This is another question that I get all the time. Am I contributing enough to the TSP? Or said in other words, how much should I be putting in my TSP?
But just like many other questions in life, there is no perfect answer. If there was, it would make my job as a financial planner much easier.
To answer these questions correctly, the first thing to know is what you are going to be using your TSP for. This one is easy because for most feds, it is retirement. The next question is much harder. How much do you need at retirement?
And what makes it so difficult is that for some 100k is enough and for others, 2 million may not be. What makes the answers so diverse 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.
External factors make a huge difference as well. This includes things like inflation, tax rates, and investment returns.
One big potential curveball that might affect all of us is the depletion of Social Security. It is well known that at the current rate, there won’t be enough funds to pay out full benefits starting in 20352. Now, the government very well might come up with a way to fill the gap but it will have to come from somewhere and that somewhere is usually us, the taxpayers. And regardless of what happens to social security, that is just the tip of the iceberg when it comes to the benefits federal retirees rely on from the federal government. Now, I am not trying to say that you should all plan on the government going under. First, the odds of that are very very small. And second, if the government goes under then we will have bigger problems.
All I am trying to say is that the TSP is one of your few benefits that you have control over. You control how much you invest, how you invest, and how you use it in retirement. And because you have control, the TSP is one of the best tools to fill all your retirement gaps. And like I mentioned, it is sometimes hard to know what your retirement gap will be with all the unknowns with future inflation rates, tax rates, social security, and more.
This is why when feds ask me how much they should be investing, I tell them “as much as you possibly can”. Because without knowing more about your personal situation, it is almost impossible to know how well someone is prepared. And it is much easier to work with “too much” money at retirement than not enough. And odds are, things will go a lot better than the worst case scenario, and you will still have plenty.
That being said, I don’t endorse postponing all types of trips, entertainment, and nice things till retirement just in the name of filling your TSP as much as possible. You have to find a balance that works for you now, but also takes care of your future needs as well.
And just like anything else, the sooner you start, the easier it is to be prepared. This is why it is so important to start planning as early as possible in your career so that you can make all the necessary adjustments as you go. It is much more painful and difficult to make a measurable difference in the last 2 years before retirement. If you haven’t already, start now and you will thank yourself over and over again.
