The TSP (Thrift Savings Plan) can be an incredibly powerful wealth building tool if used properly and my goal for this guide is to show you how to do jus that. We’ll start off with some of the basics and then we’ll jump into some strategies.
The Match
The match is one of the most well known aspects of the TSP, but I would be amiss if I didn’t mention it for those who might not be as familiar with it.
Your agency offers a match that can add up to 5% of your salary as long as you contribute at least that much. But it is broken down into the following parts:
The 1st 1%- Your agency will automatically contribute 1% of your salary into your TSP account regardless of how much you contribute (even if you don’t contribute at all). But in most cases, you’ll have to work with the government for 3 years to become vested* in this amount.
*Being vested means you can take that money with you even if you leave federal service.
The next 3%- Your agency will match dollar for dollar of the first 3% of your pay that you choose to contribute.
The next 2%- You agency will then match 50 cents of every dollar of the next 2% of your base pay that you contribute.
This chart illustrates how this works:
To summarize, if federal employees don’t want to leave any money on the table then it generally makes sense to contribute at least 5% of your salary into your TSP account.
Often, it makes sense to invest much more than 5% but you have to start somewhere.
The Fees
It costs money to run and manage investment funds and these costs are generally covered by the people that invest into the fund. Whether you know it or not, you pay a portion of your TSP balance every year to cover the TSP’s costs. The good news is that the fees are right around .042% (in 2019) of your account balance.
That means it costs about 42 cents per $1,000 you have in the TSP per year.
For example, if your TSP balance is $100,000, then you’ll pay right around $42 per year. This is exceptionally low compared to the vast majority of funds in the world.
The TSP can be an incredibly powerful wealth building tool if used properly and my goal for this guide is to show you how to do just that. We’ll start off with some of the basic features and characteristics and then we’ll jump into some of the best TSP strategies.
The Match
The match is one of the most well known aspects of the TSP, but I would be amiss if I didn’t mention it for those who might not be as familiar with it.
Your agency offers a match that can add up to 5% of your salary as long as you contribute at least that much. But it is broken down into the following parts:
The 1st 1%- Your agency will automatically contribute 1% of your salary into your TSP account regardless of how much you contribute (even if you don’t contribute at all). But in most cases, you’ll have to work with the government for 3 years to become vested* in this amount.
*Being vested means you can take that money with you even if you leave federal service.
The next 3%- Your agency will match dollar for dollar of the first 3% of your pay that you choose to contribute.
The next 2%- You agency will then match 50 cents of every dollar of the next 2% of your base pay that you contribute.
This chart illustrates how this works:
To summarize, if federal employees don’t want to leave any money on the table then it generally makes sense to contribute at least 5% of your salary into your TSP account.
Often, it makes sense to invest much more than 5% but you have to start somewhere.
The Fees
It costs money to run and manage investment funds and these costs are generally covered by the people that invest into the fund. Whether you know it or not, you pay a portion of your TSP balance every year to cover the TSP’s costs. The good news is that the fees are right around .042% (in 2019) of your account balance.
That means it costs about 42 cents per $1,000 you have in the TSP per year.
For example, if your TSP balance is $100,000, then you’ll pay right around $42 per year. This is exceptionally low compared to the vast majority of funds in the world.
The Potential of Your TSP
We all have heard the common regret of “I wish I would have started investing earlier”. Or “If only I knew then what I know now”. But unfortunately, there is nothing we can do to change the past. Fortunately, we can learn from our own past as well as the past of others to make our future bright despite our mistakes.
And because we all hear the regretful almost-retiree talking about starting earlier, I figured it could be helpful for all of us to see an example of why investing early and consistently makes such a difference. Or in other words, why it pays to be the tortoise instead of the hare in the race of an incredible retirement and a robust TSP.
