The TSP is a great retirement saving tool, but how does it stack up next to other plans in the private sector such as a 401(k)?
Let’s dig into it.
In January of 2020 the average TSP balance was $138,933 while the average 401(k) balance was $112,300. The market has seen some turbulent times since then but it is very likely that the average TSP balance is still way ahead. This one fact tells us a lot about how well these plans function.
The TSP does a few things extremely well that make it hard for most 401(k) plans to keep up.
- The Match-The government offers up to a 5% match. This is free money that all eligible feds should be taking advantage of. If a 401(k) plan has a match at all, it is very rare for a company to be as high as 5%. Most matching plans are around 3%.
- The Fees- It is not uncommon for participants in a 401(k) plan to pay 1% between fund fees and advisory fees. Federal employees on the other hand, pay between 0.026% and 0.039% depending on what funds they are in. That means that someone in a 401(k) with a 1% fee is paying 25-38 times what feds are every year. 1% may not seem like that much but it really adds up over the years.
Let’s do a quick example. Say one person invested $500 a month in funds that earned 8% per year. He kept investing for 40 years. At the end, he’d have more than 1.6 million dollars. But if he would have paid a 1% fee every year, he would have only ended up with about 1.2 million dollars. That is a difference of $400,000 over a career!
Now, I do want to mention that all fees aren’t bad. I often charge fees in my work as a financial advisor. Just like with everything else, it comes down to what you are paying compared to what you are getting. If you find value in the services you receive then by all means pay the fee. Just make sure you understand the fees you are paying and what you get in return for those fees.
- The Funds- The TSP funds are a head and shoulders above most 401(k) plans because of their simplicity. Because most employees struggle to know how to invest, the simpler the better. For the average Joe, these 5 funds are plenty to build a solid portfolio.
When you put all these advantages together, the TSP becomes an impressively powerful retirement planning tool. Now, I am not saying that 401(k)s are bad, because they aren’t. All I am saying is that it is very hard to find a retirement plan that trumps the TSP.
All that being said, the TSP is merely a tool. And just like any tool, the TSP is absolutely useless until you start using it. Those that truly understand the merits of the TSP are those that invest into it often and consistently. And it is not a surprise that these same people are generally the ones who become TSP millionaires.
