It may be odd to hear this, but it’s quite possible that messing up your Thrift Savings Plan (TSP) retirement assets is easier than preparing great ones. Not encouraging? That’s okay. Using my decade of experience helping federal employees retire, I will make sure YOU do not end up in that group. In this article, I will share the top 8 ways I have seen people easily mess up their federal retirement, and I will share 10 easy ways to counteract them and get on track.
1. Lack of Vision
Failing to have a retirement goal can lead to uncertainty and financial insecurity during retirement. Having a clear vision for your retirement goals is essential, including savings targets, investment strategies, and income sources.
Easier said than done, right? Life can easily get in the way and derail our best intentions.
Let’s start with something simple: pick a retirement date. For FERS federal employees, you are eligible for a full, unreduced pension at the following age and service combinations: minimum retirement age (MRA) & 30 years of service, age 60 & 20 years of service, and age 62 and 5 years of service.
Simple Step #1
So, let’s keep it simple – based on your current age and years of service, which of those three options do you qualify for the soonest? Set that as your earliest retirement date. Now, we can run some scenarios to tell us if we are saving enough to be on track to retire at that age.
There are some tools on TSP.gov and OPM.gov that allow you to estimate growth rates and withdrawal amounts needed to support you financially. Are they super detailed and take into account all the details that go into a financial plan? No, but it’s not a bad start for some quick, easy, and illuminating information.
2. Underfunding TSP, Match Only
Relying solely on the employer match in the Thrift Savings Plan (TSP) may result in inadequate retirement savings. It’s crucial to contribute enough to your TSP account to maximize its benefits and ensure sufficient savings for retirement.
It is always surprising to me how many people I encounter doing just enough to get the match or not even enough to receive the full one! Yes, you are maximizing the “free money” option of TSP, but are you maximizing your benefits by only contributing 5%? I would suggest no.
For 2024, federal employees under age 50 can contribute up to $23,000, and those over age 50 can contribute an additional $7,500. If you are not contributing those amounts annually to the TSP, you are leaving some tax-deferred or tax-free benefits on the table.
The TSP is the only benefit you will have complete control over in retirement. Having a larger balance will allow you to have more options in retirement. As a financial planner, if I can get more money into your pockets, I will fight to do so.
Simple Step #2
Increase your TSP contributions by 1% or $50 today. Unless you are contributing close to $845 or $1,173, respectively, each pay period, you aren’t in danger of over-contributing. Don’t think; just do; act now. You’ll feel good about it!
3. No Asset Allocation Strategy in TSP
Without a proper asset allocation strategy, your TSP investments may be too risky or too conservative for your retirement goals. Developing a well-diversified asset allocation plan tailored to your risk tolerance and time horizon is essential for long-term investment success.
Asset allocation is more than “not putting all your eggs in one basket”. Asset allocation is about decreasing your risk but ALSO increasing your return.
Sounds too good to be true? Well, that’s exactly what Harry Markowitz won the Nobel Prize for in 1990. He mathematically proved you could do both with proper asset allocation. Unless you have a dedicated investment strategy you are probably not maximizing your return for you risk tolerance.
Simple Step #3
Consider the L Funds. Are they perfect? No, but they provide diversification and try to mitigate risk. This move could also help you manage your emotions in periods of market volatility. Working with your financial advisor can also help determine the proper diversification for you.
4. Wrong Risk Tolerance
Misjudging your risk tolerance can result in investments that are too aggressive or too conservative for your comfort level. It’s essential to accurately assess your risk tolerance and align your investment strategy accordingly to avoid unnecessary stress or loss of potential returns.
Isn’t this the same as the previous point? Similar but different, this point builds on the previous. Even if we have the right allocation, we may have selected the wrong allocation between stocks and bonds.
Why is that bad? I bet your mind went to, “Oh, I’m not too aggressive,” but believe it or not, having the wrong risk tolerance can also be too conservative. What, no way!! Yes, part of having the right allocation is understanding your appetite for risk.
All too often, I see people wanting to retire as soon as possible but not having the proper growth allocation in their TSP. They are allocated more like someone who is already retired yet wants to retire early, and that can’t happen. Having the appropriate amount of risk in your profile is key to limiting emotional responses to the short term.
Simple Step #4
This fix may require a little more work than the other points as these terms may be newer to you, but the time spent here could be priceless in the retirement it could provide. Start at the TSP website to learn about some general guides to risk management.
5. Not Selling High and Buying Low: aka Rebalance
Okay, now this is just regurgitating the points above, Wes… No, it’s not, I promise, but we are starting to see that proper investment management responsibilities are starting to add up, right?
Neglecting to periodically rebalance your investment portfolio can cause it to become imbalanced, exposing you to unnecessary risk or hindering your ability to achieve your financial goals. Regularly reviewing and rebalancing your portfolio helps maintain a suitable asset allocation and risk profile over time.
Did 2022 hurt? Many folks I see coming through for financial planning admit handling the market volatility was very uncomfortable. Why? What was the common string? All were overweighted to the C Fund.
Wait, what are you saying, Wes? I’m saying that while the C Fund has done well in proper asset allocation, one should not OVERWEIGHT an asset class just because it has done well recently.
To build on points 3 and 4, when you target a specific allocation tied to YOUR risk tolerance, what are you essentially doing if you get out of balance? You are taking more risks than you are getting “paid” for.
