It is often much easier to not worry much about the market when we are still far from retirement.
However, as we approach retirement, it often takes much more emotional fortitude to stick to a long-term strategy when the market is volatile.
But one thing that we all have to remember is that when it comes to investing, retirement is often not the finish line. While we all want to have as much as possible in the TSP at retirement time, the real goal is to have our money produce as much as possible throughout our entire retirement.
This means that even at retirement we still need a long-term strategy to get the most out of our money.
Investing In Retirement
There are many strategies across the internet for investing in retirement so feel free to do plenty of research before deciding on which one works best for you.
The most important thing is that you have a sound strategy that you understand and that you can consistently execute throughout your retirement.
In my opinion, the 2 goals of any good retirement investment strategy should be:
Make sure the money that you’ll need in the short term is safe.
Make sure that your money grows, beats inflation, while allowing you to maintain your standard of living throughout your entire life.
Note: Even great investment strategies will struggle if you simply don’t have enough money to support your lifestyle so make sure you are comfortable with what your investments can provide before you retire.
Here is one strategy that may make sense for you.
Bucket Strategy
A great way to think about retirement investing is to break it down into buckets or timeframes. And then you would assign a dollar amount to that timeframe based on how much you’ll need from your investment during that time.
For example, split up your retirement into 3 different buckets. A cash bucket, mid-term bucket, and long-term bucket.
As the picture shows, the cash bucket is where you get your “paychecks” in retirement or in other words, where you take distributions from.
But how much money do we put in each bucket? Great question.
A good rule of thumb is 2-3 years worth of needed income in the cash bucket, the next 2-3 years of income in the mid-term bucket, and any money that you’d need after that can go into the long-term bucket.
How To Invest Each Bucket?
The reason we split up your retirement into different buckets is so that you can tailor your investment strategy for that time period.
The cash bucket is designed to cover your income needs in the very short term so you want this money to be in cash or cash equivalent. The G fund can often be a great choice for this bucket.
The G fund won’t grow much but it will provide the stability that you need in the short term.
And since you don’t need any money from the mid-term bucket for at least 2-3 years it allows you to be a little more aggressive but still not too aggressive. Often a good choice for the mid-term bucket is bonds (the G and F funds).
These funds will grow faster than your savings account but are much more stable than the stock market.
And any money that is not in the first two buckets will go into your long-term bucket. This bucket should be invested in funds that will provide the growth that you need overtime. The C, S, and I funds often make a lot of sense in this bucket.
As a result of the first two buckets, you now have about 5 years worth of retirement income that will be there for you regardless of what the stock market does. This means that even if the stock market gets cut in half on the day you retire, you have 5 years worth of income before you even have to think about selling your stock-based funds (C, S, and I) when the market is down.
This strategy gives the market plenty of time to recover at which point you can refill your cash and mid-term buckets.
So just like any good retirement strategy should, this bucket strategy successfully protects your short-term needs while also providing the growth that you need to maintain your standard of living over time.
How Should You Invest Your TSP in Retirement?
Like I mentioned above, there are many retirement investment strategies out there and it is up to you to find the one that works best for you. This bucket strategy may make a lot of sense for some but not for others so like always, you will want to tailor everything that you read to your own situation.
