Any reader watching the stock market in the past several months with one eye on the value of your TSP retirement portfolio and another on the volatile stock market returns could be wondering if retirement from federal service is further away than you thought it might be.

Baby boomers who are about to retire are generally under the older CSRS retirement system so they are not as dependent on the TSP for their future retirement income. But, anyone who has a stack of money and knows it is there whenever they want to use it, generally counts on using that money for expenses of some kind. The planning may involve travel, a new house or car or buying a second home in the mountains or at the beach or just paying a monthly mortgage.

You may have noticed that the latest figures for the TSP show a decline of 5.92% so far in 2008 for the C fund; a decline of 8.59% for the S fund and a decline of 6.5% for the I fund. Those are not the kind of figures you want to see if you are planning on retiring soon (or if you are already retired).

And, while not trying to rub salt into the wound, these figures only tell part of the story. The C fund has lost more than 10% of its value since the close of business on October 31, 2007 and the market's close on January 15, 2008. The I fund has lost 12% of its value in the same time and the S fund is down about 14%.

On the other hand, the G fund and the F fund have actually increased in value in that same time. They have not gone up much but a gain of 11 cents per share (the G fund) or 44 cents per share (the F fund) are certainly better than a loss of 10% or more. You can pick different time frames and come up with figures that are a little higher or lower but, regardless of how you look at it, your TSP stock funds have recently declined in value.

One obvious question is whether the bottom has been reached and stocks will now start going back up again. A drop of 10% or more is significant and experts would call it a market "correction." If you are a retired federal employee and were planning on using your TSP funds for expenses, or if you were planning on retiring soon, you might look upon this turn of fortune as a disaster.

Here's the rub. There is nothing to stop the market from dropping another 10%. Earnings from some companies are not looking as good as financial analysts had hoped; the housing market has not recovered; and the reaction of consumers to the recent drop in stock market prices is not yet known. The market could turn around or keep on dropping for awhile.

If you have the ability to predict the future of the stock market and you guess correctly, you are in good shape because you probably sold stocks and moved your money into the G fund at the top of the market. Anyone who did that is fortunate and, if the person in the cubicle or office next to you made a good call, he will probably be glad to tell you about it. The best indicator of a market bottom is when owners of stock decide to dump their shares. Often the absolute bottom of a market drop is when the herd instinct kicks in, investors decide they absolutely cannot afford to lose any more money, and sell. That is often a precursor to the market turning around. The result is that the stocks that are sold for a small sum will cost much more a few days or few weeks later if you then decide it is time to get back into the market. And, if the guy in the cubicle or office next to you made such a decision and took a financial bath, you are unlikely to ever hear about it as he is likely to keep that information to himself.

The advantage of a diversified portfolio is to help cushion the value of your TSP investments when the market drops as it has done recently. Of course, you can take a stab at selling when the market is going up and hope that it doesn't continue to go higher. For most people, financial advisers suggest a diversified portfolio so that you don't panic and sell your stocks at a low point in the market.

One other item that retirees have to consider: How much do you withdraw from your stock investments each year?

Even if you have a federal pension check arriving each month, some retirees are taking money out of their TSP to help meet their expenses. If you withdraw out a fixed dollar amount each month, you may be cannibalizing your TSP investments. In other words, you will have to sell more of your C fund shares to equal a $1000 withdrawal when the market is down.

You don't want to live longer than your money will last. Putting all of your TSP into the G fund ensures you will not have the benefit of a rising stock market and not having money in stocks is likely to cost you a great deal of lost money over the duration of your retirement. Some advisers tell their clients to keep as much as 60% of their investments in stocks, even after retirement. But that can be worrisome at times like this when the market has gone down and you need your money.

Here is an example as depicted by the Wall Street Journal. "Consider an individual who retired in 1973 with a $500,000 portfolio, withdrew 5% of that nest egg in the first year of retirement and increased the withdrawals annually to keep pace with inflation. If that investor put all his money in the S&P 500-stock index, the average annual return through 1990 would be 11.3%, but he would run out of money in that year, according to Franklin Templeton Investments. If the same investor put half his money in stocks and half in bonds, he would still have nearly $100,000 left in 1992, though he received a lower 10.5% average annual return. The stock-and-bond portfolio has only about half the volatility of the all-stock portfolio...."

If you are retired, and can avoid withdrawing money from your stock investments during a down market, that may be a good strategy. Each person is different and will have to plan accordingly to your circumstances. But, regardless of where you stand in the federal career cycle, everyone needs to think through the implications of your financial decisions and then act accordingly.

© 2008 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.

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