Consider a Navy shipyard engineer I'll call Mark. In late 2007 he was 60, with $800,000 in his TSP and a plan to retire in 2009. He had been 90% in the C Fund for years, because it had worked beautifully. Why change?

Then 2008 happened. The C Fund lost about 37%. On a 90% stock allocation, that was roughly $266,000 gone in twelve months, and his balance dropped to somewhere near $537,000. His FERS annuity was intact, but the cushion he'd counted on to bridge the gap before Social Security had shrunk by a third. He worked three more years. Markets recovered, and he did fine in the end, but those were three years he had planned to spend differently.

Mark didn't pick bad investments. He had a timing problem, and it's the one that matters most near retirement.

What sequence-of-returns risk actually does

Two people can earn identical average returns over a decade and end up with very different outcomes. The difference is when the good and bad years arrive.

While you're contributing, a market drop is mostly an opportunity. You buy shares cheaply. Once you start withdrawing, the same drop is a problem, because you're selling shares at low prices to fund living expenses. Those shares can't participate in the recovery.

Here is a simplified example. Two retirees each start with $1,000,000 and withdraw $40,000 at the start of each year. Both experience the same five annual returns: +15%, +10%, +5%, -10%, and -20%. Only the order differs.

  • Retiree A gets the bad years first (-20%, -10%, +5%, +10%, +15%). After five years: about $720,500.
  • Retiree B gets the good years first (+15%, +10%, +5%, -10%, -20%). After five years: about $793,800.

Same returns, same withdrawals, and a gap of roughly $73,000. If neither of them withdrew a dime, they'd finish at exactly the same number. The withdrawals are what turn the order into a cost.

Five years is a short window, and this example is gentle. A deeper early loss, a higher withdrawal rate, or a longer slump widens the gap, and the damage compounds across a 25 or 30 year retirement.

Why the five years before retirement matter so much

The danger zone runs roughly from five years before your retirement date to five years after. Call it the red zone.

Your balance is at or near its peak, so you have the most dollars exposed. You have the least time to recover, because a big loss at 62 can't be waited out the way one at 35 can. And you're about to begin withdrawals, which is when order starts to matter.

A loss in this window can also change decisions you thought were settled. You might delay retirement, claim Social Security earlier than planned, or take a part-time job you hadn't wanted.

Ways to reduce the exposure

None of these eliminates the risk. They shift how much of it you carry.

Build a shock absorber

Many people use a reserve of two to five years of expected withdrawals (net of pension and Social Security income) in stable assets. In the TSP, that usually means the G Fund, which holds short-term Treasury securities and doesn't lose principal. In an IRA, it might be a money market fund, Treasury bills, or CDs.

The idea is simple. If stocks fall, you spend from the reserve and leave the stock portion alone until it recovers. If stocks rise, you can refill the reserve.

Lower your stock allocation gradually

Rather than flipping a switch at your retirement date, many people step down over several years. A 90% stock allocation at 57 might become 70% at 60 and 50% to 60% at retirement. TSP Lifecycle (L) Funds do this automatically as the target date approaches, which is one reason they suit people who don't want to manage the glide path themselves.

There is no universally correct number here. It depends on how much of your spending is already covered by guaranteed income.

Count your guaranteed income first

This is where federal employees have an edge. A FERS annuity, the FERS supplement if you're eligible, and Social Security all arrive regardless of the market. If those cover most of your essential expenses, your TSP funds discretionary spending and extra cushion, and you can tolerate more stock exposure. If they cover only half your bills, you need to be more careful.

Do this math before you touch your allocation: list essential monthly expenses, subtract guaranteed income, and see what the portfolio must actually supply.

Keep your spending flexible

A rigid withdrawal plan is the most fragile kind. If you can trim spending by 5% to 10% in a bad year, skip an inflation adjustment, or delay a big purchase, the portfolio's odds improve noticeably. Research on this consistently shows that flexibility often does more than shaving a few points off your stock allocation.

Consider the timing of other decisions

A few levers worth knowing about:

  • Working one more year. It adds contributions, delays withdrawals, and shortens the number of years the portfolio must fund.
  • Delaying Social Security. A larger guaranteed benefit later means less pressure on the portfolio, though you need enough liquid assets to bridge the gap.
  • Roth conversions after a drop. Converting traditional TSP or IRA money when balances are depressed can mean paying tax on a lower amount. This one has real tax consequences, so run the numbers with a professional and check irs.gov for current rules.

The tradeoff nobody should skip

Playing too safe has its own price. A retiree at 62 may need the money to last past 90. Inflation quietly erodes a portfolio parked entirely in the G Fund, and over three decades that can hurt as much as a market crash.

So the goal isn't to eliminate stocks. It's to hold enough stable money that you're never forced to sell stocks at a bad moment, while keeping enough growth to outpace inflation. That's a balance, not a formula.

A practical checklist for the red zone

About five years out, work through this:

  1. Estimate your first three to five years of withdrawals, net of guaranteed income.
  2. Decide how much of that you want in stable assets, and by when.
  3. Review your current allocation, including any IRA held outside the TSP, so you see the whole picture.
  4. Choose your rebalancing rule in advance, so you aren't improvising during a downturn.
  5. Run a stress test: what happens to your plan if the market falls 30% in your first year?

If the answer to that last question is "I'd be fine, maybe a little annoyed," you're in good shape. If it's "I'd have to rethink everything," you have time to adjust.

What to remember

Market timing is a guessing game. Sequence risk is a planning problem, and those are different things. You can't know when the next decline will come, but you can decide ahead of time how much of it your retirement can absorb.

Mark's story had a decent ending, but only because he could work longer. Plan so that you don't need that option. Contribution limits, withdrawal rules, and distribution ages change, so check tsp.gov and irs.gov for the current figures before you finalize anything. For a decision this large, a fee-only planner who understands federal benefits is worth an hour or two of your time.