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TSP REFUGEE

Let me make one thing clear:  I like the TSP.  I have been in the TSP since 1991 and had no intention on leaving.  I thought all the changes that were made to the TSP about 2 years ago would have included one major change that would have taken care of all my problems.  I was wrong.


Of all the changes that came about, the main change was introducing other types of investments into the TSP, even though you had to pay $150 just to view the investments.  While some people wanted to have access to other investments, the one single thing that many retired people were looking for was the ability to take out money from the TSP from a single fund.


Currently, when you take money out of the TSP, it comes out based on the percentages of your TSP funds.  If you have 60% in the C Fund and 40% in the G Fund, then that’s what your payment will consist of.  If you are in one of the L Funds, then the money will come out based on the percentages of all the funds.  Let’s take the L 2025 Fund.  The money would come out in the following sequence:


61.46% G Fund

5.85%   F Fund

16.99% C Fund

4.26%   S Fund

11.44% I Fund


The TSP will not let you take out money from just one fund.  That was a tremendous setback for all the people that wanted the ability to do that.


You can ask why is this so important?  You are still receiving your payments every month so what’s the big deal.  Maybe your funds are doing really well and things are great.  You’re retired and living the life.  Good for you.


The problem is you don’t notice anything wrong while the Stock Market is doing well.  The problem is when the Stock Market is down, then you really start to notice something strange. If we go back to our example of 60% C Fund/40% G Fund and the market is not doing well, your C Fund is the main source of growth for your TSP.  If you start taking out money from the C Fund when the Stock Market is down, you will begin losing the ability to earn while in retirement.


It took some tremendous events to finally make me realize that not having the ability to just take out money from one fund, in this case the G Fund, is a losing battle. The Covid of 2020 and negative rates of return for 2022 became a brutal lesson and reminder that if you don’t pay attention to how your TSP is set up, the consequences will hit you with a vengeance.


So what does the ability to take out from one fund do?  By only taking out money from the G Fund, you let the C Fund recover from those negative rates.  It may take 1-3 years for the C Fund to grow back but it will grow back.  That’s what the Stock Market does.  It bounces back eventually and your C Fund will not only be fine but will grow very well.


These issues apply only to people who are taking money out of TSP.  While your still working, you can invest in the TSP and those contributions are like a cushion, to help your TSP grow especially when there has been a bad year like 2022. 


The continuous injection of money into the TSP is what helps it grow.  When you retire, you are no longer putting money into the TSP, so that ability to generate earnings slows down.  So what can you do?  There are a couple of basic things you can do that can really help.


If you leave your TSP alone and don’t take any money out, your TSP will grow well.  Not as good as when you were still working and kept funding the TSP but it will grow with acceptable results.  But if you need the money and have to take it out, then you are giving your TSP a double whammy:  No more contributions and slowly limiting the ability of the TSP to keep making you money well into your 80s and 90s.  You will see this happen if you keep track of your TSP during a bad year like 2022.


I started noticing this effect in 2020 during the Covid.  My balances were going down and not recovering like I needed them to do.  I tried several experiments to see if I could fix this but I came to a major conclusion while this was taking place.  The only real strategy that would work is to take money from only the G Fund and let the C Fund recover, but not in the TSP.  The TSP system would not let you do it.  Now I had a major decision to make.  Where do I put my C Fund to make money?


I eventually transferred about 75% of my TSP to Charles Schwab and left approximately 2.5 years worth of payments in the G Fund.  The money would only come out of the G Fund.  The C Fund would be left alone for that 2.5 years and recover.  It has done more than recover I am glad to say.


Even though I put my money in Schwab, any of the main private vendors like Fidelity, Vanguard, TD Ameritrade, or JP Morgan would be fine.  There are pros and cons for each private vendor.  Some are very customer service oriented, some are good for research, some are good for day trading or advanced options like Short calls or Derivatives.


The strategy is simple:  Leave the C Fund alone for awhile and just use the G Fund.  After 2.5 years I will start to transfer one years worth of money out of the C Fund and use a cash account like the G Fund at Schwab to distribute the funds.  I could even put money back into the TSP, via the G Fund only, and continue to make payments from there but I have a feeling that won’t be necessary.


It’s just easier to use a cash account in Schwab.  I won’t close out my TSP completely.  I will probably leave about $1,000 dollars or so in the G Fund.  The G Fund is still a very good fund and you can’t find it in the private vendors.  The G Fund is an exclusive product of the U.S. Government and you can get close to it in the private vendors but it’s still not the same. I also don’t want to let go of the TSP on the rare chance I could use it again because once you close out your TSP account, you can’t go back in.


It was very disorienting to think I had to transfer out of the TSP.  I didn’t want to do it.  I had been in the TSP too long.  But when you are up against a wall you need to make some serious moves and the TSP does not make it easy to make those transfers.  The process to transfer money out of the TSP is slow and archaic.  It takes about 2 weeks to a month.  Yes, you read that correctly.  2 weeks to a month! 


That’s a glacial pace for the investment community.  The private vendors make it a source of pride that they can efficiently and safely transfer large sums of money and they will give you plenty of support and advice about doing this.


The first hurdle to overcome is the address of the institution you are sending the money to.  Even if this address has been around for years, the TSP takes 7 days to verify this address.  Maybe it’s a safety thing, to make sure people are not being scammed.


Now after that, the TSP will take another 7 days to make the transfer.  This is where things get confusing.  While all this is happening and you are waiting, you don’t really know what’s happening to your money.  You start asking yourself if you pushed all the correct buttons to make the transfer. 


