In managing your Thrift Savings Plan account, you have one way to succeed and two ways to fail. You can succeed only by achieving your goals with little or no forced compromise along the way. You can fail by either failing to achieve your goals, or by living further beneath your means than necessary — in essence by being too cautious — and leaving money “on the table” in the end.
Retirement investing is ultimately about producing cash flow — money to spend when you need it. This is also referred to as liquidity. What good is it to be wealthy if you can’t readily convert that wealth to spendable cash when you need it to support your desired standard of living? With this in mind, success in retirement investing can be broadly defined as producing the cash flow you need to support the highest standard of living possible without depleting your assets below a minimum acceptable value. To succeed, you need to produce adequate cash flow from your resources without exhausting them.
If you’d like a certain standard of living in retirement, that standard of living will require cash flow. If that cash flow is greater than that provided by your guaranteed income, such as annuity or Social Security income, then you may have to rely on your TSP account to provide supplemental income to fill the gap. To be successful in managing your account, it must produce this income when you need it, without running out before the job is done.
If you must leave a certain amount of money behind as part of your estate, then this makes the job a little tougher, since you must not only produce the needed income without exhausting the account, but you must also make sure that you do so without allowing the account to fall below a certain value.
Understanding this definition of success is important, since without it, you can’t manage your |account to achieve a relevant objective. Like so many investors, you’ll manage your account to some other, irrelevant objective, such as to beat a market index, to achieve a certain yield, or worst of all, to no objective at all.
Many investors manage their TSP accounts with no clear objective in mind, and without any clear definition of success on which to base their performance. This is like driving a car without knowing where you’re going. It might be a scenic or exciting drive, but you won’t have much control over where you wind up.
The most serious failure is to fall short of your goals — failing to meet your expectations. This happens because you follow a plan that is too aggressive to be safe. This kind of plan is either doomed to fail from the start, or it has an unacceptably high probability of failing. It’s too risky, and the risk becomes reality.
But there’s another less severe, but still important, kind of failure. That is failure to extract the standard of living you could have had if you’d only known that it was possible, and how to get it safely. While this failure isn’t as serious as coming up short, leaving money — and the standard of living it could have supported — on the table in the end is still a kind of failure that most of us would rather avoid.
Defining and understanding what retirement plan failure is, and isn’t, is a key part of building and managing a successful retirement investment program. Common measures of investment performance — like rate of return, comparison to an index, or realized yield — are subordinate to the real definition of success: producing the cash flow necessary to support the highest standard of living possible during your lifetime.
Pursuing measures of success that are irrelevant to achieving your objectives is wasteful at best, and disastrous at worst. So, before you make investment decisions, it’s wise to clearly define your goals and understand the relevant measures of success and failure. Chances are, they’re not what that broker, banker, insurance agent or journalist is telling you they are.