Summer is in full swing. It is a time to relax, enjoy the beach, and spend time with your family and friends. But before you pick up your paperback and dip your toes in the water, why don’t you take advantage of this slow time and take another look at your TSP and make sure it is in peak condition:
Never pass up free money
Your agency is offering you free money. One of the most important things you can do as a federal employee saving for retirement is to contribute at least enough to get the matching contributions in full. To get the full match, an employee must contribute 5% of their salary to TSP each pay period. For most employees, this should be a top financial priority — even ahead of paying down credit card debt or saving for college.
Bank your pay raises
Contributing enough to get the full match is a great starting point (especially when you are young and just beginning your federal service), but it is not enough to get you where you’ll need to be for a comfortable retirement. Try to up your contribution by a percentage or two each year until you’ve reached a level that works for your unique situation and goals. Any time your pay goes up, consider increasing your contribution rate, too. After all, nobody ever says, “I sure wish I hadn’t saved this much money for retirement!”
Bring in an expert
Unfortunately, many federal employees do not know enough about their TSP. They are contributing the full amount but have no idea what happens to their money after that. As a federal employee, how do you decide where to put your money in TSP? Do you look at risk? When you need the money?
How many people do you know do the SWAG style of investing? That’s a Scientific Wild Ass Guess! Not surprisingly, this is not going to get you the best return on your investment, and probably exposes you to some real risks. Those risks can take the form of being “too aggressive” and losing a lot of money in a market downturn, or being “too conservative” and not earning much in TSP because you’re too safe. It works both ways.
Looking at the 5 funds available in TSP, many federal employees feel overwhelmed and confused. They want to do the right thing, but they’re not quite sure what the right thing is. One thing we’re most certain of — taking a SWAG isn’t going to cut it!
You need to look at the five funds available for TSP, what they mean and what you need in retirement. The objective is to strike an optimal balance between the expected risk and the return associated with each fund.
A trusted financial professional can help you take away the guessing and help you make a real retirement plan. Consider getting an introduction to a financial professional in our network.
Maintain a good balance
Once you’ve determined the right mixture of funds, then you must determine your right mixture of tax advantages that you want out of the TSP. That’s right – tax diversification!
Many federal employees choose to invest in the traditional TSP because they can see the immediate tax benefits. Of course, there’s a catch! All of the money is is taxed when you take it out in retirement.
The “Roth” TSP works exactly the opposite. You pay taxes on the money you put in now, but the money you pull out later is all tax-free! Not only is your own money tax-free, but so are all of the earnings. That is a beautiful thing! Check out the FedImpact Webinar we did on the Roth TSP for more details!
So which one is better? Well – it depends! Both the Traditional and Roth options have unique tax advantages that are beneficial to different kinds of people in different types of financial situations. Most people need some mixture of the two. A financial planner will help you determine what is best in terms of tax efficiency when you go to take the money out in retirement.
We all know that taxes are going to go up and down throughout your life. If taxes are high when you need to take money out then you want to be able to take money out of your tax-free account (the Roth.) In reverse, if taxes are low then we don’t mind taking money out of the taxable account (the Traditional).
If you want to learn more about making the most of your TSP (and all of your other important benefits decisions), attend the Federal Retirement Impact Workshop near you.
TRAINING AVAILABLE FOR FEDERAL EMPLOYEES:
Check out the workshop schedule to attend a FedImpact workshop in your area! Use the SF-182 to request paid time off to attend the training. Don’t see a workshop in your city/state? Add your name to the list to be notified when new locations and dates are announced!
ABOUT THE AUTHOR:
Chris Kowalik is a federal retirement expert and frequent speaker to federal employee groups nationwide. In her highly-acclaimed Federal Retirement Impact Workshops, she and her team empowers employees to make confident decisions as they plan for the days when they no longer have to work.
As the developer of dozens of highly-regarded retirement planning materials for federal employees and the creator of the FedImpact Webinar and the FedImpact Podcast, Chris has also analyzed the challenging retirement scenarios for thousands of federal employees – helping them to avoid costly mistakes, and highlighting opportunities for them to gain greater financial security in their retirement years.
Chris’ candid and straightforward nature allows employees to get the answers they need, and to understand the impact these decisions have on their retirement. After all, if what you thought was true wasn’t, when would you like to know?