Retirement Distribution Strategies: Will the TSP Hold You Back in Retirement?

Austin Costello |

Your retirement savings represent years of hard work and diligent saving. But accumulating a sizeable nest egg is only half the battle. Now that you’ve transitioned from the “accumulation” to the “distribution” phase of life, there are a host of new considerations to make in order to maximize the impact of your investments:

  • Should you withdraw from your funds proportionately?
  • Which accounts should you take from first?
  • Does it make sense to draw from you or your spouse’s account?
  • Are there any tax strategies that could lower my lifetime tax liability?

These are only a few of the questions to consider, but one thing is clear. The way you manage your investments funds during retirement can significantly impact your financial security in your golden years.

For Federal Employees, the Thrift Savings Plan (TSP) serves as a cornerstone of retirement savings. However, when it comes to withdrawing funds during retirement, the TSP operates differently than many other investment accounts. Unlike investments held outside the TSP, where you can selectively sell specific assets or funds, the TSP does not allow you to choose which funds to withdraw from. Instead, it employs a proportional withdrawal method, taking funds from each investment option in your account.

While the proportional withdrawal method has its merits, it also poses challenges, especially during market downturns. During bear markets or periods of heightened volatility, selling investments across the board can inadvertently lock in losses, potentially eroding your retirement savings faster than anticipated. This lack of flexibility can be frustrating for retirees who prefer more control over their withdrawal strategies.

So, what can Federal Employees do to maximize their retirement savings and navigate these challenges effectively? Here are some distribution strategies to consider:

Diversification Beyond the TSP: While the TSP offers low-cost, diversified investment options, having additional retirement savings outside of the TSP can provide flexibility during retirement. By diversifying your retirement assets across different types of accounts, such as IRAs or taxable brokerage accounts, you gain the ability to choose which assets to sell during retirement, potentially avoiding selling investments at inopportune times.

Strategic Withdrawals: For Federal Employees with non-TSP retirement accounts, strategically withdrawing funds based on market conditions can be beneficial. During periods of market volatility or when certain asset classes are underperforming, prioritize withdrawals from funds in other categories to avoid locking in losses in the underperforming funds.

For our clients, we advocate for using a “bucket strategy” and having a few years’ worth of spending needs in an asset class that is non-volatile and very liquid. That way, if the market experiences a downturn, you can access these funds while you allow the rest of your portfolio to remain invested.

Tax-Efficient Withdrawals: Be mindful of the tax implications of your withdrawal decisions. Depending on your tax bracket and the type of retirement accounts you hold, certain withdrawal strategies may minimize your tax burden and maximize your after-tax income.

Depending on your situation, you may even want to consider converting some of your Traditional retirement savings to Roth. This strategy doesn’t work for everyone but has the potential to save you thousands of dollars in lifetime tax liability.

This introduces another limitation of the TSP. You cannot convert money from Traditional to Roth within the TSP itself, so if that strategy does make sense for you, the funds would have to be rolled into an IRA first.

Income Planning: Consider creating a retirement income plan that incorporates guaranteed income streams, such as Social Security, pensions (if applicable), and any other income. By understanding your retirement income needs, you can have a better understanding of exactly how much you’ll require from your portfolio so that you can invest accordingly.

Regular Portfolio Reviews: Stay proactive about monitoring your investment portfolio and adjusting your asset allocation as needed. Periodic portfolio reviews with your financial advisor can help ensure your investment mix aligns with your retirement goals, risk tolerance, and market conditions.

Emergency Fund: Maintain an emergency fund outside of your retirement accounts to cover unexpected expenses. Having readily accessible cash can prevent the need to dip into your retirement savings during market downturns or financial emergencies.

In conclusion, while the TSP offers Federal Employees a valuable retirement savings vehicle, understanding its limitations and complementing it with strategic distribution strategies is essential for maximizing retirement savings. By diversifying your retirement assets, strategically withdrawing funds, and staying proactive about your investment strategy, you can navigate market volatility and enjoy a financially secure retirement. Consulting with a qualified financial advisor can provide personalized guidance tailored to your unique financial situation and retirement goals.

Originally published on FEDweek.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.Investing involves risk including loss of principal. No strategy assures success or protects against loss. This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.