The TSP is a retirement plan for federal employees. It has limited investment options, but its simplicity and low cost structure makes it a powerful part of a federal government retirement plan. Besides the TSP, federal employees can receive other benefits during retirement including a FERS supplement, pension, social security, health insurance, life insurance, etc. But these benefits alone may not may not provide enough for a federal employee to afford retirement. It’s important for federal employees to contribute to their TSP account while working so they are financially comfortable during retirement.
So, how do we maximize the TSP? Is there some secret way to ensure that you’ll never have to worry about money again? In this article, we will go over some ways you can invest like a pro, and get the most out of what you put in.
5% Employer Match
If you contribute 5% of your pay to their TSP account, the federal government will match the contribution by adding another 5% into your TSP account. That is a huge benefit! There might be circumstances where you have a financial crisis and can’t contribute 5% of your pay to the TSP, but you should try everything in your power to contribute at least 5% of your income to get the 5% employer match.
Some people even go above and beyond. They try to maximize their TSP every time. The maximum amount you can put into your TSP currently is about $23,000 per year. There are also circumstances, if you’re a little older, where you can contribute even more than $23,000 per year. That is not financially possible for everyone, but if you’re able to maximize your TSP while maintaining a standard of living that you’re comfortable with, then it will certainly provide you with more financial flexibility when you retire.
What Can You Invest In?
The TSP keeps things relatively simple. There are five basic funds that you can invest in (G, F, C, S, & I). Here is a rough breakdown of what each fund is invested in:
G Fund – Government securities
F Fund – Bonds and other debt instruments
C Fund – Matches the S&P 500 (500 largest companies in the United States)
S Fund – Small to mid-sized companies in the U.S.
I Fund – International stock markets
Generally, G and F funds are more conservative. Their returns are very consistent in the short-term but lower in the long-term. The C, S, and I funds are more aggressive. Their returns are less consistent in the short-term but higher in the long-term. If you would like to check out the returns of these funds over time, check this link out.
There are other TSP funds called the “L-Funds”. Currently there are 10 different L-Funds. These funds are just a combination of the basic 5 funds we discussed earlier (G, F, C, S, & I). I won’t go into too much detail on how L Funds work. But, here is a great article about it that you can check out here.
What are the Best Investments?
This is the golden question. The answer is: it depends.
If you are just barely starting out your career or you are not planning to touch your retirement money for a long time, you probably want to invest in more aggressive funds like the C, S, and I funds. These investments may go up and down a lot in the short-term but over time they have proven to be a great long-term investment. The pitfall that some people get into is when they see the return of the C, S, or I funds is very low one year and they decide it’s not a good idea to invest in them. Never assume you will get the same return this year compared to last year’s return. You need to use long term data if you’re not going to touch your money for a long time.
If you are about 10 years from retirement or planning to use your retirement money soon, it’s good to start investing SOME money into more conservative funds like the G, and F funds. It’s probably not the best idea to invest all your money into conservative funds because you want your money to last for your whole retirement (retirement could last up to 30 years or more).
Sometimes we tell our clients who are approaching retirement or retired to invest 40% into more conservative funds, and 60% into more aggressive funds. The goal is to have about 7 years of spending money in conservative funds. But, this example DOES NOT apply to everyone.
Traditional vs ROTH
The last bit of advice we want to go over is the power of the ROTH TSP. Basically, there are two options you have with taxes and the TSP. You can pay taxes later (traditional TSP) or you can pay taxes now (ROTH TSP). If someone is just starting out their career as a federal employee, they will most likely be in a lower tax bracket now than when they want to retire. They also have many years for their ROTH TSP to grow without ever paying taxes on the gains. For this person, it’s a great idea to invest into the ROTH TSP now so you don’t have to pay more taxes later.
Conclusion
We discussed many strategies you can apply to get the most out of your TSP. Some of the strategies and examples we used won’t always work perfectly for you. As with all finances, it’s very circumstantial. But, we hoped that helped to get a clearer picture of any way you can get more bang for your buck. If you are still nervous about any other topic, we have countless resources on our website. Feel free to check it out here.
