Delivered on: Wednesday, November 13, 2024

To watch on YouTube, CLICK HERE

Maintaining Solid Habits in the Thrift Savings Plan

What you do regularly in the TSP is more important than what you do every once in a while—no matter how long you have left.

• CONTRIBUTIONS: Choosing how much to invest and which funds to use
• TEMPERAMENT: Choosing how to react to changing market conditions
• TIMELINE: Choosing how to view your access to money in the TSP

Download Handouts: CLICK HERE

Register for our next short webinar: FedImpact.com/webinar

Find a comprehensive retirement workshop for your area: FedImpact.com/attend

*********************************

Prefer to read instead? A transcript of this webinar is below:

Welcome everyone to the Fedimpact webinar today on maintaining solid habits in the Thrift Savings Plan. Habits might not seem all that exciting to talk about, but I think what you’re going to find today is if you’re thinking about TSP in the right way and you have good habits established on how to look at the overall world of investing, that the TSP can serve you very well into the future.

You guys know me, I’m Chris Kowalik, the founder of ProFeds. I’m really lucky that I have a chance to be able to talk about a wide variety of different topics on different platforms, whether it’s through the workshops that we do, we have a team of speakers that go out and deliver those sessions, doing these webinars, the podcast, whatever it might be. I’m grateful to be able to have the platform to be able to do that, and we pick at lots of different parts of these benefits to be able to explain them. And so I’m excited to talk about these habits today.

Maintaining Solid Habits in the Thrift Savings Plan

This idea of maintaining solid habits in the TSP comes from the belief that what you do regularly in the TSP is far more important than what you do every once in a while. And it really doesn’t matter how long you have left before you retire. Of course there are certain aspects of time that can work in your favor. The younger that you are, the further you have before you plan to retire.

But as far as the habits themselves of getting in good habits and routines in the TSP, you’ll be very well served by being mindful of the things that are happening in your own mind when it comes time to invest, depending on what the market is doing, how you decide how much you’re going to contribute, all of those things really have a lot to do with the ultimate success that you’re going to have in the TSP.

Agenda

For today’s agenda, we will talk about contributions that you’re making to the TSP, how you choose how much to invest and which funds to use. There’s a lot that goes into that. I know I’m oversimplifying that here in the agenda item.

Next is temperament. There’s lots of aspects of habits that have to do with just our mindset around how we react to things, and in this case, we’re going to be talking about the market changes. The market goes up, the market goes down, how do we feel and how do we behave when that happens?

And then next is the timeline. Choosing how to view your access to money in the TSP because these habits that we’re talking about are habits that you have while you are working and contributing to the TSP.

Habits on the other side of TSP once you’re already retired will look different, but for right now, for those of you who are joining us, the majority of you are still employed, these are the timeline of the habits that we’re talking about right now.

What this webinar WILL NOT cover

We are not here to give investment advice. We’re here to talk about the concepts and how you’re looking at an investment as important as the TSP. We’re not going to tell you what funds to go invest in or the hot stocks or anything like that. You still need some professional guidance. The TSP account is for most of you, the largest investment asset that you have perhaps outside of your home.

Some would argue that you’re not supposed to include your home as an investment asset, but whatever that might look like for you, leaving this to chance or to your level of experience and expertise in managing investments, I would argue that getting some professional guidance makes a lot of sense for the vast majority of employees. And so I encourage you to look at all that we’re going to be sharing today through that lens.

Picking Your Heroes

Let’s start with picking your heroes. Pictured here on the left-hand side is a picture of Warren Buffett and Jimmy Buffett And when it comes to investing advice, I know which one I’d talk to. Both of these gentlemen have done very well in their lifetimes. Of course, Jimmy Buffett just passed recently.

Warren Buffett, of course, investment mogul, and really an incredible legacy that both of these gentlemen are going to ultimately leave behind when their time is here. Of course, in the investment world, Warren Buffett is looked to as a guidepost for many investment strategies and the philosophy of investing and has quite a bit of advice, generally speaking, for investors.

Jimmy did pretty well for himself too, don’t get me wrong. But I would probably go to Jimmy Buffett for some life advice on how to live life fully and Warren Buffett on how to save so that you have enough money to live like Jimmy. I just want to have a little bit of fun today.

