The Thrift Savings Plan-the government's 401(k)-style retirement savings plan-is a much-lauded program. It's cheap to administer, empowering for employees, free for taxpayers and grows federal workers' savings so they can afford to retire.
But one thing that the TSP is not is a defined benefit. There's nothing definite about the program; what you put in-both in terms of money and effort-is what you get out.
"Just being a good sport and sitting down once in your life and signing up, while of itself is a big step, is not enough," said certified financial planner Karen Schaeffer. Fund selection is key, she said.
The TSP has five funds. The G fund, which invests money in ultra-safe government securities, is the default, which means if you don't take the time to select a mix of funds, your money gets put in here. The F fund invests in fixed income securities, the C fund in common stocks, the I fund in international stocks, and the S fund in small and mid-sized companies.
"If you just go along and have been putting your money in the G fund…not only did you lose a lot of opportunities, you may have lost the ability to retire," Schaeffer said. "People are going to live to be 100 years old; you can't have your money sitting on the sidelines."
In the Mix
Choosing your mix of funds depends on how comfortable you are with risk, and how high your earning ambitions are. In basic terms, the C, S and I funds are good long-term growth funds, although the S and I funds are more volatile and aggressive. The G and F funds are reliable, but aren't big earners.
Just because you're nearing retirement doesn't mean you should rule out long-term growth funds. Employees should allocate their TSP investments based on the notion that they'll expect to use the money for many years after their retirement date.
When in doubt, the L funds are an option. Introduced this summer, the TSP's life-cycle funds automatically mix your money into the existing five funds, steadily putting more into conservative options as you near retirement. Even if you don't opt to put your money into the TSP-designated automatic funds, studying their design provides a good road map for participants.
For example, the 2010 L fund (designed for people who expect to retire in puts 43 percent of savings into the safe G fund, 27 percent into the C fund, 15 percent in the Ifund, 8 percent in the S fund and 7 percent in the F fund. Participants can use this mix as a model, tweaking the percentages. If you already have separate savings invested in government bonds, you may want to shift more of your money into higher-yielding options.
Participants should note: The TSP Board's design still puts 50 percent of savings into long-term growth funds for people just five years away from retirement. If you're planning to retire in 2010, but have enough alternate forms of income so that you won't need to withdraw TSP funds until 2020, consider investing in an even riskier fund mix, financial advisers say.
If you choose to allocate funds yourself, however, you need to commit to revisiting the mix of investments on a regular basis.
No Such Thing as Too Late
Even if you're only a year or two away from retirement, it's not too late to take advantage of the TSP, according to retirement experts.
Georgia Bohuslav, a federal retirement counselor and contractor with FPMI Solutions Inc., says it's never past due to max out your TSP contribution. For the last 15 years of employment, she says, workers should put the allowed maximum of 15 percent of their salary into the TSP. The 5 percent matching contribution from the government brings you to 20 percent in savings.
If you haven't done that, there's still an opportunity. The TSP instituted the option of catch-up contributions for employees age 50 and older. Those participants can invest another $4,000 above the 15 percent to make up for lost time.
While the TSP is important, financial advisers stress that it should only be a complimentary source of income for retirees.
"Spending the thrift money immediately is a mistake," Schaeffer said, because many retirees have 25 or 30 more years left to live. She recommends using TSP savings for "bigger ticket items" such as cars, travel or family events, rather than basic needs.
Schaeffer said employees should still be relying on their defined annuity, Social Security and other savings for the basics, and if that's not enough, "then we have to wonder if they're expecting too high of a standard of living in retirement."
One of the biggest decisions employees have to make concerning money in TSP accounts is what to do with it once they retire. Should they leave it in the TSP or roll it over into an Individual Retirement Account?
Unlike the TSP plan (which the government keeps simple to keep maintenance costsdown), an IRA has many more investment choices. Another reason for doing so is easier access to your savings. The TSP requires you to choose how you want to receive your money at the time you retire; IRAs let you take it out when you want it. Many IRAs, however, have higher maintenance fees, and require more effort to administer than the TSP.
If you choose not to put your TSP savings into an IRA, there are three choices for retrieving money from the TSP when you retire:
- Determine a set dollar amount to receive every month, with the option to change the amount once a year.
- Receive a monthly payment based on your age and life expectancy, so that every year, you receive a bigger percentage of your dollars.
- Buy an annuity through MetLife, which contracts with the TSP, to ensure you get a set dollar amount every month for the rest of your life, but with no chance to change and no savings to pass on to your heirs.
Above all, don't underestimate the value of the TSP. Retirement counselor John Grobe, author of Understanding the Federal Retirement Systems (FPMI Solutions, Inc. 2005), contrasts investing in the TSP with planning for your children's education.
"Your child can always go to a state school instead of Harvard," Grobe said, but there's no second-tier backup option for your retirement.