TSP strategy for mid 40's with 20 years till retirement. Anyone? Bueller?

[coastalite]

Hello to all and thank you in advance for any advice and opinions you may have. I am in need of some help and am so happy to have stumbled onto this site.

I've been saving for a good 15+ years or so, investing $630 each month into my TSP and have pretty much been going 50% into C, 25% into S, and 25% into I.

I have $21.5K (9%) sitting alone in F with no money allocated to it. The rest of the money is 57% sitting in C, 18% in S, and 16% in I with a grand total of $260K saved.

I kind of stuck my head in the sand and took a beating when the economy soured. I don't know if I should moved everything to G & F so I just kept everything status quo (in C, S, & I).

It appears that S (down 7.63% for 2011) & I (down 14.90&) aren't doing very well in 2011. Should I get out of I completely? Am I foolish to sit here and take a beating in I or is the thought that it is wise to stay in because I am buying shares at a lower price in hopes they will go back up?

Is it time to start going a bit more conservative now that I am in my mid 40's?

I was thinking about changing it up and doing an Interfund Transfer AND Re-Allocating everything to: 25% C, 25% F, 25% S, and 25% G.

Thoughts?

 

[Birchtree]

You'll be invested long after you retire - stay with your current program. Slow money with dollar cost averaging is the best approach. Accumulate as many shares as you can at these lower prices. When the market finally sees the light you'll zoom even faster than imaginable.

 

[nasa1974]

coastalite, This is a great place to learn. Welcome aboard. Sure sounds like you have been doing a good job so far. Good luck.

 

[nnuut]

Welcome to the Board coastalite!
Best of luck.
Norman

 

[coastalite]

Thanks for the replies. I was hoping to get a few more opinions on moving everything to 25% G, 25% F, 25% C, & 25% S?

Also, would like to allocate future contributions to 25% G, 25% F, 25% C, & 25% S.

My thinking is that in my mid 40's I can't afford to be too risky, so half my money should be in the more stable G & F, and the other half in the more risky C & S.

As I'm getting older, I feel the need to be more proactive and keep a much closer eye on these funds, and not necessarily just sit back with my head in the sand (like I've been doing).

If I see any indication that one fund is taking off or others tanking, I'll try to IFT my money around accordingly.

 

[nasa1974]

Thanks for the replies. I was hoping to get a few more opinions on moving everything to 25% G, 25% F, 25% C, & 25% S?

Also, would like to allocate future contributions to 25% G, 25% F, 25% C, & 25% S.

My thinking is that in my mid 40's I can't afford to be too risky, so half my money should be in the more stable G & F, and the other half in the more risky C & S.

As I'm getting older, I feel the need to be more proactive and keep a much closer eye on these funds, and not necessarily just sit back with my head in the sand (like I've been doing).

If I see any indication that one fund is taking off or others tanking, I'll try to IFT my money around accordingly.

You hit the key word, RISK. It really comes down to what you are willing to put out there. What I would say is look at how you have your allocation spread out. One thing to remember, you only have 2 IFT's for the month but you can allocate your money to different funds at different percentages twice a month if you want to, but the timing can be tricky. If you are looking for small share growth then spreading your money around is the right thing. What you might think about is putting 100% in a specific fund for a month or two depending on how well the fund is doing then move 100% into a different fund. The one place you may want to increase your shares might be the I fund. Once this Euro thing is cleared up I think the I fund will get back over $21 pretty quickly. At 25% per fund your share growth will be small but you will have less risk of large losses. I think the most funds I spread my allocation to was 3, CSI, at any combitation of 30%,30%,40%. You still have some good years to make a big impact to your TSP. Good Luck!!

 

[ILoveTDs]

If you have 20 years the G Fund is for suckers, it doesn't even keep up with inflation. If god forbid you are talking about a buy and hold strategy in a conservative fund, at least put your funds in the F Fund - AVOID THE G FUND!!!!!!!!!!!!!

