Determining the arrangements surrounding your Thrift Savings Plan is complicated– and frankly, it’s scary. Whatever choices you make with it today will have an impact on the entire rest of your life.
A lot of elements of the TSP – like the return on different investment funds – are out of your control. But there are three things that you do have power over, which can impact your TSP:
In short, the earlier you start contributing to your Thrift Savings Plan, the better. It’s a question of basic math. A child who puts a quarter in their piggy bank will have more money after twelve months than they will after just one.
So let’s say you’re a FERS employee and have an $85,000 salary, and you’ve decided to contribute 5% of that income to TSP. You’ll be receiving the agency’s 5% matching, with a COLA averaging 2%. Lastly, let's say you average a 5% return from investment funds.
If you do that for 10 years, you’ll have $118,000. If you do it for 20, you’ll have $338,000. If you do it for 30 years, you’ll have $728,000. The only difference between those results is how long you contributed, and how long you let your money grow.
The lesson there is clear: start today and don't put off contributing to your TSP early.
As we’ve already come to understand about TSP, investment funds aren’t strictly consistent. The market’s last ten years won’t be a clear prediction of the next ten years. However, in general, there are different funds that are better suited for different stages of your life.
Let’s continue with that earlier example of a $85,000 salary, the 5% contributions, and an average 2% COLA. If you spend thirty years in more conservative funds and get a 3% return, you’ll have $531,000.
However, if you select a more aggressive investment fund in your early years, your risks might pay off. You might get an 8% return, and end up with $1.2 million. That's a huge change, all just because of the funds you picked!
Of course, the closer you are to retirement, moving your money into more conservative funds might be a good idea so that trouble in the market won’t affect your hard-earned money. However, it all comes down to balancing your choice of investments based on your personal risk tolerance.
The last major impact you can make on your TSP is simple: how much are you going to put into it?
No matter how much money you decide to contribute to your TSP, remember the agency's matching limit is 5%.
So if you’re earning that $85,000 salary with a 2% COLA and an average 5% return from investment funds, how do your contributions affect your final TSP? If you regularly put in 5%, then you’ll get that 5% matching benefit. Over those thirty years, you’ll accumulate $728,000. But if you were to contribute up to 15%, you could end up with $1.4 million dollars!
Again, it’s basic mathematics: putting away a quarter every week will result in less savings than putting away a dollar per week.
It’s rare for someone to successfully arrange all three of these factors (time, contributions, and compound interest) but if you do then you’ve achieved what we call the “trifecta.” You do so by starting early, contributing as much as you can, and choosing the right investment funds at different stages of your career.
If you can act on at least one of these three items, you can make an impact on your Thrift Savings Plan.
Playing all three cards right could create a TSP worth millions of dollars. And the more you earn with your TSP, the easier your retirement will be. Other sources of retirement income like social security may not be guaranteed in the years to come…but your Thrift Savings Plan is your money.
How much is your TSP going to grow based on your current influence?
We can help you figure that out!
United Benefits has assisted thousands of federal employees on several impactful topics. We can help you, too. Ask us anything!
Click here to request a consultation and talk one-on-one with a representative and talk one-on-one with a representative about the options available to you. United Benefits and its representatives do not make specific trade recommendations for individual TSP funds.