In this example, our tortoise fed is named Julie and our hare fed is name Robert. They both start their careers at 27 and both make $75,000/year. We’ll assume that their salary stays the same for their entire career to keep the numbers easy. Julie, right out of the gate, decides to invest 10% of her salary into the TSP. She got used to living on the lower amount and never thought much about it. Robert, on the other hand, decides that he is very far from retirement and will opt out of the TSP for now.
Now let’s fast forward 10 years. Both Julie and Robert are 37 and they both think about their TSP again. Julie realizes that she has already accumulated $169,781 (we’ll assume a 8% return for this entire example) and is pleasantly surprised. Robert talks to Julie and realizes that he really needs to start using his TSP. He decides to take a pretty drastic cut to his lifestyle to start contributing 10% of his salary into the TSP as well.
Fast forward 10 years again. They are both 47 and Julie now has $536,325 in her TSP and Robert has $169,781. They talk again and Robert gets fiercely competitive. He wants to contribute more than Julie so he takes another drastic cut to his lifestyle and starts contributing 20% of his salary into his TSP. Julie decides to stick to her 10%.
Fast forward 10 years one last time. They are both 57 and Julie is ready to retire. She has accumulated a whopping $1,327,666 in her TSP and she has plenty to cover the gap between now and when she starts drawing social security at 70 so that she can get higher social security payments. She is confident in her retirement and her financial freedom. She buys a vacation home and lives a comfortable life.
Robert has done pretty well too. He has accumulated $649,643 in his TSP but decides to work a few extra years because he doesn’t want to eat through a major portion of his TSP trying to fill the gap before he starts social security. He too has a good retirement but definitely doesn’t have the same cushion and freedom that Julie now enjoys.
In the end, Julie ended up with more than twice the amount of retirement savings than Robert but this is not very surprising by itself. The surprising part shows up when we look at how much they each put into the TSP themselves. This charts makes it a little easier to see:
Both Julie and Robert contributed the same amount to their TSP accounts during their careers but when they contributed it made all the difference in the world. Julie was consistent the whole time while Robert had a late start and rushed to catch up near the end.
And while the details and amounts are different, I have seen this same story play out over and over again in real life. There are those feds that start early and stay consistent and are pleasantly surprised how much they end up with. And there are those that rush to catch up near the end. And as we have seen, the results tend to be dramatically different between the two groups.
But I don’t write this to discourage those that might have had a late start. We all have things that we wish we could go back and change. All we have is now and there is still so much we can do to prepare for the future.
If you want help knowing what you need to do to be best prepared for retirement, it may make sense to talk to a professional that understands your needs and federal benefits. But regardless of where we are at or what we have already done, we can all do something today to make your future that much brighter.
Do you Have Enough in Your TSP to Retire?
At this point, I hope you are feeling motivated and ready to take action. You should now understand how powerful of a tool the TSP can be, and if you are like many of the feds that I talk to, their next question is “How much should I be putting in my TSP to be ready for retirement”? Or for those closer to retirement, the question is “Do I have enough in my TSP to retire”?
I get these questions all the time and understandably so. Everyone wants to know where they stand, but interestingly enough I hear the same concern from those with 100k in there TSP as well as from those with 2 million. And what makes it so difficult is that for some 100k is enough and for others, 2 million may not make it through retirement.
What makes this question so hard to answer is that everyone’s retirement plans, goals, and needs are very different. Some people have no consumer debt, no mortgage, and all their expenses are covered by their pension and social security. They really don’t need much if any from their TSP in retirement other than fun money. Others may still be paying off their mortgage or may have higher lifestyle goals in retirement. Everyone has a different idea for what an ideal retirement looks like but the tricky part is knowing if your finances can support your choices.
The 4% Rule
Many people have been using the 4% rule to give them a place to start. For those who haven’t heard about this rule, it basically says that you can conservatively withdraw 4% of your retirement savings every year and not have to worry about running out of money. So for someone retiring with $400,000, 4% would be $16,000/year or about $1,333 per month.