Here’s the deal. Not really Jimmy Buffett or Warren Buffett, but there’s lots of other financial gurus out there that you’ve heard on the radio, you see on TV, they write lots of books. Here’s the deal, they don’t know you and neither does the water cooler expert in your office.

Whoever you’re picking as those heroes to be able to follow, you need to appreciate that what they’re sharing is not intended to be advice to you. And even if it sounds like advice to you, you want to be able to filter what you’re hearing and what you’re considering doing through the lens of your actual financial situation.

We’ve done lots of sessions on water cooler experts and how they can lead people astray and all of that, and even the well-intended financial gurus out there, the Dave Ramseys, the Suze Ormans, the Ken Fishers, those types of people that have a platform to be able to talk a lot about what they think everyone should be doing, but just remember that they don’t know you and your situation.

And so I try to use this platform to help people better know how to think through financial matters and the things to consider and not what to think. I don’t want to just tell you what to do, because one, I can’t do that I don’t know you, but two, I don’t think it serves you very well.

But if we can help you to think through the different facets of financial concepts as they relate to federal benefits, I feel like that carries with you and you’re able to use that kind of thought process as you’re thinking about the next benefit that you’re looking at.

Just remember, to fully understand what you should be doing in the TSP, you need to be looking at your entire financial situation. It’s so easy just to look at TSP in a bubble, but that does not typically serve you very well because TSP is part of your financial life, but it’s not your whole financial life. You have your pension. If you’re married, your spouse may have other assets, a 401k, they may have a pension as well. There’s all these moving parts that go into this, and the TSP needs to be viewed in light of the bigger financial situation that you have.

And I would offer, instead of looking for a hero, someone to save the day and tell you all the things you should be doing investing, I would encourage you to look for a guide. In every story there’s a hero, there’s a guide, there’s the villain. This idea that we’ve got a guide in our life to be able to help steer us and ask more thoughtful questions, know the way, that’s what a good guide does.

And so we work with a group of financial professionals throughout the country who serve as a guide to federal employees as they’re trying to sort through all of these decisions, of course, TSP being one of them.

But instead of looking for someone to save you, you can be your own hero in your story, but getting some guidance from a person who’s acting as a guide on your journey probably makes you feel a little bit more in control of what you’re doing and feeling great about what steps you’re taking to secure your future.

Defining the Role of Your TSP

Defining the role of your TSP. The TSP is not the end-all be-all for investments, but it does serve a very, very important role in your ability to retire and receive your pension and then fill in the gaps with the TSP. Most of you have access to the social security program as well.

And so that trifecta of your pension, TSP and social security for all of our FERS employees listening, that is a really … The TSP becomes a really pivotal part of that process. And if we don’t know what role the TSP is supposed to play, then we have a harder time knowing how to leverage it.

Here’s what I mean. The TSP is the long game. It’s not your get rich quick account. It is not the bank account that you use to put money in and take money out and do the hokey-pokey and turn yourself about right. The TSP is not supposed to be that plan. You need to assume that you are not going to have access to this money until you’re 59 and a half or you retire if that happens to be sooner.

It is super, super important to realize once this money goes in the TSP, you should consider it gone until you reach the age that the IRS intends for you to be able to use it, which again, is this 59 and a half mark or retirement if that happens to be sooner, there’s some special rules on access for the TSP.

We’re not going to go into those rules today but plan on not needing that money until that point. If we follow that advice, then what it means is we have to have money outside of the TSP for shorter goals that we have.

The goals that we have of capital purchases, purchasing a car, the hot water tank, the whatever it might be that you might need in a short period of time, that needs to likely be in a really accessible account, like a normal savings account where you have your emergency fund and that type of thing. If you’ve got a known purchase like a car that I mentioned a few minutes ago, that is certainly something that can be a little bit more predictable than the true emergency fund.

But then we have medium range goals. Many of you are in your final stages of putting children through college or perhaps you’re still paying for that out of your pocket. Whatever that might look like, those are medium range goals that we shouldn’t be investing in long-term accounts like the TSP or other 401Ks.

