Things to Consider when Investing in the TSP Funds [Video]

As a federal employee, you are provided retirement plan options. The Thrift Savings Plan (TSP) is the federal version of the private sector's 401(k).

The TSP is a recognized, defined savings/investment contribution plan. The Thrift Savings Plan's account balance comprises several components - federal employee contributions from pre-tax income, employer matching contributions, and any interest or appreciation earned over the years.

So, when looking at your TSP, one of the things that you might be curious about is how much money should you put into the TSP and what funds should you choose? And that's a very good and very complicated question.

First of all, there's a general rule of thumb in retirement planning. Now, if you've watched any of my videos or had a conversation with me before, you've probably heard me say that at Medallion Financial Group, we have a saying, and that's:

“Rules of thumb are dumb because they forget all the other fingers.”

In other words, there's a lot of variables that go into your personal situation. With that in mind, if you want to look at a rule of thumb, generally people say you put about 15% of your income away into retirement. And if you do that consistently, you'll be in a good place.

Your Thrift Savings Plan Contribution

Retirement planning is hugely personal, and every situation, scenario, and person is unique. Many variables impact investment decisions – especially those decisions that have to do with retirement planning.

To keep things simple, most financial specialists agree that if an investor can consistently put 15% of their monthly income into a trusted investment vehicle, these dedicated contributions are likely to set up an excellent foundation for a comfortable retirement.

But, if you want to get down to the nuts and bolts of investment analysis, things have the potential to become a bit more complex.

Start with the End in Mind

A retirement analysis begins with a well-defined idea of how you see yourself in retirement. What are your goals and objectives? This retirement picture needs to be quantified - meaning you must start to analyze how much money is required to afford your desired or ideal retirement.

Another important investment factor to consider references the amount of time you have until you plan to retire. This time – be it 10, 20, or 30 years, is the time you have available to invest, plan, and reach your retirement goals.

Once you have a more quantified picture of your retirement goals and you have considered your time horizon for saving and investing, you can now have a more mathematical and systematic way to approach how much you need to put into your TSP.

Here is an example –

As a 30-year-old woman who plans on retiring at 68, Pam wants to ramp up her retirement preparation. Based on a careful and well-thought-out analysis of her current assets (and future retirement objectives), Pam determines that she will need to save $500,000, which she intends to add to her existing retirement investment account.

Based on this example, how much should Pam be contributing monthly to meet her retirement goal?

Working backward, one can easily calculate the contribution required to reach a defined investment objective. Pam has 38 years (68 -30= 38) to reach her goal of $500,000. To determine Pam's required yearly contribution, divide $500,000 by the years Pam has before retirement (38).

Or $500,000/38 equals $13,158 yearly. This translates to about $1,096 monthly.  

Note – The above example has been simplified to illustrate how to calculate a monthly retirement contribution. It is likely that the investment's value at retirement will far exceed Pam's goal because this streamlined analysis does NOT account for potential interest earned, dividends paid, or appreciation on the amount of the investment. The cumulative interest and appreciation that occurs over decades may be significant, depending on the number of years that the retirement funds have to grow – tax-free.


When you have an idea of how much to contribute to your retirement, it is also important to determine how to invest these funds. But first, a word about an important investment concept – risk tolerance.

Risk Tolerance and the Impact on Retirement Planning

Risk tolerance refers to how much variability/volatility of an investment that an investor is willing to withstand. In other words, how much can you stomach should there be large swings in the value of your TSP account?

The concept of risk tolerance is typically related to age, although it is not the only determining element. But, from a general perspective, younger investors who have a longer time horizon can typically take on greater risks than those with shorter timeframes.

One's risk tolerance is a critical part of retirement planning. With the application of some incredible technology, a risk score can be developed. This risk score becomes a crucial part of investment planning as it helps you avoid investment stress that may be too overwhelming. It is important to be realistic and honest about your risk tolerance because taking on excessive risk may cause you to panic and make decisions for the wrong reasons at the wrong time.

Determine Which TSP Funds are Most Suitable for You

The TSP offers a variety of funds, each of which functions differently - aligned with specific investment objectives.

TSP funds are offered in two primary categories –

  • Individual Funds – monies invested in these funds have a defined investment-specific objective, some of which are more vulnerable to certain market conditions. For example, one fund may only invest in short-term government securities, while another may focus on a stock index, etc.
  • Lifecycle Funds – Lifecycle Funds are available in varying mixtures of the individual TSP funds. However, the allocation within the fund (and thus the risk) is adjusted periodically as the investor nears their retirement date.

The Asset Allocation Strategy

With a solid understanding of your current financial situation, defined retirement objectives, a quantified risk score, and a calculated time horizon, an asset allocation strategy can be developed to help you meet your retirement goals. Asset allocation is ongoing, as many factors impact the funds' performance and the investor's objectives.

However, it is essential to note that because one's age is a significant contributing factor when optimizing an asset allocation strategy, it is important to regularly review and adjust the allocation of retirement assets as you move closer to retirement age.

How Should You Invest TSP Funds? – The Take-Away

The Thrift Saving Plan is an easy, seamless way for federal employees to save for retirement, but it can be overwhelming. Hopefully this begins to give you an idea of at least a general outline of how to approach investing in the TSP. If you have additional questions about your specific investment goals or situation, please reach out to Medallion Financial Group to explore the many TSP funds available to meet your retirement goals. We specialize in helping federal employees navigate the federal benefit system and certainly the TSP is a big part of that. Give us a call today or schedule a free consultation.

 

See If You Are Ready To Retire!

 


For over 30 years, federal employee retirement planning has been a key focus of Medallion Financial Group. We recognize that FERS retirement benefits have extra layers of complexity, such as the Thrift Savings Plan (TSP), 401K, Pension plan, FEGLI and more. It’s easy to get lost in a sea of bad advice when so few people understand the basics. We help with the basics and beyond to enable our clients to get the education and advice they need to retire with confidence.Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.We strive to exceed client expectations – because we have high expectations of ourselves.