The Ultimate Life Question
This is a question that plagues many a federal retiree and veteran. Many veterans have worked for decades in service to their country, retired, then obtained employment as civilian contractors. They are earning a salary and their military pension. Many of these veterans are also contributing like clockwork to their Thrift Savings Plans (TSPs). As they hit their sixties and they realize how close they are to the day they will want to stop working, they start looking at their TSPs a bit more closely.
Typically, the Thrift Savings Plans are invested in indexes that have shown high average rates of return. The S&P 500 is holding steady at an annual average rate of return of 6.51%. These veterans look at their portfolios within their TSPs and think, “OK, 6.5% rate of return per year on average looks pretty good. My portfolio should be well into the 6 figures, inching towards 7 figures by the time I retire. If I retire at 70, holding at this rate of return, I should have just about a million in that account. My financial adviser says I can withdraw 4% per year —. $40,000 per year for the rest of my life. That’s not a ton of money, but it should be enough to live on.”
But each person has to ask themselves, “How much do I need to retire?”
Sequence of Returns Risk
When people look at their TSPs this way, they fail to take into account the sequence of returns that have led the S&P 500 to average this rate. This rate of return also takes into account market corrections, such as was the case in 2008, when market returns averaged a 40% drop in value. It is truly impossible to predict when this will happen again, but it is also the height of naiveté to assume that it could not happen just as we plan to retire.
Consider the cases of two military retirees who follow the exact strategy that I listed above. They each have close to $1,000,000 saved up in their TSPs. They liquidate 4% of these TSP balances per year. One starts taking distributions with market returns that start at -23% and later rebound and increase. His TSP is depleted by the time he turns 78. The other starts taking distributions with market returns that start off at 26% and then start to drop. His TSP lasts him past retirement and leaves a healthy legacy.
Everyone hopes that they will have the latter retiree’s fate, but it is impossible to guarantee that in the securities market. Both retirees used the exact same accumulation strategy. Both had the same amount going into retirement. One simply had the misfortune of retiring during a bear market. The other did not. It was entirely bad luck that led the former to have to get another job in his late seventies just to make ends meet.
This story is a cautionary tale. It is not enough to just accumulate value inside your retirement account. To protect against the fate of the former retiree, you need to have a distribution mechanism in place. At US Vet Wealth, we can help you ensure that your TSP will never run out, regardless of market behavior.
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