Steve Martin used to have a routine that went like this: "You can be a millionaire, and never pay taxes! You say, 'Steve, how can I be a millionaire, and never pay taxes?' First, get a million dollars."
That's pretty much the answer to the question of how some people have been able to accumulate $1 million or more in their Thrift Savings Plan Accounts. In most cases, the reason is the ability to transfer other tax-deferred retirement savings to the TSP.
An employee who comes to work for the federal government from the private sector has the option to transfer the money invested in an existing 401(k) retirement plan into the TSP. Presumably, the 75 people who currently have accounts valued at $1 million or more have done exactly that. It's important to remember that these people are very much the exception to the rule. Although there are more than 10,000 individual TSP accounts with a balance of more than $500,000, the number of accounts with a balance under the $500,000 threshold tops 4 million. The average TSP account is less than $70,000. Why Not More?
Why isn't the average TSP balance higher? Here are some reasons:
- The TSP is only 23 years old. Generally, a working career runs about 40 years, and the average federal employee has less than 14 years of service. So no one's been investing in the TSP for a full career yet.
- When the TSP started there were limits placed on the percentage of pay that employees could contribute: 10 percent of basic pay for those under the Federal Employees Retirement System and 5 percent for those covered by the Civil Service Retirement System.
- In the late 1980s, the highest-paid federal civilian employees could not be paid more than Level V of the Executive Schedule -- which at the time was $75,000.
- In 1987, the tax deferral limit (that is, the maximum amount an employee could contribute to the TSP) was $7,000, and participants couldn't make catch-up contributions. The 2010 tax deferral limit is $16,500, plus an additional $5,500 in catch-up contributions.
- There was a waiting period of up to one year for new employees to begin making contributions (and, in the case of FERS, receive agency automatic contributions). That waiting period has since been eliminated.
- The TSP started slow and grew conservatively. In March 1989, there were 1.3 million TSP accounts established, with investments of more than $3 billion. As of April 2010, there were more than 4.3 million TSP accounts with total investments of more than $244 billion.
Rates of Return
So how can you get the most out of your TSP, even if you don't become a millionaire? In a word, diversify.
If you invested $1,000 in the common stock C Fund this fund in 1987 and left it there until the end of 2009, you would have $6,692 in your investment. If you had invested the same $1,000 in the government securities G Fund, your balance at the end of 2009 would have been less than $4,000. Even though the stock market is volatile and unpredictable, it is still possible for your investment to outperform inflation and provide an investment that will offer important retirement income to supplement Social Security and the FERS basic retirement benefit.
Of course, the volatility and unpredictability means you probably don't want to put all your investments in the C Fund. To minimize risk and increase revenue, it appears that a diversified investment (spread over many different kinds of stocks and bonds) and allocated for your time horizon is the best way to plan for a comfortable retirement.
The TSP offers not only the C Fund (which tracks the S&P 500, made up of large companies headquartered in the United States), but also the I Fund (an index of large companies headquartered overseas) and the S Fund (based on the companies in the stock market outside the S&P 500). Furthermore, the TSP's life-cycle funds use a strategy of diversification based on a specific time horizon. If you are not sure how to diversify your account, the life-cycle funds will do it for you.
CORRECTION: The original version of this story said the Thrift Savings Plan is 27 years old. It is 23 years old. The article has been updated to correct the error.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.
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