Because the time in which we need the money is so far out into the future, but we need the money sooner. And so super important that we have different buckets of money that serve different purposes or different roles in your life.

And keep in mind, TSP is a money game, but it doesn’t do you any good to stare at the scoreboard. You can keep looking at your TSP account every day. You can log in and keep looking at the number, but you have to put the work into making it happen.

So don’t put up zeros. And what we mean by that is you have to get started early. The earlier you start, the better off you are going to be. We are going to talk about procrastination here in just a bit. We’ve got some fun numbers to let everybody review, but we’ve got to get started.

When we’re not participating in an investment strategy, yours being the TSP, we are putting up zeros. We’re not giving ourselves a fighting chance to be able to have this account grow to what we need it to be.

Next, kind of going through this game and scoreboard mentality, you have to show up to practice, you have to put in the work, you have to be contributing day in and day out, day in and day out, to the TSP. Now of course, you’re not contributing on a daily basis a true daily basis. You’re doing that on a pay period basis, but you’ve got to be an active participant in the TSP for all of this to work.

And next, be ready for game day. If you know that the ultimate goal of your TSP account is to support you in retirement, it puts into perspective some of the things we’re willing to do without now, the sacrifices that we’re willing to make as we’re in the process of investing.

It makes those feel better because we know it’s for a specific purpose. The more defined you can make the role of your TSP, the better off your mindset is likely going to be to weather some of those storms that you are bound to hit as you roll through your career.

Deciding How Much to Contribute

Next up, deciding how much to contribute. This is always a little bit of a challenge because sometimes people can become very resentful of their investment strategy if they find that they’re contributing so much to TSP or any other kind of investment that it’s truly crippling their ability to live a good life and that things are so hard you end up getting into credit card debt or other kinds of bad financial situations, then this money becomes counterintuitive of what you’re trying to really accomplish.

Deciding how much to contribute is an important thing. We want you to push yourself but not to the point of resentment. There’s got to be a balance there. As you move through your career, perhaps when you’re first starting, you’re thinking, wow, I need every bit of this take-home pay that I can possibly get. I cannot devote 5% of it to the TSP.

I say you’re crazy because you’re getting a match on that money that you’re contributing, but a lot of people just can’t quite get there. If you’re not to 5%, do everything you can to get to that 5%, because it is a 100% return on your investment. You’ll never ever find that with that consistency anywhere else. This is free money.

Please make sure no matter where you are in your career, that you are at least putting in 5% of your salary and be sure to do it over all 26 pay periods so that you get your full match.

Once you’ve met the 5% threshold, which most of you listening have, because you are regular listeners of the webinar, you’ve been following us for a long time, you know that we’ve got to get all these ducks in order.

But once you get past that 5%, now the question is what would it take to get to 10%? Would I have to give up something? Does something get paid off? Maybe I’ve got a car that’s getting paid off or some other type of loan that’s being paid off that’s now freeing up some money in my budget that I wasn’t living on before. Could I put that towards contributing to the TSP to get to the 10%?

Once you’ve reached 10% of your salary, then ask yourself what would it take to max up what the IRS will allow me to put in the TSP? That number changes each year. You want to keep your eye on what that number is as time goes on.

We’re going to talk more about some of the big changes that are happening for next year in next month’s webinar, but the idea that if the IRS allows you to keep putting more and more and more in, how does your budget need to look to allow you to be able to do that?

And keep in mind that what I love about investing like the TSP is that you’re creating a habit on living less than you make. As long as you are not at the same time creating credit card debt and that other kind of negative financial situation for yourself, by the virtue of you setting aside money that you’re earning now, that you are not going to spend now, you are creating that habit of living on less than you make.

That is a great habit to have and it will serve you very well later when you’re going to need that money.

Choosing Your Funds

Let’s talk about choosing your funds in the TSP. There are lots of different options as far as investing in the normal financial planning world. In TSP, you kind of have some unique things. There are different funds that you can choose to invest in and each of them carry different risks and rewards just like you would find out in the private sector.

The regular funds of course that you have access to are the G, F, C, S, and I. The C, S and I are the ones that are really in the stock market. Those are the ones that have the massive fluctuations. And then we have the L funds that are a preset mixture of the regular funds that we just talked about and those adjust as you get closer to retirement to be more and more conservative.

