LINDA JENSEN – About five million people have a good chunk of their retirement savings in the TSP (or Thrift Savings Plan), but there are many of them are not using it to its full potential. What is the TSP? It’s the government’s correspondent to a company’s 401(k) plan. Money is automatically put into a plan each pay period into at least one basic investment option. The great thing about the TSP is its simplicity – unlike other plans. It provides a limited number of investment choices, which decreases the chances for mistakes. It also gets rid of asset classes that add to the long-term value for people looking to save for retirement.
Are you looking to get the most from your TSP?
The Thrift Savings Plan provides target-retirement date funds, making it really simple to choose an investment to save into. As an investor get closer to retirement, the investment gets a little riskier to ensure they have enough money for retirement. There are five choices with the TSP:
- C – Considered a clone of the S&P 500
- F – Index of government and corporate bonds throughout the world
- G – Investment of short-term U.S. Treasury securities
- I – Investment of International stocks of 21 countries (U.S., Canada, etc.)
- S – Index of all stocks in the U.S. not seen on the S&P 500
Each choice is exposed to both small and large-cap U.S. stocks, international stocks, the basic bond market, and a cash-like, risk-free option. The biggest weakness of the options is that there is no value option. In the last 10 or so years, value stocks have constantly offered great long-term returns in growth stocks of the TSP’s S and C funds.
When You Want Higher Returns From The TSP
If you go for a TSP option, you can attain high long-term results from the S Fund, which means you’re investing the portfolio in small and mid-cap stocks for an extended period. These funds have done much better than stocks seen in the I and C funds. Aggressive investors could put up to 80 percent of money into the S Fund. More conservative investors could boost the expected returns into equity funds, with an increase in combined equity between 60 and 70 percent. For every extra 10 percent in equities, the long-term expected return increases 0.5 percent a year. While this does not seem like a lot, it can make a huge difference over the span of 20 to 30 years. It also means you have much more money at the time you want to retire. If the investment is in a target-date TSP fund, a person could allocate another 10 to 20 percent of their typical contribution to the S fund.
Higher Returns From Stocks Not In The TSP
While the TSP has no value options, you can always have an outside account to complement the TSP. For example, the Roth IRA is one option that allows you to contribute $5,500 a year or $6,500 a year if you’re older than 50. How do you do this? Invest the whole IRA into small and large-cap value stocks, emerging markets stocks. However, if you have a minute amount of money to go into this, you’ll have a great long-term option if you add the small-cap value either with a low-cost index fund or ETF.
Linda Jensen is the principal and owner of Asset Care & Preservation Services with offices in Olympia, WA. Linda began her career with Prudential Preferred in 1994 where she was an agency leader. She earned the credentials of a financial planner and has been in practice as an investment and insurance professional since that time. Linda started her own company in 1997.
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