G Fund 2 June 2003 = $10.00 today = $13.80 i.e. 38% in last 9 1/2 years.
F Fund 2 June 2003 = $9.97 today =$15.30 i.e. 53.5% in last 9 1/2 years.

 

[coastalite]

What you might think about is putting 100% in a specific fund for a month or two depending on how well the fund is doing then move 100% into a different fund. The one place you may want to increase your shares might be the I fund. Once this Euro thing is cleared up I think the I fund will get back over $21 pretty quickly. At 25% per fund your share growth will be small but you will have less risk of large losses. I think the most funds I spread my allocation to was 3, CSI, at any combitation of 30%,30%,40%. You still have some good years to make a big impact to your TSP. Good Luck!!

Good stuff. Thanks. I am beginning to see the big picture. Maybe I'll take your 30-30-40 CSI advice. Curious, why not F? Over the last 12 months, F is at 5.68%, outperforming both S & I.

What are your thoughts on moving it all into L2030 and walking away?

 

[coastalite]

If you have 20 years the G Fund is for suckers, it doesn't even keep up with inflation. If god forbid you are talking about a buy and hold strategy in a conservative fund, at least put your funds in the F Fund - AVOID THE G FUND!!!!!!!!!!!!!

Yeah, I hear ya, but the G Fund since inception is 5.93%. F since inception isn't much better at 7.09%.
Since inception, I is the WORST at only 4.43%, but has only been around since May 2001.

If looking long term, based on rate of return since inception, C is the best at 9.55%.

Why not just go 100% C if it's showing the best rate of return over the long haul?

 

[coastalite]

Judging from your statement, you seem to be asking for the long term stability that the L-Funds already provide.
If you're going to work till age 60-65 and want to have a steady allocation that you might only change infrequently (less than 3 times a year ) then going into the L2030 might meet your longer term goals.

If you want to stay more aggressive, and learn how to manage your money at the same time, the best thing to do (what I did) was sign up for one of the pay services from this site who typicaly shift you from 100% stocks to 100% G and/or F based on a variety of time proven statistical and heuristical methodology. You can ask Tom (who runs this site) more about them, or read about them on the main homepage.

At the same time, reading Tom's daily wrap up every evening (also on the main homepage) is a great way to learn on the fly. And when one of the premium service gives you a buy or sell signal you can follow what some of Tom's (or Coolhands, JTH's) charts are showing and follow along. You will likely start seeing patterns developing and you can then (on the side) start making moves on the side on Tom's Autotracker and see how your new found skills are shaping up to what the pay services (or the L Fund) are doing for you. Read the blogs and the forum posts here...engage in debate...great places to learn form others (or share what you've learned).

After some time, you may feel your tools are sharp enough to go out on your own. Or you might like the returns the pay services or the L Fund provides.

Question... what do the L Funds have against investing in the F Fund? For example, L2030 starts F at 9% and then 25 years later it slowly ends up at 6% in F. I didn't think F was that risky, so why end up at only 6%?

Another problem I have with L is how much of a percentage is invested in G. For Jan 2012, it is 23.15% going to G. Do I really want that much sitting in G when that money could be missing out on serious growth in C S or I?

What if I were to loosely follow the model of L2030, but do it manually with my own tinkering? If you go to the tsp site you can adjust the slide on the L2030 pie chart to see what the % invested in each of GFCSI at any given qtr all the way up to 2030. Jan 2012 for example is (GFCSI) 23.15/8.35/35.40/13.40/19.70. I was thinking it should be more on S and F, and less on I and G. Thoughts?

 

[Boghie]

Coastalite,

I didn't respond because I thought FWM's response was on target. And, anyone who has perused these boards knows that I am rarely silent on FWM commentary.

Anyway,

• Prior to more advanced investing I strongly recommend Ric Edelman's and Ray Lucia's books. They are on personal finance rather than investing. They explain risk and asset allocation and long term investing strategies. I especially recommend 'The Truth About Money', the 'Lies About Money', and 'Buckets of Money'. You will learn why the allocation to the 'F Fund' reduces as you get closer to retirement age. But, why not answer that question...
  
