The Inevitability of Down Markets
Here’s the deal: throughout your retirement, there are going to be down markets multiple times. That’s just how it works. Every few years, there’s going to be a fairly significant one, and every ten years, there’s going to be a really big one. That’s just how it has happened over the last decade. It’s not a matter of trying to avoid a down market in retirement because you’re not going to. If your retirement is any length at all, you will experience them. The real question is, when the market goes down, what on earth do you do? Let me just cut to the chase: if you have a good plan, do nothing. If you don’t have a good plan, then you’re in real trouble.
Balancing Short-Term and Long-Term Goals
Let me share what a good plan actually looks like. Most people have two major goals for their retirement money. First, they want short-term money that is there for them so they can actually enjoy the investments they’ve worked hard to save. They need a place to take withdrawals from without worrying about what the market is doing, allowing them to maintain their lifestyle. Second, people want to make sure they never run out of money. They want to ensure that in twenty or thirty years, if they live a really long time, they still have money that hasn’t been killed by inflation. This requires long-term money that can actually get some growth over time.
These two goals must be balanced. If you go too far either way, you run into problems. If you’re too short-term focused, you’re going to be hurting decades down the road. If you’re too long-term focused, you may not have the stability you need to get through the crazy times in the market.
The Power of Doing Nothing
When I say short-term, I’m talking about things like the G Fund and the F Fund. When I say long-term, I’m talking about the C Fund, the S Fund, and the I Fund. If you have a nice balance between these two sides, and the long-term side (C, S, or I Funds) goes down, the answer is to do nothing.
Think about it like your house. Let’s say your house is worth $500,000, and a housing market downturn happens—like in 2008—and your house is suddenly only worth $300,000. Do you go to your spouse and say, “Our house was worth $500,000, now it’s worth $300,000. It’s time to sell and lock that in”? In most cases, the answer is no. You don’t need to sell; you’re happy in your home, so you just wait until things recover. The same thing applies to your investments. If the market goes down, let’s not sell. As long as you have a nice balance, you have stable money in the G and F Funds that you can rely on for withdrawals, and you can simply ride out the fluctuations on the long-term side.
The Danger of Market Timing
You may have a coworker who claims they time the market perfectly—selling when there’s bad news and buying back in later. Here’s the reality: when people do this correctly and make money, they tell you about it because it was awesome. When they lose money, they are pretty quiet. The stats show that 90% of the time, you’re going to lose when trying to time the market. If you knew you would lose 90% of the time at a casino, you wouldn’t go in. You want a strategy that works every time.
Enjoying Your Retirement
The strategy that works is having a good plan with a nice balance of short-term and long-term investments. When the long-term investments fluctuate, do nothing, ride it out, and wait for things to recover. Don’t act emotionally, and don’t look at your accounts too often. If you look at your TSP twice a day, you’re going to stress yourself out because there is constant motion—whether it’s a war, a pandemic, or something else. Do yourself a favor and don’t look at it so much. Retirement shouldn’t be about staring at your TSP or IRA; it should be about enjoying your life. If you have a good plan, stay the course, and you will thank yourself time and time again.