By Stacy Livingstone-Hoyte
Just a few decades ago many working Americans retired with the benefits of a pension plan and held a steadfast confidence in the viability of the nation’s social security system and other entitlement programs.
Today, the opposite is true; the burden of funding one’s retirement lies predominantly with individuals and overall confidence about retirement readiness remains at historic lows. This can add an additional stressor in life but a little advanced planning can help put things in perspective.
The Thrift Savings Plan (TSP) for uniformed service members and federal civilian employees serves as one means to overcoming the burden and uncertainly of what lies ahead for our economic futures.
Here are a few things to consider about the Federal Thrift Savings Plan:
1. Enrollment and contribution selection
TSP uniformed service participants are afforded a very simple enrollment process using the respective service’s automated system (https://mypay.dfas.mil). Check with your agency payroll department to determine how to enroll in the TSP.
TSP participants can make traditional (pre-tax) or Roth (after tax) contributions to their account. Pre-taxed contributions lower the amount of income subject to federal taxes. After tax contributions will lower the amount of take home pay and provide no tax deductions. The decision about which contribution option is best is fundamentally a tax decision/question – Where will the greater advantage lie? Deferring to pay taxes on TSP contributions and earnings until withdrawal conditions are met? (traditional) Or dealing with the tax burden at today’s tax rates (Roth)? Consider this: can you make reasonable projections about your future tax rates in retirement? Many people project lower income and therefore reduced tax rates in retirement. However, If you project higher tax rates in retirement, then Roth contributions may provide the best benefit as you would pay a lower current tax rate. Do you prefer to have less of your contributions siphoned off to pay taxes and instead promote account growth? Then, traditional contributions may be more financially appealing. Finally, consider having a mix of both pre-tax and after tax contributions as an opportunity to diversify your retirement holdings and reap the benefits of both options. Speaking with a tax advisor, qualified financial services representative or military financial counselor can help sort out the details. Additionally, the TSP contribution calculator (www.tsp.gov) is also available as a reference tool.
2. Fund Selection
Cost, diversification and access are some of the foremost issues that every investor must address when considering the investment options best suited for their goals. Cost is where the TSP shines with an overall expense ratio that is far less expensive than private 401k plans. Enjoying greater investment returns because of lower expenses is the prized pursuit of every serious investor.
Furthermore, the simplicity of fund selection among TSP’s well diversified investment options (five core funds and five lifecycle funds) reduces the complexity of fund selection in our highly sophisticated marketplace. TSP funds provides access to the US equity and bond markets (C,S, and F Fund), provides exposure to global markets (I fund) and also offers the security of US treasuries specially designed and only offered to TSP account holders (G fund). Investors can opt to create their desired investment mix from these five core funds (G, F, C,S , I funds) or select a predetermined and professionally designed asset allocation mix by using a lifecycle or target date fund which rebalances automatically (the “set it and forget it” approach).
3. So why bother placing your hard earned dollars in the TSP?
While I recognize that retirement planning cannot be done in a vacuum because of competing priorities (limited paychecks, seemingly unlimited wants vs. needs, living expenses, debt payments and other life goals) - increased life spans and less reliance on government programs are just a few of the prevailing factors that make retirement planning today an urgency. Simply put – TSP is a direct investment in your financial future over which you can have a great degree of control. Time is your greatest ally when planning for your financial future, so start today if you would like to enjoy the fruits of your labor for many years to come.
4. First things first; back to basics.
Before you commit dollars to a retirement fund, ensure that you have spent time creating or reviewing your current spending plan, eliminate high interest rate debt and maintain a safety net of liquid funds for financial emergencies (at least three months worth of living expenses and debt payments). Doing this will ensure that you are not saddled with overwhelming debt, lack savings and truly have the wherewithal to save for retirement.
About the author:
Stacy Livingstone-Hoyte, AFC™ has served at the Fleet & Family Support Center, Millington, TN as a Financial Counselor since Nov 2009. She conducts one-on-one sessions, Command training, group workshops and other efforts designed to meet the “Mission Readiness” goal of the U.S. Armed Forces. Her extensive contributions to our blog include tips for year round financial stability: It’s time to start budgeting for the holidays! Get Your Financial Bearing by Setting a Budget Declare Financial Independence in 2013