• The 'F Fund' - and in fact all the F/C/S/I Funds have risk. The 'G Fund' has no risk. When you move the little slider bar on the L2030 Fund to the right you are actually moving into the future and closer to retirement. Magic. If you watch closely the F/C/S/I Funds all shrink and the 'G Fund' increased in allocation ratio. At 60 years old (at about 2025 I guess since I think you mean to retire at age 65) you are 50% in the cash/bond funds (G/F) and 50% in the equities funds (C/S/I). Right now, the L2030 fund is 31% G/F and 69% C/S/I. Basically, the L Funds get safer as you near its final date. They do not market time or change allocation based on charts or whatever.
  
• So, after reading the above, a person with a 50% bond (G/F) allocation is investing like a sensible 60 year old. You sound like a sensible 45 year old. If you are not advanced enough (yet) to use technicals and fundamentals to trade at the edge than you are limiting your retirement severely. I use Quicken Premier to attain the 'Expected Return' and 'Expected Risk' noted below for you allocation and the L2030 allocation in 2025:
  1. 25% G / 25% F / 25% C / 25% S : Expected Return = 4% / Expected Risk = 7%
  2. 43% G / 7% F / 27% C / 8% S / 15% I : Expected Return = 4% / Expected Risk = 5%
  As you can see, a scientifically allocated portfolio generates the same expected return at significantly less risk.
  
• As you can see, you will be scaping Alpo from a rusty can if you invest long term like a 60 year old when you are 45. If you are not following a trading method - and thus holding a bit in reserve till some market tells you to get back in - than you will not have a rewarding retirement. At 45 you should spend as much time in equities as you can with as much allocated toward equities as you can stomach.

Finally, unless you have the skill - and luck - to implement technical trading don't worry about day or week trading. Try instead to get a read on the big moves. For example 2008 wasn't really a mystery and 2009 (from maybe May onward) wasn't a shock. Who really cares about October 23 2009 or whatever. But, you might care about October 2008:embarrest:.

 

[coastalite]

• The 'F Fund' - and in fact all the F/C/S/I Funds have risk. The 'G Fund' has no risk. When you move the little slider bar on the L2030 Fund to the right you are actually moving into the future and closer to retirement. Magic. If you watch closely the F/C/S/I Funds all shrink and the 'G Fund' increased in allocation ratio. At 60 years old (at about 2025 I guess since I think you mean to retire at age 65) you are 50% in the cash/bond funds (G/F) and 50% in the equities funds (C/S/I). Right now, the L2030 fund is 31% G/F and 69% C/S/I. Basically, the L Funds get safer as you near its final date. They do not market time or change allocation based on charts or whatever.

I understand in principal how the L Funds work, but since I am not knowledgeable enough to IFT from week to week or month to month, I am leaning towards just putting everything in L2030 and walking away. I'm beginning to understand why the L Funds don't invest a little more in F. I know F does have some risk, but looking at it since inception, it appears to be somewhat of a safe investment, with no big losses from year to year. Take 2008 for example, CSI all took a beating, but F gained 5.45%. Would it have been better to be 100% in F for 2008, or weather the storm and stay in C,S, & I and buy in at lower share prices in hopes of rebounding and bigger future gains???

So, after reading the above, a person with a 50% bond (G/F) allocation is investing like a sensible 60 year old. You sound like a sensible 45 year old. If you are not advanced enough (yet) to use technicals and fundamentals to trade at the edge than you are limiting your retirement severely. I use Quicken Premier to attain the 'Expected Return' and 'Expected Risk' noted below for you allocation and the L2030 allocation in 2025:As you can see, a scientifically allocated portfolio generates the same expected return at significantly less risk.

• 1. 25% G / 25% F / 25% C / 25% S : Expected Return = 4% / Expected Risk = 7%
  2. 43% G / 7% F / 27% C / 8% S / 15% I : Expected Return = 4% / Expected Risk = 5%

I should probably just go with L2030 and be done with it.

