You have decided to save for retirement. That is a good thing! But how should you invest your money?
Should you put it in the stock market, mutual funds, precious metals, bitcoins, lottery tickets, or a bank account?
While no one can make that decision for you, we will attempt to lay out a few good options.
There are plenty of barracks financial experts out there who will be glad to tell you how they made a ton of money doing this or that. But you have to wonder: If they are such great financial wizards, why are they still in the military instead of living on their yacht in the south of France?
Sometimes, the best financial advice is to be careful with how you invest.
The Most Important Word in Investing
Diversity. Yep, it's that simple: diversity.
Diversity in investing is what most experts (and older people who have seen everything come and go, often many times) recommend. You've heard it before: Don't put all your eggs into one basket. That certainly should apply to your investments.
Maybe you have heard that you can make a ton of money in the stock market. This is true, but you can also lose a ton of money in the stock market. So, should you put all your money in the bank, making ½ of 1 percent in a savings account? Well, maybe not.
What should you do? The answer is somewhere in the middle.
How to Pick the Right Investment Mix
One old-time piece of advice stands as a good starting point: the rule of 100. Simply put, you subtract your age from 100 and invest the difference in the stock market, putting the rest into something safe, such as corporate bonds or a bank account.
So, if you are 20 years old, you would put 80 percent of your money into the stock market and 20 percent into a safe investment like a bank account or Certificate of Deposit. If you are 40 years old, you would put 60 percent into the stock market and 40 percent into safe investments.
The reason for this strategy is simple: When you are young, you can make riskier investments because you have time to make the money back if the market takes a dive. As you get closer to retirement age, you don't want to have all your money in risky investments because if you lose it, you are pretty much screwed. You don't have time to make your money back after a loss, and who wants to work until they are 80?
But many financial experts now say this rule is outdated because retirees need more money than in the past, and they live longer. This is somewhat true, and a lot depends on your situation -- whether you have a pension, how you plan to live after retirement, whether you have a mortgage etc.
Today, most experts recommend an amended rule of 100, subtracting your age from 110 or 120, instead of 100. That is pretty good advice.
Remember that you should invest as you feel comfortable. Don't let somebody push you out of your comfort zone just because they are an "expert."
Diverse Investments and the TSP
So far, so good. But how do you diversify your investments if you have the Thrift Savings Plan?
You may know the TSP has five main funds:
- The G Fund. This fund invests in government securities and is the safest option. You won't lose money investing in this fund, but your rate of return is the lowest.
- The F Fund. This fund invests in U.S. government, mortgage-backed, corporate and foreign government bonds. Your risk is fairly low, but your rate of return is too. Usually, when stock markets go down, bonds go up in value.
- The C Fund. This fund invests in the stock market. The stocks are made up of the Standard and Poor's 500 (S&P 500) Index, a mix of stocks of 500 large- to medium-sized U.S. companies. If the stock market goes up, you can make money. If it goes down, you can lose money. The risk is higher than the F fund, but the rate of return is higher too.
- The S Fund. This fund invests in the stock market also. But instead of big companies, it invests in smaller firms that aren't in the S&P 500. The risk is higher than the C fund, but the rate of return is higher too.
- The I Fund. This fund invests in international stock markets. This is the riskiest fund, but you may also make the best rate of return from it.
Let's check out the rates of return on each of these funds:
|2018||Last 10 Years|
How can you diversify your TSP investment with these choices? As you can see, 2018 wasn't a good year for stocks across the board -- precisely why you should diversify. But you can also see that, over time, the funds mostly follow a pattern of better returns for riskier investments.
The good folks at the TSP have come up with four special funds that do this for you, known as the L funds, for "Lifecycle." The civilian world calls them "target-date" funds.
The current L funds that TSP offers are based on projected retirement dates:
You pick the fund that is closest to the date you plan on retiring and put your money there. The folks at TSP will move the money between all five of the other funds as necessary to somewhat replicate the rule of 100 for you. There is nothing more you need to do.
Let's compare how the TSP currently invests two of its L funds:
As you can see, the L2020 fund puts 73 percent of your money in safe investments, and the L2050 puts 82 percent into riskier investments that pay a higher rate of return.
TSP officials automatically move money from riskier to safer investments as time goes by, making minor adjustments every three months. You don't have to worry about making changes.
You don't have to follow this plan, but if you want a "set it and forget it" type of investment, the L funds are for you.
If you want to invest for other things besides retirement, there are many fine online brokerages or financial planners at your credit union or bank who can set you up with diverse investment portfolios.
Just remember that with bigger returns come bigger risks.
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