Winning the Lottery is Not a Retirement Plan

By on February 10, 2010 6:53 AM in Retirement with 0 Comments
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Updated: June 11, 2018 10:16 AM

This is a multi-part series on tips, tricks, and strategies for managing your TSP in uncertain times.

You may have seen the e-trade commercials on television with the talking baby sitting in a high chair. The latest version has “Frank” scraping a lottery ticket while the baby berates him for even considering that this is his retirement meal ticket.

We can make fun of Frank for this illogical plan, yet when asked about their retirement plans, most Americans can’t answer with a plan that’s much better. For federal employees in the FERS system, the Thrift Savings Plan is intended to provide 1/3 of your retirement income. So, how do you go about creating a plan for your TSP that won’t leave you scratching lottery tickets as a last resort?

After saving (see Allocating Your TSP in Volatile Markets), the next important thing you must do is have a strategy or investment plan. Buy and hold over the long-term is one strategy, but there are a few things you need to determine about yourself and your penchant for risk before you use this as your default.

What is long term? If you’re thinking 10 years, you need to look at the average returns in each of the TSP funds over the past 10 years. The C, S and I Funds all performed dismally with average annual returns over the 10 years being:

  • C Fund (.94%) – yes, the parentheses mean negative
  • S Fund  1.69%
  • I Fund   1.1%

Two bear market corrections during this 10 years certainly took their toll, but looking back 15 or 20 years when we include the roaring ‘90’s, you come up with a 10.33% per year average in the C Fund over 15 years and 10.09% over 20 years. Compare these numbers to the F Fund return over the same time periods where the 15-year average is 7.03% and the 20-year average is 7.15%.

A lot of risk and volatility went into earning the 10.09% return in the C Fund compared to plugging along at 7.15% in the F Fund. The 3% higher return over time would, however, have a significant impact in the value of your TSP. Which brings us to the point of this planning exercise.

Would you have been able to stay invested through the entire 20 years to get the 10.09% average return? Or would the emotion of it all have gotten to you when you saw the value of your account drop 50% as it did from November 2007 to February 2009?

Most investors cannot take this kind of loss emotionally and end up moving out of the C Fund as it nears the bottom and waiting until it’s regained a significant portion of the loss before moving back in.

That’s not so much a plan as an investment roller coaster based on emotion not logic. But who ever said investing was logical? And how easy is it to be logical in the throes of a bear market when your portfolio is being decimated? These are the questions you need to ask yourself in determining whether a buy and hold strategy is the right plan for you.

During the go-go years of the 1990’s and the secular bull market, buy and hold worked perfectly because the market was moving in a general direction for your benefit – UP! It’s pretty easy to stay invested when the average annual return from 1988-1999 was 19.31% in the C Fund.

But as the market cycled to a secular bear market (beginning in 2000), it’s tougher to hang in there with that buy and hold strategy. So the key is paying attention, getting as much information as you can from good sources on the economy and overall direction of the markets, and creating and implementing a plan that fits your tolerance for risk, timeframe, and overall retirement goals.

Then, you can enjoy the occasional lottery ticket as a luxury—not a retirement plan!

Securities offered through Cabot Lodge Securities LLC New York, NY 10281-- Member FINRA and SIPC. Advisory services offered through CL Wealth Management LLC-- SEC registered. Retirement Planning Strategies is not controlled by or a subsidiary of Cabot Lodge Securities LLC or CL Wealth Management LLC.

© 2020 Ann Vanderslice. All rights reserved. This article may not be reproduced without express written consent from Ann Vanderslice.


About the Author

From her office on The Denver Federal Center, Ann Vanderslice has been working with federal employees to help them achieve retirement success since 2002. She is considered one of the foremost authorities on federal benefits in the country. She is a nationally recognized author and speaker on topics of interest to federal employees. Contact Ann to learn more about the federal benefits programs Ann presents for federal agencies.