Worry Worry What’s The Hurry?

What happens if your TSP 401K or IRA  losses money fast? What should you do? How should you react?

 

This year the future for the stock market could be quite volatile, and being prepared for the ups and downs is important. Even more important is understanding what NOT to do.

 

What Happens When Your Value Drops

 

It never feels good to see the value of your TSP or 401K drop, this we all know. But is a reaction even necessary? Is a sudden change in your allocation or balance wise? If you are more than 5 years out from retirement, than your plan could be just stock indexes, C fund and S fund, and you need not be overly concerned. Why not?

 

The fact is that the stock funds, while having a lot of volatility, also have the most amount of growth. Hence the expression “risk and reward”. You take the risk, you will be rewarded, over the long term. Research over time has revealed that those who make no sudden changes, who are disciplined and not trying to time the market, time and time again outperform those who react and attempt to rebalance to safety. This is because those making changes are likely moving funds after most of the losses have occurred, too late to “safe” funds to even matter. Then when the market springs back, they miss the swing upwards, adjusting too late again.

 

While it is true that those several years from retirement may need to take a portion of their money and use the G fund, bond funds or indexed annuities, those farther away from retirement should not be overly concerned. Time is on their side.

 

Stay Away From the Drama

 

The news programs and market watches are intended to be exciting, otherwise less viewers will tune in. The volatility associated with the stock market is reported on in a sensational manor. You can imagine if the broadcasters said “nothing knew to report on” day after day, no one would tune in.

 

Stay away from all the drama and excitement that is being televised, and being posted and broadcast thru social media channels. It is intended to grab you and make you react. The reactions can be dangerous, as mentioned previously.

 

Be disciplined, not emotional, and know what recovery timeline you have. Most large balances inside TSP and 401Ks have been due to a set it and forget it mentality. This coupled with maximum funding of your accounts inside stock funds are what garnish handsome returns and large account balances.

 

What If I Am Retiring?

 

If you are retiring soon, there are 2 essential questions you need to ask. First, will you need your retirement savings for monthly income? Second, how much risk tolerance are you comfortable with?

 

If you will be needing your retirement savings for monthly income, then a portion of it should be made available that is stable. This would require a separation of your funds, so that the stable investments could be away from market losses, and provide modest returns. This is not possible at either TSP or a 401K, because the money can not be split into separate accounts. The separation of the account helps the money set aside for income not be subject to losses, thereby enabling you to know with certainty how much is available in the account for monthly income.

 

Risk tolerance may have little bearing on your income needs, but more bearing on your feelings. If you could handle a -20% drop in your portfolio, you may get a +30% rise in your balance. But going from 1 million to 800K is just too much for some. You may therefore be more comfortable with a -10% loss for just a +15% gain. Typically near retirees and retirees find they no longer have the appetite for large losses associated with all in the stock market or stock mutual funds mentality.

 

Many near retirees are more concerned about keeping their money from loss than they are with growth. Many multi-millionaires are more concerned about preserving what they have than growing the balance more and more. This is called preservation of principal, and for many investors this is a major goal. Grow the portfolio modestly, but don’t risk loss of principle.

 

TSP and most 401Ks allow an age based at 59 ½ in service aka “while employed” rollover so you can create at minimum the stable portion of your portfolio for retirement income. What a relief to know these retirement plans are reasonable, and once you’re nearing retirement age the flexibility exists to start laying the foundation of your retirement plan.

 

Key Takeaways

 

When you hear bad news about the stock market, know you have a plan, and stay away from the drama. Do not react emotionally and if you can, lay the foundational assets of your retirement plan well before actually retiring.