it has to do with the timing of investments. So investor A, he retired in a year when the markets were really up and he benefited from that. That actually helped him. Investor B retired in a year when the markets were really down and experiencing volatility like we’re experiencing now, and then took withdrawals out on top of those negative returns. So it’s like digging a hole with two shovel, and as a result ended up depleting his money by year 13. So that’s called sequence of returns risk.

And so if you’re going to have your money completely invested in the market and you’re not going to follow this traditional wisdom of moving things more and more conservative as you need the money, well then to quote, I think it’s Clint Eastwood, you know, “Do you feel lucky?” Is that Clint Eastwood? I don’t know. But you got to ask yourself, do you feel lucky? Right? Are you going to feel lucky enough to retire on a good year or a bad year? And I would assert that hope is not a strategy. And I would strongly encourage you as you approach your planning to have a strategy and to plan for contingencies.

And when you do that, that really helps to remove the stress and anxiety from this whole planning process. When you have a plan and you’ve developed certainty in an uncertain world, that helps you to feel secure knowing that you’ve got a plan and you’ve planned for this worst case scenario. All right. So that’s the reason for that conventional wisdom. And this is the exact reason why you want to move to more conservative positions as you need money. So the second question you need to ask are, what are your financial goals? Do you have major purchases coming up? Do you have plans to travel? Are you buying a home? Are you downsizing your home? Do you have a wedding to pay for in the near future?

That’s the next question that we always want to ask. What are your financial goals? And anything, again, that’s coming up soon, you’re going to want to have set aside and should not have market volatility associated with it. So again, think money market, savings accounts, things like that. They’re not going to earn a lot of interest but that’s okay. This is a short term thing that you’re saving for. So that’s the next question that we want to know when constructing a sound financial plan is what is your goals. And then finally, we want to look at are you diversified, because diversifying can help spread the risk, right?

When you have all your eggs in one basket, if it’s all in the tech sector and the tech sector crashes, well then there goes all of your money. But by diversifying across various different markets that helps spread that risk around. Some places maybe get hit worse than others. Some categories may be up when others are down, and so that helps provide balance in your portfolio. So one of the ways that you can help reduce the risk and the anxiety in your portfolio is making sure that you’re properly diversified and spreading your eggs across multiple baskets.

So the next thing that I want to talk about is are there any specific weaknesses exposed in the TSP when we have volatile markets like this? And the short answer to that is yes, there are a few, and I want to address those. The first thing that I want to say though is that the TSP Modernization Act was a fantastic move and it did address some of these issues, but it obviously hasn’t fixed everything. And the reason they call it the TSP Modernization Act is because the TSP is now implementing things that have been available in 401(k)s for years and years and years. You know, the ability to access your money at 59 and a half and take out multiple withdrawals and all of these things.

We’ve done another webinar where we’ve talked specifically about the Modernization Act, if you’re not familiar, and the changes made. You can check that out on our website, medalliongroup.com. You can watch that video there if you’re not familiar with it. But one of the things to keep in mind, so it did do a lot of good things, but it hasn’t addressed everything and nor was it expected to. One thing that’s still clear is that in the TSP you still only have five funds to invest in, so it’s still extremely difficult to diversify within the TSP itself. You’ve got a large cap investments, small cap investments, developed international, you have corporate grade bonds, and then a fixed government securities fund. The L funds are just combinations of those other funds. So really there’s only five funds that you can invest in inside the TSP and they’re in very linked economies so it’s very difficult to diversify within the TSP.

So that’s one challenge that still is present inside the TSP. The other is that you have to take your money out pro rata. So in the TSP when you have to take your money out pro rata. So in other words, if you want to make a withdrawal in a time like this and you’ve got a bunch of money in the G fund set aside, you can’t take money just out of the G fund. You’re also have to take it out the C fund and the S fund and the I fund. And for the reasons that we just explained, maybe you don’t want to do it. Maybe you just want to take it out of the G fund because the market’s down and you want to give that stuff time to recover, because of that sequence of returns risks that we previously discussed. So that’s one challenge that’s still present inside the TSP.

Obviously, there’s a lot of pros to the TSP, particularly while you’re still working, you’re getting matching contributions, the cost is very low in the TSP, and it can be a really great growth tool, but something that you want to assess as you get closer to retirement, is this still the right vehicle to have all of your money? OR does it make sense to diversify your TSP into other avenues? And that’s definitely a question that I think you really want to ask yourself as you hit that 59 and a half mark, where that TSP becomes accessible to you to roll into IRAs and do other things with.

Now, I’m not making any suggestions or recommendations there because obviously that really varies depending on the specifics of your situation, whether that’s a good idea or not. And hardly ever do I recommend somebody gets rid of their TSP unless there’s a really good reason to do so because it still is an excellent tool as part of your overall planning. But you know, really, for us, we view the TSP as a really good long term planning tool because there is some great options inside of it, and it is really inexpensive in terms of investment. But there are some weaknesses to it. There are some places where it’s exposed and it might make sense to diversify. So those are things to think about as you think about the TSP.