A lot of people will ask me what I think about the L funds. Is that a good idea? I would argue that the L funds are better than taking a complete guess on what you’re doing in the five regular funds, but they’re not as good as having some professional guidance on what you’re doing with respect to the bigger financial life that you have.

The L funds are not good or bad necessarily, it’s just what level of input do you have in the investment strategy and how much do you want to have that will determine what kind of guidance you’re actually going to need to make this a good choice.

As an investor gets closer and closer to that retirement window, they tend to be at least on average, more conservative in their fund choices. Most of the time we don’t have a 70-year-old who’s rolling the dice in the stock market to a large degree. If they are, they have also got other assets that are not riding on the stock market that allow them to free up some of their headspace to be able to have some of those market gains.

But that’s typically a very intentional strategy that an investor creates for themselves and most of the time it’s not them by themselves trying to do it. They’ve got some professional guidance to make that happen.

Timing Your Contributions

Let’s talk about timing your contributions. The good news is the TSP actually does a lot of this for you because they put you on this, set it and forget it plan of investing each and every pay period. Trying to time the market is quite dangerous. You’ve probably heard of people trying to do that, that you’re trying to pick the perfect time to invest and get out at just the right time, and that is not how most investors operate in the financial world.

Instead, if you invest regularly and consistently in the TSP or frankly any other investment, you have a chance to automatically do this thing that we call dollar cost averaging. This concept that you are regularly going to invest the same amount over and over and over again over a long period of time, this dollar cost averaging, I want to explain how this works.

No matter what the market is doing, you invest the same amount of money. The idea here is that you buy fewer shares when the prices are high and you buy more shares when prices are low. And that sounds quite simple, but the overall objective here is when we look at the average of what you paid for all of those shares over a swath of time, that you buy shares at an average cost below the average price.

I’m not going to get into the super specifics of dollar cost averaging mostly because the TSP is automatically doing this for you and you might not have even known it, but this idea that you’re setting your contributions on a per pay period basis, so it’s regular and consistent as far as the dollar amount, that money is going in TSP every two weeks and that is being used to purchase shares, they buy fewer shares when the prices are high, we buy more shares when the prices are low.

That’s all happening within the construct of the TSP. It’s not something you have to opt into, it’s just naturally happening with the way that you are investing.

For an average investor outside of the TSP, outside of a 401k that has this automatic kind of thing, a lot of times investments will take in big purchases. So, oh, I’ve got 10,000 I want to throw into this investment. Well, and that might work, the timing might be perfect for that, but it might also be bad.

And so you’re not really having to worry about that in the TSP because you’re not allowed to contribute to TSP in that way. This is a great perk for anybody doing regular consistent investing, to take advantage of the market’s highs and the market’s lows.

Delaying Gratification

Let’s talk about delayed gratification. This is something that is hard, mostly for younger people to appreciate, because they think they have so much time on their side and we’ll get into procrastination here in a little bit. But this idea that if I give up something now I’m going to get something better later, is hard for a lot of people to grasp.

Just like this poor boy trying to figure out how he’s going to eat this cupcake and if his mom is going to be mad if he does it, the idea for you is how do you delay the gratification of using money that you’re earning right now for your lifestyle and delaying that gratification until retirement when you’re going to need that money. Different kind of cupcake there, but still very important.

We’ve got the idea of immediate versus delayed consequences. By investing today, you’re deciding that you’re willing to take less now for more later. This normally comes with giving up some sort of standard of living, right? You’re not going to take as much of the pay raise into your checkbook and into your bank account as you are hoping instead you’re going to use some of that to invest in TSP for instance.

But the idea is that you have a larger pool of money for the future, and that’s what all this is about, of creating that third leg of the retirement piece that OPM has created for you for FERS, social security and TSP. This is rounding out that third leg that you’re going to need.

Most investors actually suffer from this thing called hyperbolic discounting, and it’s this idea that sounds like a really fancy phrase here, but it’s the idea that they’re willing to take smaller immediate rewards over larger delayed rewards. Things like they’d rather have $100 now than $200 later.

