How the debt crisis could affect you, the federal employee

Monday - 7/25/2011, 6:29pm EDT

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By Andrew Mitchell
Federal News Radio

What should you do with your TSP account, given the uncertainties produced by the impasse in the negotiations on raising the nation's debt limit?

Probably nothing.

That's the advice of Karen Schaeffer, certified financial planner and co-founder of Rockville, Md.-based Schaeffer Financial, who joined WFED's For Your Benefit host Bob Leins to discuss the impact of the debt crisis on federal workers' retirement benefits.

"I hate it when the markets are the lead stories," Schaeffer told Leins on this week's edition of the program, which is broadcast live on Mondays at 10:00 a.m. on Federal News Radio. "People just keep thinking they have to do something."

In fact, that attitude can lead people to unnecessary losses, she said, adding: "Buy low, sell high really is the best investment strategy. Everybody knows this, but - if I'm trying to overthink this - I'm probably selling when it's already dropped... and I'm probably getting back in when it feels better, which means a high price."

Schaeffer, who is a certified financial planner, said the trick is to think of your Thrift Savings Plan funds as long-term money, even if you're nearing retirement.

"Even if I were retiring today," she said, "I'm likely - if I'm retiring from the federal government - to be in my late fifties or early sixties. If I'm reasonably healthy, I might have decades of life expectancy.

"My Thrift Plan is my really cool money: don't want to spend it first, because to spend Thrift money triggers a tax. By spending other money, I get to let this money grow even further.

"So Thrift money, even for people who are retiring tomorrow, is long-term money."

As such, Schaeffer said, investors need to take the long view when crises such as the current impasse over the debt negotiations shake the world's financial markets.

"I would say that most people looking at their Thrift Savings Plan just have to take a deep, cleansing breath here," Schaeffer advised.

She said investors should tell themselves, "I may not like what's going on, I may not like this indecision, but my Thrift Plan is long-term money and this is a short-term, somewhat embarrassing spectacle going on, and I really don't need to be reallocating."

As for the G Fund, from which the government borrows money, Schaeffer stressed that it will not be hurt by the U.S. debt crisis.

It is true that the U.S. government has been borrowing from the G Fund during the last few weeks in order to avoid defaulting on its obligations. However, federal law requires the government to ultimately credit the Plan with all of the interest that was foregone by the temporary suspension in the issuance of interest-bearing Treasury securities to the G Fund.

This is known as the "G Fund rule." As For Your Benefit co-host Tammy Flanagan has written, the G Fund of the TSP cannot, by law, "suffer any reduction in assets or loss of interest income as a result of the actions taken by the Secretary of the Treasury" under these circumstances.

Email us or call the show live at (202) 465-3080 to have your questions answered by the experts.