The TSP Turns 25

By on April 12, 2012 in Retirement with 14 Comments

The Thrift Savings Plan turned 25 this week.  The TSP opened for business on April 1, 1987, with the creation of the first 600,000 personal accounts for those switching from the Civil Service Retirement System (CSRS) to the new Federal Employee Retirement System (FERS).

The establishment of the TSP came as part of the FERS Act, signed by President Reagan on June 6, 1986.  The goal was to transition new and recently hired federal government employees from a single “defined benefit system” or single pension, to one that mixed a reduced pension with Social Security and a new “defined contribution” system, which became the Thrift Savings Plan.  The government would provide matching funds for up to 5% of money that individuals saved and invested from their salaries in the TSP.

Due to delays in appointing board members and the executive director to oversee the creation and administration of the new TSP, the opening of the first TSP accounts was delayed from January 1, 1987 to April 1st of that year.  The G Fund was the first fund available to new TSP investors, and the F and C Funds began accepting contributions in January 1988.

So how have these original funds done since then?  All in all, pretty darn well, although the C Fund especially has experienced a lot of ups and downs since then.

Take, for example, an investor who started contributing to the TSP in early 1988 as a GS-07 Step 1, making just over $18,700 a year back then.  With promotions and increases in salary, this individual gradually worked her way up to a GS-12, making approximately $60,000 by April 2012.  This represents a 5% increase in wages a year, on average.

If this individual invested 5% of her salary each year into the G Fund (the contributions in these examples were invested monthly instead of biweekly for ease of calculation), and the government provided another 5% in matching funds, her TSP account would have grown from $0 in January 1988, to approximately $140,100 at the end of March 2012.  She would have experienced no drops in her balance during that time.

Had she invested entirely in the F Fund during this time, she would have grown her investments to approximately $172,300 by April 2012.  However, she would have experienced a few declines in 2004, in late 2008, and again in late 2010, but only by a few thousand dollars.  She would also face significant interest rate risk by early 2012, as rising interest rates in the future could negatively impact the value of the bonds held in the F Fund.

Interestingly, had she invested in the C Fund – the U.S. stock market index fund – she would have grown her investments to over $197,800 during this time, despite the wild gyrations of the stock market especially in the 2000s.  For example, her fund balance would have dropped from over $108,500 in mid-2000 to just over $65,000 in September 2002.  It would not have recovered for another year, even with steady investments each month.  After reaching $166,200 in October 2007, her fund balance again plummeted to just over $85,700 in early 2009.  It later recovered and grew to new highs again with additional investments, but not everyone could have stomached these drastic ups and downs in their fund balances.

An alternative would have been to diversify into a moderate portfolio, with 60% going into the C Fund and 40% into one of the bond funds (the G or F Fund).  For example, with 60% of her contributions going to the C Fund and 40% to the F Fund, she would have just over $187,600 by the end of March 2012, slightly less than the C Fund but more than the F Fund alone.  And she would have avoided some of the drastic declines in her fund balances.  Her $85,000 in mid-2000 would have dropped briefly to just under $71,000 in September 2002, and then would have more than recovered to $85,000 again in October 2003, for example.  While still a decline of around 16%, that decline was nowhere near the 40% decline in the C Fund alone.

Similarly, from a high of $143,700 in October 2007, this moderate portfolio would have dropped to $101,000 by February 2009 before recovering with steady contributions a year later.  While this was a significant drop of around 30%, this was less than the drastic decline of almost 50% in the C Fund during that same time.  And the S and I Funds, which were introduced in 2001, suffered even steeper declines during these significant market gyrations.

While the TSP is still quite young at 25, investors have experienced many ups and downs since it became operational in April 1987.  The general trend since its inception has been up, but recent experience teaches us that sudden and sometimes sustained drops do happen from time to time.  The prudent investor should thus understand his or her own risk tolerances and invest in the TSP accordingly.

For further details on the data used in this article, see TSP Fund Returns, 1988-2012.

W. Lee Radcliffe runs the Web site TSPstrategies.com and is the author of TSP Investing Strategies: Building Wealth While Working for Uncle Sam.

© 2016 W. Lee Radcliffe. All rights reserved. This article may not be reproduced without express written consent from W. Lee Radcliffe.

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  1. W. Lee Radcliffe says:

    I’d like to address some of the calculations in the comments
    section, so that people do not draw the wrong conclusions based on incomplete
    information.

     

    First, the total personal contributions by the hypothetical
    TSP investor in this article was $42,393, which, with the automatic government
    contribution, brings her total investments over 25 years to $84,786.  Also, it is important to note that over half
    of her contributions – $23,601 – came in the last 10 years of this 25-year time
    span, because her income was greater over this timeframe.  This was not a very long period to grow her
    investments, essentially someone starting at age 22 with $0 and reaching the
    age of 47 this year. 

     

    Next, I ran a separate analysis of the monthly returns, this
    time controlling for monthly inflation over the entire 25-year period (the
    monthly inflation figures can be found here).  After adjusting for monthly inflation, had this
    hypothetical TSP investor invested solely in the G Fund, she would have a total
    of $103,620 on April 1, 2012.  Had she
    invested solely in the F Fund, her investments would total $125,473 by this
    time, removing inflation.  Had she
    invested solely in the C Fund, the total adjusted return would be $139,214.  

