Avoid These Thrift Savings Plan Mistakes
The Thrift Savings Plan is a huge asset for service members. Unfortunately, too many of us fail to take full advantage of it. When used properly TSP funds could be the key to your retirement!
Not investing soon enough – opportunity cost
In regards to compound interest, time is money. The sooner you begin investing in the Thrift Savings Plan (TSP) the more time compound interest has to work in your favor!
You should begin investing in the Thrift Savings Plan the moment you begin receiving paychecks. The more you invest, sooner, the larger your retirement will be! I lament in the fact that I will never be able to catch up to what my TSP could be worth if I had contributed more at an early age.
The opportunity cost of not contributing at an early age is huge. Don’t make the same mistake I did by only putting a little bit into your TSP…invest right away, and invest as much as you can afford! If you’re smart about this you could stop investing after four or five years, and no longer have to worry about your retirement from a 401K point of view.
Imagine how much capital this could free up for investing in real estate. Imagine the security you would feel, knowing that compound interest is building you a fortune while you sleep!
Not meeting the TSP funds matching contribution
This is just plain silly. With the new, blended retirement system, the government will match up to 5% of your annual salary in the thrift savings plan.
Here is more information on the Blended Retirement System.
I still find service members that aren’t contributing to their thrift savings plan. This is money the government is willing to pay into your retirement, and all you need to do is contribute 5% as well. YOU ARE PASSING UP FREE MONEY!
Seriously, at the bare minimum, you need to contribute 5% in order to receive the full government-matched amount! This comes out to over $150 a month ($1800 a year) that you’re missing out on.
Here is a useful tool from their website: TSP matching calculator
Not understanding the Thrift Savings Plan
There are a lot of resources on base and plenty of classes where you can learn about the ins and outs of the TSP. Most units also have a command financial specialist (I happen to be one) that could answer most of your TSP related questions!
There are PDF’s and brochures on the TSP website that will help you understand how the thrift savings plan works.
Take a little time to familiarize yourself with this program, because it could make you a substantial amount of money in life. The TSP is a great platform, and has some of the lowest (if not the lowest) fee’s out of any 401k on the market!
Research what allocations are available, and how these funds have operated over the last decade. If you aren’t willing to do a little homework I would recommend placing all of your money into a lifecycle fund, and never touching it again!
TSP Funds – Not updating your allocations
For years the Thrift Savings Plan automatically allocated your money into the “G Fund.” They did this because the G fund is safe, and has NEVER lost money over the course of a year. The problem is that the G fund barely outpaces inflation (if at all) with its measly returns.
Here is a real-life example of what happens when you fail to update your allocations.
For years I failed to understand the TSP, and never updated my allocations. I did this from 2008-2014/2015 …but for the sake of simplicity (and because I can’t find the annual returns for 2008) I will illustrate this using 2009-2016 returns.
I invested an average of 10% in my TSP through this time period (roughly $3600 annually). This would be the total value of my account at the end of 2016, depending on what fund I had left my money in.
G-fund —> $31,946
C-fund —> $52,298
S-fund —> $53,499
Lifecycle 2050 fund —> $41,298
My current allocation —> $52,548
I missed out on $20,000 in my TSP funds!
It is clear that anybody who left their money in the G-fun (like me) during these years missed out on around $20,000 towards their retirement. The crazy thing is that 40 years later this $20,000 would have grown to anywhere from $300,000 to $2,000,000 depending on the rate of return. That isn’t even calculating the $30,000 that was already in your account.
I LITERALLY missed out on million(s) towards my retirement, by leaving my money allocated in the damn G-fund!
Finally, in 2015 the Thrift Savings Plan changed the default allocations to your respective lifecycle fund. The lifecycle funds are designed to slowly shift from a more risky portfolio of investments to a less risky portfolio as you grow closer to retirement. This change means that you should be able to do alright without adjusting your allocation, but it is still a good idea to verify the allocation you want/have once a year!
Adjusting the allocations to your TSP funds too frequently
Once you have identified an allocation strategy I recommend rebalancing your account(s) annually or at most every six months. I currently have 75% of my money in one fund, and 25% in another…every year I rebalance the accounts back to this 75/25 split in order to maintain my goals.
I wouldn’t do it more than twice a year in order to avoid paying fee’s when you make these transactions. The fees are minimal, but the more you can avoid them the better! The other reason for setting a specific month for rebalancing is to avoid the temptation to buy/sell depending on market fluctuations. It is very difficult to outpace the market, and I do not recommend trying to do it.
The best strategy for the TSP is to “set it, and forget it! (Ronco)”
Not contributing enough
If you’re a single Marine throughout your first enlistment I would love to see you max out the TSP at $19,000 a year! You can contribute up to $56,000 per year when you’re deployed to a combat zone!
My friend Doug wrote an awesome article titled: Maximizing Your Thrift Savings Plan Contributions In A Combat Zone
I understand this isn’t realistic for everybody, because we want to live life, adventure, party, go on dates, buy vehicles, etc.
This is where you need to be wise beyond your years. Think of the opportunity cost. I could max out my TSP allotment for the next 5 years, and still not be able to catch up to what the value of my account would be if I had contributed more, sooner.
If you can max this out for three or four years, you could potentially cease all contributions, and not have to worry about that piece of your retirement ever again! Then you could allocate the annual contribution amount to other investments, and be financially free at an early age!
Taking loans from your TSP
Don’t do this!
If you don’t have the self-control to avoid dipping in the TSP “cookie-jar” I would suggest not even looking at your account. It can be difficult to resist the urge to borrow from your TSP when you see a large balance. Remember, that is your retirement nest-egg.
If you must take a loan from your TSP, remember the faster you repay it, the less compound interest you miss out on. TSP loans seem like a good deal because you aren’t paying interest (just repaying yourself). However, you are essentially paying whatever interest rate the account is earning while you’re money is being repaid.
If you borrow $10,000 and the fund it was in earns 10% interest the entire time you’re repaying this loan…you were basically paying 10% interest for that loan. This is not a good deal, and I suggest you avoid taking loans from your TSP at all cost!
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The Thrift Savings Plan is the best 401k on the market. This account is a huge asset for service members. I cannot stress the importance of taking full advantage of your TSP funds. The more you invest, earlier, the better you set yourself up for success in the long run.
Don’t neglect the TSP, it isn’t sexy, it isn’t “fast money,” but it is simple and effective!
This post has some more advanced TSP strategies for you too!
Don’t forget to grab the FREE E-book HERE!