Dave Ramsey answers questions from all over the world on his very popular radio show.
And over the years, he has gotten many many questions from federal employees about their tsp and retirement.
In general, Dave Ramsey has some great advice. But sometimes it doesn’t apply perfectly to everyone. And the more I think about it, Dave Ramsey has a hard job. He has to give advice on-the-spot that has a high probability of applying to a large group of people. Consequently, that advice may not always be very specific, or tailored to your situation. But if I was in Dave’s shoes and spoke to millions of listeners a week, I would have to make my advice generic as well.
So here is some of Dave’s advice on the TSP along with my comments.
Dave’s Thoughts:
He says to be debt free except your mortgage before you start investing in the TSP. He also encourages you to have a 3-6 month emergency fund before investing as well.
My Thoughts:
I do agree that you should have an emergency fund before you think about long-term investments. You don’t want to be forced to sell investments when the market is down because something happens in your personal life.
In an ideal situation, everyone would be debt free and still have lots of time to prepare for retirement. For many people, if they waited to be debt free (except their mortgage), they would have much less time to save and let their TSP grow. It often makes sense to attack debt while also saving in the TSP. This would allow you to get your agency’s match while also getting you in the habit of consistently investing.
That being said, credit card debt and other high-interest debt should be attacked as quickly as possible. Overall, there is no perfect formula. Each persona will have to find a balance between tackling debt now and preparing for the future.
Dave’s Thoughts:
He openly suggests on his website that feds should invest their TSP in either an 80% C fund, 10% S fund, and 10% I fund or 60% C fund, 20% S fund, and 20% I fund.
My Thoughts:
Let me start off by saying that there is no such thing as a bad TSP allocation but there is not one or two allocations that make sense for everyone. Dave’s allocations are very aggressive and this may make sense for younger employees that have lots of time before retirement.
But as people approach retirement, their needs change. If someone invests aggressively up till retirement they are taking a risk that the market might drop dramatically right before or right when they retire. If this happens, it is very difficult for them to recover because they often have to start withdrawing from their TSP when the market is low to maintain their retirement lifestyle. Most people will want a more balanced strategy to give them more stability into retirement.
Dave’s Thoughts
He suggests that federal employees should always move their TSP accounts into an IRA as soon as they are able too. For most feds, this is at retirement.
My Thoughts:
An IRA is a great tool and has a lot of great uses. But just like a hammer, it is not perfect for every job.
Here are some of the pros and cons of keeping your TSP
Pros
-You are familiar with it and know what the investment options are.
-The fund fees are low.
Cons
-Limited investment and withdrawal options
Here are some of the pros and cons of moving your TSP to an IRA
Pros
-More investment options and withdrawal flexibility.
Cons
-Potentially higher fees if you don’t find low-fee investment options.
-More complex
So again, there is no clean cut answer. It just depends on what you care about the most and what you want to deal with in retirement.
Conclusion
Overall, I think Dave Ramsey has some great advice. The world would definitely be a better place if more people took his advice. But just like all advice (mine included), it is up to you to decide if it makes sense for you.
