One of the most powerful financial vehicles for service members is the humble Thrift Savings Plan (TSP). It’s also one of the most misunderstood. In a culture where pensions are the norm, many people don’t understand the power and versatility of TSP. Let’s highlight a few of the major misconceptions.
Misconception #1: TSP is a Pension
A pension is a regular payment from a fund that your employer manages. They put aside money periodically and invest it so that you can benefit from regular income in your retirement. While service members and federal employees have access to pensions upon retirement, TSP is not that pension.
TSP is a 401K for federal employees and military service members. The money that funds your TSP is your own, possibly with a match if you are participating in Blended Retirement System or the Federal Employee Retirement System.
Misconception #2: The Military Owns Your TSP
TSP is your money. This is your investment account. All of the grow in the account, minus some minor fees, is all yours. Your chain of command cannot take money out of your TSP. They have zero say in how much money goes into your TSP or in what funds you decide to place your TSP funds.
When you leave the military, you take all of the money and rights in your TSP with you. That’s right – even if you don’t put in 20 years, you still get to keep this money. That’s why I love the new BRS so much. You can leave the service and STILL have something to show for it, even if you decide not to be a lifer.
Misconception #3: You just put money in it, That’s it!
This misconception isn’t all wrong. Yes, you put money into TSP and it grows, tax free, without your involvement. Largely, that’s because it’s invested in the G Fund by default. The G Fund is invested into US Treasury bonds, and as of the writing of this article, has a 10-year return between 2-3%. While this doesn’t grow very quickly, it manages your downside risk quite well.
A number of other funds are available to you, including stock market index funds, corporate bond index funds, and target date retirement funds. Each of these funds exposes you to greater short-term risk, but they also expose you to greater gains. You can just put money straight into the G fund, but it’s worth doing a bit of research to see which of these funds will work best for you in your current situation.
Misconception #4: It’s free!
While many 401K’s have funds with high fees, TSP does not. It’s not free, either, but that’s okay and very normal. The main fee to pay attention to in retirement accounts is the expense ratio. These fees exist to pay for employees, computers, and the taxes associated when the fund buys and sells stocks or bonds. The market average for mutual funds is around .75%. This means that for every $100,000 in those mutual funds, you pay the funds $750 a year.
TSP’s expense ratios are far, far below the market average. That same $100,000 invested into any fund in TSP only costs you $40. While it’s not free, it’s pretty damn close.
Misconception #5: Just contribute to the match, that’s enough
FERS and BRS both provide a 5% match. For the first 5% that you put into TSP, you’re effectively doubling your money. Immediately. That’s 10%! The downside is this isn’t enough. If you’re planning on having a 40 year working career from 25 to 65, you should be contributing a minimum of 15%. If you’re getting a late start, it’s probably higher than that.
If you’re planning on working a full 40 year career, take the time to project what your pension will look like, what your social security benefits will look like, and then determine how much of a TSP balance you’ll need to maintain your lifestyle. A good rule of thumb is 25x your current expenses, minus any yearly benefits from your pensions or social security.
Got something else to add?
Write a comment below about a misconception you had, or something you’d like me to add as an article! You can also e-mail me at ReserveFI@gmail.com