TSP Contribution Strategies

By on February 6, 2013 in Current Events, Retirement with 18 Comments

Editor’s note: This is part 1 of a 3-part series on TSP investing.

The TSP is a valuable savings tool for all federal employees.  This is especially true for those in the FERS retirement system, where the TSP serves as one of the three primary retirement income sources, along with the FERS annuity and Social Security.  Utilizing it effectively is key to a comfortable retirement.

Contribution Levels

The first and most important factor that federal employees can control with regard to the TSP is their contribution level.  Contributing at least 5% provides for the matching 5% from the government (for FERS employees), which should be considered a minimum level.  Any contribution percentage less than 5% is giving up matching funds, and is also at a level that will be unlikely to provide the necessary retirement income.  The maximum level for 2013 is $17,500 per year, plus a $5,500 catch-up for those people over age 50.  Contributing the maximum amounts will provide the best odds for a more comfortable retirement, regardless of the actual investments chosen.  The bottom line is that you should attempt to save as much as you can to improve your comfort level at retirement.

Many people are not able to afford to contribute the maximum amounts, but are still concerned that they are going to have a comfortable retirement.  The first step in evaluating any particular situation is to review all potential income sources.  After projecting your federal annuity, social security benefits, etc., you can work backwards to determine how much of your current take-home income will need to be made up by the TSP.  After the income need is determined, you can work through an investment plan to get a feel for how much you will have to contribute to meet your goals.  It is recommended that you go through this entire process with someone familiar with both the federal retirement system and financial planning.  Once the planning is complete, you may find that you need to increase your contribution level.

One method of increasing your contribution level over time is to do so when it won’t affect your take-home income.  For example, if you get a raise or step increase, you can increase your TSP withholding by the same percentage.  Your budget would not change, but you are able to increase your contributions.  The same concept can be applied if you are able to eliminate an expense from your budget.  An example of this is paying off a vehicle loan and subsequently increasing your TSP contributions by the same dollar amount.  This concept could also be applied to paying off a mortgage, no longer having child care expenses, or even dropping your landline phone.  The amounts may seem small, but will have a large impact when accumulated over time.

Roth Option

Contributions can go toward the new Roth accounts or the regular pre-tax TSP.  Roth accounts vary from the standard TSP in that the contributed funds are after-tax, rather than pre-tax.  Roth accounts are not taxed at retirement, however.

The decision on whether to utilize the Roth option should be addressed on an individual basis, factoring in income, age, current balance, etc.  Recent legislation has also allowed for the potential future possibility of converting existing standard pre-tax savings to the Roth account.  This should also be considered on an individual basis if it is implemented.  The decision regarding the Roth account can have a dramatic effect on the future taxation of your retirement, and should be given careful consideration.  If you’re not sure how to evaluate it, get help from someone who is familiar with the issues involved.

Dollar Cost Averaging

“Dollar cost averaging” is a common investment term, and refers to the practice of making consistent dollar amount investments over time.  The benefit of this approach is that during a market downturn, you continue to buy into the funds at reduced prices.  When they rebound to pre-downturn levels, you would then have made a return on that new money, rather than stay flat.  This level contribution concept is somewhat automatic when contributing to TSP, and it is recommended to stay with a level contribution, rather than starting and stopping contributions with market movements.

Outside Accounts

The TSP is a very cost-effective investment vehicle, and offers well-diversified options for the federal employees that utilize it.  There are, however, some occasions when accounts outside of TSP may make sense.  The detailed scenarios are beyond the scope of this article, but you may consider investigating further if one of these situations applies to you:

  • Transferring TSP to an IRA to gain withdrawal flexibility in retirement
  • Transferring TSP to an IRA to gain control of whether withdrawals should come from the pre-tax or Roth accounts (current TSP distributions will come proportionally from each, with no option to select levels)
  • Saving in an IRA for the purpose of investing a small portion of the portfolio in options not available within TSP, such as real estate, gold or precious metals, oil, etc.
  • Saving in an account outside of TSP to build up an accessible emergency fund
  • Saving in an account outside of TSP to build up a fund for the first few years of retirement, when TSP withdrawals would be subject to early withdrawal penalties (retiring before the calendar year you turn 55)
  • Saving in an account outside of TSP in order to save more than the maximum allowed in TSP.

Are You On Track?

Many federal employees question whether they are saving enough, and on pace for their planned retirement.  The answer depends on the individual situation, but it can be helpful to consider an example for comparison.  The following is a theoretical scenario, in which percentages will be used that could apply to any salary.

