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By: FEDweek StaffAs you approach retirement, one of the most important financial questions federal employees face is: Should my TSP (Thrift Savings Plan) investments change when I retire?
It’s a fair question—and a critical one. Throughout your federal career, your TSP likely served as a powerful engine for building retirement wealth, particularly if you were invested in growth-oriented funds like the C, S, and I funds. But now that you’re about to begin withdrawing from your TSP instead of contributing to it, the rules of the game change. The risk tolerance, strategies, and purpose of your TSP investments need to shift accordingly.
Let’s explore why—and how—you might want to adjust your TSP investments at retirement.
The Risk of Staying Fully Aggressive
During your working years, the C, S, and I funds (which track large-cap U.S. stocks, small/mid-cap U.S. stocks, and international stocks, respectively) may have delivered strong returns—especially when markets were thriving. In fact, since their inception, these funds have had impressive average annual returns:
● C Fund: ~10.88%
● S Fund: ~8.87%
● I Fund: ~5.09%
These kinds of returns are great if you have time. But what if the market crashes right when you need to start withdrawing funds for retirement income?
Let’s say you’re retired and fully invested in the C Fund. If the market drops by 30%, and you’re forced to withdraw money to pay for your living expenses, you’re effectively locking in that loss.
Worse yet, you now need even higher gains just to get back to where you started. This is known as sequence of returns risk, and it can devastate a retirement portfolio.
The Solution: The Bucket Strategy
One effective way to protect yourself from this kind of scenario is by using a bucket strategy—a method of dividing your TSP into segments, or “buckets,” based on your time horizon and risk tolerance.
Here’s how it typically works:
Bucket 1: Short-Term (4-8 Years)
This is money you will likely need in the near future. It should be kept in safe, stable investments such as the G Fund or F Fund. These funds don’t offer the same high returns as the stock funds, but they also won’t tank when the market drops.
Bucket 2: Long-Term (8+ Years)
This is the portion of your portfolio that you won’t need to touch for several years. This money can remain in growth-oriented investments like the C, S, and I Funds, where it has time to recover from market dips and grow over the long run.
The Problem: TSP’s Withdrawal Limitations
Now, here’s the twist that often surprises retirees: TSP withdrawals come out proportionally from all your investments. That means if you have 50% in the G Fund and 50% in the C Fund, and you request a withdrawal, the TSP will take 50% of the withdrawal from each fund. You can’t simply withdraw only from your G Fund during down markets.
This proportional withdrawal rule can disrupt your carefully designed bucket strategy.
The Workaround: Manual Rebalancing
To get around this limitation, you’ll need to manually rebalance your TSP account after each withdrawal. Here’s how:
1. Let’s say you have $50,000 in your short-term bucket (G Fund) and $50,000 in your long-term bucket (C Fund).
2. You request a $10,000 withdrawal from TSP. TSP sends you $5,000 from each fund (proportional).
3. Immediately after, you transfer $5,000 from your G Fund back to your C Fund.
4. Now, your long-term bucket is effectively untouched, and your short-term bucket has absorbed the withdrawal.
Yes, this adds an extra administrative step, but it allows you to continue managing your TSP with the bucket strategy in mind, despite TSP’s rules.
IRA Alternative: More Flexibility, More Control
Some retirees choose to roll their TSP funds into an IRA after retirement for one key reason: flexibility.
In an IRA, you can control exactly which investment your withdrawals come from. You can withdraw entirely from your conservative funds during a market downturn without touching your long-term investments.
Of course, rolling over to an IRA comes with pros and cons, including potential differences in fees, investment options, and protections. Still, if control over withdrawal sources is critical to your strategy, an IRA may be worth considering.
A Balanced Retirement Allocation
So what’s a smart investment mix for retirement?
Many financial professionals suggest a balanced allocation, often using the classic 60/40 split—60% aggressive (C, S, I) and 40% conservative (G, F). This balance helps protect you during downturns while still offering long-term growth potential.
That said, there is no one-size-fits-all allocation. Your strategy should reflect your:
● Risk tolerance
● Income needs
● Life expectancy
● Other retirement income (FERS pension, Social Security, etc.)
Final Thoughts: It’s Time to Shift Your Strategy
The bottom line is this: Retirement changes everything. You’re no longer in the accumulation phase—you’re in the distribution phase. That means your investment approach should shift from growing your money to preserving it and making it last.
Blindly keeping your TSP fully invested in aggressive funds as you approach or enter retirement is risky. While the C, S, and I funds can still play a role in your strategy, you’ll also want the safety and stability of the G and F funds to provide short-term income and protect you during market volatility.
By using the bucket strategy, rebalancing carefully, and potentially exploring an IRA rollover, you can take greater control over your TSP in retirement and give yourself the peace of mind you’ve earned after a career of federal service.
Remember: Your TSP should serve you in retirement—not the other way around. Plan wisely, invest smartly, and enjoy the retirement you’ve worked hard to achieve.
Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at Haws Federal Advisors.
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