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Many articles, websites, and newsletters focus their efforts on helping you learn more about how to grow your TSP prior to utilizing it in retirement to supplement your fixed income. Many of these resources provide a plethora of knowledge to help you understand the different TSP funds, to track their performance, and even monitor your TSP account to quickly communicate market downturnsā¦ but the way these resources are often interpreted, it leaves readers with the impression that if they can āhit their numberā prior to retirement then they will simply have enough money to ācoastā through their golden years.
As a result, there are still far too many feds around the country that view retirement as the financial finish lineā¦ which couldnāt be farther from the truth.
While retirement may represent the āfinish lineā of the TSPās Accumulation Phase, it is simply the starting line for the āDistribution Phaseā of your life.
When we separate from services, there is no āportfolio auto-pilotā that we get to engage and far too many of the pre-retirees that we speak with are unaware of the fundamental differences between investing your TSP during your career (the āAccumulation Phaseā) and investing your TSP in retirement to generate the income needed to maintain your lifestyle (the āDistribution Phaseā). To learn more about the differences between these two phases, especially in respect to āSequence of Returns Riskā read the following:
In designing your very own Thrifty Spending Plan, theĀ often overlookedĀ key focus is on managing the pace of the withdrawals from your account through changing markets, interest rate environments, and through the changing financial needs of a 20-30 year long retirement.Ā
So, youāve made it out the door to retirement with your nest egg intact ā great! Now how do you know how much you can sustainably spend? How much money can you afford to enjoy? How much is too much?Ā
Well, there are 2 primary methodologies that attempt to answer that question ā Systematic Withdrawals and The Bucket Strategy. These two approaches both work to guide retirees on how much money they can afford to withdraw each year as well as providing insight as to where to pull it from.
This planning approach identifies a percentage of your portfolio to withdraw each year (often adjusting for inflation) and is commonly used because of its simplicity to understand, implement, and follow. In this approach you invest across a broad spectrum of assets and asset classes (for diversity) and then look to withdraw an amount each month proportionately from each underlying account. This is the school of thought upon which the (now considered outdated) ā4% Ruleā was built.
In years when the portfolio gains more than the 4% needed for income, the withdrawals came purely from earnings, leaving the principal completely intact to continue growing. Conversely, in times when the portfolioās return is less than 4%, this methodology is forced to spend down the account principal ā reducing the funds available to earn interest later in your retirement. In years where the portfolio has a negative return, those losses are compounded by your cash-flow needs, further reducing the principal left in your account to generate future income.Ā
Since this approach treats all of a retireeās broadly invested assets exactly alike, it requires regular rebalancing to maintain its diversity through varying market conditions.
Unfortunately, because the portfolio is viewed in aggregate (as a whole), this strategy causes many users a lot of anxiety and concern when the market experiences a sharp downturn or correction ā which makes it difficult to maintain a long-term āThrifty Spending Planā whenever the market doesnāt play nice. When this method was popularized, a 50/50 portfolio following the 4% rule had a 94% chance of success, whereas at todayās interest rates researchers say it only provides a 69% chance of success.
So, how can we design a spending plan that we, as emotional investors, are perhaps better equipped to stick to? Is there an alternate methodology that may allow retirees to sleep easier during times of market volatility?
In this approach, we look to segment your assets into different āBucketsā that are aligned to fund different periods of your retirement ā bringing a chronological consideration to when each asset class gets utilized.
Why can it be helpful to outline the order in which you plan to spend your assets? So that we can use that information to help us determine how much risk would be appropriate for each bucket based on how far in the future that particular segment of funds needs to be available to pay the bills.Ā
Generally, our short-term buckets are positioned to ensure the funds within are both safe and available, regardle