Most federal employees focus on how much they’ve saved for retirement. Fewer think about the order in which markets perform once they start drawing from those savings, and that oversight can be costly.
Sequence of returns risk is the danger that a stretch of poor market performance early in retirement can permanently damage your financial picture, even if long-term average returns look perfectly acceptable on paper. The math is unforgiving: when you’re withdrawing money from a declining portfolio, you’re selling more shares at depressed prices to meet the same income need. Those shares aren’t there to participate in the recovery. The damage compounds in a way that’s difficult to reverse.
The TSP Pro-Rata Problem
For federal employees, this risk comes with an added wrinkle that’s unique to the Thrift Savings Plan. Unlike most private sector 401(k) plans, the TSP does not allow you to direct withdrawals from a specific fund. Whether you’re taking monthly payments or installment distributions, every withdrawal is drawn proportionally from all of your funds based on your current allocation.
That means if you’re 70% invested in the C Fund and 30% in the G Fund, every dollar you withdraw comes out 70/30, regardless of what the market is doing. You can’t simply say “pull from the G Fund this year while my stock funds recover.” That flexibility doesn’t exist in the TSP, which makes proactive planning before retirement all the more important.
The Advantage Federal Employees Already Have
Here’s the good news: federal employees are actually better positioned than most Americans to manage sequence of returns risk if they plan around it intentionally.
Your FERS pension provides a predictable, guaranteed income stream that covers a meaningful portion of your monthly expenses from day one of retirement. Combined with Social Security, many federal retirees can cover their basic needs without touching their TSP at all in the early years, or at least significantly reduce how much they need to withdraw. That breathing room is enormously valuable when markets are down.
Strategies Worth Considering
Because you can’t pick which TSP fund your withdrawals come from, the best lever you have is your overall allocation heading into retirement. Gradually shifting a larger portion of your balance into the G Fund in the three to five years before you retire creates a natural buffer. In a down market, your withdrawals are still pulling proportionally, but a heavier G Fund weighting means less is coming from your equity funds at the worst possible time.
Delaying TSP withdrawals in early retirement by leaning on your pension, Social Security, or other savings first is another way to give your equity funds time to recover before you need them.
Sequence of returns risk is one of the most under-appreciated threats to a secure federal retirement. The combination of the TSP’s pro-rata withdrawal rules and the timing of market downturns can undermine even a well-funded retirement if the plan isn’t structured carefully. A review with a Federal Retirement Consultant (FRC®) is one of the most practical steps federal employees can take to make sure their strategy accounts for this risk before it becomes a problem.