     

    Thus, this hypothetical investor enjoyed returns on each of
    the funds even after factoring in inflation over this time frame and including
    all of the ups and downs of the funds in the late 1980s, the 1990s, and the
    2000s to 2012.  She recovered well after
    the major declines in 2000-2002 and from late 2007 to early 2009, for example.

     

    Of course, the results will be different for TSP investors
    depending on when they started investing, how they allocated their
    contributions among the funds, and how much they contributed.  In the example for this article, this
    hypothetical investor contributed under $3,000 in 2011 – a total of $5,748 with
    the government match – well below the $16,500 limit for that year.  Had she contributed more, she would have
    enjoyed even greater growth over the long term. 

     

    I have a fuller
    discussion here.  

    • PublicCitiZen says:

      For my part, no misrepresentaion was intended, nor was I trying to imply misrepresentation on your part.

      It’s just that in my view, the best case scenario for the example you used, ain’t that great.

      200K sounds like a lot of money when you make 60K, but if it designed to supplement your pension for 20-30 years, it’s not a lot of money.

  2. Jimijr says:

    That is me to a “T” except I contributed a whole lot more that 5%. Like the hypothetical, my ending balance after 24 years was twice my contributions, but over twice the example’s ending balance.

    Public Citizen, I estimated my total return at 6% using the rule of 72.

    • PublicCitiZen says:

      If your contributions doubled in 24 years using the rule of 72 your average return was 3%.  72/24 = 3.  Unless you want to count the government match separately, in which case you are correct for the amount the government matched.

      I’m in the same boat.   I’m going have a large sum at retirement, but that’s because I’m saving a large sum every year.  Not just the 5% matching.

      How did you find your total contributions for your 24 years? I looked on the TSP website and couldn’t find a total without adding it up year by year.

      • Jimijr says:

        You are correct that doubling in 24 years indicates 3%, but the sum total of contributions was not on ‘deposit’ for 24 years. Rather, the average value should be used, which is one-half the total. Therefore it underwent two doublings, once every 12 years, for 6%. Dig?

      • Jimijr says:

        Oh, I just saw your question. You have your year-end pay stubs. I kept track on a page in a ledger. Then I also kept a graph going, sum of contributions and quarterly balance. This allowed me to use curve-fitting techniques to reach an independant estimate, also 6%. You can also use the first two terms of a Taylor’s Series expansion of BAL/CONT=[1+x]**n, where n=24. Ratio is 2, so x=0.06.

        • PublicCitiZen says:

          Thanks. I was hoping for the ability to click and track, but at least I know that I have to do the research myself. I think I’ll suggest to the TSP website that they make the info more easily accessible.

          Good point on the ROI. My point in the original post was that the growth does not really do much more than keep up with inflation.

          Even after seeing the author clarifying his methodology, I believe the returns show that having the equivalent of 3 1/2 years of final salary as you TSP nest egg is frightening and instructive.

          And if you truly want to be able to have enough to live on in retirement, you need to save far more than the matching amount.

          But you and your figures are 100% correct. I should have used the 50% figure to calculate ROI.

  3. 2012retire says:

    I started  with the TSP back in 1987.  November 1988 I had $72.58 as a balance.  After the 25 years I will retire this November with over $500,000.   Not too bad.  This takes SAVING more than the 5%.  In recent years I have maxed out contributions.  I have done no transfers into the TSP during that time and have even taken out two loans over that 25 years.

    • Vicki S Harris Civ says:

      wow you did well…why did the author not mention the early to mid 90’s when we were losing money had over fist from which I have never fully recovered…..

  4. PublicCitiZen says:

    From the article:

    “So how have these original funds done since then? All in all, pretty darn well, although the C Fund especially has experienced a lot of ups and downs since then.”

    Not really. 

    If my calculations are correct, and the above federal employee’s raise were evenly spread out over 25 years, then their average salary was $39,350.

    That means with matching contributions, they put in $98,375 before return on investment.

    In the authors best case scenario, the employee now has $197,800 in TSP retirement.  A net gain of $99,425.  That means that the employee’s Return on Investment for the past 25 years is 2.83%.

    Adjusted for inflation the $197,800 they have in TSP is worth $98,698 in 1987 dollars.  Or $323 more than they have in total contributions.

    After 25 years, that’s a  $12.92 gain per year.

    Once again, that’s using the best case scenario the author presented.  Everybody else lost real money in every other example presented.

    The only benefits to employees have been matching funds and tax exemption, the same as in any private sector (401)k.

    • Mikecanoeing says:

      Well said Public Citizen! You have explained why our standard of living just “seems” to be falling behind,because it is!

    • Black_Diamond says:

      Im CSRS with no match. I put about 80k (98% between 9/99 and 8/07) My balance is 146k so i made 82% in 13 years. If you do weighted average I did 100%. You need help

    • RsubG says:

      Yeah the numbers aren’t very inspiring at all. You do have to account for the fact that this employee would have only put in half of the 98k that was invested because of the match. Therefore, she turned 49k into 197k. Not as shabby if you think of it that way but still not enough to retire, not even close.

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