I recently went through some old documents that I’ve saved since 1987, and found the first Thrift Savings Plan open season brochure. It estimated that a federal employee with an average salary who saved 5 percent of basic pay in the TSP eventually would have about a third of their retirement income come from their investments. The other two-thirds would come from Social Security and the Federal Employees Retirement System basic benefit. For many employees retiring today, that initial projection is becoming a reality.
The TSP is arguably the most important part of securing your retirement. It’s the one benefit that is in your control in terms of how much you save and where you invest those savings. This can be a blessing or a curse, depending on how committed you are to saving and how you manage your long-term investments. Some retirees will receive a larger portion of of retirement income from their TSP accounts if they are able to save a significant portion of their income and be consistent about managing it. Others might have to rely more heavily on their basic government pension benefit and Social Security.
It’s important to remember that if you have higher-than-average earnings, your future Social Security retirement benefit will replace less of your pre-retirement income. This is because the Social Security retirement formula is tilted towards the lower wage earner. The monthly benefit for a 62-year-old who earned $53,880 last year and had an average wage every year since 1978 would be $1,333 per month. That would replace about 30 percent of their income. But the more you earn during your career, the lower that percentage drops.
Remember that your gross benefit amount may not be as important as knowing your net retirement income after reductions and withholdings. (For more information, see my column, Don't Overestimate Your Expected Income.) There are several online tools to help you make sure you’re taking full advantage of the opportunity to save for retirement, including the TSP’s Ballpark Estimate and How Much Will My Savings Grow? calculators.
One effective strategy to increase your savings is to put aside more money when you receive a pay increase. Think of a raise as having three parts: one goes to taxes and increased expenses, another to savings and the last to having some well-earned additional spending money. As my friend Karen tells her children, “You’ve been living without the money before the raise, so you should have no problem putting a portion of it into savings.”
It’s important to know that if you aren’t saving 5 percent of your salary in the TSP, you’re not receiving full matching contributions from your agency. Whether you’re earning a lower salary or higher, this is an important savings goal for anyone covered under FERS.
I recently received an email from a friend who related a story about a coworker. He discovered that she earned a salary of $63,743 a year and was contributing to the TSP—but only at the rate of $50 every two weeks, nowhere near the $122 that would bring her up to 5 percent of salary. He understood that might have been all she could afford, but suggested she consider saving a percentage of her salary instead of a dollar amount. Then, every time her pay goes up, her TSP contribution will increase. She’ll have a more tangible gauge of how close she’s getting to the goal of contributing at least 5 percent of her salary. And the increased TSP contributions will lower her federal (and state, if applicable) tax withholding.
The strategy of contributing a percentage of pay rather than a dollar amount works best for those who are not contributing the maximum elective deferral. My friend said he’s able to contribute $18,500, the maximum for 2018. If he used a percentage for his contributions, he might contribute too much, and miss out on the match for the last pay periods of the year. So he chooses to contribute $725 per pay period, which allows the maximum $18,850 savings, with the final withholding of $375 for pay period 26 to hit the annual limit.
When an employee reaches age 50, he or she can contribute an additional $6,000 in catch-up contributions. These contributions don’t receive any agency match, so they can be spread out over any number of pay periods.
The TSP website provides examples of everyday savings such as the cost of coffee or eating lunch out to show the power of saving small amounts over long periods of time. Using a 6 percent average rate of return, compounded monthly, saving $3.50 a day over 40 years would lead to an account balance of $209,105. That’s a nice chunk of retirement money.