In our recent market, the C Fund has experienced unprecedented growth over the last 10 years, so what do we do as emotional investors? We pile more into what is doing well, hoping it will continue to go up when we should do the opposite and rebalance back to our targeted percentages. This will help prevent us from experiencing a major loss in a market downturn.
Simple Step #5
Use an L Fund or set a reminder to rebalance every 6 months on your calendar, phone, or fridge, whatever you need to ensure you do it! This will take your mind away from the short-term volatility and help remind yourself that you have a plan, so you will hopefully be less likely to make an emotional move.
6. Letting the Tax Tail Wag the Investment Dog
Sounds backward, right? How about choosing one outfit for the rest of your life based on the weather today? That doesn’t sound right.
The same can be said about rejecting Roth contributions based solely on what your income is today or in retirement. Overlooking the benefits of Roth contributions and conversions in your retirement accounts can result in missed opportunities for tax diversification and potentially lower taxes in retirement.
Consider incorporating Roth contributions or conversions into your retirement savings strategy to take advantage of tax-free growth and withdrawals in retirement. Did you catch that? Tax-free growth AND withdrawals.
Yes, you pay taxes on the money when it goes into the Roth TSP, but everything you put in and everything it earns comes out tax-free if you meet the 5-year qualification. If we implement the simple strategies above to max out TSP and allocate it more effectively, our TSP balances SHOULD be higher than before, right? Well now imagine if we were to grow a TAX-FREE portion like that – incredible opportunity. You must be excited about this!
Simple Step #6
You should put that amount you were going to increase your TSP contributions in Step 2 toward the Roth TSP. You should consult with your tax professional or financial advisor on your situation.
7. Not Taking Advantage of Your Advancing Age
Aging like fine wine, of course… Delaying or neglecting to increase your retirement savings contributions as you approach retirement can make it challenging to catch up later and may result in insufficient savings for retirement. Take advantage of catch-up contributions available to older workers to boost your retirement savings and bridge any savings gaps.
There is nothing to add here except that we are typically reaching our peak earning years in our 50s. Maybe the kids are on their way out of the house now too. Consider putting more into TSP to reward yourself with the retirement you deserve.
This catch-up can be implemented at the beginning of the YEAR you turn 50, not your birthdate, which is a big point to remember. So, for example, if your birthday is in December, yes, you can increase your contributions on January 1st and start putting in the catch-up contributions.
Simple Step #7
Very similar to #2, put more in when you turn 50. Use technology to remind you. Set a reminder in your calendar for the December before the year you turn 50 to remind yourself to increase your TSP contribution. You can start the catch-up contributions the Jan in the year you turn 50, you do not have to wait until your actual birthday.
8. No Withdrawal Strategy for TSP
Failing to have a withdrawal strategy for your TSP account can lead to inefficient or unsustainable withdrawals during retirement. Developing a withdrawal plan that considers tax implications, income needs, and longevity risk is critical for managing your TSP assets effectively in retirement.
The TSP is ok as an accumulation vehicle, but as noted in my other article, Should I Stay or Should I Go, there are plenty of reasons to note why TSP may not be the best place to keep your money in retirement.
One reason to highlight here is how money comes out of the TSP. Funds are sold pro-rata, according to how you are invested when drawing income. This could have a devastating impact on the portfolio if there is a prolonged downturn in the market.
Also, you may have heard TSP just made it easier to withdraw money. The 30-day waiting period between withdrawals was removed. Great, right?! Yes, I agree with that, but also keep in mind that there could be the temptation to withdraw money more frequently because that barrier has been removed.
Simple Step #8
Consider doing a direct rollover to an IRA and withdrawing your income there. I’m not saying this is the best option for everyone, and there are a multitude of additional considerations, but it is a simple way around the limitation noted above.
Bonus Risk: Picking an Unrealistic Retirement Date
Unfortunately, bad news; you may have already messed up by picking the wrong date in Step #1. Setting an unrealistic retirement date without considering factors such as financial readiness, healthcare costs, and longevity risk can lead to financial strain or forced early retirement.
It’s essential to carefully plan and evaluate your retirement timeline to ensure a smooth transition into retirement. You can get points 1-8 absolutely spot on, but if you are targeting the wrong retirement date, it could all be for nothing. You’ll still probably have more in your TSP account than you would have otherwise, but the point is that you have to be serious about what is realistic for you.
If the plan is to retire at MRA, you could potentially add 10-15 YEARS to your retirement income need. This could be devastating for your future, older self. According to a recent study from the National Bureau of Economic Research, “Older workers who are 10 years away from retirement and who decide to work one month longer at the end of their careers can get the same increase in retirement income as they can by adding one percentage point to their retirement saving rate over 10 years”.
What?! It’s mind-blowing that one month could have such an impact on your retirement security.
Simple Step #9
I’m not sure there is a simple answer here. Expect that if you have gone through all 8 steps above, many federal employees stay 1-2 months more. Are you thinking about going on your birthday, which is not in December? Consider staying until the end of that year and take advantage of the massive impact working one more year has on your retirement.
Conclusion
This list provides insight into the potential consequences of each mistake and emphasizes the importance of proactive retirement planning and informed decision-making to avoid ruining your federal retirement. As extensive as this is, we have barely scratched the surface of what goes into investment management. If this is overwhelming, reach out! I help our feds head off mistakes every day.
Prepare. Plan. Propser.
James “Wes” Battle is a Financial Planner offering securities through Cetera Advisor Networks LLC, member FINRA/SIPC. Advisory Services offered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity. 2101 Gaither Rd., Ste 600, Rockville, MD 20850.
The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