It’s a really bizarre thought process because if we really understood the power of money and what time can do for you in the long run, we wouldn’t be thinking this way. But this thought process is the leading contributor to procrastination. This idea that I’ll just take the bird at hand right now, this $100 versus waiting for $200 later, and it really ends up tripping us up.

Recognizing the Value of Time

The next habit is recognizing the value of time. When it comes to investing. Time is an incredibly important asset and I think unfortunately people when they’re younger tend to not value what time can actually do for you. Let’s kind of get into this.

When we think of recognizing the value of time, if we put time on our side, it allows us to take advantage of compound interest. It’s widely said that compound interest is the eighth wonder of the world. Albert Einstein said that and he essentially said he who understands it, earns it and he who doesn’t, pays it.

Compound interest works both ways. You can either earn compound interest or you can pay compound interest with respect to credit card debt and that type of thing. We want to put time on our side and allow you to benefit from this incredible thing called compound interest.

The Price of Procrastination

There are several things that kill compound interest unfortunately. Things like taking loans or taking money out of an account, so you’re actually selling the shares at that time, either buying or selling shares at an inopportune time in the market and then procrastination.

We talked about that a little bit on the previous slide and we’re going to jump into some numbers here with procrastination because I think this is always a fascinating concept that most people understand later in life.

They say things in our retirement workshops like “I really wish I’d have started sooner” whether that was just planning in general or with respect to investing in an account like the TSP. The price of procrastination, this is kind of a fun scenario that we’re going to go through.

We don’t deliver this in our pre-retirement workshop because by that point in someone’s life, they’ve probably already gone down that path and it doesn’t do them any good to say “Well, what you really should have done was this, when you were younger.” But I know that we have a lot of folks younger in their career on this webinar and regardless of really where you’re at, the concept still holds true.

Mary’s Scenario

Here are two scenarios we’re going to look at. The first is Mary. Mary is going to invest $10,000 a year from age 25 to 34, and then she’s going to stop. Sam is going to invest $10,000 a year from age 35 to 44, and then he’s going to stop.

For both of these people, they’re invested in the same funds, they got the same interest rate, we’re going to assume just 6%, very modest in the world of investing, and they’re the same age. They both want to retire at age 65.

We’re just going to take a look at what the scenario is for each one of them when they’re at the point of 65 when they’re planning to retire. We’re going to evaluate these two scenarios by asking three important questions of both Mary and Sam.

First, how much have they invested? At 65 what is the value of each of those accounts, including the principle and the growth that’s happened over all that time? And then at 65, what was the real cost of procrastination? We’re going to start with Mary. Remember from 25 to 34, she contributed $10,000 a year and nothing after that. 35 to 64 she didn’t put in a dime.

What does that look like? At 65, in total, she would’ve put $100,000 in the account, 10,000 for 10 years, and the growth on that money would be $726,586. She would have a total of $826,000 in her account.

For all of us that know younger people, I hope that you will take this strategy back to them and encourage them to not only invest but leave the money alone. And keep in mind, this is not some crazy investment. This is a modest 6% growth. This is showing you what happens over a large swath of time to allow that compound interest to work.

Sam’s scenario

Just a quick recap, from 35 to 44, he just got started 10 years later, he too is going to put in the $10,000 a year and nothing after that. What does that look like? At age 65, Sam has the same $100,000 of principle that Mary did and the growth on that is still impressive. It’s 354,000 of growth. A total of 454,000 in that account.

Again, still a healthy number, but what could it have been had he just done that sooner in his life? There’s kind of a lot going on this slide so let me explain a couple of things first. We know that Mary started at 25. The blue bars that you’re seeing on this chart represent Mary’s investment and the growth on that money.

Sam started 10 years later, so he’s at 35, he’s represented in the gray bar and you see the growth continuing for him. Here’s the deal. If both Sam and Mary looked back and they said how have things gone, I think both of them would conclude that they’ve gone well. They’ve earned a lot of money off of their principal.

But Sam might very well look at this and say from 25 to 35, had I put in $10,000 during that time, there would’ve been a growth of 37,000. That’s what I’m missing out on for those first 10 years. But that’s what he thinks he’s missing out on. What he’s really missing out on is the last 10 years of growth. That totals $372,000, that money just sitting there would have grown to over those 10 years.

