Your TSP just dropped 20% at 60: what to actually do

1. Why this downturn is different from the last five

You have been through downturns before. In 2008 you kept contributing and it was the best money you ever invested. In 2020 the drop reversed before your quarterly statement arrived. In 2022 you barely looked. Every one of those was survivable for the same reason: you were adding money, not taking it out, and you had time.

At 60, about to draw on the account, both of those conditions have reversed, and the arithmetic changes with them. This is sequence-of-returns risk: the order of returns matters once you are withdrawing, because a loss followed by a withdrawal removes shares that can never participate in the recovery. Two retirees with the same balance, the same average return over thirty years, and the same withdrawals can end with wildly different outcomes depending only on whether the bad years came first or last. A 20% drop in year one, with 4% withdrawals on top, can leave an account permanently smaller than an identical drop in year fifteen.

That is the thing to protect against, and it is more specific than “the market fell.” The market falling is not the damage. Selling stock funds at depressed prices to fund spending is the damage. Everything that follows is organized around not doing that.

Three retirees, same drop, different outcomes

All three retire at 60 with $600,000, 80% in stock funds and 20% in G, and plan to draw $24,000 a year. The stock funds fall 20% in year one, rebound 18% in year two and 12% in year three, then return 7% a year; the G Fund earns 4%. Retiree A had set aside three years of withdrawals in the G Fund and draws only from it while stocks are down. Retiree B leaves installments on autopilot, drawn pro rata, so about $37,000 of stock is sold at depressed prices in the first two years. Retiree C panics after the year-one drop, moves everything to the G Fund, and returns to an 80/20 mix two years later.

Same market, same spending, same starting balance. Leaving installments on autopilot costs Retiree B about $68,000 over the retirement: real money, and avoidable with one click. Fleeing to the G Fund costs Retiree C nearly $400,000, because he sold the entire stock position at the low and missed the two strongest recovery years. That is the difference between an inconvenience and a permanent injury, and it is why this guide spends most of its words on the one move never to make.

2. The decision flowchart

Work down from the top. Most retirees exit at the second box.

3. Decision 1: where does next year’s money come from?

Before you touch anything in the TSP, write down four numbers: your essential monthly spending; your FERS annuity (or the interim payment OPM is currently sending, which may be 60% to 80% of the final figure); your FERS supplement if you are under 62 and retired on an immediate unreduced annuity; and your cash outside the TSP. Subtract. The result is the amount you need from the TSP in the next twelve months, and it is usually smaller than the installment you set up.

For most FERS retirees with a full career, the result is close to zero or negative. A retiree with a $38,000 pension, a $1,300 supplement, and $60,000 of essential spending needs about $6,400 from the TSP this year. On a $600,000 balance that is 1%. She could take it from the G Fund with barely a ripple, or cover it from cash and take nothing at all. Her downturn, correctly handled, costs her nothing.

The retiree who does have a gap is the one this section is really for. If you need $30,000 a year from the TSP because the pension is small, the first move is still not to sell stocks. It is to pause the automatic installments so that money stops flowing out of stock funds on autopilot, then rebuild the withdrawal deliberately from the least-damaged source. The TSP lets you change or stop installments online at any time and restart them later. Do that today.

4. Decision 2: what do you sell, and what do you never sell?

If Decision 1 says you must draw from the TSP, the order is fixed:

• G Fund first. It has not fallen and cannot. Every dollar you draw from G is a dollar of stock you did not sell low. If you built the G Fund bucket before retiring, this is what it is for; spend it down and do not refill it from stock funds until they recover.
• F Fund second. Bonds often hold up in a stock decline (2022 was an exception, when both fell). If F is up or flat while stocks are down, it is the next source.
• Stock funds last, and only the minimum. If you have exhausted G and F and still have a gap, you sell stock funds, but you sell the smallest amount that covers essentials, not the installment you set in better times.

