Learn More About Your Thrift Savings Plan (TSP)

Source: www.tsp.gov

 There are some common misconceptions about the Thrift Savings Plan (TSP) causing investors to “lose” money. By understanding how the TSP works, you can make more money for your retirement. An active role in the TSP can earn you a better return and help you retire earlier. Here are some of the misconceptions with the TSP (Roth or Traditional) I’ve seen.

·         I’ve started my TSP, so I’m good right? If you’ve gone to MyPay or have gone to your local finance office and started your TSP, then you’ve only accomplished the first step. When you start TSP, by default, your money automatically gets invested in the “G” Fund. The G Fund is the safest fund, and as such, has the lowest rate of return. You will never actually lose money, but you mathematically “lost” money by not being in higher rates of return funds. According to TSP.gov, the G Fund has returned 3.4% over the last 10 years compared to the “C” Fund which returned 7.4% over the same time.¹ You must go to www.tsp.gov to change your fund allocation. This is a crucial step for retirement planning. If changing the allocation stresses you too much, then consider one of the Lifecycle (L) funds.  Pick your target retirement date (or the date nearest your 55^th birthday) and place it all in that L Fund.

·         I’ve changed my fund allocations, so I’m good right? Changing your fund allocation should be an annual event. Leaving your fund allocations stable, isn’t necessarily a bad thing and will earn you average returns from the Dollar Cost Averaging method. But if you want to maximize your earnings, you should check your fund allocation every year and change it as applicable. If the stock market is down then you should invest more in the C or S Fund to take advantage of the low market prices.  Or conversely, you’ve seen a huge increase in profits in your C or S Funds, so you can reduce those contributions and put more into your G Fund to take advantage of a potential sell off.

·         I’m following the market closely, but I can’t be as active because I have the TSP and not an active investment account. This is a very common myth. You can “buy and sell” out of your TSP funds at any time. Some people even engage in TSP day trading. “Buying and Selling” is accomplished by doing an Interfund Transfer (IFT) by going to www.tsp.gov or by calling TSP directly. There are some limitations, so day trading isn’t necessarily as easy as in a normal investment account, but you can actively trade. Instead of waiting for your annual allocation change (like mentioned above), you can take $10K out of your G Fund and move it to the S Fund and vice versa as the market changes. This differs from changing your fund allocation because you’re “locking in” the gains you’ve made in the fund you are transferring out of.

Bottom Line: Make sure, especially if you are under 45, that all your money isn’t being put in the G Fund. After you’ve adjusted your allocation to meet your investment needs, then consider changing it annually or more frequent if you do sufficient market research.

¹ Annual TSP Returns: https://www.tsp.gov/investmentfunds/annual/annualReturns.shtml