10 Awful TSP No-Nos You Should Avoid

By on October 16, 2016 in Retirement with 0 Comments

Image of the word 'No!' underlined by a red pencil

Me: “Who helped you select the funds in your Thrift Savings Plan?”

Client: “Ummm…..I just picked what my friend did.”

Me: ”How much time did you spend researching what you picked?”

Client: ”I didn’t.”

Me: <sigh>

This sort of exchange happens quite a bit and much more than it should.

What most investors don’t realize is that at some point, your TSP will most likely be the largest income producing asset you own. Sure your home could be worth more, but, your home isn’t going to send you home with a monthly check to live off of.

There are several reasons why investing in the TSP makes sense for so many people, but the primary reason you should take advantage of your TSP is because once it’s set up there’s nothing much left to do (except the occasional review as I’ll discuss).

Your TSP can be automatically funded using your earnings at your job – you won’t have to remember to make contributions.

However, there are some big TSP no-no’s I’ve seen through the years of helping federal employees that I think you should avoid. And the sad part is that many people make these mistakes without even knowing . . . don’t become one of them.

1. Not Saving at All in the TSP

If you’re a full-time federal employee you haven’t taken advantage of the TSP . . . why not? Again, once you have it set up, there’s not much left to do.

Investing within the TSP will help you automatically save for retirement without hardly thinking about it. Before you even have access to your spending money from your paycheck, your TSP contribution will be made. Easy peasy.

Seriously, I’ve had clients who chose an allocation at the beginning of their career and just kept socking money into the TSP and had no idea they had over $300,000 saved.

You need to start investing for retirement. Unless, of course, you like the idea of living on Social Security payments alone (that’s a scary prospect).

Even if you’re wealthy, why not save even more for the future?

How could it hurt? You live the second part of your life better than your first? Sounds pretty alright to me.

2. Just Saving Enough to Get the Match

The TSP offers up to a 5% match and I’ve said many times that not taking advantage of this is biggest federal employee retirement mistake.

Chances are you should invest more money into your retirement than what the government will match in the TSP. It would be a good idea to research just how much money you need to retire and consistently contribute that amount.

3. No Match, No Savings

So, once you’ve met the match, you’re done contributing right?!

Wrong!

It’s perfectly fine to invest above and beyond the match, or even better yet for many the best idea would be to open a Roth IRA outside of the TSP. And no, the Roth TSP and Roth IRA are not the same things.

Remember, the TSP is a great way to automatically make contributions toward retirement. Take advantage of this super easy way to invest your money. It’s still worth it.

4. Investing Purely Into the G Fund

Look, I get it.

You want safety and are worried about losing money in the market. Maybe you invested during 2008, experienced a big loss and vowed to never invest in anything but the G-Fund until the end of your losing money to inflation days.

The problem with the G-Fund is for many nearing retirement – it simply doesn’t earn enough to allow people to retire.

Not only that, it has a hard time even keeping up with inflation. It may not look like you’re losing money, but that $50 dollar bill may not buy the same $50 worth of goods it would 5 years ago if your investment didn’t keep up with inflation.

Federal employees and just people, in general, are trying to retire earlier than generations past. This is all fine and dandy if they have enough to actually afford to retire. Unfortunately, I see more and more pre-retirees investing their entire account in the G-Fund that’s earning less than inflation is rising and therefore they’re losing purchasing power.

If you want an in-depth analysis on the G-Fund, check out my article here on the true cost of the G-Fund.

When you invest in your TSP, do your homework and find out about your investment options – don’t let your employer’s default choice be your only choice.

5. Not Getting Professional Help Choosing Your TSP Investments

Okay, so if you’re supposed to pick the investments in your TSP, how do you know which ones to choose? It’s best to hire a professional.

A good financial advisor can drill down into the specifics of the investments within your TSP and point out ways to improve your portfolio – and show you which funds you should avoid like the plague.

It can be even more helpful to meet with someone who understands the federal system and your unique situation.

Don’t go it alone. Get good help; you’ll save more and earn more.

6. Asking Your Coworkers for Help Choosing Your TSP Investment Options

Image of two co-workers talking at the water cooler

Remember the client at the beginning of this article? I can assure you that most of your coworkers haven’t given much thought into their TSP. One of the ways I know is because I’ve probably met with many of them. Get professional help, not the off-the-cuff recommendations of those who don’t live and breathe investments on a day-to-day basis.

Unfortunately, you might find yourself pressured to choose investments within your TSP during work when you need to be working, not making decisions about your long-term future. Instead, spend some free time after work to sit down with a financial advisor who knows their stuff.

You may not want to make the time for it but make the sacrifices now, so you won’t have to later.

7. Not Reviewing Your TSP Consistently

While the Thrift Savings Plan is a great way to ensure contributions are made by having them come directly out of your paycheck, that doesn’t mean you can sit back, relax, and forget about your TSP altogether.

Instead, you need to review your TSP on a regular basis and making sure it aligns with your risk tolerance and strategy.

Should new funds become available within the TSP (it’s possible, though unlikely), you’ll want to know about them and consider them as potentially better options for your investments. You’ll also want to consider any expense ratio increases as well as the volatility of your investment mix as you near retirement.

8. Borrowing from Your TSP

Borrowing from your TSP is definitely a no-no. I say this for two reasons:

You’ll make less money – Money not invested is money that’s not earning money. Taking money out of your TSP defeats the whole reason you put it in there in the first place!

You might find yourself paying extra penalties and taxes– If you don’t have enough money to pay back your TSP loan in time, your unpaid balance will be considered a distribution. That means you’ll be looking at a 10% penalty in addition to higher income taxes.

Repeat after me: My TSP is not a piggy bank, nor is it a good source of cash.

Don’t borrow from your TSP. You should have an emergency fund in place for emergencies.

9. Market Timing With Your TSP

Your TSP is a great long-term investment vehicle – but not something you should play around with as the market fluctuates.

Find the right funds with the help of a professional, reevaluate your funds from time to time, but whatever you do don’t let your emotions dictate your investment decisions.

The TSP is for investing, not day-trading.

10. Making Terrible TSP Decisions When You Leave Your Job

When you leave your job, whatever you do, don’t cash out your TSP. Remember those penalties and tax implications if you take a TSP loan and don’t pay it back? Well, the same applies here.

However, I would encourage you to consider an IRA rollover with your TSP after you leave your job. Not only will that open up many more investment options than your old employer gave you, but throughout the process, you’ll learn a great deal about how investments work.

TSP’s are a wonderful investment choice as long as you avoid all these no-nos. Do your research, invest with intentionality, and you’ll be just fine.

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

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About the Author

Cooper Mitchell is an Investment Advisor Representative for Dane Financial, LLC, a Registered Investment Advisor, as well as a licensed insurance agent for Dane Advisory Group, LLC. He welcomes questions from federal employees on retirement matters. You can find out more about him and his company at his website, fedretirementplanning.com. Dane Financial, LLC and Dane Advisory Group, LLC are affiliated companies.

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