To many federal employees, the Thrift Savings Plan (TSP) is the most valuable piece of their retirement puzzle. To maximize your TSP, you’ll need to do more than just contribute; you will also need to steer clear of these common mistakes:
1. Not having a TSP plan
The TSP may be the largest retirement vehicle for federal employees, so it’s important to evaluate how it fits into your entire plan.
What does your retirement look like? If you’re married, talk to your spouse about what you envision your day to day being like.
- How much money do you need to have in your TSP at retirement?
- What amount of risk are you comfortable with?
- What does your annual contribution and rate of growth need to be to reach that goal?
You need to effectively plan your TSP if you want to be able to retire. There is no one size fits all solution or effective ‘water cooler’ retirement planning.
2. Not making at least a 5% contribution
If you aren’t contributing at least 5% to your TSP plan you are leaving significant money on the table. Your agency will match up to 5% of your contributions to your TSP on your behalf. That is effectively a 5% raise as the contribution is based on your annual income.
3. Investing 100% into the G Fund
The G Fund is one of the five index funds which is invested in U.S. government securities that are only issued to the TSP. It’s attractive to some because it offers the lowest volatility, allowing you to earn interest without fear of losing your principal.
The G fund may be great at consolidating risk with no diversification but it produces poor long-term returns. The G fund is entirely dependent on federal fund rates set by the Federal Reserve.
When you have the entirety of your money in bonds you are exposing your nest egg to inflation risk. Someone who chooses to invest in a more diversified manner may fare better long term after inflation and taxes are taken into account.
Take John for example:
After the financial crisis of 2008, John became extremely conservative with his investment strategy in fear of losing his nest egg, so he invested all of his TSP plan into the G fund (2.3% 10-year return). John maxed out his contributions for the past ten years and grew his TSP account to $600,000. Had John invested 60% of his account in the C fund (13.7% 10-year return) and 40% in the G fund he would have seen a blended total return of 8.8% versus only 2.3%. John’s fear-based decision resulted in his TSP earning less than inflation over the same time period.
Note: This is a hypothetical example and is not representative of any specific investment. Your results may vary.
4. Choosing and forgetting a life cycle fund
The lifecycle funds are comprised of all five of the TSP funds and automatically shift to more conservative allocations as you approach retirement.
While this is a good place to start, there is no one size fits all solution to maximizing your TSP. The life cycle funds do not take into account personal risk tolerance. You and your co-worker may both want to retire in 2030, but does your retirement look the same?
5. Having outstanding loans
If you leave federal service and have an outstanding TSP loan balance, you can pay it back within 90 days of the date of your separation. If you fail to do this, the IRS will declare it as a taxable distribution, potentially subjecting you to significant tax and penalties. Delays in repaying the loan may also affect the processing of withdrawal if you choose to make a withdrawal election after retiring.
6. Not synchronizing your TSP with your outside investments
Your TSP is valuable but it should not be your only investment account. To effectively plan your retirement you should coordinate your TSP with your IRA as well as non-retirement accounts to make sure they are all working in harmony to help you achieve your goals.
7. Failing to update your beneficiaries
Do you know who your beneficiaries are? When is the last time you checked?
You should keep your beneficiaries current for all of your federal benefits but especially your TSP.
If you do not have a Designation of Beneficiary form on file with the TSP, your money will be distributed according to the following order of precedence required by law:
- To your spouse;
- To your child or children equally, not including step-children or adopted children
- To your parents equally
- To your appointed executor or administrator of your estate
- Next of kin living in your state of residency at the time of death
The TSP will not honor a will, a prenuptial agreement, a separation agreement, a property settlement agreement, a court order, or a trust document when distributing your account. By law, they must pay the properly designated beneficiary or beneficiaries on Form TSP-3 or, if there is no form on file, follow the order of precedence explained above.
If you haven’t looked at your TSP-3 for a while, take a look at it now. You want to make sure that it reflects your current wishes.
8. Failing to understand your withdrawal options
Your options for withdrawing your money are:
- Withdraw your money as a lump sun
- Withdraw your money as equal monthly payments based on the dollar amount or actuarial tables
- Have the TSP Purchase a life annuity for you
In options one and two, you can have a part of your funds transferred into an IRA or another employer-sponsored retirement savings plan, preserving a tax-favored status. After age 70 ½ you are required to take minimum distributions.
9. Investing based on past performance
Don’t pick a fund based on the top performance of previous years, make a decision based on your risk tolerance and how it matches your goals for the future.
What are your goals for retirement income and how do you plan to meet them? If you’d like to discuss your plan, I welcome you to schedule an introductory call.
District Financial Advisors, Justin Holtz and LPL Financial are not affiliated with or endorsed by the Federal Government. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.