So in times like these, it’s really, you can really get caught up and focusing on all of the negatives and it’s hard not to, especially with the media cycle and as we look around and we’re just so unsure and in such a holding pattern. It’s hard not to focus on the negatives and panic, but there are opportunities here. And so one of the things to ask yourself is do you have a long term outlook? Do you have a long time before you’re going to need this money? And if you do and you have available cash, now there’s an opportunity. Things have gone on sale. now might be a really good time to look at investing your money while everything’s low because we’re going to find our way through this. Things are going to eventually return back to normal.

Again, I said, I don’t know how long that’s going to take and I can’t promise you that. We’ve seen a lot worse, and like I said, we have a lot of smart people working on this. At some point our economies have to start moving again and we will eventually recover from this. So if you have a long term outlook, now might be a really good time to look at investing. The second question is do you have a well-thought-out plan? Have you sat down and thought out and mapped out what are my goals? When do I want to retire? What risks are present? Have I covered those risks to the best of my ability? Have you really sat down and thought through your plan?

How am I going to handle income in retirement? How much income am I going to need in retirement? Am I maximizing tax benefits and federal benefits that are available to me? Do you have a well-thought-out plan? And if not, now might be an opportunity to assess that. Take this extra time that you might find yourself with, and start thinking through these things. And finally, kind of the third question, and obviously I’m a little bit biased here, being that I am a financial advisor, but do you have a trusted advisor? Do you have somebody that you can work with and bounce these ideas off of that can help provide you perspective in these times? That can think about your situation in a way that you can’t think about your situation because you’re too close to it?

Do you have somebody like that in your corner to help you develop and think through a plan? And in particular, somebody that has experience, that’s weathered these storms before and that knows how to weather these storms, I think is really important. If you’re flying a plane and everything’s going good, it’s easy. The plane could just be put on autopilot. But if there’s a storm and turbulence and things starting to go wrong, that’s when you’re going to want to have somebody in the pilot seat that has some experience. And so when things go wrong that really highlights the opportunity to make sure that you’ve got trusted advisors on your team. You know, from an estate planning perspective, from a tax perspective, certainly from a financial perspective that’s helping you put together this type of plan.

So these are the questions I have for you and these are some opportunities that you can take the time to really kind of think through. And if you don’t have a trusted advisor, then I highly recommend that you get one on your team. Again, hope is not a strategy. So we would love the opportunity to do that, a little shameless plug here. This is what we do. We specialize in working with federal employees, and we would love the opportunity to explore that with you. So if you’re already a client of ours, thank you so much for being a client of ours. Thank you for the trust that you’ve placed in us. We really, really, really appreciate it.

If you’re thinking about exploring what it would be like to work with us, we do have a free get-to-know-you assessment, free get-to-know-you sessions, free consultations. We actually provide a service to federal employees called a Federal Benefit Analysis Report where we look at and run projections and create a report for you to show you what we project retirement to look like from a federal benefit standpoint. That report is free. There’s no strings attached. It is not a Timeshare presentation. We don’t pressure you into anything. We don’t pitch anything when we’re doing that report. It’s really just an opportunity for us to prove that we’re really good at what we do and that we know what we’re talking about when it comes to this stuff.

So if that’s something that you would like to explore, we’d love the opportunity to explore that with you. If you want to learn more about us, our website is medalliongroup.com. Our phone number is 301-990-9704. Give us a call, and you can ask to speak to myself, Ryan. I’m super busy right now with everything that’s going on, as you might imagine. My assistant’s name is Abigail. You can ask to speak to her as well. Finally, thank you everybody for coming out and taking the time to spend with me. I know your time is really valuable and I appreciate you sticking with me to the end of this video.

I just hope that this was helpful for you to really put things into perspective and so as we wrap up, I want to circle back. I want to recap really fast. You know, now’s a good time to assess, do you have a good financial plan. And if you’re invested for the long term, then I would recommend stay invested for the long term. And I know that it’s really easy to feel panic right now, but remember that this too shall pass. We’re not going to be in this situation forever. And for me, one thing that I think that’s really been highlighted is all the community that we have around us. All these people that have stepped up to help their neighbors and the people around them in this time of crisis.

And I think that really illustrates the goodness in humanity in a time in crisis where we really can see that shine and realize that the majority of people are good and that we’re in this together and that we’re going to help each other get through this. And I think that it’s really important that we focus on the positive and that we stick together and continue to stay positive. So I want to encourage you as we go through all of this, please, continue to stay positive. Reach out to your friends, make a list of five people and reach out to your friends, your family, your loved ones, your neighbors. Make sure that they’re okay. Make sure that they have somebody to talk to and they’re not feeling lonely and isolated, and make sure that you’re taking measures to keep yourself and your family safe.

This is serious and I think you really should be taking it seriously, but also remember to keep in perspective that this too shall pass. We’re going to get through this. We’re all in this together. We’re going to get through this together. Thank you again for taking the time to spend with me and hopefully we can help. If we can help, please let us know and we’re happy to help in any way. All right. So until the next webinar, we’ll see you guys later. Take care.