Sheltering in the TSP's G fund
By Mike Causey |
June 22, 2017
Whether the next stock market correction is a brief hiccup or an extended —possibly years-long — 20-to-30 percent correction, nobody knows. Not when, not where, not how long. But most experts say that it is coming, and many believe it is long overdue based on averages in the past.
During the 2008-2009 Great Recession, the stock market lost 40 percent. Hundreds of thousands of federal workers and retirees moved money from the C, S and I funds (which cover the entire U.S. stock market and some international markets) into the safety of the treasury securities G fund.
The G fund has a reputation as never having a bad day. Nor a particularly good one. For "safety," it can't be beat, depending on your definition of what "safe" is. If safe is zero-loss, the G fund is great. If safety is earning a return to keep pace with inflation, it's not so hot.
Financial planner Arthur Stein said that having most or all of your retirement nest-egg cash in the G fund is bad business, because over time, its purchasing power will be overtaken by inflation. That is less a factor for workers under the CSRS retirement plan, because their relatively large benefits are protected from inflation.
But it's a major concern for FERS employees and retirees. Not only are FERS annuities smaller, the inflation protection isn't as good. The FER cost-of-living adjustment does not keep up when inflation exceeds 2 percent. So purchasing power declines.
| FERS Cost-of-Living Adjustments (COLAs) | |||
| Change in CPI | Increase in annuity | Example | |
| 0% to 2% | Equals CPI | If inflation is 1.5%, annuities increase 1.5% | |
| 2.1% to 3% | 2% | If inflation is 2.7%, annuities increase 2% | |
| 3.1% and higher | Change in CPI minus 1% | If inflation is 3.6%, annuities increase 2.6% | |
If Congress approves the administration plan to eliminate cost-of-living adjustments for current and future FERS retirees, and to limit them for CSRS retirees, the amount they have in their TSP accounts could, over time, mean the difference between living comfortably or miserably in retirement.
Wednesday's column and Your Turn radio show were all about what to do when the stock market crashes or corrects big-time.
Stein provided some excellent charts and history on the subject. In response to that, Mark R., from Odenton, Maryland, said he's a big fan of the G fund, which is his operating base. Here's what he said:
"My response to your question in today's article is: I'll stay right where I am, in the G Fund. I have been in the G Fund since two days following the November general election, and I have been quite happy here, even as I watch the C and S funds far outperform my holdings.
Like you and Arthur Stein, I am completely sure that there will be correction or a 'crash' in the markets, and I'm counting on it. After that happens, I plan to jump into the C and/or S funds and pick up shares at fabulous sale prices.
I was late on the take in 2008 and 2009, but I was still learning the underlying dynamics of the TSP. My balances got burned, to say the least, in the early going, but once I stepped over to G from C in the middle of the great down-swing, I waited things out, then picked up on stocks again at close to their lowest levels and watched the numbers go up.
Sure, it takes nerves of steel and patience, but the stock market clearly demonstrates that history repeats itself like no other example I can think of."
—M.R.
Stein said he doesn't agree with Mark's strategy, but admires his spirit and attitude.
"We all know the market is going down at some point, but why fear it?"
Mark welcomes the decline and, unlike many people who bailed out of the TSP's stock funds during the recession, Mark is looking forward to the chance to buy again when stocks are on sale.
Posted by: sarah_oz@yahoo.com
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