A Bucket of Coronavirus

Worries about the coronavirus have pushed the stock market into correction territory. Would a “bucket strategy” help retirees with funds in the TSP?

The coronavirus scare has roiled the worldwide markets, resulting in a drop in most major stock indices that put markets into “correction” territory. A correction is defined as a drop of at least 10%, and that occurred over the 7 trading days that ended on Friday, February 28th.

Of course, no one knows what the future holds and it is not out of the realm of possibility that, by the time you read this article (which was written on Saturday, February 29th), the market will have regained all, or most, of the ground it lost.

Many financial writers are calling the coronavirus scare a “black swan” event; that is, an unexpected event that further upsets volatile markets. The terrorist attacks of September 11, 2001 are an example of a black swan event that further exacerbated an already ailing stock market and drove us deeper into the first recession of the first decade of the 21st century.

The financial press is quick with suggestions on how to ride out the upcoming bear market (if indeed a bear market is in the cards). A bear market is defined as a drop of at least 20% in market indices.

One well-intentioned suggestion is to follow a “bucket strategy” in your withdrawals. In fact, MONEY ran an online article on February 28th suggesting that retirees follow such a strategy.

With a bucket strategy, you would have two or more separate “buckets” of funds from which you would make withdrawals.

The first bucket would be invested in safe (presumably lower yielding) investments. This is the source for your recurring monthly withdrawals for income during retirement. Ideally this bucket should have enough in it to last several years.

A second bucket would be invested in riskier (presumably higher yielding) investments which will not be needed for some time. As the first bucket became depleted, you would replenish it from this bucket. This strategy would allow you to leave your more volatile investments alone during a market downturn and would further allow time for those funds to recover their value.

You also could have more than two buckets. For example, you could set up a bucket for “now”, another one for “soon” and a third for “later.”

Utilizing a bucket strategy may be good advice for many retirees, but it will not work for federal retirees who have left their money in the Thrift Savings Plan.

You are not allowed to utilize a “bucket strategy” in withdrawing from the TSP. The TSP requires that withdrawals be taken proportionately between your TSP investments based on your account allocation.

Let’s say that I am withdrawing $2,000 each month and that my account is evenly allocated between the five basic funds. $400 of each withdrawal would come from the G Fund, $400 from the F Fund, $400 from the C Fund, $400 from the S Fund and $400 from the I Fund. I cannot utilize a bucket strategy if I leave my money in the TSP.

Although the changes in withdrawal rules that were implemented last year do away with the requirement that TSP withdrawals be proportional between traditional and Roth balances, there has been no change to the rule that withdrawals be proportional based on your account allocation. 

Those federal retirees who have rolled their TSP money into outside IRAs will have the ability to follow a bucket strategy if they wish to do so. As a general rule, Individual Retirement Arrangements have more flexible withdrawal options than does the Thrift Savings Plan.

Agencies can request to have John Grobe, or another of Federal Career Experts' qualified instructors, deliver a retirement or transition seminar to their employees. FCE instructors are not financial advisers and will not sell or recommend financial products to class participants. Agency Benefits Officers can contact John Grobe at johnfgrobe@comcast.net to discuss schedules and costs.

About the Author

John Grobe is President of Federal Career Experts, a firm that provides pre-retirement training and seminars to a wide variety of federal agencies. FCE’s instructors are all retired federal retirement specialists who educate class participants on the ins and outs of federal retirement and benefits; there is never an attempt to influence participants to invest a certain way, or to purchase any financial products. John and FCE specialize in retirement for special category employees, such as law enforcement officers.