TSP Management for Peace of Mind and Financial Gain
Tags: Investing, Tsp, Saving, Retirement

Why

Your TSP account is a very powerful way to maximize your savings, income and retirement security.

Maximizing TSP contributions from 2007 to 2020 would result in a contribution of approximately $250,000 that would have grown to about $700,000.

Not managing your TSP account is tantamount to financial negligence.

Contributions

It is highly recommended that you maximize your TSP contributions. At the very least contribute 5% of your pay check. This value is set at myPay.

Two 2 huge benefits to maximizing your TSP contributions:

Contributions are tax free. So if you contribute $19,500, then you do not pay Federal income tax on that money. If your taxable income in 2020 is $40,126 to $85,525 (single) or $80,251 to $171,050 (married) then your top tax bracket is 22% and you’re saving $4,290. If your taxable income is $85,526 to $163,300 (single) or $171,051 to $326,600 (married) then your top tax bracket is 24% and you’re saving $4,680. That’s $4,xxx going into your pocket and not Uncle Sam’s. You are automatically saving money each pay period. Read any article about saving for retirement and they’ll recommend saving 25% — 75% of each paycheck. Contributing $19,500 each year out of a $100,000 salary is less than 20%. Maximizing your TSP contribution is a good start toward retirement savings.

To contribute exactly the maximum allowed simply divide by 26. For example, in 2021 the maximum is $19,500 / 26 = $750 per pay period. In myPay, set your TSP contribution to $750 before pay period 1 of 2021. If you are 50 years old or over, you’re allowed an additional $6,500, so ($19,500+$6,500)/26 = $1,000 per pay period.

If it’s mid-year and you want to maximize but haven’t set the correct contribution amount, subtract what you’ve already contributed (find this number on your pay stub in myPay) from the max and divide by the number of remaining pay periods. For example, say we’re currently in pay period 14 and you’ve contributed $8,500, then ($19,500-$8,500)/(26-14) = $916.67. Go to myPay and set your contribution to $920. (Don’t worry, the system won’t let you over contribute. So in pay period 26, the system will automatically deduct around $880 to maximize your allowed annual contribution.)

Note that in myPay you set your contribution amount. This is how much money goes into your TSP account. On the TSP website, you set into which Fund your contributions go. You can also transfer money already in your TSP account to different Funds. This is called fund allocation.

Contribution for money going into your TSP account and adjusted at myPay.

Allocation for money already in your TSP and adjusted at in your TSP account.

Funds

When you started working, your TSP contributions defaulted to the G Fund which grows at 1–2% per year. If this default is not changed, you are not maximizing your potential income.

TSP has several fund types to which you can allocate your investment dollars:

G Fund — Government Securities is designed to just beat inflation. It’s by far the safest: grows at a paltry 1–2% per year and will never lose money. F Fund — Fixed Income Index tracks the US Bond market. It’s very safe and has grown 4% per year for the last 10 years running. C Fund — Common Stock Index tracks the S&P500 (think of this as “the US stock market”). Usually grows between 10%-30% per year. Over the last 10 years, it’s averaged 13.6% per year. But it can crash, like in 2008 (took 4 years to recover) and in 2020 (recovered in the same year). S Fund — Small Caps Index tracks small to mid-sized US companies. Risk is a little higher than the C Fund because smaller companies can fail or perform poorly easier than large ones. Performance is very similar to the C Fund but usually lags a little behind. Usually grows 9%-30%. Over the last 10 years, it’s averaged 13.1% per year. Crashes are similar to the C Fund. I Fund — International Stock Index tracks international stocks (the MSCI EAFE Index). Risk is a higher than the C and S Funds because of the international flavor. Performance has lagged both the C and S Funds. Usually grows 6%-22%. Over the last 10 years, it’s averaged 5.9% per year. Crashes are similar to the C and S Funds. L Funds — Lifecycle Funds manage your money for you. If you want to “set it and forget it”, pick a L Fund. It’s very simple. The number of the L fund is the approximate year you want to retire. So if you plan on retiring in 2044, then select the L 2045 Fund. The L Funds manage risk for you. When you’re a long way from retiring, they take more risk to maximize your potential return with the C, S, and I Funds. As time creeps closer to the retirement year, risk is decreased by moving more money into the G and F Funds.

