Thrift Savings Plans: What You Need to Know About Your TSP

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Val Majewski:
Welcome back to the Federal Retirement Show. I'm your host Val Majewski with American Benefits Exchange. Appreciate you joining me for another episode. Today we're going to be talking about TSP and why I believe it is the wild card when it comes to your retirement. You'll understand what I mean by the time that we're done and finished. But first, let me thank you again for joining us, and I encourage you to go back to our previous episodes, learn about all the other topics that we've discussed, and we've discussed a number of them in length. Uh, if you find anything that is intriguing, you have questions, you need help. You want to benefits in retirement review go to our website dot Federal Retirement show.com. And you can fill out our form. And one of our reps, if it's not me personally, will be reaching out to answer your questions and get all the information that you're looking for. Oh, and by the way, uh, once you're done with your benefits and retirement review and getting your questions answered, we will send you a complimentary copy of my book, There's No Excuse Your Guide to Maximizing Your Federal Benefits. So let's dive into today's information and talk about why TSP is your retirement wild card. So first of all, just a refresher. And I'm sure you know this already as a federal government employee. But what is TSP? It is the government version of a 401 K.

Val Majewski:
It was established by Congress in the Federal Employees Retirement System Act of 1986. It's one of your three retirement income sources if you are a Fers employee. So first employee, you get your pension annuity, your first annuity and Social security. Those are your other two income sources. Tsp would be your third. Now CSRS employees can participate in TSP. Although you do not get any matching funds or as employees, you get up to 5% matching. It's free money. I've told you before, on other episodes, the government does not give you much for free. They want to give you some free money here. So most will take advantage of at least putting in the 5% matching so you can or so you can get the 5% matching and take advantage of that free money the government wants to give you. Now there's different fund allocations. I say six different funds that you can choose from. There's six letters right. The Gfcs I and L funds. The five main funds are the Gfcs and I. There are numerous L funds starting with the L income going all the way up to the L 2065. Each L fund is made up of a portion of all the other funds. So you may say, hey, I have the L 2035. Well, guess what? The L 2035 is made up of each of the gfcs and I just a collaboration of all that in different percentages. You can go to TSP gov and figure out what each L fund is made of, how it's going to change over time, etc.

Val Majewski:
there is also the mutual fund window that you can take advantage of if you need more information on that, you can reach out to us again, go to Federal Retirement Show.com fill out the form. We can get that question answered for you, but that's the basics of TSP. Now again, we talked about retirement income sources and why I say TSP is the wild card. First of all, TSP is the wild card because it is relying on you, right? Relying on you. What do I mean by that? Well, your other two retirement income sources, the first two listed here, your pension and Social security, you really don't have to do anything to get those. You really can't do anything to affect those. But what do I mean by that? Your pension is calculated based upon the amount of years you work and your high three salary. The only way you can really affect your pension is by trying to earn more money and working longer. You can't change the calculation, it's set. Same with Social Security. You work a certain amount of time, you've earned a certain amount of money, you've put in a certain amount into Social Security. They will calculate how much they're going to pay you. There's not too much you can do to affect that. So those two things are pretty much set.

Val Majewski:
And those are going to be lifetime income sources for you in retirement. Tsp is relied on you. You decide how much you want to put into TSP. You decide how that money is invested. Yes, there's some matching funds that you can take advantage of, but you're deciding again how much comes out of your paycheck to go into TSP. You are deciding what to invest in, and you are deciding how those things change over time. Tsp is an administered account. It is not an actively managed account. You don't have a money manager at TSP making choices for you and deciding where to move money around that is totally reliant on you. You make those decisions. So it's a wild card because you have two retirement income sources that are going to be set, and you have one that is kind of up in the air, right? We don't know exactly how this is going to turn. Out because there's a lot of variables, there's a lot of things. How much you put in, where do you invest, how do those investments do? How do you move money around and manage it over time? Are you more conservative or are you more risky? So understand if we're looking at retirement income sources and making sure you have enough these these main three, your TSP is going to be the wild card. Now let's look at your Fers annuity.

