Maximizing Your Thrift Savings Plan -TSP Investment Options

The Thrift Savings Plan (TSP) is a powerful tool for federal employees and members of the uniformed services to secure their financial future through disciplined investing and diversification. The TSP is the primary tax advantaged retirement vehicle for federal employees, very similar to a 401(k) offered by many private-sector corporations to their employees. It is an opportunity for federal employees to dedicate a portion of their income to retirement, reduce their tax burden, and receive matching contributions (FREE MONEY) from their employer. Federal employees can contribute funds to their TSP accounts automatically, prior to the money hitting their bank accounts. This direct deposit is beneficial because most individuals will not notice the money never hit their bank account and they are saving for retirement without even realizing. This guarantees retirement contributions monthly and ensures retirement saving does not get put on the back burner. The TSP contains a variety of funds and investment options and provides ample opportunities to build wealth over time.

Understanding TSP Investment Options The TSP offers a range of investment funds, each designed to target specific asset classes and levels of risk. Diversification within the TSP is crucial to optimize returns while managing risk. The TSP has a total of 15 different funds options and offers the ability to invest in mutual funds (with the necessary fees). The funds are broken down into two main categories, Individual Funds and Lifecycle Funds (L Funds). Individual funds include the ability to invest in government securities, stocks, and bonds, typically attempting to match well known indexes.

Utilize your TSP to build for your financial future. Start early and your financial seedlings will grow to fruitful trees and provide you with passive income and financial independence.

Here's a breakdown of the available individual funds:

1. G Fund (Government Securities Investment Fund): The G Fund invests in government securities and offers a low-risk, stable return. It's an excellent choice for capital preservation.

2. F Fund (Fixed Income Index Investment Fund): The F Fund invests in a broad bond index, providing exposure to fixed-income securities. It offers potential for income and some level of diversification.

3. C Fund (Common Stock Index Investment Fund): The C Fund tracks the performance of the S&P 500 Index, providing exposure to large-cap U.S. stocks. It offers the potential for long-term growth.

4. S Fund (Small Cap Stock Index Investment Fund): The S Fund tracks the performance of the Dow Jones U.S. Completion Total Stock Market Index, providing exposure to small-cap and mid-cap U.S. stocks.

5. I Fund (International Stock Index Investment Fund): The I Fund tracks the performance of the MSCI EAFE Index, offering exposure to international stocks. It enhances diversification by including non-U.S. companies.

Analyzing Past Performances Let's examine the historical performances of TSP Individual funds (as of Aug 2023):

The individual funds in the TSP can grow over time. With the proper asset allocation, you achieve 10%-plus annual return on your investments

In addition to the Individual Funds, the TSP offers Lifecycle funds which are intended to let an individual invest their entire portfolio into a single L Fund by utilizing a mix of the five individual funds discussed above. The L Funds are established based on target retirement year. Each fund is designed to include more risky assets for younger individuals, then gradually become more risk adverse. This is because younger investors would have much more opportunity to make up for any losses they might experience early on in their investment life and riskier assets tend to have higher returns in the long run. As an individual gets older, they have fewer years to work and recoup any losses, therefore it is prudent to reallocate resources to be less risky, even though they will likely bring in less money. Every three months, the target allocations within each L Fund automatically adjusts to account for the age of an individual and to gradually become more risk adverse. Here is the performance of a few of the L Funds offered by the TSP (the numbers within the name represent the year an individual intends to retire from working):

The Lifecycle funds in the TSP utilize target retirement dates to achieve a portfolio balanced between risk and return.

Example of TSP Wealth Building

Here is a VERY conservative example of how investing into the TSP can help a government employee build significant wealth. Consider Sarah, a government employee with a consistent wage. By strategically allocating her TSP contributions across funds, she manages to build substantial wealth over time. Sarah starts her TSP journey at age 30 with a salary of $60,000 and contributes 10% of her salary annually. She contributes across the C, S, and I funds and returns an average of 8% per year. If she continued this trend over the course of her career and retires at age 65 she would have over $1,100,000 in her TSP. Keep in mind, this is assuming Sarah NEVER gets a raise and continues to make $60,000 her entire career. In reality, her income should rise and, in-turn, her TSP value should significantly increase. This example really showcases the power of disciplined investing and diversification.

Supplementing TSP with Other Retirement Accounts

While the TSP is a robust retirement vehicle, you can further enhance your financial security by supplementing it with other retirement accounts:

1. 401(k): If your employer offers a 401(k), take advantage of it. Maximize employer matches and contribute as much as possible to benefit from tax advantages and compound growth.

2. Traditional IRA: Consider opening a Traditional IRA to further diversify your retirement savings. Contributions may be tax-deductible, and earnings grow tax deferred.

3. Roth IRA: A Roth IRA allows after-tax contributions and tax-free withdrawals in retirement. It's an excellent choice if you anticipate higher tax rates in the future.

4. Health Savings Account (HSA): If you have access to an HSA, consider contributing to cover future healthcare expenses. HSAs offer triple tax benefits: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.

The Thrift Savings Plan is a powerful tool for federal employees and uniformed service members to secure their financial future. By leveraging diversification across Lifecycle and Individual funds, individuals can optimize returns while managing risk. Past performances and real-life examples demonstrate the potential for substantial wealth accumulation over time. Additionally, supplementing your TSP with a 401(k), IRA, or HSA can further enhance your retirement security. Start early, invest strategically, and take advantage of tax-advantaged accounts to create a comprehensive retirement strategy that ensures financial freedom and a comfortable retirement.

If you are looking for more specific asset allocation to your unique situation, please feel free to reach out to us here at the Tactical Wallet. We would be happy to sit down with you to discuss which funds across the TSP, or supplement investment vehicles might be helpful for you on your path to financial freedom!