Disclaimer: This article is for currently working members whose retirement days are in the distance. The article probably won’t make sense for people close to retirement or in retirement. Realize I’m making generalizations based on what applies to most people. There are always exceptions. If what I say doesn’t apply to you personally, so be it. I’m only scratching the surface of these complex issues. My intent is to raise the topics and build awareness. You should expect to dig deeper using the suggestions at the end of this article.
A couple articles back in “Sit’n in the TSP G Fund”, I wrote about how safe and conservative funds do not build the wealth required for retirement assets. Feedback from that article provided the basis for this article.
My experience, after meeting with clients, conducting financial presentations, and talking to servicemembers of all ranks each year, indicates that there are some serious misconceptions about how to invest in retirement accounts. Managing a TSP, 401k or IRAs using practices based on these misconceptions will ensure you lose the retirement investment battle.
Here are the top 5 misconceptions.
“I have some savings”, as I’ve often heard, won’t cut it. Surveys indicate people underestimate the amount of wealth it takes to retire at the lifestyle we imagine. For my purposes, wealth means having enough in investment assets to allow you to retire, live at the standard of living you desire, and live the rest of your life on the investments you accumulated. You put aside current income now to serve as your income when you no longer work and that saved money has to last for decades.
Your investments may have to provide income for as long as your current pre-retirement jobs provide you income while you are working. Your military career is just one stage of life. There’s a whole new life after the Service waiting for most of you. Plus, if you will have a survivor, you have to figure for your survivor’s lifetime also.
Wealth is achievable if planned properly. Roughly a $1,000,000 portfolio can generate about $40,000 of income a year—I did say roughly, right? What about inflation? Forty-grand won’t be the same in 20+ years.
On the other hand, if you can live off your retired pay and Social Security, you’re golden. Having a small financial footprint (how much it costs you to live) reduces the need for wealth.
Too many people I speak with think that the TSP G (cash account like a money market) and F funds (bonds) are a safe and secure way to save for retirement. No they are not. Unless you are contributing half of your salary to your TSP each year, you won’t have enough saved to live on in retirement. The issue is that in order to build an appropriate amount of wealth, you must have a return on your investments that surpasses both future taxes and inflation. Funds like F and G historically don’t provide enough return. I suggest you scroll down this blog and read “Sit’n in the TSP G Fund” if you haven’t read it. I’ve met people who played it safe and they realized too late their retirement assets were going to fall way short.
This is where I’m usually bombarded by comments that you can’t trust stocks. “Don’t I see what goes on with stocks?” Up and down. They are too risky. You can lose your shirt. I have investments also. I understand stocks. If this is your concern, I suggest you need a different plan and a new point of view. To quote Warren Buffett, “Risk comes from not knowing what you are doing.”
Don’t let the ups and downs determine your concept of investing. The ups and downs (volatility it’s called) are your friends. It helps you build wealth. Rather than letting volatility ruin your day, learn how to tame it and take advantage of it. This blog is full of lessons on how to ride the stock market and build wealth. MOAA has a publication for MOAA members explaining how to implement a strategy that will work for you.
The bottom line is that ups and downs aren’t the problem. Lack of a strategy for how to deal with them is.