Val Majewski:
I'm going to focus on Fers but let's say CSRs first. You can get up to if your CSRs 80% of your high three in your pension. That's awesome. You work 42 years. You get one retirement paycheck up to 80%. If you have TSP, that can supplement the remaining amount. And you can get up to 100 or above 100 of your pre-retirement income. Pretty sweet. Fers. It's approximately 1% per year. So you work 30 years. You're going to earn about 30% of your high three in retirement. That leaves an extra 70% that we need to make up with Social Security and TSP. That's assuming you want to get back to your pre-retirement income. We'll talk about that more a little bit later. But Social Security should cover 20 to 25% of that. So if you work 30 years you get 30% of your high three. You get extra 20, 25% from Social Security. So we're at, what, 50, 55% of your pre-retirement income? That leaves up to 50%, maybe 45% of your retirement income. We're looking to get from TSP if you're trying to get back to 100%. Now obviously I'm talking about gross numbers. And, you know, the net numbers might be a little closer. So so bear with me on the percentages. But let's just say on the conservative end, you need TSP to carry the weight of 40% of your retirement income. Okay, I said 50. 45. Let's go down to 40%.

Val Majewski:
That's still more income than your pension, more income than your Social Security. And it's not 100% guaranteed. It's relying on a number of factors. So will it be enough? How much money do you need TSP to cover when it comes to your retirement income? Are you planning for that? A lot of people I talk to are just planning to accumulate TSP funds and not understand the function that their TSP is going to serve them in retirement. Now, if you're in a position where you've done well enough and your Social Security and your first pension are going to be enough to sustain you in retirement, great, then your TSP is bonus money and you're not going to need it. You just want to let it sit and grow and do some things for you. That's fine, but most that I talk to will need Social Security to provide them some. I mean TSP to provide them some sort of income in retirement on top of Social Security and the Fers pension. So here's a question. Now when we talk about TSP and you've seen even when it comes to 401 KS or retirement accounts, you see commercials on TV, you know, how much money do you need? People are carrying around their number. You blabbed the number. You own a bubble above their head. Do I really need $1 million? A question I get is people want to say, is $1 million going to be enough in my TSP? And that's that magical number.

Val Majewski:
I have two commas in my account balance, which is great. I've got over a million. But is that going to be enough? Or even is is a million the number I need to hit? Maybe your number is only 800,000. Maybe your number is 2 million. And that's up to you and what you want your TSP to do for you in retirement. But I see this all the time as people are trying to hit a certain number. Do I really need a million? Do I really need x, y and z? It comes down to what function do you want your TSP to serve and how is it going to serve that? Now that's why I said this TSP is your wild card because there's not just a set in stone function. There's not just one purpose or TSP, there's not just one path. Everybody's situation is different. Yes, for your pension, there's one path. You're going to get it. Social Security. There's one path. When you turn it on, you're going to get an income. There's not much you can do to affect that. Tsp again, being the wild card, there's a lot of variables. There's a lot of uncertainty. So do you need a million. What is your number. Well how do we determine what your number is. Let's take a look. So here's uh TSP accumulation scenario.

Val Majewski:
And then using TSP for income. Now your situation might be different than this. Your situation might be similar. But let's say you get hired. Now, the average higher age for a new federal employee is between age, uh, 35 and 45. Typically I'm going to go in the low end of that. Right. So let's say the average new hire is about 35 years old. I'm just going on the low end of that, that grid there and the average salary, if you look this up, statistically, the average salary for all federal employees right now is just over $106,000 per year. So I'm just using some averages. Yours might be a little higher, might be a little lower. But 35 year old new hire making the average federal government employee salary that's across the board. And let's say putting in 5% of the salary to get the maximum matching funds. And let's say you're fairly conservative in your TSP investments and earned 5% per year. And after 30 years of service, retired at age 65. What is that balance going to be? This person would have approximately $850,000. Now, if the investments did better, it'd be higher. If they did worse, it'd be lower. But 850,000 after 30 years of saving in the TSP, what could this do for them? It could generate an extra 45 to $50,000 per year in lifetime income. Now that can be a lot. That can be a game changer.