That being said, not everyone can afford to only withdraw 4% of their TSP every year. The good news is that the 4% rule is very conservative and many people can withdraw more and still not run out of money.
This is why the 4% rule has become popular. It is simple and conservative. And this is the type of strategy that makes sense for most feds. Now, I don’t mean that everyone should use the 4% rule specifically. I simply mean that everyone needs to find a strategy that makes sense for them and at the same time is simple, conservative, with a good margin of error. This way you will be prepared to adjust as changes and curveballs come your way.
Note: One potential pitfall for the 4% rule is if the market has a series of bad years at the beginning of your retirement. In this case, the strategy’s likelihood of success does drop. You will want to have a strategy to ride out the good and bad times in retirement.
Investing Your TSP
When you are young and early in your career, it often makes sense to put the majority of your TSP in the C, S, and I funds. And because young feds tend to have a lot of time before retirement, they don’t mind that these funds bounce around because overtime, they grow at a fast rate.
But as you progress through your career and approach retirement, it often makes sense to introduce more of the F and G fund. These funds won’t grow nearly as fast, but they will provide more of the stability you need in retirement.
But even in retirement, I almost never recommend going 100% into the G fund. The G fund is safe but won’t grow enough to beat inflation and maintain your lifestyle over time.
Having a good mixture of funds allows the more stable funds (G and F) to provide consistent cash for your retirement lifestyle and the other funds (C, S, and I) to beat inflation and continue to grow your wealth.
At this point, some of you might have noticed that I haven’t mentioned the L funds. And this is because the L funds are not independent funds. They are just a mixture of the other 5 funds.
For example, this is the allocation of the L 2030 fund as of July 2020:
Source: https://www.tsp.gov/funds-lifecycle/l-2030/
What makes the L funds useful is that the allocation will automatically become more conservative (transfer more to the F and G funds) as time goes on. The purpose of these funds are so that employees can “set it and forget it”. In practice, feds pick the L fund that is closest to their retirement date and they don’t have to think about it again.
My problem with the L funds is that this approach doesn’t make sense for everyone. For example, I have a client who is close to retirement. Once he retires, his social security and pension income will be more than enough to pay for his expenses so he is not planning on using his TSP balance for some time. In his case, we are able to invest his TSP more aggressively because he has a substantial amount of time before he needs the money. If he had chosen an L fund, the allocation would have been far too conservative for him.
The L funds are not bad funds but you have to make sure it makes sense for you before investing in them.
Always keep in mind that there is no perfect TSP allocation. It all depends on your situation and goals. The exact percentage of each fund that makes sense for you will often be different than what makes sense for your co-workers.
The best thing to do is to educate yourself enough to make an informed decision. A financial advisor who understands the TSP can be a huge asset in this process as well. Because regardless of where you are in your career, getting your TSP right can make a huge difference over your career and retirement.
Once you come up with a TSP allocation plan that makes sense for you, stick to your plan. Don’t worry about what the market is doing. Focus on what you can control and not on what you can’t.
You can’t control the markets but you can control how much you set aside for retirement. You can’t control the economy but you can control how well you plan for the future. The good news is that by reading this book and educating yourself, you took one more step towards being prepared for whatever comes your way.
What Should I Do With My TSP in Retirement?
The TSP has served you well over a long career but now it is time to retire. My retiring clients often say things like “Is the TSP still the best option in this new stage of life? Some people talk about moving it to an IRA, but all I’ve known is the TSP. I’ve done well enough investing my TSP during my career but I really don’t know how I should invest in my retirement.”
Unfortunately, there is no black and white answer. There is not one single answer solution that fits the needs of every single federal employee out there. Everyone, (that means you too) needs to educate themselves enough to know the basic pros and cons of this decision because it can make a big difference over a long retirement.
To get you started, here are some things to consider.
IRA?
An IRA is a great tool and is widely used by those working in the private sector. It is less common among feds however, because they have access to the TSP.