And the thing you never do: move the stock balance to the G Fund. This is the mistake that separates retirees who were inconvenienced by 2008 from retirees who were harmed by it. A 20% drop followed by a move to G converts a paper loss into a realized one and removes you from the recovery. Between March 2009 and the end of 2010 the C Fund gained more than 60%; participants who had fled to G in late 2008 or early 2009 captured none of it, and many never returned to stocks at all. The TSP’s own data on interfund transfers during 2008 and 2009 showed the largest flows into the G Fund arriving after the bulk of the decline had already happened.

The distinction is easy to state and hard to hold under stress: drawing your spending from G is the plan. Moving your investments to G is the panic. The first uses the G Fund as a shock absorber. The second uses it as a hiding place, at the exact moment hiding is most expensive.

5. The federal shock absorber: pension and supplement

Here is the advantage you have that most people reading generic downturn advice do not. Your income floor did not fall. The FERS annuity is guaranteed by the Treasury and did not lose 20%. Social Security, when you claim it, did not lose 20%. And if you retired on an immediate unreduced annuity (MRA with 30 years, 60 with 20, or under VERA once you reached MRA), the FERS supplement pays roughly what Social Security would at 62, until you turn 62, and it did not lose 20% either.

That means the TSP’s job in your retirement is different from a 401(k)’s job in a private-sector retirement. A private-sector retiree at 60 with $600,000 needs that account to produce most of her income for the rest of her life, so a 20% drop is a 20% cut in her standard of living unless she does something. A FERS retiree at 60 with $600,000 and a $38,000 pension needs the account to produce a supplement to an income that already exists. The pension is doing the job the bond allocation does for everyone else, as the L Funds guide explains, and in a downturn that means the pension is the reason you can afford to wait.

Two ways to use this deliberately:

Let the pension carry the household for a year. If essentials are covered, treat the TSP as untouchable for twelve months. Skip the trip, defer the kitchen, keep the car. At the end of the year, reassess. Most declines are well into recovery by then; if this one is not, extend by a year. There is no rule that says you must withdraw in the year you retire, and the RMD that would eventually force it is at least thirteen years away.

Use the supplement window. If you are 60 and eligible, the supplement runs to 62, which is two years of extra guaranteed income arriving precisely during the recovery window. A retiree who planned to draw $20,000 a year from the TSP and receives a $15,000 supplement has a $5,000 gap, not a $20,000 one. Make sure OPM has actually started paying it; the supplement is computed with your annuity and can be delayed by the interim-pay process. If you are working part-time, remember the earnings test applies to the supplement above $24,480 in 2026.

6. Five things that feel urgent and aren’t

Downturns generate activity. Most of it is harmless and some of it is expensive. In order of how often it comes up:

Checking the balance daily

Harmless in itself, but it is the precondition for every bad decision below. The balance will be lower tomorrow or higher; neither changes what you should do this month. Check once when you build your plan, once when you execute it, and once on your scheduled rebalance date.

Switching to the L Income Fund

The L Income Fund is 72% G and F and 28% stocks. Moving your whole balance into it after a drop sells roughly three-quarters of your stock funds at the bottom. It is the allocation cliff in a more respectable outfit. If you want the L Income Fund as your long-term home, the time to move was before the decline, gradually, and the time to move now is after the recovery, gradually.

Rolling out to an IRA to “get better options”

An adviser will suggest this in every downturn. The IRA has no G Fund. It will not protect you from the next drop better than the TSP does; it will charge you more for the same exposure. And if you are under 59½ and relying on the Rule of 55, the rollover reinstates the 10% penalty. See the rollover pitch before you sign anything.

Trying to time the bottom

The plan to “go to G now and get back in when things settle” has a perfect record of failure, because things settle by going up, and by the time it feels safe the recovery has happened without you. The largest single-day gains in market history cluster inside bear markets. Missing a handful of them costs more than the decline did.

Cancelling the survivor election or changing FEHB to save money

A drop in the TSP is not a reason to reduce the guaranteed pieces of your plan. The survivor annuity protects your spouse against exactly the kind of uncertainty you are feeling now; the FEHB you would drop cannot be regained. Cut discretionary spending, not the floor.