Three factors come into play when selecting which funds to invest in:

Time horizon — how long till you retire. Most folk’s time horizons are long: >5 years. In general, the longer the time horizon, the more risk you can afford to take. If you’re 15 years away from retiring and all your money is in the C Fund and if it crashes, then you have 15 years to make your money back. There has never been a 15 year span where the S&P crashed and didn’t not come back to a winner. But if you have 2 years to go and the market crashes, now you might be down with little hope of recovering before you retire and start drawing money out of the account. The shorter the time horizon, the less risk you want. Risk tolerance — bigger risk can mean bigger gains or losses but the lower the peace of mind. The G and F Funds are the safest but also offer smaller gains with the highest peace of mind (you’ll never lose money in these funds). Higher risk funds include the C, S, and I Funds. Management — how often you want to manage your fund allocation. If you want to “set it and forget it”, select a L Fund. If you want to actively manage your account, select a one or a mixture of C, S, and I Funds.

What’s Best

The best strategy depends on your time horizon, risk tolerance, and level of management.

Set It and Forget It

The easiest is the person who wants to “set it and forget it”. To do this decide what year you want to retire and put 100% of your contributions and allocation into that L Fund. The fund will manage your risk appropriately. For example, if you plan on retiring in 2048, put all you money into the L 2050 Fund and you don’t have to look at it again till 2049 when you’ll receive an email telling you the L 2050 Fund is closing and you need to move your money elsewhere (then you’ll take a retirement seminar and they’ll tell you to select either the G or F Fund or a combination of both).

The down side of the L Funds is that they do not maximize your potential income. To do this you’ll have to be a little more involved.

Long Time Horizon

You can also “set it and forget it” with the C Fund if your time horizon is long enough. The C Fund took 4 years to recover from the 2008 crash, so make sure your time horizon is >5 years. But if your time horizon is longer, then you can afford more risk and enjoy the 13.6% average gain.

Short Time Horizon

If you have <5 years till you retire, then you should play it much safer by doing all you can to avoid the impact an economic crash can have on your hard earned savings. The G Fund is 100% safe from crashes. The F Fund is also very safe from crashes.

As you near retirement, you’ll want to move money out of the C, S, and I Funds into the C and F Funds.

Actively Manage

If you want to actively manage your money to maximize your gain, then you’re looking at the C, S, and I Funds.

Of these three, the C Fund offers the lowest risk and highest returns. In general, an actively managed account will have a majority of funds allocated to the C Fund most of the time.

By actively manage I mean moving money between the C Fund and any other fund (usually the G Fund). The idea is that when the C Fund (US stock market) goes down, you move your money to the G Fund where it’s safe and when the market turns around and comes back up, you move your money back into the C Fund. Sell high and buy low. You’re literally selling and buying the C Fund.

Under special circumstances you’ll move money into the S or I Funds. For example, say we’re recovering from a pandemic and small/medium businesses’ stocks (reflected in the S Fund) have been beat up but the government is handing out cheap loans to help save these business and a vaccine is on the horizon, then moving money from the C Fund which has already recovered into the S Fund which has yet to recover, makes sense.

How often you move funds into and out of the C Fund determines how active you are. (I am an active manager of my account, but I only move funds once or twice a year. The vast majority of the time my moneys are in the C Fund.)

Do NOT try to guess market swings and move your allocation between the C and G Funds without proper knowledge and research. Guessing tops and bottoms is a losing game.

Moving money around requires research or having your finger on the pulse of the markets. The US stock market has Seasonal Trends: the Santa Clause rally, the Sell in May and Go Away and the September is the Worst Month to name a few. Markets also tend to drop before presidential elections. Research these and make small to medium moves in your account to squeak out a few extra dollars. Also see: Market Seasonality: Capitalizing Upon Summer Decline

What’s Next

Either “set it and forget it” by contributing and allocating to a L Fund or do more research and decide what strategy is best for you:

Poke around and read information at TSP.gov. Read CNBC.com to keep a pulse on the market. Read a basic personal finance and investing book. Browse Amazon or go to a bookstore and pick one you like. All the into books have the same basic information. Talk to people who know about investing. Ask them what their strategies are and why.

Good luck … and get rich while maintaining peace of mind!