Federal workers often ask whether they should change their investments when they retire. Should all investments be reallocated to the G Fund? Should the retirement Lifecycle funds be adjusted? What happens to investments when withdrawals are taken from the plan? Of course, there is not a one-size-fits-all answer, and the mix of investments held throughout retirement will vary greatly from person to person. It is important to coordinate investment choices with your overall wealth planning including your spending needs and risk tolerance. Let’s explore some of these in greater detail.

1. Spending needs

Many federal workers will choose to take withdrawals from their retirement investments in order to supplement their pensions and social security income. In this case it is often necessary to include investments intended to provide both long-term growth and stability in your portfolio. If all investments were in equity investments (like the C Fund) and the stock market pulled back, investors may be forced to sell those investments at a loss in order to supplement spending needs. If all investments were in treasury investments (like the G fund), they may suffer from interest rate, inflation, and longevity risks and not have enough growth to keep up with spending needs later in retirement. Often, investors will look for a balance of growth investments to help keep up with inflation and growing spending needs and also fixed investments to reduce volatility.

2. Risk tolerance

While it is often necessary to structure investments to accomplish specific goals, investors must also consider their own comfort with risk. An investor who is not comfortable with risk or is more interested in wealth preservation may want to allocate more of their portfolio towards fixed income investments. However, an investor who is more comfortable with market volatility and has a goal for achieving long-term growth in their portfolio may choose to allocate into more equity investments. It is important for an investor to understand their appetite for risk in order to remain aligned to their overall objectives.

Investors should also consider how making withdrawals impacts the overall portfolio. When a withdrawal is made from the TSP, investments are sold and withdrawn proportionately from each investment, and this may force a federal worker to sell and lock in losses even if they have other investments they could sell instead. For this reason, many federal workers choose to roll their TSP into an IRA and separate their investments. SCO Wealth Management often uses a bucket approach to investing separating liquid money market investments and laddered income investments from equity investments. The liquid money market bucket and laddered fixed income bucket allow for immediate and upcoming spending needs to be secured regardless of market conditions while the equity bucket provides long-term growth opportunities for the portfolio.

The advisors at SCO Wealth Management are experienced investment managers and understand the unique needs of federal employees. Please use us as a resource for your questions or schedule a complimentary review of your retirement plans.