TSP Fuzzy Math

Looking at average rate of return numbers to evaluate an investment is universally accepted, but unfortunately not an accurate gauge of actual returns. Here is an example of what I mean:

A +50% gain in one year followed by a -50% loss the next year, is a zero average percentage and would be reported as such in the fund performance figures. But now let’s do the math again with dollars involved using a $100,000 “C” fund type of account:

$100,000 plus the 50% gain equals $150,000. Now apply the 50% loss for the following year and you have just $75,000. This is a 25% LOSS on your original investment that was not reflected in the average percentage results!

Just about anywhere you look in marketing and reporting literature you will not find this loss. But it will be staring right back at you when you open your account statement. Unfortunately, new contributions from payroll deductions tend to obscure the severity of the hit.
Simply put, losses have greater weight on your actual dollars than gains do. The importance of avoiding losses in your portfolio cannot be over stated.

This is where crash proof financial vehicles like indexed annuities can play an important role. Since there can never be a negative rate of return in these plan designs they never have the challenging math of trying to dig out of a hole where a 30% loss needs around 50% in gains just to get even! And to this point, I’ve really only been addressing the accumulation years before retirement. Losses in the distribution years after retirement are even more difficult to overcome and will be addresses in part two this topic.

In the meantime, feel free to reach out to me toll free at 800-997-8434 and ask me to email historical graphs showing indexed annuity performance vs. the S&P 500. The graphs show dollar balance, not average return and after reading this article you may not find the results surprising, but they sure are impressive. Perhaps I should have titled this article “The Hidden Advantage of Indexed Annuity Returns” instead.

As a Retirement Income specialist with 30 years in the business I can tell you which indexed annuities have the best growth prospects for your state. I’ll include a brochure if tell me your state of residence.

Todd Ensing, RICP®
Retirement Income Certified Professional®