The Thrift Savings Plan will ultimately end up being one of the largest sources of income for many federal employees.
Given the fact that FERS employees have three different parts to their retirement — TSP, Pension, and Social Security, the TSP, in theory, makes up 1/3 of their retirement. However, in actual dollar amount, it’s quite a bit more.
In fact, in 2015 a study was done to determine the average balances of federal employees who are in the TSP.
So, with the TSP being such an integral part of government employees retirement’s, what if I told you the amount you will have in your TSP could be doubled?
And, what if I could practically guarantee it? Intrigued, huh?
3 Steps to Double Your TSP for Retirement
Having worked with the amount of federal employees I have, there are some common themes that I run across.
One of the questions that invariably ends up being asked is, “Cooper, how can I have more money in my TSP?”
Everyone and their grandmother wants to know how to stash more money away in their TSP. AND, it’s for a good reason. If people are planning to draw a decent amount of their income in retirement off of a contribution program that they control, why wouldn’t they be interested in maximizing the amount?
The problem, as I often illustrate, is that people tend to focus on the wrong ideas.
Let me be the first to tell you, there is no magical TSP allocation that will always blow away inflation, and never go down.
Now, can you create a TSP investment strategy that is most effective for your goals, risk tolerance, and other factors that are unique to YOU? Yes, of course!
But, that is only a small part of the BIG picture. The rest is equally important but often overlooked.
Step 1: Actually Contribute to the TSP
This step is super simple, but it’s imperative.
Many of the people who are laser-focused on gaining the largest return possible aren’t even consistently investing in the TSP.
Who cares about the performance of your investments if you don’t even have anything invested? Consistency always trumps intensity, so rather than focusing on investing a lot of money one month and taking off the following month. Make the decision to choose a percentage to CONTRIBUTE EVERY PAY PERIOD.
The on again, off again approach that so many people make when it comes to their retirement savings is better than nothing, but it certainly isn’t ideal.
New research has shown that the more consistent an investor is, the better off they’ll be when it comes time for retirement.
The Employee Benefit Research Institute examined just under 25 million 401(k) plan accounts at the end of 2014. Although these aren’t TSP accounts, the same principles apply.
Of the nearly 25 million accounts analyzed, 8.8 million had a balance for four consecutive years, and 3.5 million had a continuous balance seven years running. The consistent accounts held tremendously higher balances than the average account.
In the study, when accounts with four-year history were examined, EBRI found that 19.5% had a balance of greater than $200,000. Compared to all other accounts who sit at 10.7%. Accounts with a balance of $100,000 to $200,000 made up 16.1% of the accounts with a four-year history while it was only 9.5% for all other accounts.
If we looked at an even more consistent group, those who have consistently invested for seven years from 2007-2014 which even included the financial crisis, we see a significant trend. 26.9% of the consistent accounts had more than $200,000 and 19.3% had between $100,000 and $200,000. Compared to all of the other accounts, they only had 10.7% and 9.5% respectively.
Now that I’ve given you all of this data, what can we learn from it?
To put it simply, the tortoise beats the hare.
If you consistently invest, you will most likely do better than if you didn’t do so consistently. Who thought you needed so many numbers to tell you that?
Step 2: Accept the 5% Employer Match
For the majority of full-time federal employees, if you invest 5%, you receive 5%.
Not taking advantage of that match is without a doubt the biggest federal employee retirement mistake that I see. It still blows my mind that many people who can afford to take advantage of the match simply do not.
This is free money we’re talking about people. FREE!
In my opinion as well as many others, this is one of the best benefits you receive as a federal employee. The only problem with it is it’s on YOUR shoulders to take advantage of the benefit. The government isn’t going to give you a match if there simply isn’t anything for them to match.
The percentage that I most often suggest contributing is 5%. Now, there’s definitely some other things you should do before deciding to contribute, such as set up that emergency fund I always tell you about…
The reason for contributing 5% is pretty easy.
Remember when I said that I knew of a way that I could practically guarantee that you could double your TSP? Well, if $3,000 is 5% of your salary, and the government matches that by contributing $3,000 on your behalf. That’s a 100% rate of return that doesn’t even factor in the interest you’ve gained from your allocation.
By taking advantage of the match, you’re giving yourself an automatic 100% rate of return.
The 5% match doubles your TSP contribution and doesn’t even include any interest earned by your allocation choice.
Thank you, Uncle Sam!
Step 3: Pay Fewer Taxes
If you take a look at the wealthiest people in this country, you start to realize a few things.
One of the most common threads is that the wealthy focus on paying as few taxes as possible. It’s something we see in the media often, especially with Donald Trump and is talked about in one of my favorite finance books The Millionaire Next Door.
Whether you agree with the ultra-wealthy paying taxes or not, the simple fact is a goal of financial planning is to reduce your taxable income. There’s a reason the tax laws are so complicated and if given the opportunity to reduce the taxes you pay; that opportunity should be taken advantage of.
So how do taxes relate to your TSP?
By contributing to your Traditional TSP, the one a majority of people are in, you are reducing your overall income for the year. By lowering your income, you’re therefore reducing your taxable income.
Your contributions then grow tax-deferred. You will owe taxes on those contributions and earnings when you end up withdrawing them, however.
By reducing the taxes you pay, there may not be a physical dollar amount added, but you’re not losing money which in a sense is just as good as gaining money.
These three steps should double your TSP.
One step that I didn’t even talk about was the interest you earn by investing in the TSP. Choosing a tsp strategy is an important topic and should not be taken lightly.
There are many tools and tricks to help you track your TSP performance that I believe should be employed for review.
Don’t make the mistake so many do and invest without a plan. Keep track of how your investments are performing and reduce your taxes as much as possible.
– Cooper Mitchell