Assumptions:

  • 62 years old and 30 years of service at retirement (at some future date)
  • FERS annuity will provide 33% of gross income
  • Social Security at 62 will provide approx. 20% of gross income (can vary greatly)
  • 10% of salary contributed to TSP for all 30 years, plus 5% matching
  • Salary increased at a rate of 3% per year over career (including raises and step increases)
  • TSP earned a return of 7% for entire career
  • TSP withdrawn at an initial rate of 4% in retirement

TSP Progress:

  • TSP account value after 10 years:  1.75 times salary at the time
  • TSP account value after 20 years:  4.5 times salary at the time
  • TSP account value after 30 years:  8.25 times final salary
  • TSP income provided at retirement:  33% of final salary

The numbers used in this example will vary based on many factors, such as age, length of service, regular raises, investment returns, etc.  Changes in returns, for example, can have a significant effect over time.  The example is useful, however, to give you a feel for the power of the TSP as a component of your retirement income.  In this situation, with 33% of the final salary coming from the FERS annuity, 20% from Social Security, and 33% from the TSP, 86% of the final salary is replaced.  Considering that the 10% TSP contribution is no longer withheld and FICA taxes are no longer paid, this example provides a higher take-home income in retirement than while working.

Those employees who will be retiring sooner or with less service time will need to target higher TSP balances earlier on to maintain the same level of income.  Please consider your own situation in its entirety before making an evaluation of your progress.

Conclusion

The best place to start if you are considering your contribution levels is to put together an actual retirement plan, and use that to drive the rest of your decisions.  For federal employees, that starts with a complete analysis of the federal benefit package, and what to expect from it in the future.  Once you have an overall plan, you will be able to see what portion of your retirement that TSP will need to cover.  You can then set an appropriate goal and, with that goal in mind, work backwards to determine what combination of contributions and investment returns will be necessary to reach it.  Once you know what you need to do, you can begin the process of getting there.

© 2016 Jason Visner. All rights reserved. This article may not be reproduced without express written consent from Jason Visner.

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About the Author

Jason Visner is a financial advisor with Brook Federal Advisors, and works with federal employees to optimize their retirement benefits. The process starts with a complimentary analysis of the complete federal benefit package, and then builds an overall retirement plan on that foundation. He can provide recommendations on FERS or CSRS annuities, survivor benefits, military/LEO service, FEHB, FEGLI, TSP, IRAs, annuities, and social security. He can be reached at 262-456-5514 or brookfed.com.

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  1. Sue says:

    Which is the best advice/plan of action? “park the money in the C Fund until stabilization occurs and then to reinvest”; put it on “auto pilot – 25% C, 25% S, and 50%”, or “Put it all into the L-Fund labelled for the decade you plan to die in (not retire in), and leave it there”?
    I will be 60 this Aug, and I plan to retire at 62 with 21 years of service. Ty.

  2. MikeeB63 says:

    I have my TSP on auto pilot – 25% C, 25% S, and 50% I. My portfolio is up 29% the past 12 months. I am happy. Also, the dollar cost averaging works. When the market is down you are buying more shares – what’s wrong with that??

  3. Misterpcus says:

    Good

  4. Tunnelrat69 says:

    Since we are talking about retirement and the TSP – at 63 yo, just over 20 years in TSP, total is close to $450K – How am I doing??
    I am kind of conservative now, 50% G; 10% C; 24% S; 16% I  –  been this way for over 6 months – I plan to retire in 2 years at 65, how am I doing??  Reading some of the comments on this forum, I would think 75% of the people are already Millionaires.

    • Just another Gov employee says:

      $450k = $30,000 a year from TSP for the next 15 years or until you reach 80 yrs old. What you would need to know is how much Soc Sec you will be getting to complement your TSP..

  5. J7mmmagnum says:

    Get Real with todays numbers

  6. Luckyus says:

    Hey, I retired on 1/1/2012.  When I started I was a FERS employee 1987.  The most I could put into the TSP was 10%.  Over the years I put in more as salary & lifestyle would permit.  When a ROTH IRA became available outside the TSP my wife & I tried to fund those to the MAX while contributing 12-15% through the TSP.  As i started as a lowly GS-5 but progressed to the GS-12 level it was easy to “tone down” the lifestyle while diligently saving.  Results you ask?  Today at 61 a year into retirement we enjoy our 15 yr old paid for home, our three paid for cars  a 2010, 2009 and an old 2004.  After rolling over the TSP to get better investment choices (still mostly index funds) that 500K balance is sweet.

