How to Get the Most from Your Thrift Savings Plan

Let’s face it. The Thrift Savings Plan doesn’t come with an instruction manual.

If you joined the military or federal government you’ve likely only had approximately 1-2 hours of instruction/briefings on your Thrift Savings Plan.
During this presentation you were likely given very basic guidance regarding your options and if you were lucky, you had a question answered. We hear about this scenario far too often and believe its a shame. The Thrift Savings Plan is your retirement vehicle and one of your most precious assets.

We believe something as important as the Thrift Savings Plan should be understood completely by all TSP participants.

Think about this for a moment, because most people rarely do…

• The Social Security Administration openly admits benefits are expected to be depleted by 2034. After that time period the program is expected to pay out 75% of benefits.
• Chances are you’re going to live longer than you think. According to a recent report from the American Academy of Actuaries, if you reach retirement age (59 1/2) you have a good chance of living to the age of 80.
• Are you factoring in medical costs during your retirement? Fidelity benefits consulting released a retiree health care cost estimate revealing the average 65 year old couple will spend approximately $245,000 on medical expenses during retirement.

Social Security is underfunded. You may live longer than you expect. And medical expenses are likely going to cost you a small fortune. How can we prepare for these lifetime expenses?

Start Investing in the Thrift Savings Plan Now

Most people have heard at some point or another they should start investing early. This can seem counter-intuitive because there’s a very good chance you don’t make that much money between the ages of 18-25. But we’d like to show you the math behind starting early, perhaps this can help shed light on this investment principle.

If you start investing early in your lifetime, the effects of compounding can be tremendous. Let us give you an example…

Let’s say you start setting aside $1,000 a year at age 25, or approximately $19 a week. This can easily equate to dinner for two at Chipotle or an IMAX movie ticket. You put it in a retirement account earning 8% a year. If you stopped investing completely when you turn 35 – that is, you’ve invested for only 10 years and didn’t add another penny – your total investment will have grown to nearly $169,000 by the time you turn 65 and are ready to retire. That’s right – a $10,000 investment turns into $169,000.

OK, here’s where it gets really interesting.

Let’s say you do the same exact thing, but instead of starting at 25, you don’t invest the $1,000 a year until you turn 35. And you keep on investing that much every single year until you turn 65. That is, you invest $1,000 a year for 30 years, rather than for 10 years as in the previous example. How much do you wind up with when you’re 65?

Only about $125,000. That’s right: Even though you invested $30,000—three times as much money—you wind up with less. This is the power of compounding when you start investing at such a young age.

Make Your TSP Account A Priority

Would you believe me if I told you the law in the United States of America actually encourages you to save for retirement?

There are tax laws which make it extremely advantageous for individuals to contribute to their Thrift Savings Plan, or other retirement accounts, such as an IRA, 401k, 403b, etc. Corporate pensions are rare these days, and the government offers individuals incentives for investing in retirement plans. Therefore you should take advantage of the benefits you qualify for. Start prioritizing saving and investing.

These tips can help you maximize your Thrift Savings Plan:

Take advantage of the matching contribution policy – The Thrift Savings Plan offers a 5% matching policy to federal employees. Unfortunately at this time the TSP does not currently have a matching policy for military personnel. However, the new blended military retirement plan will offer future military members a TSP Match (starting in 2018).

Think twice before overextending yourself on large purchases – By no means are we suggesting you deprive yourself of every single enjoyment you could possibly have, just to save money. Instead we’re simply stating you should weigh the current and future value or large purchases you intend to make. For example, can you reliably drive back and forth to work in a $15,000 car versus a $30,000 car? If so, wouldn’t it make sense to purchase the $15,000 vehicle and contribute the money you are saving towards your Thrift Savings Plan? Keep in mind, 10 years from the time you purchase the vehicle it will lose approximately 80% of its value, while that $15,000 you invest has the potential to grow far beyond the amount you contributed (see the example above about how $10,000 in contributions can turn into $169,000 over 30 years).