The main advantages of an IRA in retirement is the flexibility. You have much more wiggle room with withdrawal options, as well as investment options. The one potential problem that comes with more choices is the complexity. The TSP’s strength lies in the fact that it is so simple and easy to use. There are limited investment options, but they meet the needs of most feds just fine. Not to mention the fees are incredibly low. If you want to have more flexibility to withdraw and invest funds in more complex ways and you don’t mind the extra complexity then maybe an IRA is the right choice.
It is important to note that many financial advisors will tell you to roll your TSP into an IRA. This is not always a bad thing especially if you’d like your advisor to manage the account for you. Just remember that most advisors get paid to manage money. The more money they manage, the more money they make. Because advisors can’t directly manage your TSP they will often advise you to simply roll it out into an IRA so that they can manage it.
Now, I am not saying that all financial advisors will throw your interests aside just to make more money. There are many advisors out there who truly put their clients before themselves. As an advisor myself, I have definitely seen both the good and bad in the industry.
My advice to you is to not be afraid to ask your advisor when you don’t understand why he/she advises a certain way. An advisor that is worth their salt will be able to walk you through the reasons why a certain action makes the most sense for you in the long run.
This is Way More Important Than Your TSP
In my day job as a financial planner, I speak with a ton of feds within a couple years of retirement who are cramming money into their TSP as fast as they can. They are all trying to make up for lost time and do some last minute prep.
I have to admit though that in some areas of life, last minute cramming is my go-to method. Like taking tests in college. I knew that I would forget much of what I studied if I prepared too far in advance, so I just waited until the last minute.
The bad news though, is that the 11th hour cram doesn’t work that great in retirement planning. To be honest, it actually doesn’t work much at all. 11th hour retirement planning is less planning and more just finding out if you have to work longer than you want or not. It becomes less about creating your dream retirement and more about accepting whatever benefits you can get.
And the worst part about last minute prep is not that your retirement benefits probably won’t be as good as they could be but that you are leaving a huge portion of your life up to chance. Will you be able to afford your dream lifestyle and maybe that boat as well? Maybe. I don’t know, but do you?
The best thing to do is to start now. Wherever you are at in your career. Start by thinking about what kind of retirement you want and then we can plan backwards from there.
Some people don’t like the word retirement. This is often because they honestly don’t know what they’d do if they didn’t have work everyday. That is totally okay. At least for me, retirement is much less about not working and much more about not having to work. So for those that don’t like the word retirement then we’ll call it the day that work becomes optional.
Regardless of what we call it, think about what an ideal day looks like for you. What would you like to do or see? What would you like to not ever do again? Who would you like to spend your time with? Do you want to travel the world? Golf 6 days a week? Read for hours a day? Buy a beach house? For many of us it may be hard to describe the perfect day. That is okay. For some, the most important thing they want in retirement is the ability to do whatever they feel like in the moment.
These types of questions are the backbone of the retirement plan I build with my clients, and it should be a big part of yours as well. Because when it comes down to it, no one really cares about how much money they have in retirement or in life. What we actually care about is what kind of life we are able to live and create for our family. If we are able to enjoy a life that we absolutely love, then we don’t really care about how much money we have in the bank.
Now, I am not saying that we shouldn’t be prepared financially. All I am saying is that we prepare financially to create an incredible life. Not the other way around.
Once you have an idea of what you’d like your life to look like, then we can start finding the best strategies to get there. This is when we start looking at your TSP, pension, social security, and all your other benefits to maximize and optimize them for your goals. But these are just tools, and not the end goal. Even if I found the perfect TSP allocation and made 5 million dollars in the stock market. It would not matter at all if I wasn’t happy at my job or in my relationships.
My hope with this guide is that more feds will be a little better prepared for retirement. And maybe they will be a little more motivated to put more in their TSP. But I hope they don’t do it for their TSP’s sake. I hope they do it to create a life that they love. A life that excites them and that they are passionate about. A life that they just can’t wait to get up every morning to live.
