The Millionaire Story of TSP Account Balances
Thrift Savings Plan account balances have helped many people hit the $1 million mark. In 2020 alone, almost 26,000 TSP account owners hit the $1 million mark, going from 49,620 to 75,420 TSP account owners with at least $1,000,000 account balances. This figure is even more exceptional given that the short-lived bear market had reduced the number of TSP millionaires to 27,212 by March 31, 2020. Thus, the millionaires were most likely not far above the $1 million marks at the beginning of the year.
A recent biography of billionaire Warren Buffett talked about a specific phenomenon. "The Snowball Effect," as the biography puts it, refers to the effects of time on the value of money. TSP has been around for about 34 years. So, it is not very unusual that there are lots of heavy account balances under the plan.
It is safe to assume that many TSP account owners that have reached the $1 million mark have been in service since the late 80s. Most of the people in that category are either about to retire or have retired already. Another thing the TSP millionaires have in common is that they began saving in their TSP as soon as they started service, and they contributed the maximum amount every year without fail. For some of the millionaires, fortune came from previous enormous 401(k) balances.
Recall that 401(k) accounts came into existence in 1980 and had circulated significantly by 1983. As a result, workers who were formerly in private employment started contributing between 4 to 7 years before people who have always been Feds.
Let's examine the "rule of 72." The rule states that dividing a rate of return by 72 will result in the number of years it will take for a dollar to double. For example, with a 7.2% rate, it will take a decade for money to double. The C Funds and S Funds have had return rates of 10% and 11%, meaning a dollar will double in about seven years. With an average of 4.2% returns rate, the G Fund has the lowest annual returns rate.
From the analysis above, it is clear that time and consistency are helpful tools to build your TSP account balance. You can hit and surpass the $1,000,000 threshold if you start saving early and remain consistent with it. However, saving abysmal amounts for a long time will not yield the results you want. Instead, you have to contribute large amounts to your TSP account consistently. Doing this, along with favorable stock returns, can help you surpass the $1 million threshold.
