Managing the TSP – How to Handle Risk

managing the tspFrom personal life to the weather, one never knows exactly what tomorrow will hold. The best of plans cannot account for every eventuality and new development that a new day brings. Learning to cope with the unknown elements of life is not an easy task and requires careful consideration.
When it comes to retirement preparation, there are certain elements that not even the best planner can predict: social upheaval, market swings, economic downturns, and global pandemics to name just a few. While these massive events cannot be fully predicted they can be prepared for—at least in part. In today’s blog, let’s look at what part of your future you can control and the steps to bring confidence to your retirement plan by managing the TSP.

Economic Uncertainty

There’s no better example of the unpredictability of life than the COVID-19 pandemic. Aside from the obvious health risks faced across the globe, nearly every American felt the impact to the economy, the market, and bank accounts. In regard to the market, the key term here is volatility; volatility refers to the tendency for sharp, severe swings in the market. When it comes to financial accounts, like the TSP for federal employees, volatility can mean a sharp increase or decrease in value. If the TSP will be an important piece of your retirement, then it would be wise to have a plan in place to handle a potentially volatile market.

Know Your Investor Profile.

Vital to maneuvering through a volatile market is knowing your investor profile. The two factors that determine your investor profile are risk tolerance and capacity. Risk tolerance is time horizon, level of education, personality, political philosophies, etc. Tolerance is essentially who you are as an investor. As you consider your investor profile, a key area you need to address is your own mindset toward risk. How comfortable are you with taking on risk? If you are an experienced investor, this is a great moment to look back on your track record and see what story the numbers tell. If you stayed steady in your course through a tumultuous event such as the market crash of 2008 or the COVID-19 pandemic, then you may be better at taking on risk than others. However, if the past year in the market brought overwhelming stress and panic, then perhaps it’s time to evaluate how comfortable with risk you really are.

Complete RBI’s free Risk Tolerance Questionnaire to begin assessing your comfort level with risk.

Meanwhile, capacity is where you are as an investor. Capacity addresses your age, lifestyle, income-tax bracket, liquidity, and general financial situation. If you need to get four children through college, you are certainly in a different situation as an investor compared to someone with only one child who has already graduated college and is entirely independent.

Not quite done yet.

Understanding who you are as an investor is vital to handling volatility but is only where the solution begins. The next step is to align your portfolio with your investor profile. In certain instances, it may be helpful to speak with a financial professional about how this can be done effectively. Volatility is not the only risk facing retirees. Tax risk, which is the potential for taxes to increase in the future, and providing for your family in the case of unexpected passing, are two real risks that may need to be addressed as well. For more on these situations, please visit our website.