The Top TSP Mistakes That Can Wreck Your Retirement

November 10, 2020 4:37 PM
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The Thrift Savings Plan can be a powerful wealth accumulation tool, especially when used wisely. Here are the top three mistakes that Feds makes with their TSP.

Not Starting Early

When it comes to investing, time and compound interest are key. When those two things get together, the results can be incredible. That is why it can be so powerful to start investing early in your career.

Here is a simple example to emphasize this point:

Let’s say a Fed who makes 50k per year starts investing at age 35. He contributes 5% of his salary and his agency matches his 5%. This means that he puts about $208/ month into his TSP and his agency adds another $208/month. Let’s say he continues to do this without increasing his contribution for the next 30 years. Assuming a 7.5% return, he’d retire with over 500k at age 65. 

Pretty cool right? Now let’s change just one variable in this equation. Let’s say that he started investing 10 years early at age 25 instead of age 35. That one change changes his ending balance at retirement to almost 1.2 million dollars! 

That is the power of investing while you are young. Even if you can’t invest very much, start as soon as possible!

Not Understanding The Funds

Especially for a newcomer to investing, the TSP funds can be daunting and confusing. That being said, understanding at least the basics can pay off big over the long haul. 

The first thing that a Fed should know is when to be aggressive and when to be conservative. When a federal employee is young and early in their career, they should be investing primarily in the C,S, and I funds. These funds are stock funds and will grow much faster than the F and G funds. Many Feds regret spending way too long in their early career in the G fund. While the G fund does protect you from losing money, it also protects you from making much at all. 

But as an employee approaches retirement, it often makes sense to get more conservative. This way, their account balance won’t be bouncing too much when they need to start drawing money out. 

For those that don’t want to worry much about their TSP investments, the L funds might make sense for you. The L funds are designed to automatically get more conservative as you approach retirement. They aren’t a perfect solution, but they are the government’s best guess at a one-size-fits-all approach.

With all that being said, the best investment strategy is what makes sense for your personal situation, so make sure you do the research to understand your options. 

Panicking In Downturns

Downturns in the market can be scary, especially when our life savings are involved. That being said, we have to make sure that our decisions are rational. Market downturns are a very normal part of the economic cycle and the great investors know that downturns are the best time to invest.

For most Feds, it makes the most sense to just ride out the waves and stick to their long-term investment strategy. Statistically, someone that just buys and holds will do much better over time than someone who is trying to time the market. Like the famous saying goes, “it is not about timing the market, it is about time in the market.”

Conclusion

Because of the wealth building power of the TSP, many Feds become millionaires every year. The vast majority of these millionaires aren’t made through luck or winning the lottery; they are made by consistent effort and patience.

© 2020 Dallen Haws. All rights reserved. This article may not be reproduced without express written consent from Dallen Haws.

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About the Author

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at PlanYourFederalBenefits.com.

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