It’s all a matter of perspective. And if we wait long enough, Sam would reach the same amount that Mary has and Mary would be even higher than that. This chart … And life doesn’t end at 65, it just happens to be where this chart ends. At 75, at 85, all of this continues to grow, assuming that we’re still in accounts that are returning 6%. And of course the market’s never quite smooth like that.

We know we have high years, we have low years, all of that. But just to give a simple idea of what that compound interest can really look like for somebody, is impressive. If you’re on this call and you’re 55 or 65 years old, you’re closer to retirement, you’re probably wishing that things could have gone differently for you or maybe you’re really happy where things are, compound interest can still happen for you even in retirement.

Because as long as the money is still there and it’s still invested in accounts that have a rate of return on them, then you’re going to continue to feel the good effects of compound interest. You can also experience loss if those investments take a loss in retirement. There’s always going to be that balance there.

But the earlier in life we start, the better off we are. Again, if you know some folks back at the office, even your own children, they might not be investing in TSP, but whatever they might be investing in, helping them to see the value of compound interest is really a formidable financial strategy that even younger people can appreciate and get them on their way and help them to overcome that hyperbolic discounting.

That idea that they’re going to gobble up and use all of the money that they make right now and forgo the bigger reward in the future. This idea can resonate with a lot of them that helps them get moving on investing faster.

Observations

Some observations for both Mary and Sam. They both invested the same amount of money, but that compound interest that happened over a really long period of time, made a significant difference. They put in the exact same amount, but what it grew to was so different.

If you wait to invest, compare what you might’ve given up, those first 10 years of contributions, that’s what you would’ve done without during that time. But what would it really give you? And that’s that last 10 years of growth that we saw in the chart for Mary that unfortunately Sam didn’t get.

The earlier we do this, the better. By far, the number one comment we get in our workshops is, “I wish I’d have known this sooner.” Whether it’s about TSP and investing, whether it’s about life insurance, whether it’s about preparing the pension, whatever it might be, the sooner we know things, the better off we can be. But we’ve got to start somewhere and today seems like a great place to start.

Reacting to the Market.

How you react oftentimes depends on your investment stage. Younger people, and I know this is a spectrum and I’m broad brushing this, but generally, younger people deal with risk in an easier way. They don’t need the money right now. The idea that the market goes up and down, they probably aren’t even paid attention honestly.

But if you’re really close to retirement and you know the moment that you retire, you’re going to have to start taking some money from the TSP, your eyes are probably glued on that statement. And so we have to find that balance there of continuing to invest and looking to the future versus what we’re going to need right now.

Understanding your risk tolerance is important. I would offer to you if you are married or in a entangled financial relationship, so you might not be technically married, but you’re sharing finances with somebody, it is important that you both understand the risk tolerance that you feel.

When the market soars and the market plummets, what happens to your stomach? That’s the gut reaction. And if we get queasy when the market plummets, then it’s a pretty good indicator that we have a low risk tolerance. And if we feel kind of exhilarated when the market plummets, but then it takes off sky-high, then we probably have just more tolerance for risk and we can stomach that a little bit more.

Here’s what I find completely interesting with respect to the reactions to the market. We know that instinctively because we’ve been told this over and over again, that we’re supposed to buy low and sell high. We buy shares when they’re on sale and we sell them when they’re really expensive and that’s great.

We know that’s what we’re supposed to do with houses too, right? We buy it, great market, we got a great deal on a house and we sell it at the height of the market and get the very most for it. That’s what we’re doing when we’re investing. Here’s my question. Why are we so happy when the market is up?

At this point we’re talking about while you’re still employed, you’re still contributing to the TSP. We ideally want that to be a suppressed market. We want the value of those shares to be as low as possible because we’re buying them at that time. And then in an ideal world, right about the time that we’re going to need that money, we want the share prices to soar and we take it out.

We know that it doesn’t actually work that way, but I find it funny that we’re so elated when the market’s up when we’re buying shares, but that’s not at all what the rule tells us. We want those share prices to be low. And so it is kind of an ironic situation because when you step into retirement, you’re not buying shares anymore. You’re not contributing to the TSP. The value of your shares are going to continue to fluctuate, but you’re not buying more of them.

