Are you new to the federal government? Congratulations! You have entered into one of the best employee benefit arrangements in the world. It may not be what your co-workers received but it still offers a variety of opportunities, as well as necessary decisions. Stay on top of your benefits to make sure you understand topics like the health plan, pension, sick leave and annual leave.
Also, as a new federal employee, whether you are aware of it or not, you will be signed up for the Thrift Savings Plan or TSP. 3% of your pay will be debited from your paycheck before income taxes and diverted into the investment account. For example, if you begin earning $50,000 annually, then $1,500 over the course of the year will go into your TSP rather than your pocket. In addition, your agency will place an automatic contribution of 1% and a matching contribution of 3% of your pay into the account for a total of 7%. This equals $3,500 every year not accounting for growth of the account’s investments.
You are, of course, allowed to opt out of all this if you feel the cash flow is needed to cover your monthly bills or other debts. However, the 1% automatic contribution will continue so you will have a TSP balance even if you elect not to participate. The merits of contributing, at least up to the default 3% if not more, are obvious: it assures you are accumulating a balance for retirement and taking advantage of available tax planning and matching. Life is expensive so the decision whether to contribute and how much can be difficult, especially in the beginning stages as you get a feel for what your paychecks are going to be each pay period and if you need to move or buy a car to take on your new federal position.
Regardless of how much is being deposited, the question then becomes, “what is it being invested in?” As it stands right now, the default option would be what is called the G fund. This refers to a federal government bond fund. It earns a rate of interest that is relative to today’s environment.
Whether the G fund is the best place to be for you personally is not something that can be answered by this article. Questions surrounding your retirement goals, tolerance for risk, investment experience, and financial standing would be necessary to determine that answer.
However, Congress is seeking to change the default investment option away from the G fund. A bill is moving through the committees that would automatically enroll new hires in something called the L funds. These are groupings of TSP investment options that are based on the enrollee’s age relative to retirement. For example, if you are 35 when you begin work for the federal government, you have approximately 30 years to retirement. If you are to reach retirement age in 2050, you would automatically be invested in the L 2050 fund. By comparison to the G fund, this option has approximately 87% of the value invested in stock securities like C, S, & I funds that are subject to market fluctuation. This isn’t to say market fluctuation is always bad or good. Provided the markets cooperate long term, you should earn a higher return than the G fund. The message here is to follow these changes as they relate to your personal finances and make sure you are comfortable with the decisions being made, otherwise it is possible some very important ones could be made for you.
If you would like an assessment of the pace you are on toward your goals, feel free to give me a call or email.