Pay raises and bonuses are a great opportunity to fund your retirement – If you’re good at your job, there is a likelihood you will receive promotions and pay raises throughout your career. This gives you the opportunity to turbocharge your retirement savings. Instead of putting your entire raise toward funding a grander lifestyle, try increasing your Thrift Savings Plan contributions. If you receive a 3% raise, try contributing an extra 1-2% to your TSP. You won’t notice anything less in your paycheck, but your retirement account will grow faster through the years. The same holds true for bonuses. You can contribute some or all of your bonus toward your TSP, greatly increasing the value of your retirement account.

The Truth About Investing

Most people won’t admit it but studies and statistics show the average investor performs horribly over time when compared to the overall market. This isn’t due to lack of knowledge held by the individual investor, the cause is something much more profound…

Fear & Greed!

Most investors simply cannot handle the emotional toll of seeing their investments rise and fall over time. It is because of this they buy at the wrong times due to greed and sell at the worst times due to fear.

DALBAR is the nation’s leading financial services market research firm and performs a variety of ratings/evaluations based on investor behavior analysis. Over the last 20 years, they have studied what affects an investor’s decision to buy or sell securities over the course of their investment career. The results they have found consistently show the majority of mutual funds that mimic the overall market return approximately 9% a year on average. But the actual annual return earned by the average investor was only 3.2% – this doesn’t even cover inflation.

No investor can consistently predict the direction of the market over a long period of time. It has been proven impossible.

While we don’t recommend setting and forgetting your TSP allocation, we have configured an allocation that should capture the overall growth of the stock market over time while leaving room for exponential growth via small cap stocks. If you want to set and forget your TSP allocation then it should be configured for 75% C Fund and 25% S fund. Here is why…

Over the last 120 years the general direction of the U.S. stock market has been up. There have been multiple crashes and recessions but capitalism has always prevailed. And for the doom and gloom crowd out there you have to keep things in perspective. The U.S. stock market has survived:

• Two World Wars
• A Great Depression
• Epidemics
• The Great Recession
• The List Goes On

Bottom line, over 30-40 years the stock market will trend upward. If you understand this simple concept and start investing early you are almost guaranteed to come out ahead.

Make More Profits In Your TSP Account

Nobody knows where the market is going, this is a proven fact!

We at TSPInvesting.com are one of the very few investment newsletters who openly admit we have no clue what the market will do next. It certainly loses us a lot of potential customers, but it’s the truth and we value our integrity far too much to jeopardize it over a few extra sales.

While we cannot consistently predict which direction the market will move over time, we can certainly identify market trends. More specifically, we can identify when the market is bullish, or trending upwards. Or when the market is bearish, or trending downward. This investment strategy is known as “Trend Following” and we are very good at it.

We want to be clear, we are not recommending jumping in and out of markets to capitalize on short term market movements, this has been proven to be catastrophic for portfolios. Our proprietary trend following strategy takes advantage of long term (multi-year) movements. Let us give you an example…

You may remember the most recent stock market crashes that occurred in 2000 & 2007. During those stock market crashes the market lost approximately 50% of its value in 18-24 months. Individuals who stayed fully invested in their portfolios saw their life savings cut in half. Even more depressing, in order for these investors to break even the market would have to generate 100% return, which is no small feat.

Think about it this way, if you had $1000 and it was cut in half you would be left with $500. In order for you to get back to $1000 – You would need to generate $500 just to get back to where you started!

Here is the million dollar question, if you knew you were about to suffer a huge potential loss to your $1000…

1. Would you want to protect your capital?
2. Would it make sense to step aside from the ensuing carnage, then simply return to the market when conditions were more favorable?
3. Would it be in your best interest to invest $900 at the start of a new bull market instead of $500?

The proprietary system we have developed enables TSP members to get the most out of their Thrift Savings Plan. You won’t have to check your account daily, weekly, or even every pay period. You rest assured that your road to retirement is clear and profitable.

Want to learn more? You can learn more about our TSP Investment Newsletter by visiting our site.