Using your Thrift Savings Plan to maximize your retirement standard of living isn’t complicated if you’ll ignore all of the lousy “advice” swirling around out there. Twenty years ago, federal employees were ignored by the investment industry.
Most advisers and brokers need to take custody of large sums of your money to take their fees and commissions. They are either investment sellers charging sales commissions or “asset gatherers,” skimming a percentage each quarter from every dollar you invest.
But until recently, federal employees were assumed to have their retirement wealth tied up in pensions, with little left over to invest elsewhere. Now that the TSP has grown so large, however, you have become a target of opportunity for salespeople and asset gatherers.
In order to protect yourself from bad advice and put your money to work for you and not some agent, broker, banker or corporate stockholder, you’ll need only to diligently follow four simple but important rules concerning your TSP account. Respect all four and you can’t go wrong.
1. Maximize your contributions. Do this by saving for retirement to the TSP before you save anywhere else. Thinking about saving to an IRA or Roth IRA? Not until you’ve maxed out your TSP contributions. If you’re saving for something other than retirement, then it’s OK to save elsewhere. It doesn’t make sense to contribute to the TSP for a car purchase, new home, wedding or college tuition, but when it comes to saving for retirement, the TSP is numero uno.
If you have a traditional IRA, 401(k), 403(b) or other employer-sponsored retirement plan account that contains only pre-tax money, you should transfer it into the TSP as soon as you can. For some, this can be a way to improve the performance of large amounts of money that otherwise could not be contributed.
2. Leave your money in the TSP as long as possible. Spend from your other accounts before you begin to invade your TSP account. Once you reach age 70½ and you’re no longer a federal employee, you’ll have to begin withdrawing your money, but you should withdraw only what you need, or must take, if it’s less.
3. Select the right asset allocation model. It might not be enough to have money in the TSP. If you want to get the most of what you want out of it over a lifetime, you’ll need to manage it prudently along the way. Unless you are nearly ready to withdraw the money, or have other accounts that are managed in coordination with your TSP account, that should mean being invested in all five basic TSP funds all the time. No market timing. No hiding under the bed until the scary times blow over. Guess what? They won’t.
Instead of trying to predict the next market move or economic trend, which only adds risk to your account, diversify your holdings among cash, bonds and stocks to hedge the risk lower. There are effective ways to determine which mix of funds is right for you, but it takes certain analytic skills that aren’t exactly common — even among financial services professionals. It requires specialized pension fund management techniques that must be applied on a regular basis to account for changing conditions and goals. If you’re not sure what to do, and aren’t willing to find out, then your best bet is probably to pick the L Fund that most closely corresponds to your life expectancy.
4. Rebalance regularly. Regardless of how you make your investment decisions, there is no benefit in ignoring your account for long periods of time. Things change and you must make adjustments. Rebalance your account to the appropriate fund allocation at least once per year, and no more than four times per year. Don’t try to pick the best times to do it, just set a regular schedule and stick to it. Pay attention and you’ll catch problems early, manage your account toward your goals, and give yourself a better chance to succeed without the cost of big mistakes.