7. What a downturn is actually good for

A few things become better when the market is down, and a retiree with time and a low bracket can use them.

Roth conversions

An in-plan Roth conversion moves a dollar amount from traditional to Roth and taxes it. When the balance is down 20%, the same shares convert for 20% less tax, and the recovery happens inside the Roth account where it is never taxed again. A retiree in the 12% bracket with $40,000 of room who converts at the bottom has done something few investors ever manage: bought the recovery at a discount, tax-free. The conversion ladder covers the bracket math; the five-year clock guide covers the timing rules that attach to converted amounts.

Rebalancing into weakness

If you are past the danger zone (essentials covered, G bucket intact) and your scheduled rebalance date arrives during the decline, rebalancing means buying stock funds with G Fund dollars at low prices. That is the mechanical version of “buy low,” and it is the only version that works, because it is triggered by a calendar and not a feeling. Do it only on the scheduled date, only back to the target, and only with money you do not need for five years.

Reconsidering the Social Security claim

If you planned to claim Social Security early because the TSP would “probably be fine,” the downturn is a reminder that the TSP is the variable and Social Security is the constant. For many retirees, the drop strengthens the case for bridging to a later claiming age: the larger check is the one asset that cannot fall.

8. If you haven’t retired yet

If the drop arrives in the months before your separation date, you have one option retirees do not: you can change the date. Whether you should depends on a single question. Will your TSP withdrawals fund essentials or extras?

If extras, retire as planned. Your pension does not care what the market did, your supplement is unaffected, and the TSP will recover on its own schedule while you are not touching it. Delaying retirement to “wait for the market” when you do not need the money is trading healthy years for reassurance, and it is the trap covered in one-more-year syndrome.

If essentials, a delay of six to twelve months has real value, not because the market will necessarily recover in that time but because each month of salary is a month you do not sell depressed shares, and each month of contributions buys shares at lower prices. Run the numbers in the stay-or-go framework and add the downturn as a reason on the “wait” side. A year is usually enough; an indefinite delay is not a plan.

Either way, if you are still contributing, keep contributing. Every pay period of contributions during a decline buys more shares than the same dollars bought a year ago, and the agency match is unaffected by the market. Stopping contributions in a downturn is the working-years version of selling low.

9. What history says about the wait

None of this is a prediction. It is the record, and it is the reason the advice above is “wait” rather than “hope.”

Three patterns. The recovery has always come, but the wait has ranged from six months to more than five years, which is why the G Fund bucket is sized in years, not months. The worst outcomes in every episode belonged to people who sold near the bottom, not to people who held through it. And the G Fund did its job every time: no loss of principal, a positive return, and cash available on any business day.

The honest caveat: the C Fund’s recovery record dates from 1988. Other markets have had longer waits; Japan’s took decades. That is an argument for the S and I Funds alongside the C Fund, and for a pension that does not depend on any of them. It is not an argument for selling.

10. The 48-hour checklist

• Pause TSP installments online. Restart them deliberately once you have worked through the rest of this list.
• Write the four numbers: essential spending, pension (or interim payment), supplement, cash outside the TSP. The gap is your TSP need for twelve months.
• Confirm the supplement is being paid if you are under 62 and eligible. Call OPM if it is not on your annuity statement.
• Check what is in the G Fund. If it covers the gap, you are in the green box. Draw from G only.
• If it does not: cut discretionary spending for six to twelve months; draw from G, then F, then the minimum from stock funds.
• Do not move stock funds to G or L Income. Write this down and put it where you will see it.
• Check your bracket. If you have room under the 12% ceiling, price a Roth conversion at the depressed balance.
• Mark your scheduled rebalance date and do nothing to the allocation before it.
• Talk to your spouse. Both of you should know the plan is to wait and why, so that neither of you sells in a moment the other is not watching.
• Stop checking the balance. Set a calendar reminder for the rebalance date and one for the twelve-month reassessment.

11. Frequently asked questions