Ask The Experts: Money Matters

By Mike Miles

New TSP calculator, same old problems

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The Thrift Savings Plan’s website, www.tsp.gov, has posted a new income calculator. Well, it’s not entirely new, it’s mostly just remodeled. Now, instead of going directly to the old monthly payment calculator or the annuity payment calculator, you must go through a wizard that automatically runs both and compares the results.

As much as I like the TSP and have endorsed its use, I have to say that I find this effort to be misguided and disappointing. I can’t imagine how the cost-benefit analysis was run to produce a green light for expending participant’s resources on what is an entirely cosmetic, and arguably counterproductive, change.

It’s not evident that there has been any real change to the calculator’s mathematics, I found its presentation of results to be confusing, and the addition of some rather elaborate graphics lends an aura of undeserved sophistication to the output.

That last dig is my biggest problem with this new calculator: The newer, slicker packaging will only make the still unreliable results seem more reliable. To me, it’s a lot like putting candy in a medicine bottle. Some people may be fooled into believing that candy will cure their illness, and ultimately suffer the consequences of their delusion.

The new calculator is really two calculators; a monthly payment calculator and an immediate annuity calculator.

The monthly payment calculator asks you to predict things that aren’t reliably predictable, and then uses simple arithmetic to generate an outcome that appears certain. What it’s really saying is that IF you start with a certain amount of money and IF you live to a certain age and IF you earn a certain return on your money each and every year as you go, you may safely expect a certain stream of income from your TSP account.

The fact is that none of these factors that determine the result produced by the calculator can be known, with certainty, in advance. All of them involve probabilities and the relevant probability analysis for this exercise is beyond the capability of the vast majority of TSP participants, if my direct experience is any indicator.

In addition to the unpredictable nature of the factors used in the calculator, one of the factors you’re asked to predict isn’t directly relevant to the purpose of the calculator. Your account’s average rate of return, when money is being contributed to, or withdrawn from it, is not a reliable indicator of its ending value.

This is an important fact overlooked by many investors. If two investors start with identical balances and take an identical series of withdrawals from their accounts over a period of time, it is impossible to know which investor’s account ended with the larger value if all you know is the average, or compounded rate or return earned by each investor over the period. It is possible that the investor who earned the lower rate of return actually ended the race with greater wealth.

So, in addition to being impossible to accurately predict, asking for the “rate of return” you’ll earn isn’t even the right question to ask.

The annuity calculator is an exception to my complaint if, and only if, you are ready to buy an annuity right away and have the necessary purchase price set aside in the G Fund. Otherwise, like the monthly payment calculator, it requires that you predict the unpredictable.

This calculator is useful when you are ready to retire, or are retired, for calculating the amount of guaranteed income your money can produce. Use this information as the benchmark for comparison when considering the other income options available to you.

If you’re still years from retirement, however, this calculator is also unreliable.

The TSP has protected itself from liability by affixing the following disclaimer to the calculator:

“This calculator is provided for informational purposes only. It is not intended to provide retirement income advice or be used as an investment advisory tool or as a guarantee of monthly payment amounts or a final account balance.”

To the uninitiated, “for informational purposes only” means that you should not rely on the object of this phrase — in this case, the calculator — as the basis for your decision-making. This disclaimer is used everywhere in the investment and financial services industry. In fact, it’s harder to find published “advice” without it than with it.

Unfortunately, it is also widely ignored by investors, to their detriment.

For your own, good, I urge you to take it seriously and treat this calculator with the same respect you’d allow a stick of dynamite. Any benefit it might produce should be weighed against the risk that it could explode in your face.

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