These TSP Assumptions Can Undermine Your Entire Retirement Plan—Even If You’re a Careful Saver

Key Takeaways

• Even disciplined TSP savers can undermine their retirement goals by relying on outdated or overly optimistic assumptions.

• In 2025, changing withdrawal rules, inflation pressures, and market volatility require a closer look at your TSP strategy before and after retirement.

The Hidden Risks Lurking in TSP Planning

When you think of your Thrift Savings Plan (TSP), you may feel a sense of confidence. After all, you’ve consistently contributed, taken advantage of matching, and diversified your portfolio. But the most dangerous part of any plan isn’t the part you see—it’s what you assume without questioning.

In 2025, the retirement landscape continues to shift, and public sector employees like you must reexamine some long-standing TSP assumptions. What worked five years ago may not hold up today. Here’s what you need to be watching for.

1. Assuming Your Contributions Are Enough

You may be contributing regularly to your TSP, perhaps even meeting the 2025 elective deferral limit of $23,500. But contributing alone doesn’t guarantee future financial security.

• Inflation adjustments: The cost of living continues to rise. Even with the 2025 COLA increase of 2.5%, your retirement spending needs could outpace your TSP growth, especially if your investments are too conservative.

• Longevity risk: Life expectancy for retirees continues to stretch. If you retire at 62, you might need your savings to last 25 to 30 years or more.

You should reassess your annual contribution level and retirement income projections using realistic inflation and longevity models. A common mistake is thinking that “maxing out” your contributions alone makes you safe.

2. Assuming TSP Lifecycle Funds Will Automatically Fit Your Goals

Lifecycle (L) Funds are designed to gradually shift from aggressive to conservative allocations as you near your target retirement year. While they offer convenience, they are not one-size-fits-all.

In 2025, these funds may be too conservative for someone who retires early and faces a long drawdown period. Or they may not provide enough protection for someone needing stable income soon.

• Review the glide path and asset mix of your L Fund.

• Compare it to your specific income needs and risk tolerance.

• Remember, L Funds are built for average investors, not your unique situation.

3. Assuming You’ll Withdraw Only the Minimum

Required Minimum Distributions (RMDs) start at age 73 in 2025. Many retirees plan to wait until then, assuming that minimizing withdrawals will preserve their savings.

But this strategy can backfire:

• Tax burdens: If you delay withdrawals, you may end up with large RMDs that push you into a higher tax bracket.

• Missed Roth conversions: The years between retirement and RMDs may be ideal for converting portions of your traditional TSP to a Roth IRA at lower tax rates.

A deliberate withdrawal plan before age 73 can smooth your tax liability and improve long-term outcomes.

4. Assuming You’ll Always Rebalance Once a Year

Rebalancing is the practice of restoring your TSP portfolio to its original asset mix. Many public sector employees rebalance annually, often during the same month.

That approach worked well in a stable market. In 2025, with inflation still pressuring interest rates and the market reacting to geopolitical and policy changes, annual rebalancing might not be enough.

• Quarterly rebalancing may better control risk.

• Market-driven adjustments (within limits) can preserve gains or protect against losses.

Rebalancing too infrequently or robotically can cause your allocation to drift far from your intended risk profile.

5. Assuming the G Fund Is Risk-Free

The G Fund is often viewed as a “safe haven” due to its stable returns and protection against loss of principal. While it does not fluctuate like stocks or bond funds, relying too heavily on it carries its own risks:

• Inflation erosion: If G Fund returns remain below inflation, your purchasing power decreases over time.

• Missed growth: Over a 20 to 30-year retirement, the lack of equity exposure can significantly reduce your total withdrawal ability.

In 2025, the G Fund is yielding modestly, but not enough to beat inflation. A blended approach may offer better long-term sustainability.

6. Assuming Your Federal Pension and Social Security Will Cover Everything Else

You might assume that your FERS annuity and Social Security benefits will handle your basic income needs, with the TSP serving as a cushion.

But in 2025:

• FERS COLA for annuitants under age 62 is still limited.

• Social Security’s full retirement age is now 67 for those born in 1963.

• Healthcare costs continue to rise, even with FEHB or PSHB coverage.

If you underestimate your income gaps or healthcare expenses, you may be forced to tap into TSP sooner or more aggressively than planned.

7. Assuming You Won’t Need to Adjust After Retirement

Some retirees believe they can “set and forget” their TSP after retirement. That’s rarely wise.

• Required distributions, tax changes, or health events can rapidly alter your spending needs.

• Market downturns may force temporary adjustments to preserve capital.

• Legislative changes affecting tax treatment or withdrawal rules could impact your strategy.

In 2025, staying agile and reviewing your plan at least once a year is a must.

8. Assuming All Withdrawals Will Be Taxed the Same

If your TSP includes both traditional and Roth contributions, how and when you withdraw matters.

• Traditional TSP withdrawals are fully taxable.

• Roth TSP earnings are tax-free if taken after age 59½ and the account is at least five years old.

Mismanaging the sequence or proportion of withdrawals could result in an unnecessarily high tax burden.

In addition, Roth IRAs are not subject to RMDs, while Roth TSPs are unless rolled over. Knowing the rules helps you avoid costly missteps.

9. Assuming TSP Is the Only Account You’ll Ever Use

Many federal employees focus solely on TSP, ignoring outside IRAs, savings, or spousal assets. That narrow view can limit your flexibility.

A coordinated approach to withdrawals and taxation across all your accounts can increase your net retirement income.

In 2025, integrated retirement income planning is more important than ever. Your TSP should be a core piece, but not the entire puzzle.

10. Assuming Government Rules Won’t Change

You may have structured your retirement plan around current tax laws, TSP rules, and Social Security timing. But laws and policies shift.

Recent proposals have included:

• Raising FERS employee contributions for new hires.

• Replacing the TSP G Fund subsidy.

• Modifying annuity supplement eligibility.

If you’re retiring in the next 3 to 5 years, build flexibility into your strategy. Have contingency plans in place for benefit reductions or higher tax exposure.

Planning Smarter in 2025

The assumptions above can seem harmless at first. But if they go unchallenged, they can leave your retirement vulnerable to gaps, taxes, or lost opportunities.

Here are some best practices to adopt now:

• Run updated projections annually with conservative growth and inflation assumptions.

• Diversify withdrawal sources to spread risk.

• Review your TSP allocations and update your risk tolerance profile.

• Consider working with a licensed professional to craft a strategy that addresses your full financial picture, including tax efficiency, legacy goals, and healthcare planning.

Avoid Letting Faulty Assumptions Derail Your Retirement

Your TSP is a valuable asset, but it’s only as strong as the strategy behind it. Questioning common assumptions now can protect you later from expensive surprises.

Before you finalize your TSP withdrawal approach or retirement budget, reach out to a licensed professional listed on this website. They can help you review your full income picture, avoid tax traps, and plan with greater clarity.