The Thrift Savings Plan (TSP) is a way for federal employees to secure their financial security after retirement. Your participation in a TSP means saving part of your income through automated payroll deductions. Often, people commit mistakes that can get in the way of maximizing their TSP—for example, basing your TSP funds on past performance, placing 100 percent of your money in only one type of funds, and more.
For your sake and your future financial security, follow these simple strategies to maximize your Thrift Savings Plan:
1. Contribute At Least Five Percent
If you aren’t putting at least 5% of your income into your TSP to maximize the matching contributions from your agency, you’re turning down free money.
To ensure that you’re making the most out of your TSP, at the very least, you should be contributing five percent of your income. If you aren’t, it means you’re not maximizing the matching contributions from your agency.
There is a chance that you’re already contributing five percent because as of Oct. 1, 2020, the automatic enrollment percentage for TSPs was increased to 5 percent from 3 percent of basic pay. However, if you enrolled with the default option before that time, you may want to go ahead and increase your contribution. If you’re willing and capable, you can even go higher than five percent, by all means, as long as it’s no strain on you.
2. Split Your Money
When it comes to investing, make sure that you don’t put all your money in one place. Any financial advisor will tell you that the smart way to invest is in several different places. There are five core TSP funds you can choose from:
- Government Securities Fund (G Fund)
- Fixed Income Investment Fund (F Fund)
- Common Stock Index Fund (C Fund)
- Small Capitalization Stock Fund (S Fund)
- International Stock Fund (I Fund)
- Lifecycle Funds.
It is vital that you meet with a financial advisor to help you choose the best course of action. Because it can be easy to choose the “safe” or “guaranteed” options, but depending on your financial situation and life goals, you need more than just surface-level knowledge.
For example, people often invest 100 percent of their money into the G Fund because it feels “safe.” Unfortunately, this can expose your retirement savings to inflation risk.
The Lifecycle fund is another one you should think twice about before investing. It’s more popular and common for younger federal employees. It takes a “target date” approach to investments. This means that as your retirement date nears, they automatically become more conservative in their asset allocation and more.
3. Understand Your Withdrawal Options
When it’s finally time for you to leave federal employment, there are a few withdrawal options to choose from, each with its set of benefits.
You can withdraw all of your money as a taxable lump sum. This means that in one tax year, 100 percent of your Traditional TSP balance will be exposed to federal income taxes and possibly state income taxes as well. You could also withdraw your money in equal monthly payments based on the dollar amount.
This very simple approach may or may not work well for you, depending on your goals. There is also the option of letting TSP purchase a life annuity for you. However, this means that you will be subject to their terms and conditions with no room for arguments or adjustments. And finally, the best and simplest option is to work with a financial advisor. This way, you can be more organized and have better withdrawal options.
The TSP can be a great part of the retirement and investment plan of federal employees. However, without some research and effort on your part, it won’t be worth much in the end. First of all, you have to weigh your options and make smart choices. Just because the TSP is a great option doesn’t mean it’s foolproof. Doing these three simple things can allow you to make the most of your retirement.
If you’re looking to get the most out of your TSP, we would be happy to help you. My Federal Plan can connect you with top-quality licensed agents or registered investment advisors for your retirement planning needs. Get in touch with us today to schedule an appointment with one of our network of representatives!