Publisher's Perspective

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There’s an old saying that the only two things that motivate investors are greed and fear. That’s certainly cynical, but like many old sayings there’s a germ of truth in it.

Is the same true of retirement decision-making? There’s some evidence to suggest that it is.


Take the Thrift Savings Plan, where the history of emotion-driven investment decisions, to the account holder’s detriment, was the main reason the program created the lifecycle L funds. Those funds are designed to ride out ups and downs of investment markets—especially the downs—by self-adjusting to balances that over time have proven to have the best mix of risk and potential returns for a given investment period.

For example, in the market downturn of 2008-early 2009, TSP investors moved some $22 billion—out of a program with about $200 billion on investment at the time—from stock-based funds to the never-losing government securities G fund. That money was not in stocks for the start of a significant rebound in March 2009 and that lasted a full decade.

During that time, they gradually moved money on a net basis back out of the G fund and into the stock funds but it wasn’t until 2015 that the overall percentage of investments in the G fund returned to its pre-downturn level.

Then just early in 2020 as stocks dropped steeply in February and March as the pandemic hit, again there was a flight to the safety of the G fund, with $24 billion moved into it out of a total amount on investment at the time of about $560 billion. Again, stocks quickly changed direction but investors were slower to follow.

That’s selling low and buying high, about the worst form of investor behavior.

That’s an unfortunate record of decisions with retirement savings but possibly more serious are the implications for another key issue, the decision on when to retire.

Almost every long-time federal employee has stories of colleagues who retired on short notice for some emotional reason. Maybe it was the denial of a promotion, the arrival of a new know-nothing political appointee, a change of direction in policy or any of a number of other possibilities. With nearly one in six federal employees eligible to retire at any time, it happens.


That’s anecdotal, but a recent study by the Center for Retirement Research documented how it can happen. The goal of the study was to determine how people reacted to information about Social Security could affect their decisions regarding when to draw that benefit.

The information involved the annual reports projecting when the Social Security trust fund will be depleted, which now is projected to happen in about 13 years. After that point, unless the law is changed by then, there will be only enough money coming in from Social Security taxes to pay about 75 percent of the benefits that have been promised to what will be the beneficiary population at the time.

It gauged responses to stories providing that information that were identical except for the headline and the first line of the story. For the control group, it was Social Security Faces a Long-Term Financing Shortfall.

For three others, it was The Social Security Trust Fund Will Deplete its Reserves in 2034; Social Security Fund Headed toward Insolvency in 2034, Trustees Find; and Revenues Projected to Cover Only 75 Percent of Scheduled Social Security Benefits After 2034.

It found that in contrast to the control group, those in the three other groups then stated an intent to begin drawing Social Security benefits about a year earlier, which would cause a reduction in their benefit amounts—although less than a tenth of them meanwhile reacted by saying they intended to start saving more for retirement. “If future beneficiaries follow through with their intention to claim a year earlier, they will lock in lower monthly benefits without increasing their saving to make up the gap,” it said.

It also found that after reading the story—which clearly stated that the program could provide 75 percent of promised benefits long-run even without changes—almost a fifth said they expected to receive either nothing or no more than 20 percent of their promised benefits long-run. Another quarter said they expected to receive only between 20 and 60 percent.

That first reaction looks an awful lot like greed and the second like fear. Watch out for them when it’s time for you to make important retirement decisions.


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