According to a report from the Center for Retirement Studies, one major reason as to why retirement savings account does not reach their entire earning possibilities to support a retiree through their retirement is mainly due to touching the account prematurely.
This report came around the same time as the changes that have made the Thrift Savings Plan (TSP) much more flexible to withdraw from, such as taking an in-service withdrawal from the age of 59 and a half without any tax consequences. The previous in-service withdrawal rule was only allowed once in their career. Under the new policy, four in-service withdrawals can be made as long as these withdrawals are at a minimum of 30 days apart from each other.
The TSP has stated that there has been a rise in these types of withdrawals since the new rules were set in place on September 15th of this year. It is speculated that this increase may be temporary due to participants wanting this option for so long, but only time will tell.
Age-based withdrawals during employment can also be made in many other retirement savings programs such as a 401(k) as well as withdrawals due to financial hardship. There are also loans that can be pulled from these accounts, including the TSP. However, loans will not deduct the amount from your account in a permanent manner. You will eventually have the loan paid back into the account through payments.
The report mentioned above states that these kinds of withdrawals are not the only things that can disrupt the potential earnings of your contributions. This can also happen when the employee moves on to new employers and closes out their retirement savings account instead of rolling them over to an IRA or a new workplace offered plan. Te report states that about one and a half to 3 percent can be lost in the value of the savings every year due to this action. This is a large amount of money that is being taken away from your retirement.
There are other attributes that can make your savings less than what it should and could be worth as well, such as not participating as much as possible to accounts, or not having accounts offered by the workplace, as well as admin fees of these accounts.
For those that are eligible for the TSP, many under-participate even though the plan is very low-cost when it comes to fees. Roughly a third of federal workers under the Civil Service Retirement System do not contribute to the program and end up losing out on tax benefits. About a tenth of workers under the Federal Employees’ Retirement System do not participate in the program, which also has them lose out on tax advantages and free dollars in the form of matching contributions offered by their employer.