You may be wondering whether it’s worth it to contribute an extra $50 per pay period to your Thrift Savings Plan account. Particularly when you’re in the early stages of your career and have many other needs competing for your paycheck, it can be difficult to choose between spending and saving a little more toward a retirement that is many years away.
Our culture tends to send conflicting messages on the issue. On one hand, relentless ads beg you to spend every penny you have on products and services. Even our political leaders from time to time endorse consumer spending as a patriotic duty. On the other hand, your parents, investment companies and political leaders encourage you to save every penny that you don’t have to spend on necessities, to be prepared for inevitable rainy days. Saving is, again, frequently characterized as your patriotic duty.
So, you’re constantly in the middle of a tug-of-war between desire to spend and guilt over not saving enough. The trick is to find a balance that meets your needs for living the life you want today while also preparing for a reasonably secure and comfortable lifestyle tomorrow. To find this balance, you need to know what you’ll get tomorrow in exchanging for sacrificing today. Unfortunately, this usually is not easy to figure out.
Consider the $50-per-pay-period decision. You know what $50 will buy you today, but before you decide whether to save or spend that hard-earned money, you’d like to know how much it will buy you in retirement spending if you save it.
The problem is that the answer depends on a number of factors, including your age now, your age when you retire, how long you live, how you manage your TSP account, your luck in the investment markets, your tax returns and inflation rates over your lifetime. All but one of these variables involves uncertainty and long periods of time, and this uncertainty generates lots of risk.
Because of this risk, it’s not safe to simply project future account balances and spending rates using assumed fixed rates of investment returns, inflation rates and lifespan. Even risk to your projected retirement date and saving rate should be considered in the decision. This means taking into account the possibility that your TSP investment might grow less than you expect over time, or that inflation might be higher than you expect, or that you might not be able save what you’d like, or that you might retire sooner than you think, or that you might live longer than you expect.
Fortunately, there are methods for quantifying and managing this risk that make these uncertainties more predictable. If you coordinate your planning, analysis and decision-making, you can make more reliable decisions and then manage your plan in accordance with your objectives, which improves your odds of success. However, this means that what you decide today should depend on how you’ll decide in the future. The value of your $50 in savings will be unique to you, and your circumstances and decision-making. There is no one-size-fits-all answer.
Based on my planning, analysis and management methodology, for example, if you are 30 years old and plan to retire in 37 years at age 67, your $50 in TSP savings today can reasonably be expected to buy you about $8,100 per year in additional spending during retirement, after taxes and adjusted for inflation. Since the $50 savings contribution is pre-tax, it’s like saving $37 per pay period, or $962 per year, in after-tax income to realize an additional $8,000 per year in spendable income during retirement — a return of roughly 730 percent on your investment.
While the costs and benefits of saving more will be unique to your situation, this example should give you an idea of the kind of benefit that can accrue from investing in the TSP. You can use this information to help you weigh your options and make an intelligent decision.