Val Majewski:
For some, it may be not enough for some others. So that's why I said earlier, do you really need $1 million? Well, this person at age 50 and it generated a good amount of income. But if you're like, whew, okay, 850 is only going to generate 45 50,000. I'm going to need more than that. Well then maybe your number is above a million again. Maybe it's 2 million. If you're saying wow, 4550 is way more than enough. I don't need to save as much in my TSP or. Or I won't need to utilize all of my TSP for lifetime income for my third retirement income stream. So you can have the best of both worlds lifetime income, and have some additional money saved in reserve that can act as rainy day money. So that's why I keep saying TSP is your wild card when it comes to your pension. It's going to generate some sort of income for you to be your third income source, and how much you're going to need is going to be dependent on your situation. How much you can generate is going to be dependent on your balance, the amount you saved over time. So we can run through those scenarios with you and determine if you're saving enough in your TSP to satisfied or satisfied that wild card scenario. What do you need TSP to do for you? Let's make sure you're on the right track and not just guess.

Val Majewski:
Hey, a million is going to be enough. Well, is it really? Is a million going to be the number? Why? Because you need to generate income. Well, how much is that income going to be at 57. At 60 at 65 at 70. When I retire we can run all the numbers and make sure you're going to get what you want out of your TSP. When it's all said and done, TSP should be done with a purpose and with some focus and have an end goal in mind. Now your results may change your end goal. The goal post may shift over time, but at least you have something you're aiming for and you know what you're doing with it. Instead of just throwing money at TSP, you're going to have a certain function, a certain goal, a certain end result that you're trying to get to. Now what if, okay, we run through TSP and you try to realize I don't have enough or I'm not hitting my target or things have changed. Okay. What are your retirement goals? We need to to label those. And how much retirement income are you going to need? Well, can TSP pick up where Social Security and Fers left off? This is going to be your wild card. It's going to fill in the gap. Social security and Fers pension are only going to do so much. How much of your TSP or how much income do you need TSP to generate to hit that goal? Right.

Val Majewski:
You can look at the graph at the bottom or the graphic. Most people I talk to want to get as close to 100% of their pre-retirement net take home income in retirement. So what am I saying? Most federal retirees want to make the same money, take home the same money when they retire as they did before retirement. So the day before retirement and the day first day of retirement, they want to be taking home the same money. Why? Because they want to live the same lifestyle. Well, what's TSP going to have to do with that? It's going to bridge the gap between what Social Security and Fers can handle, and what the person actually needs to get as close to 100%. You're left to manage the risks again with TSP. There's a lot of factors, so understand your TSP can do really well as far as investment, because there are actual investments in stock funds that you can utilize. You know, the FCC and all the funds are subject to some sort of risk. The only fund that is guaranteed not to lose is the G fund. So understand where your risk tolerance is and you're left to manage that. Tsp does not manage that for you. That's another wild card scenario. You are left to manage your money. Will it be enough? That's up to you.

Val Majewski:
Again, we can run the scenario and we can see if you are on track for TSB to hit the goals that you're looking for it to hit. Should you contribute more to TSB? Well, you can determine well, based on the estimates that we're running, TSB is not going to do enough for me. So you have two choices at this point. If you realize it's not going to be enough or you think you're not hitting the numbers you want to hit, you can put more into TSB, go above and beyond the 5% matching, and then sum up to the maximum contributions, which as of the date of this recording is 23,000 a year and 7500 in catch up contributions. If you're 50 or older, you can go into TSB as much as you want, or you can leave your TSB alone and look at creating another income stream for yourself. You can set up an outside retirement savings account, create a fourth income stream. What are the benefits of this? Well, you're already taking advantage of the 5% matching in TSB. Why not diversify a little bit more and set up a fourth account, rather than putting all of your eggs in the TSB basket? That's completely up to you, but that's an option, so it's good to explore everything that's out there so you can make the best decisions for you and your family. Now what if what if your situation is so awesome that you do not need to use TSP for income? What I mean by that is you've saved well, you've got, uh, enough money with your pension and Social Security.

