As a Thrift Savings Plan investor approaching or in retirement, it is important that you adjust your
investment strategy to meet the changing needs you’ll expect your account to satisfy during the coming
years. And that strategy is probably not the one that served you well until now.
Early in your working years, when withdrawals for retirement income are likely to be 30, even 50, years
away, your primary investment goal should be maximizing the growth of your account value for the time
you are ready to retire. The potential for a high average annual rate of return is one of the most attractive
attributes of an early-stage investment strategy. The volatility of annual return amounts is not too
important, since it is likely that, with enough time, unusually bad investment years will be overcome by
subsequent, and more frequent, unusually good investment years. The farther you are from needing to
tap your account for income, the more you can focus on potential for return in developing your investment
If you deposit a sum of money in year one and leave it to grow for 20 or 30 years, the total return, or
average rate of return, during the period are all that matter. The sequence of annual investment return
numbers that produce that total or average rate don’t matter at all. As long as the average is the same,
any sequence of returns will produce the same ending balance. Starting with $100 and then earning 10
percent in the first year, followed by losing 10 percent in the second year, and then earning 20 percent in
the third year produces the same ending balance, $118.80, as losing 10 percent, earning 20 percent and
earning 10 percent. In either case, the returns result in an average annual rate of return of about 6
percent. Therefore, with 30 or 40 years to retire, the smart bet is to select the investment strategy with the
highest expected rate of return – everything in the S Fund, for example – without much regard for the
volatility of the annual returns that will be produced.
What is not often recognized is that as retirement – and the need for withdrawals – approaches, this
strategy must change. When withdrawals are taken from the account, the sequence of returns becomes
critically important to the end result.
Start with $100, earn 10 percent, withdraw $5, lose 10 percent, withdraw $5, and then earn 20 percent
and the ending account balance will be $107.40. But, start with $100, lose 10 percent, withdraw $5, earn
20 percent, withdraw $5 and then earn 10 percent and you’ll be left with only $106.70. Consider similar
scenarios with account balances of $100,000 or more and withdrawals of $5,000 or more, and varying
return sequences that last 20 years or more, and the differences in returns can be staggering.
The important thing to notice in these examples isn’t the specific dollar amounts, it’s that when you
consider total wealth – the amount you have and the amount you spend – taking withdrawals changes the
nature of the game. During retirement, the sequence of results produced by an investment strategy is at
least as important as the magnitude of the rate of return.
It is possible for two investors, both achieving the same average rate of return from their accounts and
taking the same series of withdrawals, to experience different results – one retiring comfortably and the
other going broke – because their strategies produced different year-to-year results.
Not many investors seem to realize this and they carry the same investment strategy that may have
served them well early in their careers into retirement – focusing almost exclusively on the expected rate
of return, or “upside potential.” In fact, as the previous examples show, the best investment strategy is not
always the one that produces the highest rate of return.
At or near retirement, the best investment strategy is the one that produces the greatest total wealth in
your particular case. You must judge the quality of an investment alternative – type of fund, choice of
investment manager or strategy, for example – in light of how that alternative’s results will interact with the
cash flows you expect to demand from your account.
Written by Mike Miles
For the Federal Times
Publication May 19, 2008