As you can see, you will be scraping Alpo from a rusty can if you invest long term like a 60 year old when you are 45. If you are not following a trading method - and thus holding a bit in reserve till some market tells you to get back in - than you will not have a rewarding retirement. At 45 you should spend as much time in equities as you can with as much allocated toward equities as you can stomach.

I'd rather not eat dog food if I can help it, so I better follow the age appropriate investment strategy.

Finally, unless you have the skill - and luck - to implement technical trading don't worry about day or week trading. Try instead to get a read on the big moves. For example 2008 wasn't really a mystery and 2009 (from maybe May onward) wasn't a shock. Who really cares about October 23 2009 or whatever. But, you might care about October 2008:embarrest:.

Thanks for all your advice!

 

[Boghie]

Coastalite,

Don't let me scare you to the point of a pure buy and holder. Especially with the L Funds.

The current holdings in the L2030 are:

G: 23.15%
F: 8.35%
C: 35.40%
S: 13.40%
I: 19.70%
Expected Return: 5%
Expected Risk: 7%​

The expected return is inflation adjusted. Thus your annual return for L2030 is actually 8%. What the risk actually means is that you can expect anything from +12% to -2% in any single year. (Actually pre-inflation adjusted it would be +15% to 1%).

My one concern about using the L Funds is their allocation into the I Fund. Personally, I think that is one of the easy reads I was talking about. I would probably dump it a bit. And, why hold cash at all. My personal allocation is:

G: 0% - At my age I really don't want anything (or much) in 'cash'
F: 20% - To me, the 'F Fund' US Gubmint bonds and mortgage holdings are bubbly and crashy, but I don't know
C: 45% - Overallocate the L2030 G/I Fund holdings here
S: 30% - Overallocate the L2030 G/I Fund holdings here
I: 5% - Who knows when the bottom hits. My guess is that I will bump this to 7% or 8% this week
Expected Return: 7%
Expected Risk: 10%​

My advice would be to use the L2030 as a starting point and adjust the allocation a bit based on the easy reads. Europe and Japan are trash right now. They look like we did in 2008.

 

[coastalite]

Thanks, I think rather than just sit in L2030, I will do something similar to your allocation. I'm tired of taking big losses. My 3rd qtr wasn't pretty.

What do you think is an appropriate allocation for someone in their low to mid 40's?

Are you going to max out to the new limit of $17,000 for 2012? How do you go about doing that?

What does that come out to, $653.84 for 26 pay periods? But that amount is with matching?

 

[Boghie]

CoastaLite,

I see you went 25/25/25/25/0 G/F/C/S/I.
Expected Return: 4%
Expected Risk: 7%

I agree (for what it is worth) that the 'I Fund' has the most risk of all five funds. However, the 'F Fund' will get hammered when interest rates are rumored to go up. Watch that one like a hawk. And, an allocation with a long term track record of a 4% return should not be something you hold for a long time at your age. You've got to get in the 6% - 8% (inflation adjusted - means 9% - 11%) which is available with a higher equities (C/S/I) allocation. You can mix in some F to smooth it out. My current 0/15/47/31/7 allocation has a return of 7% (10%) with a risk of 10%. I'm in my mid-40s. This is close to my normal average market allocation with some dump from I to S.

I am still paying off some debt. Gotta do that before putting more money in a retirement account.

And, yes the $17,000 ($650/pp) does include the matching. The match will be 5% of your gross salary. If you have a high salary watch out that you do not over contribute. Take 5% of your gross salary, subtract it from the $17K, and you get the total amount you can invest - then divide that by 26. Remember, the tax savings will mean that you will not feel the whole punch of contributing $650/pp. That math is way to hard to do here - but it is a very nice feature of a 401(k).

Thanks, I think rather than just sit in L2030, I will do something similar to your allocation. I'm tired of taking big losses. My 3rd qtr wasn't pretty.