Val Majewski:
The lifestyle you're living does not need more income. You're going to get everything you need from your pension, Social Security, or maybe other sources you have, and TSP is not going to be needed or retirement income. So we've been talking this whole time. Tsp is a wild card for income, income, income. But what if you don't need it? Well, most federal employees I talk to, there's a couple points that we want to make sure they're aware of when it comes to TSP as being your wild card. Number one, you're switching generally as you get closer to retirement from accumulation to preservation and conservation. What do I mean by that? As you're working through your career, you've been building up money in your TSP. As you get closer to retire, your risk tolerance should and in general does get less and gets less, which means your desire to lose money goes down as close to zero as you can get it. In most cases, as you get closer to retirement, most people do not want to lose any money as they're walking out the door. So you're now in preservation and conservation mode as you get closer to retirement. So now your goals change and you might have to change your investment strategy within TSP.

Val Majewski:
That's completely up to you. But that's what I generally see is the attitude of federal employees as they get closer to retirement. They want to preserve and conserve their TSP balance and not be a risk of losing anything as they're walking out the door. Number two, along with that means we will have to take market risk off the table. So as you turn from accumulation mode into preservation and conservation, most that I talk to want to take market risk completely off the table, meaning they don't want to lose a penny. They don't want to lose a dime. They don't want to lose everything. They're happy with what they've gained. They're calling that the risk quits. They're not quitting on earning interest, but they're just taking complete market risk off the table. That's a big thing in retirement. So we're switching from again, accumulation to preservation, taking market risk completely off the table and putting yourself in a position where you cannot lose any money. That's if you do not need TSP for income. What if also now if you don't need it for income, this is going to be your rainy day funds, right? Money that you can utilize if needed. You can pick at and you want to, uh, make a purchase, go on vacation. You just want to let the money sit and grow. You want to take it out to spoil the grandkids, whatever it might be.

Val Majewski:
It's your rainy day money, and whatever's left over at the end, you may decide that you just want to leave it as a legacy gift, a legacy offering to your family, to your loved ones. I mentioned grandkids. You can set it up in that way. You can leave it in TSP. You can put it into your outside IRA. You can also set it up where it's going to provide some sort of better bang for your dollar legacy gift, if that's what you're looking to do. I've seen a lot of federal employees say, hey, I've got a good amount of money in my TSP. How can I take some of that and leave a legacy gift? How can I turn some of it into a plan that's easily transferable to my loved ones? Well, you know what that rings to me? It says death benefit. You know what's better is tax free death benefit. How do you do that? You set up some sort of life insurance or do some Roth conversions to where you're leaving tax free dollars. Those are things that people think about on the legacy side, not being a burden from taxes and making sure that they can transfer that wealth simply, easily, safely. Those are things that we can talk about. But if you're not using TSP for income, it's still a wild card with your contributions still a wild card. When it comes to your investment strategy, the risks that you're taking over time if you do not need it for income preservation and conservation could be the mode that you're in.

Val Majewski:
As you're nearing your entering retirement. Take market risk off the table. If you don't want to lose any money, and you can set it up as a rainy day fund with the idea of leaving whatever is left over as a legacy to your loved ones. So I hope you understood what I meant by TSP being a wild card. Um. It is one of my favorite things to talk about when I'm giving retirement presentations to groups of federal employees. It is the most exciting because again, everything else is kind of set in stone where this there's a lot of moving parts, a lot of variables that can determine where you're going to end up as you're nearing or entering retirement. Well, as I said earlier, I really appreciate your time. Please go back and see our previous sessions. Uh, view all the topics that we've discussed. There's a lot of great information out there that we've created for you. The federal employee, as I said earlier, also go to our website, Federal Retirement Show.com fill out that form, get your questions answered, get a full benefits and retirement review completed. Also, you'll get a copy of our book. There's No Excuse. Again, uh, thank you for your time. I look forward to seeing you on a future episode.

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