TSP Losses and Solutions: Protecting Your Savings with Fixed Index Annuities

Many retirees must realize that recovering from a 20% market loss requires a 25% gain to break even.

Early losses can be devastating for military retirees withdrawing from their TSPs. This article explains why TSP losses occur, the hidden risks, and how to protect your savings with safer alternatives like Fixed Index Annuities.

Understanding TSP Losses

Why Do TSP Balances Drop?

The Thrift Savings Plan (TSP) is a popular retirement savings vehicle for military service members and federal employees, offering low-cost funds and tax advantages. However, many retirees experience the unsettling reality of seeing their TSP balances shrink during periods of market volatility. This is especially concerning for those nearing or in retirement, as these losses can jeopardize long-term financial security.

Market Volatility and TSP Funds

TSP losses occur primarily due to fluctuations in the financial markets. Funds like the C Fund (tracking the S&P 500), the S Fund (tracking small-cap stocks), and the I Fund (tracking international stocks) are highly exposed to market ups and downs. While these funds offer growth potential, they come with significant risks, particularly during economic downturns.

Even the G Fund, often viewed as the safest TSP option, carries risks. While it doesn’t lose principal due to market drops, its returns usually fail to outpace inflation, meaning the purchasing power of your money declines over time. Over decades, this slow erosion of value can add up, leaving retirees with far less spending power than expected.

For example, if inflation averages 3% per year and the G Fund returns 2%, the real return is effectively negative. Many retirees mistakenly assume their money is “safe” without considering how inflation steadily undermines their savings.

To make matters worse, market volatility combined with insufficient growth makes it difficult for retirees to plan for predictable income in retirement. Unlike pensions, which provide steady monthly income, TSP balances are subject to unpredictable swings. This creates a level of uncertainty that is incompatible with long-term financial confidence.

The Sequence of Returns Risk

An often-overlooked danger for retirees is the sequence of returns risk. This refers to the impact that the timing of market gains and losses has on retirement savings, especially when you begin withdrawing funds.

For example:

• If market losses occur early in retirement, withdrawals and declining asset values can deplete your account far more rapidly than expected.
• Even if the average annual returns over time appear positive, early losses have a compounding negative effect that can significantly reduce the longevity of your savings.

Consider this:

• A retiree with $1 million in their TSP withdrawing $50,000 yearly would fare very differently depending on market conditions. If they experience a -10% return in Year 1 and a -5% return in Year 2, their balance could drop to $782,750.
• In contrast, with positive returns early on, their balance might remain above $1 million for several years.

This risk can be catastrophic for military retirees, as withdrawals amplify losses during market declines. Retirees may find themselves out of money far earlier than anticipated without an effective strategy.

To mitigate this risk, it is important to explore retirement strategies that provide income stability and principal protection. Safer alternatives to the TSP, such as Fixed Index Annuities, come into play here.

Current Economic Landscape

In today’s economic environment, factors such as inflation, global instability, rising interest rates, and slowing market growth add further uncertainty. The post-pandemic recovery remains uneven, and geopolitical risks continue to weigh on global markets. Military retirees relying solely on the TSP’s traditional fund structure may face increased exposure to risks beyond their control.

Furthermore, tax policy changes and rising healthcare costs introduce additional challenges. Many retirees need to pay more attention to how these factors can erode their savings, creating an urgent need for growth and protection solutions.

The challenge is clear: retirees need a strategy to protect their savings and ensure a steady income, regardless of external economic forces.

The Need for Alternatives

Understanding these risks is the first step to protecting your hard-earned savings. While the TSP can be a valuable tool, it is not the only option available. Exploring alternatives such as Fixed Index Annuities (FIAs) can give retirees the security and flexibility they need for a confident financial future.

FIAs combine principal protection, guaranteed lifetime income, and growth potential—key features that address the limitations of the TSP. FIAs are emerging as a critical solution for military retirees navigating an uncertain economy by reducing market risk and ensuring a predictable income stream.

Fixed Index Annuities: A Safer Alternative

What Are Fixed Index Annuities (FIAs)?

If you’re looking for a safer way to grow your savings, FIAs might be the answer. Fixed Index Annuities (FIAs) are financial products that provide growth potential while protecting your principal from market losses.

Unlike traditional investments tied directly to market performance, FIAs link your returns to stock market indices, like the S&P 500, while ensuring a guaranteed floor rate of 0%. This means you never lose money due to market downturns.

Key Benefits of FIAs for Military Retirees

1. Principal Protection
   • Your savings are shielded from market volatility, ensuring you never lose the money you’ve worked hard to save.
2. Guaranteed Lifetime Income
   • FIAs can provide a consistent, guaranteed income stream for life, similar to your military pension, but without the risk of market fluctuations.
3. Growth Potential Without the Risk
   • FIAs allow you to participate in market gains up to a capped limit while eliminating the risk of losses. This makes them an ideal balance between safety and growth.
4. Tax Advantages
   • FIAs grow tax-deferred, meaning you only pay taxes on your earnings once you withdraw them, potentially reducing your overall tax burden in retirement.
5. Flexibility
   • Unlike the TSP, FIAs offer options for structured withdrawals or emergency access to funds, providing greater control over your retirement income.

Additionally, FIAs can be tailored to individual needs, providing options for joint lifetime income, long-term care benefits, and legacy planning. These features ensure that military retirees can protect their loved ones while controlling their financial future.

Why FIAs Are a Strong TSP Alternative

For military retirees concerned about TSP losses, FIAs provide an effective solution:

• Eliminate market risk: With FIAs, your savings are protected even during economic downturns.
• Stable income stream: FIAs guarantee lifetime income, ensuring you won’t outlive your savings.
• Peace of mind: Knowing your savings are protected allows you to plan for retirement confidently.

Let’s look at a real-life example to see how this works in practice.

Real-Life Scenario: How FIAs Protect Your Savings

Imagine a retiree who rolls over $500,000 from their TSP into an FIA:

• Year 1: The market drops 15%, but their FIA balance remains at $500,000 due to principal protection.
• Year 2: The market rebounds, and the retiree earns a 5% indexed gain, growing their balance to $525,000.
• Outcome: Unlike the TSP, where losses would have significantly reduced the account, the FIA ensures no losses while still capturing growth.

By transferring TSP funds into an FIA, retirees can avoid the dangers of market volatility and sequence of returns risk, creating a secure and predictable retirement income strategy.

The TSP Rollover Decision at Retirement

At military retirement, service members face a critical decision: how to best manage their TSP savings. While many default to leaving their funds in the TSP, this often means exposure to market risk and limited flexibility.

Exploring alternatives like Fixed Index Annuities (FIAs) during this window can help secure lifetime income and protect your principal.

Why This Matters

The military retirement transition is a key opportunity to opt for financial strategies that align with your goals. By rolling over your TSP into an FIA, you can:

• Lock in principal protection and eliminate market losses.
• Create a private pension that complements your military retirement pay.
• Ensure a predictable, tax-advantaged income stream for life.

To explore TSP rollover options in more detail, watch this case study.

Take Control of Your Retirement Future

The Thrift Savings Plan is a valuable retirement tool, but its exposure to market volatility and risk of sequence of returns can create uncertainty for military retirees. By exploring safer alternatives like Fixed Index Annuities, you can protect your savings, eliminate risk, and secure a guaranteed income stream for life. Conduct a thorough thrift savings plan evaluation to understand the potential risks and rewards associated with this retirement tool.

Don’t leave your retirement savings to chance. Learn more about how the War Chest Strategy can support your retirement goals and provide financial peace of mind. Or schedule a free consultation to discuss your situation in more detail.