Your federal benefits make you different — which means your investment strategy should be different too. One of the biggest benefits that sets federal employees apart from the average American is the FERS pension. Most Americans don’t have one, and that changes everything when it comes to how you should invest your Thrift Savings Plan (TSP).
If you follow investment advice made for the average American, you’re likely to get average results. But as a federal employee with a pension and other benefits, you have the opportunity to design a retirement plan that’s more stable, more strategic, and more tailored to you.
Let’s break down what that really means — and how to make the most of your TSP when you have a pension.
How a Pension Changes the Equation
Imagine two retirees:
- The Average American (Non-Fed):
- $1,000,000 saved in investments
- $50,000 in Social Security income
- $100,000 in annual spending needs
- Needs to withdraw $50,000 per year from investments
- The Federal Employee (Fed):
- $1,000,000 in TSP
- $50,000 in Social Security
- $30,000 pension
- $100,000 in annual spending needs
- Needs to withdraw only $20,000 per year from TSP
Both have the same amount saved, but the Fed’s pension and Social Security cover a much larger portion of their expenses. As a result, the federal employee needs to pull less from their investments every year — meaning their portfolio doesn’t have to work as hard.
This is a massive difference. The pension acts as a steady, reliable source of income — something that behaves a lot like bonds in an investment portfolio.
Your Pension Acts Like a Bond
In the world of investing, there are two primary asset types: stocks and bonds.
- Stocks (C, S, and I Funds): Higher risk, higher potential growth.
- Bonds (G and F Funds): Lower risk, steady but smaller returns.
Your FERS pension and Social Security are both consistent, predictable income sources. In other words, they act like bonds — they provide stability and reduce the amount of “safe” investments you need elsewhere.
That means for many feds, it can make sense to invest more aggressively in the TSP than the average American, because you already have a built-in conservative foundation in your pension.
The Two-Bucket Strategy
At our firm, we like to simplify investing into two categories — short-term and long-term buckets.
- Short-term bucket: G and F Funds (conservative, stable)
- Long-term bucket: C, S, and I Funds (growth-oriented)
The short-term bucket should hold enough to cover your near-term spending needs — typically about five to eight years’ worth of withdrawals.
Let’s use our earlier example. If you expect to withdraw about $20,000 a year from your TSP in retirement, eight years of withdrawals equals $160,000. That means roughly $160,000 of your TSP could stay in safer investments like the G and F Funds. The rest could be invested in long-term, growth-oriented funds like the C, S, or I Funds.
This approach gives you flexibility during market downturns. If the stock market drops, you can pull income from your short-term bucket instead of selling your long-term investments at a loss. Once the market recovers, you can replenish your short-term bucket by selling from your long-term growth funds.
Why Not Keep It All in Safer Funds?
It’s tempting to think: “Why not just keep everything safe? I don’t want to lose money.”
But here’s the problem: Retirement could last 30 years or more. Over that time, inflation erodes the value of your savings. Safe investments like the G Fund may not keep up with inflation, which means your purchasing power could shrink dramatically over time.
That’s why you need both safety and growth — short-term stability paired with long-term growth potential.
TSP’s Proportional Withdrawal Rule
One challenge specific to the TSP is that when you take withdrawals, they come proportionally from all the funds you’re invested in.
For example, if you have 70% in the C Fund and 30% in the G Fund, each withdrawal will pull 70% from C and 30% from G — you can’t choose which fund to sell from.
This makes it harder to follow a two-bucket strategy directly inside TSP.
Many retirees solve this by rolling their TSP into an IRA when they retire. IRAs give you full control over which investments you sell from and when. There are pros and cons to each option, so it’s important to review with a financial planner before making any moves.
Maximizing Your TSP While Working
Before retirement, one of the smartest things you can do is take full advantage of the TSP match. If you contribute at least 5% of your pay, the federal government matches it with another 5%. That’s a 100% return on your money, instantly.
Beyond that, try to contribute as much as your budget allows. The 2025 contribution limit is around $23,500 per year, plus an additional $7,500 catch-up contribution if you’re age 50 or older. Even if you can’t max it out, staying consistent makes a huge difference over time. Please note: there’s also an additional contribution available for people between the ages of 60-63.
Traditional vs. Roth TSP
Federal employees can choose between Traditional and Roth TSP contributions:
- Traditional TSP: You get a tax break now, but pay taxes later when you withdraw.
- Roth TSP: You pay taxes now, but withdrawals in retirement are tax-free.
Generally, if you’re early in your career and expect to be in a higher tax bracket later, the Roth TSP can be a powerful tool. If you’re closer to retirement and in your peak earning years, the Traditional TSP might make more sense to reduce your current tax bill.
Bringing It All Together
Your FERS pension gives you a unique advantage — a guaranteed stream of income that most retirees can only dream of. But that advantage only pays off if you invest the rest of your money strategically.
Think of your pension and Social Security as your foundation — steady and secure. Then use your TSP as your growth engine, designed to support your lifestyle for decades.
By understanding how your pension fits into your investment plan, you can invest smarter, worry less, and enjoy the retirement you’ve worked so hard for.
