9 Mistakes Typically Made by Federal Employees

The Thrift Savings Plans (or TSP) is one of the most valuable aspects of a retirement plan for federal employees. To get the most out of your Thrift Savings Plan, employees will need to go beyond simply contributing as well as avoid these common mistakes.

1.Not having a TSP plan

One of the most important pieces of the retirement puzzle for federal employees, the TSP is one aspect you should not forget about when setting up your retirement plan. 

Some questions to start asking yourself now are:

-What do you envision your retirement looking like? 

-What do you and your spouse, if you’re married, envision your day to day life looking like? 

-How much risk are you comfortable with? 

-How much money does your TSP need to hold at the time of retirement?

-What does your rate of growth and annual contribution need to be at retirement? 

Being about to comfortable retire means effectively planning your TSP. Unfortunately, no one solution works for everyone, so it takes time and strategy. 

2.Investing too Heavily into the G Fund 

One of the five index funds only issued to the TSP and invested in U.S. government securities is the G fund. The G fund is popular amongst federal employees because it allows individuals to earn interest without the fear of losing the principal, offering the lowest risk. However, because it relies on federal fund rates determined by the Federal Reserve, the G fund generates less than favorable long-term returns. 

You’re exposed to a greater risk of inflation when you invest 100% of your money in bonds. Those who diversify their investments may experience a better long term result once taxes and inflation are accounted for.

Take John, for example:

Following the 2008 financial crisis, fearing losing his nest egg, John started being more careful with his investment strategies. As a result, he invested the entirety of his TSP plan into the G fund at 2.3% with a 10-year return. For the past ten years, John increased his TSP account to $600,000 and maxed out his contributions.

Now on the other hand, if John invested only 60% of his TSP account into the C fund, with 13.7% and a 10-year return, and 40% into the G fund, it would have resulted in a combined return of nearly 9%, opposed to just 2.4%. John decided out of fear that he would lose his nest egg, and as a result, his TSP earned less than inflation. 

Note: This example is hypothetical and is not representative of any specific investment (Your results may vary).

3.Having an outstanding loan balance

If you have an outstanding balance on your TSP after leaving the federal service, you have 90 days to pay it in full. However, if you do not pay the balance within that window, the IRS will deem it as a taxable distribution, which would leave you subject to significant penalties and taxes. Additionally, if you decide to make a withdrawal election after retiring and haven’t paid back the loan, this could affect the processing of the transaction. 

4.Choosing and forgetting a life cycle fund

Comprised of all five of the TSP funds, the lifecycle funds begin to adopt more traditional investments as you near closer to retirement age. There is not just one solution designed to get the most out of your TSP, and while may be a good place to start, the life cycle funds do not account for personal risk tolerance. While you and your co-worker may both want to retire in 2030, but in no way does your retirement look the same and personalized solutions must be designed for every retiree. 

5.Not making at least a 5% contribution

Your agency will match up to 5% of your TSP contributions, so if you aren’t contributing at least that much, you’re missing out.

6.Not updating your beneficiaries

When was the last time you checked your list of beneficiaries? 

Of course, all of your federal benefits should have an updated beneficiary list, but even more so for your TSP. If your designation of beneficiary form is not on file with your TSP, your money will be distributed in the order set by law: 

1. To your spouse 

2. To your children or children equally, not including adopted or step-children

3. Equally to your parents

4. To your administrator of estate or executor 

5. To the next of kin living in your state of residency at the time of your death

By law, the TSP must distribute the funds listed to the beneficiaries on form TSP-3, and if there is no form on file, they must adhere to the order mentioned above. Unfortunately, the TSP does not honor a separation agreement, a will, a court order, a prenuptial agreement, a trust document, or a property settlement agreement when dealing with your account. 

7. Not synching your TSP with outside investments

While your TSP is valuable, it’s best to have more than one investment account. To effectively plan for retirement, the TSP should be coordinated with your IRA and any other non-retirement accounts. This way, all of your accounts are working together to ensure you reap the most benefits and are financially stable and secure throughout retirement. 

8. Investing based on past performance

It’s best to pick a fund that reflects your future financial goals and risk tolerance and not one that is based on previous year’s performance. 

9. Misunderstanding your withdrawal options

You have three options to withdraw money from your TSP: 

1. Withdraw your money in equal monthly payments based on actuarial tables or the dollar amount

2. Request that the TSP purchase a life annuity on your behalf

3. Withdraw as a lump sum 

If you are over the age of 70 1/2, The TSP plan requires you to take minimum distributions. Whether you withdraw your money in equal payments or as a lump sum, you can have a portion of your money transferred into another employer-sponsored retirement savings plan or an IRA to maintain a tax-favored status.