I am frequently asked these questions: “Do I have enough in my TSP account?” or, “Do I have enough to retire?”
I get these questions all the time and understandably so. Everyone wants to know where they stand, but interestingly enough, I hear the same concern from those with $100k in their TSP accounts as well as from those with $2 million, and what makes it so difficult is that for some, $100k is enough but for others, $2 million may not make it through retirement.
What makes this question so hard to answer is that everyone’s retirement plans, goals, and needs are very different. Some people have no consumer debt, no mortgage, and all their expenses are covered by their pension and Social Security. They really don’t need much, if any, from their TSP account in retirement other than fun money. Others may still be paying off their mortgage or may have higher lifestyle goals in retirement.
Everyone has a different idea for what an ideal retirement looks like, but the tricky part is knowing if your finances can support your choices.
The 4% Rule
Many people have been using the 4% rule to give them a place to start. For those that haven’t heard about this rule, it basically says that you can conservatively withdraw 4% of your retirement savings every year and not have to worry about running out of money. So for someone retiring with $400,000, 4% would be $16,000/year or about $1,333 per month.
They have even tested the 4% rule for retirees that lived through all of the market crashes in the last 2 decades and it has still worked great.
That being said, not everyone can afford to only withdraw 4% of their TSP every year, but the good news is that the 4% rule is very conservative and many people can withdraw more and still not run out of money.
For example, a popular investment allocation for retirees (note: just because it is popular doesn’t mean it is right for you, but it may be) is to invest in 60% stocks and 40% bonds, or in TSP language, 60% in C,S, and I funds and 40% in the F and G fund. The long-term return of this allocation is between 7%-8%, so technically, if you earned 7% every year you could withdraw that same amount without touching your principle.
For example, let’s say you retire with $400,000 in your TSP and you earn 7% per year. That means that if you withdraw $28,000 (7% of $400,000) every year, you’d still have your initial $400,000 at the end of retirement.
The problem though is that real life is never that simple. A 60/40 (60% stocks and 40% bonds) portfolio may have an average return of 7%-8%, but one year it may be 2% and the next year 14%. If someone was to withdraw 7% in a year that only made 2%, they may be tapping into some of their original investment which then would not be around to grow the following year. Over time, this could seriously deplete your retirement savings depending on what the market does in years to come.
As you can see, this is why it becomes so difficult to answer the question of “do I have enough?” because often, it simply depends. It depends on your needs, the market, interest rates, tax rates, and much more.
This is why the 4% rule has become popular. It is simple and conservative with a solid margin of error, and this is the type of strategy that makes sense for most feds.
Now, I don’t mean that everyone should use the 4% rule specifically. I simply mean that everyone needs to find a strategy that makes sense for them and at the same time is simple, conservative, with a good margin of error. This way you will be prepared to adjust as changes and curveballs come your way.
And just like anything else, the sooner you start, the easier it is to be prepared. This is why it is so important to start planning as early as possible in your career so that you can make all the necessary adjustments as you go. It is much more painful and difficult to make a measurable difference in the last 2 years before retirement. If you haven’t already, start now and you will thank yourself over and over again.
