Most federal employees focus on how much they’ve saved for retirement. Far fewer consider how market performance unfolds after they begin withdrawals, and that distinction can have a lasting impact.
Sequence of returns risk is the danger that poor market performance early in retirement can significantly and permanently reduce your portfolio’s longevity, even if long-term average returns look solid on paper. The reason is simple but powerful: withdrawing from a declining portfolio forces you to sell more shares at lower prices to generate the same income. Those shares are no longer there to benefit from a market recovery, creating a compounding effect that can be difficult to overcome.
The TSP’s Built-In Limitation
For federal employees, this risk is amplified by a unique feature of the Thrift Savings Plan.
Unlike many private-sector 401(k) plans, the TSP does not allow you to choose which funds your withdrawals come from. All distributions, whether monthly payments or installments, are taken proportionally across your current allocation.
So if your portfolio is 70% in the C Fund and 30% in the G Fund, every withdrawal follows that same 70/30 split, regardless of market conditions. You can’t shift withdrawals to the G Fund during a downturn while giving your stock investments time to recover. That lack of flexibility makes pre-retirement planning especially important.
The Advantage Federal Employees Have
Despite this limitation, federal employees are actually in a strong position to manage sequence of returns risk; if they plan for it.
The FERS pension provides a reliable, guaranteed income stream from day one of retirement. When combined with Social Security, many retirees can cover a significant portion of their essential expenses without immediately tapping their TSP.
That flexibility can be critical during a market downturn. The less you need to withdraw early in retirement, the more time your portfolio has to recover.
Strategies to Consider
Because you can’t control which TSP funds withdrawals come from, your primary lever is your allocation leading up to retirement.
Gradually increasing your allocation to the G Fund in the final three to five years before retiring can help create a buffer. Even though withdrawals remain proportional, a higher G Fund balance means less exposure to selling equities at depressed prices during a downturn.
Another effective approach is delaying TSP withdrawals altogether in the early years of retirement. Relying first on your pension, Social Security, or other savings can give your investments additional time to rebound before you begin drawing from them.
The Bottom Line
Sequence of returns risk is one of the most overlooked threats to an otherwise well-prepared retirement.
For federal employees, the combination of market timing and the TSP’s pro-rata withdrawal rules adds an extra layer of complexity. Without a thoughtful strategy, even a strong savings balance can be undermined.
Reviewing your plan with a Federal Retirement Consultant (FRC®) can help ensure your retirement income strategy is built to withstand this risk before it becomes a problem.