The problem is you have to wait, first the 7 days to verify the address and then the 7 days for the actual transfer, to realize if you did things correctly.  The first time I did it, I made a mistake with the first 7 day period of verifying the address.  It took me a week to find out I did something wrong.  My entire adventure to make the transfer turned into 30 days.


If I had to do it again, I would probably accomplish the transfer in a 2 week period but I probably won’t need to do it again.  All the money I needed to transfer has been done.  No more transfers are necessary.


RATIOS VS. L FUNDS


That brings us to another topic to make this happen.  If you use this strategy you can’t be in the L Funds.  You have to separate your funds into two funds.  One to transfer and one to fund your payments.  You can stay in a L Fund account in the private vendor (the funds are called Target Date Funds with the private vendors) but it’s really the C Fund that gives you the best chance of growth. 


That’s the point of this whole issue.  If you eliminate the F Fund, S Fund and I Fund, you have a very simple but effective ratio of C Funds and G Funds.  The money that you leave in the TSP has to go to the G Fund.


Remember, the G Fund is just to make payments not growth.  You are using the G Fund as a tactical financial tool to fund your retirement and keep it safe while you do it.  That’s it.  I guess you could put money left in the TSP into the F Fund or I Fund or S Fund or even another C Fund but the whole idea is to keep it in a safe place while the payments are made. The last thing you want to do is put it into one of the other funds and take a loss while you need the money for payments!


The main question people would ask is what ratio of C Fund to G Fund would be acceptable?


That really depends on how much money you need to reserve for payments from the G Fund.  I figured 2.5 years of payments would help my C Fund recover but I also needed enough money in the G Fund to cover this time period.  I ended up transferring 75% of my TSP to put into a C Fund and 25% of my TSP remained for payments.  Here are some ratios that could help you:


90% C Fund/10% G Fund  (This is Warren Buffett’s ratio for leaving money to his wife when he passes away.)


70% C Fund/30% G Fund  (This ratio is a very well known strong growth strategy.)


60% C Fund/40% G Fund  (This is a famous ratio that has been around for 80 years.)


50% C Fund/50% G Fund  (Many people like this ratio because it’s easy to measure and track.)


30% C Fund/70% G Fund  (This ratio is very conservative and for people who don’t want too much risk.  This is the ratio of the L Retirement Fund.)


During my research I found a very interesting article about these ratios that was written in 2016 in the Journal of Wealth Management, by Professor Javier Estrada, from the IESE Business School in Barcelona, Spain.  In the article, the  Professor analyzed Warren Buffett’s strategy of using a 90% C Fund/10% G Fund and found some pretty interesting conclusions about these ratios.  Professor Estrada was able to attach probabilities for each of the ratios listed above.  Here are the results:


A 90/10 ratio had a 2.3% chance of failing to fund a retirement until death (30 year period).


A 70/30 ratio had a 1.2% chance of failing.


A 60/40 ratio had a 0% chance of failing.  (Probably why it has been around for 80 years.)


A 50/50 ratio had a 1.2% chance of failing.


A 30/70 ratio had a 12.8% chance of failing.


The main takeaway from the article is that the more aggressive ratios helped protect you from running out of money.  You can be in any ratio above and be fine.  It just depends on your risk tolerance.  Even at 90/10, a 2.3% chance is very small.  Just to put that ratio in context, AAA estimates you have a 3% chance of dying while driving during your life and a 25% chance of getting into some type of moving accident.


Even the 30/70 ratio, which is at a 12.8% chance of failing, gives you an 87.2% chance of success, which is still not bad really.  Only you can decide what ratio helps you sleep at night.


When I started using the ratios, I started with 50/50, which gets you to the average of what the Stock Market has returned for over 100 years (6% - 7%).  Then, as I understood more about the Stock Market and especially the C Fund, I was able to be more confident.


I eventually moved up to the 60/40, then 70/30.  But the final determining factor was how much I needed to reserve in the G Fund to make payments for 2.5 years.  That gave me a 75/25 ratio when I first transferred the money to Schwab.  Now the C Fund has grown to about 90% and the G Fund is about half way before depleting.  I still have another 18 months before that runs out.


Remember, this is only for people who are retired and taking money out of the TSP.  If you are still working, you can still keep your money in the L Funds or use one of these ratios.


I encourage people who want to examine this further to read Professor Estrada’s article.  It’s on the internet but if you can’t find it, let me know and I will send it to you.  But you really need to read it slowly and a couple of times.  It does get technical but if you read it a few times everything becomes very clear.


Yes these are some major decisions people have to make about their TSP.  It really threw me for a loop when I finally realized I had to move the money out of the TSP.  While I was working the TSP did a good job of growing my funds.


Retirement platforms like 401k, 457b, 403, IRAs and Roth IRAs are meant to grow your money safely and continuously for 30 years while you work and another 40 - 50 years of retirement.  They are not platforms for playing day trader or Wolf of Wall Street or get rich quick schemes.  That’s why the TSP used to have only a limited number of Index Funds like the C, S, I, F, G and L Funds.


The idea was to make the TSP very simple for people who may not know a lot about the Stock Market to invest.  For the more aggressive or sophisticated investors, the private platforms have lots of bells and whistles to help invest in the Stock Market.


Hopefully, this article can give you some guidance for transferring money out of the TSP during retirement.  Unfortunately, transferring money out of the TSP is a very emotional decision.  You have to be ready to give up the protection of the U.S. Government.  It is a big step but it is doable.  Even with the crazy 2 week to 30 day timeline of getting your money transferred, the result of moving your money could really be a boost for your investments.


If you need help moving the money out, you can always call me.  You can also talk to the TSP people to get guidance as well.  Don’t be afraid to enhance your investment profile if you feel it is necessary.  It is slow and it is confusing, but once you get through it, everything falls into place.


Good Luck!

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