It’s going to feel very different, the market volatility will feel very different when you’re buying shares versus selling them when you’re retired and now you’re using that money in your TSP as income. This is why it’s so important when we talk with federal employees who have to this point been pretty happy with the TSP and it served them well in the wealth accumulation phase of the game, that we caution them that the game changes on the other side of TSP.

When we step into retirement, we are now playing a different game in the TSP, which requires us to be much more savvy in what we are doing when we are taking money out. And that’s why working with a financial professional who actually knows what they’re doing with these types of decisions and how they affect other parts of your life, is so critically important.

Gaining Tax Awareness.

Sometimes we can see the forest through the trees, other times it’s a little further than we can see, but eventually the tax pokes through. We’re going to start to see the effect of our tax planning or lack thereof.

The more aware that we can be of what’s coming down the track for us from a tax standpoint, the better off we are going to be. The choices that you make now will affect your tax obligations in the future. So please choose wisely. In the TSP, you have the traditional account and you have the Roth side of your account.

We’re seeing way more feds contributing to the Roth TSP these days than we have in prior years. We’re really pleased to see that. But on just a quick recap, for those who may not be super familiar with these, the two different monikers here.

The first, the traditional account is where you’re contributing to the TSP. You get an immediate tax benefit because you don’t claim what you contributed as income for that year, but you’re kicking the can down the road to pay the taxes later. And just as a reminder, you pay that tax on not just the principle that you put into the account, but all of the growth that happens later.

For the Roth side, there’s no immediate tax benefit. You go ahead and claim what you contributed as income, but then you no longer pay taxes on that account. Your principal’s taken care of as far as your tax obligation and all the growth happens to you tax-free.

If you need some more information on the Roth TSP, we did a whole webinar on this, please go to fedimpact.com/webinar and then you can search, just type in Roth and you will see the webinar that we did on the TSP Roth advantage. And that way you can get a better sense of how the Roth accounts work.

This traditional versus the Roth TSP, remember I mentioned that phrase, hyperbolic discounting, that we were willing to take less, but get it right now versus holding out until a better number in the future. This whole traditional versus Roth, this is a hyperbolic discounting game. What are we willing to do now and what are we willing to do later?

It’s important that we recognize that there is a consequence, there is a tax consequence to any decision that we make in the TSP. And we are not going to get away with not paying any tax on it. We’re going to have to pay tax one way or the other. Traditional or Roth, you’re going to pay tax on the principle. The question that you get to answer is, are you also going to pay tax on the growth on the account?

If you go all traditional, you’re going to have tax on the growth. If you go all Roth, which nobody can truly do all Roth because there’s already traditional money in your account and your agency’s contributions will always be deposited on the traditional side, but at least for the money that you’re taking, that’s Roth money, it can be completely tax-free.

The awareness is so important with respect to taxes because if you’re not thinking about it, you’re just doing the shortest term benefit for you instead of looking at the true long-term, that can have a tremendous impact on you in retirement.

Keeping Your Beneficiaries Updated

Please make sure that your beneficiaries are updated in your TSP, I would argue in all of your accounts, but for today’s purpose, we’ll talk about the TSP. In the event that you die, you want to make sure that TSP knows exactly who you intend to get your money. You can log into your TSP account at tsp.gov and you’ll be able to see the beneficiaries that you have listed.

You’re allowed to make primary beneficiaries and contingent beneficiaries. The primary, of course, is the first person to get your money. In the event that that primary has already passed at the time of your death, then it would move to the contingents.

For instance, you might have your spouse listed as the primary and your children listed as the contingents. Please, everyone on this call, please go double check your account. Back when the TSP had their challenges a few years ago when they created the new website and all the access and all that was messed up, there were thousands of beneficiaries that were removed from these accounts.

My husband was one of them. We logged in his TSP. I was like, Hey, I need to see how this is all working. And lo and behold, one of the beneficiaries had dropped off. We had to go through the whole process to reestablish that. Please make sure double check, it doesn’t cost you any money. Just log into your account, double check.