  7. Bob O. says:

    I very much disagree with the “dollar cost averaging concept”.   Why ride a falling horse all the way down and hope for the best?  If the stock market is cratering, it is a lot better to park the money in the C Fund until stabilization occurs and then to reinvest. That is exactly what I did during the housing market crisis and am very glad that I was proactive. A little common sense goes a long way in protecting your hard earned assets!

    • GonzoDon says:

      Yours is a great strategy if you know how to time the market.  Unfortunately, over the long term, I have yet to meet anyone who has batted 1.000, or even .650, in correctly timing the market.  (How do you really know when “stabilization occurs”, as you put it?  When the market has dropped 20%?  30%?  45%).

      Hence the dollar-cost-averaging scheme.  It’s worked pretty well for me.  (And, yes, I do supplement my dollar-cost-averaging with some attempts to “time” the market for a portion of my stock purchases.  With above-average success, but I’ve made bad timing decisions as well …)

  8. Norm from GA says:

    I found it rather disappointing.  He points out what SHOULD be obvious, that the first 5% contribution should be nearly automatic  for everyone (where else can you get an immediate 100% return-on-investment, instantaneously?)

    But WHAT one should invest in is just as important.  And though he obviously doesn’t want to pick favorites, or predict the market, he should have suggested the obvious…the only advantage of putting money into the G fund over just buying savings bonds, is that it is easier.  Chances are, G fund will never keep up inflation, and even when one actually retires, leaving money in it, or the L fund, has little advantage over just putting it in a credit union savings account…or in the lining of a  mattress.  Diversity is key to any real growth in earnings.

    My best advise for any FERS employee, regardless of career stage:  Put it all into the L-Fund labelled for the decade you plan to die in (not retire in), and leave it there.  It will undoubtedly outpace inflation, or even the C fund, in the long run, and reduces the level of risk automatically each ten years.

    Free advise, and worth every penny.

    • B. Graham says:

      I agree. The author should have stressed diversification, as well as dollar cost averaging, as key to successful investing. A good mix might be 60% stocks, 40% bonds (F fund), and, within the stock allocation, 50% large capitalization stocks (C fund), 25% small/mid capitalization stocks (S fund), and 25% international stocks (I fund). Rebalance at least once per year, and things should work out well.

    • George_97220 says:

      Who the he|| in thier right mind would put 60% of their RETIREMENT money in the stock market, which is just a giant casino?  I’m 50% G Fund and 50% F Fund and I can sleep at night! It pays more than the meager interest of my credit union and, at least for right now, is ahead of inflation. This, of course, could change tomorrow.

      • Jim Call says:

        So here’s a late comment on your wonderful sleep at night plan – for the year, G fund is UP 1.86% and F is DOWN 1.76%. So for the year, you’ve earned $0 on your entire investment. Meanwhile, all the stock funds are up 21.7-37.6%. So while you’ve been stuffing your mattress, I’ve been earning money. Lots of money, I’ll be able to sleep in retirement, while you will be losing sleep over the latest attempts to cut Social Security or FERS Benefits. Even a L Fund would have garnered 15-25%.

        • George_97220 says:

          > G fund is UP 1.86% and F is DOWN 1.76%

          You’re right, and I saw that coming and pulled out of the F-fund. I read the papers.

          > I’ve been earning money. Lots of money

          Well, good for you.
          I guess you don’t think about the fact that you could lose a big chunk of it overnight.
          And take months/years to recover it.
          PLUS the lost interest while that hopefully happens.
          Good luck.

  9. Manage This! says:

    Context and information is pretty much spot on – if you don’t go in with all you can early, then when it comes to retirement you will have two problems – first – you will have established a life style that you cannot maintain on the reduced income and – second – you will have far less funds to work with than you would need even at a conservative life style.  With few exceptions – fed workers don’t make enough to live fat even though they make it appear that they can and are.  Living in credit and hoping to dig your way out is not a solution that works in any situation.  I see the majority of Americans problems relating to economics are a totally skewed interpretation of how their future selves will be with all the potential pay raises and promotions they hope to score.  Reality never hits home until they’re in their fifties and realizing that the six figure salary they expected – just never showed up.

  10. Joe999 says:

    Content of the article was ok but poorly written.

  11. jimijr says:

    All true, very good article, Jason. It was dollar-cost averaging that enabled me to climb out of the hole in 2009; I had half-again as many shares going up as when it went down in 2008. I came out with 4X my high-3 and am doing okay since shifting to a traditional IRA.. Give ’til it hurts, your future self will thank you.

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