A TSP is what the federal government offers instead of a 401(k). Do you know what a TSP is and how it works? I knew it was a retirement plan, but my family went years without knowing how to properly utilize this great benefit.
In an effort to learn more about properly investing our savings, I made an appointment to speak to a Fleet and Family Support Center Financial Counselor. These financial counselors are available for free and provide counseling and classes on a variety of finance topics such as saving, investing, and debt management.
In that one meeting, I learned a few tips I wanted to pass along:
- If you’re not contributing to TSP, that’s probably your 1st mistake.
- If you don’t contribute at least 10-15% of your paycheck, you should.
- If you’re only invested in the old default G Fund, you’re missing out.
- If you don’t have an L Fund or diverse portfolio, that might also be bad.
- If you think you’re too broke for any of this to matter, start by setting up a budget so you can save.
If you’d like to learn more in-depth, keep reading!
What is a TSP?
TSP stands for Thrift Savings Plan. The TSP was established in 1986 under the Federal Employees’ Retirement System Act for Federal employees and military members. It gives them retirement savings benefits similar to a 401(k) plan.
How TSP works
Your Thrift Savings Plan (TSP) works by allowing you to make contributions into your account from your paycheck. You have the option to make tax-deferred contributions into a Traditional TSP, or after-tax contributions into a Roth TSP.
With the Traditional plan, you’ll pay no taxes until the money is withdrawn. With the Roth TSP, you pay taxes now, but none later.
These contributions can be allocated to different investments that allow your money to grow until you hit retirement and the withdrawal age (59½ or older). The contributions work like playing in the stock market, you can make safe slow-growing investments or riskier choices with the possibility of a higher payout.
With the TSP, your service or agency will also match the first 5% of the pay you contribute. The administrative expenses for managing your investment are also low.
The six funds available under the TSP are:
- L Fund – Lifecycle Funds
- G Fund – Government Securities Investment Fund
- F Fund – Fixed Income Index Investment Fund
- C Fund – Common Stock Index Investment Fund
- S Fund – Small Capitalization Stock Index Investment Fund
- I Fund – International Stock Index Investment Fund
There are two good ways that you can invest in the Thrift Savings Plan. One way is to simply choose a Lifecycle (L) fund that will automatically invest your money into a mix of the G, F, C, S and I funds based on your retirement year.
For example, if you turn 60 in 2044, you would choose the L 2045 fund. The plans start off with a mix of investments into the riskier/higher profit funds then redistribute the ratios and put more into the safer funds as time gets closer to your retirement date.
The other way to invest in the TSP is to manage the allocations on your own and choose the mix of funds you believe are best for your risk level. You could even choose an L fund for now and then choose different allocations at a later date.
As I said, I’m new to learning about this information as well. All I can do is regurgitate the best advice I’ve been privy to and recommend that you seek out a financial counselor to learn more.
At the beginning of this, I shared some quick tips, here are the reasons behind them.
–If you’re not contributing to TSP, that’s probably your 1st mistake.
Contributing to a retirement account is a great way to earn more money. I used the TSP Calculator to do a little experiment on how much savings could grow. I used the annual income of an E-4 with 4 years of service ($32,562). Without any past contributions, I calculated what would happen if they invested 15% of their income (no prior contributions) with only staying 4 more years in the military and retiring in 40 years, with an estimated 6% return. The total contribution amount would be $19,536.96 and grow to $178,816.04.
–If you don’t contribute at least 10-15% of your paycheck, you should.
I’m not sure what the exact reasoning behind 10-15% is that makes it optimal for retirement (YET!). However, I’m sure that amount would also depend on your family and lifestyle.
However, let’s say I did the same calculation as above with only a 5% contribution. The person would have only invested $6,512.64 over the next 4 years of their investment and it would only grow to $59,608.49 in 40 years.
That amount would only be enough to live on for about 2 years in retirement. As you can see, the longer and more that you contribute, the better you can live in your golden years.
My family’s plan is to max out the contribution limit each year to make up for lost time. For 2022, this amount is $20,500 which would mean about $1,708 per month.
–If you’re only invested in the old default G Fund, you’re missing out.
The L fund became the default fund for new enrollees to the TSP on September 5, 2015. Prior to that, the G fund, which is the lowest risk investment, was the default.
In addition to the G fund having low risk, it also has very low gains. Leaving your money in only this fund would give you very little growth over the years. My financial counselor advised that it is better for people close to their retirement date who cannot risk a major loss and wouldn’t have time to recoup. The gains are basically only enough to keep up with inflation.
-If you don’t have an L Fund or diverse portfolio, that might also be bad.
Have you heard the line, “Don’t put all your eggs in one basket”? It’s a cautionary proverb to not invest all your efforts in one area because you could lose it all.
It is recommended to have your money allocated to multiple funds to lessen the risk of financial losses. The L fund automatically does this based on your assumed risk tolerance, but you can also do this yourself.
-If you think you’re too broke for any of this to matter, start by setting up a budget so you can save.
You may think that you barely have the money to survive monthly, much less to save, but that may not be true! For some families, it’s not the lack of money, but the lack of control over where their money goes.
With a planned budget and a thrifty mindset, many are able to finally start saving money! I have several posts that can help you start a budget and find different ways to save money.
The FFSC Financial Counselor can also help you in person to go over your finances and create a budget. There may also be resources available with your command’s financial specialist and the chapel.
–What does Dave Ramsey say about TSP?
Many people follow Ramsey’s advice on saving and getting out of debt; however, his advice on TSP investment isn’t recommended by others.
Dave Ramsey recommends that people only invest the amount needed to get the full match (5%) into their TSP, then the rest of the recommended 15% savings in a Roth IRA. Once the Roth IRA is maxed out, he then recommends putting more money into the TSP.
However, with the low administrative costs of a Thrift Savings Plan, it doesn’t make sense to me why one would pay more with a different retirement account.
Thrift Savings Plan Information
Thrift Savings Plan Contribution Limits 2022: $20,500
TSP Limits 2021: $19,500
Thrift Savings Plan Phone Number: 1-877-968-3778
General Mailing Address:
Thrift Savings Plan
P.O. Box 385021
Birmingham, AL 35238
This is the official page for more contact information.
If you quit your position, you will still be able to access your account and have the money grow with low administrative fees until retirement. However, you will not be able to add more money.