Is Not Contributing All You Can to the TSP Costing You More?

TSP millionaire by Bill Eager

Federal Employees often feel that they are unable to afford contributing to the Thrift Savings Plan. They also sometimes feel they cannot afford an increase in their contributions. But few things are as important as a large TSP balance, in terms of a comfortable retirement plan.

Generally, we will have three main sources of retirement income from our careers as federal employees:

1) FERS – an average mandatory contribution of about 0.8% for a regular FERS employee hired before January 1, 2013, and 4.9%  for a special category employee hired before January 1, 2013.

2) Social Security – mandatory contributions of 6.2% of salary until the “tax cap” has been reached. The tax cap is $128,400 for 2018 and will be adjusted every year for inflation.

3) Thrift Savings Plan (TSP) – TSP contributions are on a completely voluntary basis. Those who elect to participate in the TSP will have an elective deferral amount for 2018 of $18,500. Those fifty and older are able to contribute an additional six-thousand dollars.

You may wonder about the percentage of your salary, pre-retirement, that would be replaced by the mandatory part of your retirement income. We can assume a regular employee who works a thirty-year career, somewhere between fifty-five percent and sixty percent of pre-retirement income would be replaced by these sources. A financial planner will recommend that you replace eighty percent of your pre-retirement salary. You will not get nearly close enough to the recommended rate of replacement with only Social Security and FERS. This means you need your TSP.

Without obvious exceptions such as abject poverty or serious debt, you should not be contributing less than five percent of your salary to the TSP. If you’re FERS, a five percent contribution rate guarantees that you will be receiving five percent in agency contributions to your TSP account with an additional five percent that you are putting in. This equates to doubling your money!

For instance, if there are three new hires that begin at fifty-five thousand dollars per year and are given raises annually of one percent. They each work for the federal government for a span of thirty years. One employee contributes three percent of their salary, the current default contribution for new hires.  Another employee contributes to what will become the new employee default in 2020—five percent.  The third employee contributes ten percent. None of them ever increase their contribution rate. Using the TSP calculator How Much Will My Savings Grow (you can find it in the calculator section of the TSP website)  assuming an annual rate of return of five percent per year, each of the TSP’s basic funds have returned more than five percent per year since their beginning.

The employee who contributed three percent of their salary had $293,080 after thirty years. Contributing five percent, the second employee had $418,687 and the employee who contributed ten percent accumulated $628,029. It’s safe to say that’s a decent amount of money accumulated through modest bi-weekly contributions over a thirty-year span of time.  The two employees who contributed five percent and ten percent of their salaries, respectively, would likely be able to meet the aforementioned eighty percent pre-retirement income replacement goal suggested by financial planners by taking payments from their TSP accounts.

They could have even more in their accounts if they contributed a higher percentage of their salaries, worked longer than thirty years or earned a higher rate of return.

If you have questions regarding your own Thrift Savings Plan, be sure to reach out to a financial adviser for assistance.

Thrift Savings Plan (TSP)

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