What do you think is an appropriate allocation for someone in their low to mid 40's?

Are you going to max out to the new limit of $17,000 for 2012? How do you go about doing that?

What does that come out to, $653.84 for 26 pay periods? But that amount is with matching?

 

[Kaufmanrider]

CoastaLite,
And, yes the $17,000 ($650/pp) does include the matching. The match will be 5% of your gross salary. If you have a high salary watch out that you do not over contribute. Take 5% of your gross salary, subtract it from the $17K, and you get the total amount you can invest - then divide that by 26. Remember, the tax savings will mean that you will not feel the whole punch of contributing $650/pp. That math is way to hard to do here - but it is a very nice feature of a 401(k).

If I am reading this right, I think you are mistaken. The $17,000 dollar IRS limit for contributions is the amount you can deposit from your base pay. The matching funds from the government, up to 5% max, is not part of the $17,000 but in addition to it. Therefore, you can contribute the full 650 (rounded) a pay period x 26 pay periods out of your base pay.

 

[Boghie]

Kaufmanrider,

I just researched the affect of the match on the limits again. Like everything else in our Byzantine tax code it is confusing.

However, you are 100% correct. The employee is entitled to contribute $17,000 toward his/her 401(k). The match is limited to 6% (we get 5%). That match does not affect your contribution limit. Geez, that makes the math much easier...

 

[Kaufmanrider]

Kaufmanrider,

I just researched the affect of the match on the limits again. Like everything else in our Byzantine tax code it is confusing.

However, you are 100% correct. The employee is entitled to contribute $17,000 toward his/her 401(k). The match is limited to 6% (we get 5%). That match does not affect your contribution limit. Geez, that makes the math much easier...

I thought so, otherwise I would owe back taxes

 

[coastalite]

I see you went 25/25/25/25/0 G/F/C/S/I.
Expected Return: 4%
Expected Risk: 7%

Yeah, I really struggled with what to do but thought this might be safer for the short term than what I had been doing.

I agree (for what it is worth) that the 'I Fund' has the most risk of all five funds. However, the 'F Fund' will get hammered when interest rates are rumored to go up. Watch that one like a hawk. And, an allocation with a long term track record of a 4% return should not be something you hold for a long time at your age.

Thanks for the advice on F. I will watch it. My current 25/25/25/25/0 allocation is short term. I wanted to get out of I and diversify while I figure out what to do. Not sure if that was really a wise thing to do or not. I had been asleep at the wheel contributing 50% to C, 25% to S and 25% to I for some years now... not sure how wise that was wise either, but at our last sit down a couple years ago with our financial adviser, we were told that allocation was good for our timeline.

You've got to get in the 6% - 8% (inflation adjusted - means 9% - 11%) which is available with a higher equities (C/S/I) allocation. You can mix in some F to smooth it out. My current 0/15/47/31/7 allocation has a return of 7% (10%) with a risk of 10%. I'm in my mid-40s. This is close to my normal average market allocation with some dump from I to S.

I plan to reallocate next month something close to yours.

What do you think about maybe doing 5/10/45/35/5?

 

[coastalite]

The $17,000 dollar IRS limit for contributions is the amount you can deposit from your base pay. The matching funds from the government, up to 5% max, is not part of the $17,000 but in addition to it. Therefore, you can contribute the full 650 (rounded) a pay period x 26 pay periods out of your base pay.

I did not realize this. I had been contributing something like $420 per pay period ($10,920 per year) + a $210 match ($5,460 per year) = $630 per pay period. $630 x 26 = $16,380 which was close to what I thought was the 2011 $16.5K limit.

So you are saying we can contribute $653.84 x 26 = $16,999.84 but then the match wouldn't change, would it? It would remain maxed out at $210 each pay period? $210 x 26 = $5,460.

So, the most we can put in for 2012 is $17,000 + the $5,460 match on top of it = $22,460. Is this right? Unless you are 50 and then can put an additional $5,000 in "catch up" contributions.