Eight Common TSP Mistakes That All Federal Workers Should Avoid Sponsored By:Leslie “Kathy” Hollingsworth

When it comes to retirement security, there aren’t too many better ways to achieve it than with the Thrift Savings Plan (TSP). The TSP relieves headaches and helps families all over the country every single year. However, there’s a notable difference between using the TSP correctly and incorrectly. 

 

What’s the TSP?

 

Most federal workers are aware of the TSP, but it’s worth covering the basics just in case. Essentially, this is a system whereby automated payroll deductions are taken to save for retirement. Over time, it’s possible to plan retirement taxes with Roth investment options, enjoy matching contributions from your agency, and even grow funds without worrying about tax. 

 

Despite the simple goal, it’s not always easy to leverage for retirement purposes, and many federal workers struggle to avoid common pitfalls. Luckily, you have us! 

 

Eight Common TSP Pitfalls 

 

1. 100% G Fund Investment 

 

Firstly, the G Fund (Government Securities Investment) is the equivalent of sitting under a blanket in front of a fire in the winter. It’s cozy, it’s safe, and it’s protective. Invested in TSP-unique US Treasury Securities, the federal government guarantees interest and principal payments. Who wants to risk the stock market when there are secure funds like the G Fund? 

 

While security is good, you shouldn’t place all your money into this investment. Why? Because the return you receive may not outpace inflation. The better solution is to invest in the G Fund as well as others. With diversification, your success isn’t reliant on just one fund, and the growth potential is much higher. Inflation will corrode your investment income, and diversification is the key to purchasing power later in life. 

 

2. Contributing Less Than 5% 

 

Did you know that you’re missing out on free money if you aren’t investing 5% of your income into the TSP? That’s right – invest 5% of your income, and your agency will match these contributions. Invest less than 5%, and the agency will only match your own contributions, and you’re not utilizing the system correctly. 

 

Back in October, 5% was set as the new automatic enrolment percentage, so this is likely to be your current setting if you enrolled after this date. If you enrolled before this date, we recommend checking your current contributions and increasing it to 5% (if it isn’t already!). Just because your agency won’t match beyond 5%, this doesn’t mean that you can’t go beyond this amount too. Consider your financial position and invest as much as possible. 

 

3. Trusting Past Performance 

 

We get it, nobody has a crystal ball, so it’s impossible to tell what will happen in the future. However, looking in the rear-view mirror is dangerous. Unfortunately, past performance doesn’t tell us much about future results. We can’t rely on past performance data because it doesn’t guarantee anything for the future. 

 

Rather than believing that something that happened in the past will happen again, focus on the present. What does this mean? Your goals, risk tolerance, and the best TSP funds for YOUR position right now. 

 

4. Too Many TSP Loans

 

No matter how you try to justify the decision, it’s not wise to take loans from your TSP. Although the pandemic was perhaps a unique situation, you shouldn’t take money from your TSP to treat yourself to a new vehicle or vacation. If you’re investing in your TSP, this money is for your retirement and for your retirement alone – your future self won’t thank you for continually taking loans. 

 

Especially if you have plans to leave federal employment, you’ll only have 90 days to repay outstanding loans before the IRS taxes you on this amount as a distribution and income. If you’re not yet 591/2, you could also face an early withdrawal penalty of 10%. 

 

5. Relying on a Lifecycle Fund 

 

Combining all five TSP funds, lots of people rely on Lifecycle Funds because it seems to take a sensible approach to retirement saving. While we’re young, we can take on more risk to build funds because we have more time to recover should something go wrong. As we age, we prefer a more conservative approach to protect the funds already built in the younger years. 

 

One of the benefits of this funds is that it combines all five TSP funds and automatically shifts focus over time. At all times, it’s working towards a specific target retirement date. While the autopilot feature helps pilots to fly while in the air, manual adjustments are still required for landing, and this analogy applies to TSP retirement savings too. 

 

Unfortunately, what seems a positive fund is actually just a one-size-fits-all approach. Regardless of current savings, Lifecycle funds assume that all people at the same age have the same risk tolerance and goals. In truth, two people of the same age could have a very different risk tolerance, savings amount, and goal. 

 

Even though the autopilot approach does have its advantages, we still recommend working with a professional financial advisor to keep your savings strategy on the right path. 

 

6. No Updated Beneficiaries 

 

As life goes on, you’re likely to experience lots of changes with marriages, divorces (hopefully not!), children, and grandchildren. Without a TSP-3 filed, otherwise called a Designation of Beneficiary form, the account passes down using what’s called the ‘statutory order of precedence.’ What does this mean? Well, it starts with your spouse before then distributing to children and other beneficiaries. 

 

First things first, there’s no problem with this approach if you’re happy with how the statutory order of precedence works when you pass away. However, those who would rather have full control over their TSP distribution should file a TSP-3 form – this is especially true after previously filing a beneficiary form only for circumstances to change. 

 

Keep the Designation of Beneficiary form up to date through life’s most significant changes, whether this is a marriage, divorce, children, grandchildren, or something else. 

 

7. No Strategy 

 

Although some way down our list, this is one of the most common mistakes people make with their TSP. After enrolling, they either don’t think about the TSP or have no idea how to optimize performance. Instead, you should make decisions while considering how the TSP impacts other sources of retirement income. For instance, how will your TSP work alongside IRAs, Social Security, Deferred Comp, bank accounts, 401(k)s, and other accounts? 

 

The default settings aren’t optimized for your circumstances, and this is where a financial planner can help even the most inexperienced federal workers. Alongside a tax professional, they’ll consider your position and tailor a strategy just for you. They’ll ensure that your TSP is working for you and your loved ones over time.

 

If you don’t have the knowledge yourself, team up with professionals that do have the required knowledge and experience. The more help you receive, the more likely you are to make the right TSP decisions (and avoid the common mistakes listed today!). 

 

8. Lack of Withdrawal Understanding 

 

Lastly, it’s a shame to make all the right decisions during the working years only to then undo everything at the point of retirement. If federal employment is no longer your calling, due to retirement or otherwise, you’ll have a handful of options with the TSP funds: 

 

Purchase a life annuity through the TSP 

Take it all as a lump sum (taxable) 

Withdraw monthly payments (using actuarial tables or the dollar amount) 

Roll the funds over into a Roth IRA or Traditional IRA 

 

With the final option, it’s best to work with a financial professional to consider asset allocation, tax planning, income planning, and investment decisions. You’ll also need to consider beneficiaries and your legacy as well as future healthcare requirements. This is the best option if you want to open your investment horizons and finally move beyond the five options available with the TSP. 

 

Alternatively, not many people choose to take a lump sum or purchase a life annuity. Why? Because a lump sum leaves you vulnerable to tax, you could receive thousands of dollars all in one tax year, but you’ll also probably lose thousands of dollars as a result. The reason the life annuity isn’t chosen is that the TSP chooses the life annuity on your behalf – you basically get what you’re given. 

 

Furthermore, the option to withdraw monthly payments also presents issues for former federal workers. As well as being too simple, it also doesn’t work as effectively as other options. We’re often asked about the best options for withdrawing from a TSP, but this is an impossible question because everybody has a unique position in life. 

 

Summary

 

There we have it, eight of the most common mistakes that federal workers make with their TSP account. Avoid these mistakes and consider working with a financial professional to keep all investments and financial decisions working in your favor!