Dave Ramsey, the popular financial radio show host and author has some opinionated thoughts on the Thrift Savings Plan.
To start off with, Dave Ramsey, as he so often does, suggests that federal employees should not begin long-term investing such as the TSP until they are debt-free excluding their home.
“The first thing we suggest you have is that you are debt-free except your home before you begin your long-term investing and you have an emergency fund of three to six months of expenses before you being the investing.” – Dave Ramsey
I, for the most part agree with this opinion.
One problem Dave has is because he reaches such a large audience, giving individual, specific advice is very difficult for him. As a blanket statement, this isn’t a bad idea.
HOWEVER, debt isn’t always a bad thing in reality. Most people don’t know how to properly use debt, but as with any financial advice, it needs to be looked at in the big picture perspective.
The next suggestion he makes refers to having an emergency fund of 3-6 months of expenses.
This is an idea I STRONGLY agree with.
Too few people, and especially the federal employee’s I meet have very little, if any money in reserves. I have a different name for this fund however, I call it the Rainy Day fund.
The reason I call it the Rainy Day fund is because it’s money set aside in case of a ‘rainy day.’ Such as, you’ve been laid off from your job, or you have unexpected medical expenses.
This is ultra important to long term security and I plan to write on this topic in more detail in the future.
“Then if your thrift savings plan matches, we start with the TSP up to the match. If it does not, then we start with the Roth IRA outside of there because I would rather have a non-matching Roth IRA that grows tax-free than a non-matching TSP that grows tax-deferred. Tax-free is better than tax-deferred.” – Dave Ramsey
Contributing up to the TSP match is a great starting point.
The majority of federal employee’s receive up to a 5% salary contribution match. If you are not taking advantage of this match, then it’s kind of like leaving money on the table.
Dave Ramsey suggests if you don’t receive an agency match than contributing to a Roth IRA outside of the federal system due to him rather having a non-matching Roth IRA growing tax-free vs. a non-matching TSP growing tax-deferred.
Basically, he’s saying, he’d rather have the Roth IRA, because tax is paid as you contribute, whereas with the Traditional TSP you will have to pay tax when you take any withdrawals.
The Roth IRA also has many other benefits that you can find all over the internet. I especially like this article by Jeff Rose at Good Financial Cents.
Tax-free can be better than tax-deferred when it is ACTUALLY tax-free. You do still have to pay tax on the Roth-IRA, it’s just at a different time than with a Traditional IRA/TSP account.
“But either way, if you’ve maxed out your Roth IRA and want to do some thrift savings plan saving, or if you have one that does match, then you want to look at that for sure and get the match. We recommend that you put in a ratio of 80-10-10 or 60-20-20. That means put 80% in the C fund (common stock fund), the other 10% in the S fund (small-cap stocks) and 10% in the I fund (international).
In the S and I funds, either put 10% in each or 20% in each and then 80% or 60% in the C fund. Put the vast majority of it in the C fund.” – Dave Ramsey
This is the part I begin to differ some from Dave Ramsey.
Like I said earlier, it’s difficult for him to give specific advice due to the size of audience he reaches. But, recommending that every federal employee regardless of age or risk tolerance put all of their money in the stock market seems a little bit outrageous.
Some people would rather gain hardly any money if it simply meant they never lost any.
Some people want a mix, and actually like fixed income such as bonds and what is found in the F Fund.
Others, may love Ramsey’s recommendation simply because they’re looking for the highest performance possible and aren’t worried about the inherent dangers investing in highly volatile funds like the I Fund.
EVERYBODY IS DIFFERENT.
So, if you see this recommendation from Dave Ramsey, and you say you don’t like taking that much risk, then don’t.
I will say this though, it is absolutely paramount you understand where you stand on the risk spectrum and how much risk tolerance you have.
Without knowing truly how much risk you can afford to take with your retirement, then you might as well throw darts at a dart board when deciding what to invest in.
Original article from Dave Ramsey: https://www.daveramsey.com/index.cfm?event=askdave/&intContentItemId=125684
– Cooper Mitchell