As the new year is upon us, here are a few tips for the Thrift Savings Plan (TSP) that, if executed properly, could have a positive impact on your retirement.
Max Funding the TSP
This past year found a lot of people caught off guard as they were attempting to contribute the maximum annual amount to their TSP accounts. It became somewhat confusing estimating the amount per pay period once the year had already started, and the realization set in that there were 27 pay periods in 2023. The schedule will revert to the typical 26 pay periods in 2024 along with an increase in the maximum annual contribution as well.
For the year 2024, the new maximum amount for funding your TSP (or any 401(k), 403B, 457, etc.) is now $23,000, up from $22,500, for those under age 50. For those over age 50, catch-up contributions remain the same at $7,500.
For a simple calculation, $23,000/26 = $884.60 a pay period, or $885 under age 50.
For catch-up contributions, it would be $7,500/26 = $288.46
Grand total = $1,173 X 26 pay periods = $30,498 ($2 shy of max), or simply fund $1,174 per pay period, and the system will automatically lower the deduction to prevent overfunding during the final pay period.
Why does max funding matter? Perhaps it’s because over time, the last decade of work, especially the last 5-6 years, can be a significant period for retirement savings. Many federal employees’ salaries have increased and debt is now low, perhaps only a mortgage to pay. Now they can save at the maximum since bills are lower and income is higher. You may have realized that you haven’t saved as much as you want to have saved for retirement. This may be fueling the desire and goal of maximum funding to your TSP.
Let’s illustrate how max funding could have a profound effect on your end balance. One notable example began with a TSP balance of $475K and ended with $745K over a period of 5 years from 01/24/18 to 03/29/23. The TSP grew considerably by max funding and keeping the majority in equities (in this case, 5% G, 55% C, 30% S, and 10% I). Yes, the stock market was hot but went through 2 terrible declines during both COVID and the inflation correction of 2022. Through it all, if you can hold the course, you may be able to realize substantial increases in your balance as well.
But once you approach retirement it may be time for a pullback from some of the more risky equity positions.
TSP Reallocation Nearing Retirement
Once the goal of retirement seems to be financially possible and attainable and a date has been selected, then several things must be established. Will you be needing your TSP to generate monthly income to support paying monthly expenses or discretionary spending like traveling? If so, then you may want to consider pulling a large percentage away from the stock market funds (the C, S, and I funds) and settle into something stable. The reason for this is if your balance has suffered a loss and you withdraw amounts while it is down, it adversely affects how the balance can recover.
This very reason is why the L Income Fund is comprised of nearly 70% G Fund. Only 25% of the holdings inside of the L Income Fund are subject to losses from the stock market (there is also 5.61% in the F Fund, subject to interest rate risk), so if the stock market drops, this helps to ensure the preservation of your money. This fund’s investment objective is stated as follows: “…to achieve a low level of growth with a high emphasis on preservation of assets”. Why would you want a low level of growth? Because of the high emphasis on preservation of principal. No loss to your money!
You may wonder if the L Funds are right for you. I have seen many federal employees transition from being 100% invested in the C Fund for years throughout their careers to the L Funds once nearing retirement for the reasons stated above. Getting away from market risk as you approach 3 years from retirement may be the mark of wisdom. The idea that you may not have the time to recover from losses, especially while pulling monthly amounts out for expenses from a losing asset, is a sound one.
The TSP’s Achilles Heel
The weakness of the TSP, or any 401(k) or retirement plan, is that your retirement balance cannot be separated. The G Fund and C Fund money is always commingled as are the L Income and L Funds for that matter.
Outside of the TSP, there is an opportunity to design a plan so that when you are withdrawing money you may have already arranged for that specific money to be in a stable fund, possibly guaranteeing against loss. When you pull money from this fund, there is little effect on your overall portfolio. You would then have the freedom to take risks with other assets, thereby remaining in the stock market for long-term growth. As you use up the safe bucket of money, you could pour in some more money from the more risky bucket. Rinse and repeat, rinse and repeat, and on and on you go.
This may sound simple, but it is not. Even do-it-yourselfers seek the advice of professionals, and there are sound reasons why. Mistakes can abound if not done properly, and as stated previously, the time to make up for any losses is much shorter than when you were young.
To your success!