And if you do not see the people you intend to receive your money listed there as beneficiaries, please resubmit your beneficiary designation. The TSP will walk you through it. It’s kind of a weird process that they take you through. It’s not really all that difficult, but so, so important.

Do not leave this to chance. Do not lead this to some order of precedents that your HR department told you would happen. Do not leave this up to the courts to decide. List your family, list whomever it is that you want to get this money so that it is immediately paid when you die.

Final Thoughts

Creating and maintaining solid investment habits is simple, but it’s not always easy. It’s a simple concept, but doing it in real life is harder. I fully appreciate that. And we’ve all been at different stages in our life financially, where we remember the days that we didn’t have two nickels to rub together to make anything work. And now maybe things are feeling a little bit better for you and there is a little bit more wiggle room that you can get a little bit more savvy with what you’re doing.

Keeping your eyes focused on the future financial goals that you have will be great fuel for those good habits that you’re establishing. If you don’t know what you’re saving for, everything looks like you’re just doing without, meaning all the money that you’re putting away, all you can see is what you’re not able to do with that money right now.

But if the future is clearer for you of what it is that you’re trying to save for and what that account will ultimately allow you to do in retirement to live the lifestyle that you want, your good habits will be reinforced because you know it’s for something great.

And lastly, I know I’ve said this a couple of times, please get some professional help for some of these more complicated aspects of TSP, like choosing which funds you’re invested in, what the tax options are, both while you’re working and in retirement. Remember that Roth and traditional question of what you should be doing.

There’s probably a mixture that is right for most people, and it’s a matter of finding what that is for you in relation to the rest of your financial life. And then you want to make sure that when you’re thinking of taking money out of the TSP in retirement, that you structure this money in a way that allows you to accomplish the goals that you have for yourself and have access to your money when you want it.

Get some professional help. If you’re looking for somebody in your area, by all means, you can go to the bottom of the webinar screen and you’ll see a link that indicates that we can introduce you to a financial professional that’s in our network.

These are advisors who have gone through our training. They understand how these weird benefits work with federal employees, not just TSP, but all the crazy benefits that you have, and be able to give some true guidance there. And each of them operate, they’re their own business, but they’ve come through our training and we work with them on a day-to-day basis to make sure to answer any of those questions that those federal employees have that are meeting with them.

One of the biggest things that we do in these local areas is we hold retirement workshops. Those financial professionals in our program ask us to come to town to make training available for federal employees because most of you aren’t getting it from your own agency.

And I’m not here to bash on your agencies. I know they all have their own priorities of what needs to happen, but if you’re not careful, you’re going to look up one day and realize you’re about ready to retire. And if you’ve not gone through the steps to know that you’ve crossed all the T’s and dotted all the I’s, you’re going to probably regret some of the decisions that you’re making. And we want to help you to avoid that.

Wrap-Up and Next Steps

The workshops that we do are in-person training sessions. There’s no cost for you to attend. These are sponsored sessions, so the fee’s already been paid, and we cover all of the federal benefits and the decisions that you’re going to need to make at the time that you retire.

There’s a whole litany of decisions that you’re making on the retirement application and then some that even happen after retirement. And we’re walking you through all of that during the workshop. We have hundreds of these workshops all over the country every year. You can find all of the cities and dates by visiting fedimpact.com/attend.

You’ll see a map, you can look to the list, however it is that you want to find your area. While we don’t have workshops in every city throughout the United States, we do have them in the major metropolitan areas. Check those out.

And we keep adding more and more locations every year. And so please keep checking back if you don’t find your location on that map. Again, see all the details with locations and dates at fedimpact.com/attend.

Thank you so much for joining us today. We’re always looking for new topics to be able to share with federal employees, I hope that you found today’s topic really helpful.

Again, as a reminder to find a workshop in your local area, you can visit fedimpact.com/attend and to find the next webinar or listen to all of the webinar replays that we have on our site, go to fedimpact.com/webinar. Thank you so much. We’ll see you next time.

*********************************

For an introduction to a financial professional in our network: FedImpact.com/request-to-meet

Register for our next short webinar: FedImpact.com/webinar

Find a comprehensive retirement workshop for your area: FedImpact.com/attend