Thrift Savings Plan: Time for a Financial Health Assessment


Written By: Joseph Polakovic

COVID-19 has already made a huge impact on all our lives. While our individual health and the health of those we love remain our priority, many federal employees are assessing the health of their retirement. As news reports continue to outline the devastation COVID-19 has caused worldwide, many are taking a look at the effects this crisis has had on their Thrift Savings Plan.

While the market has not been kind, there are several other factors worth noting that are affecting participant accounts. Here are some areas that deserve a closer look:

5% Contribution Match
The easiest way to boost your account is to make sure you are capturing your automatic returns by contributing at least 5% of your annual salary into your TSP and receiving a full 5% matching contribution from the government. This program is a portion of your salary, so not making the full match is like taking a voluntary pay-cut. Starting out with a guaranteed 100% return on investment will help you weather this current economic storm. 

Fund Selection
The Financial Crisis of 2008 changed the investment landscape. A large dip in interest rates significantly increased the risk of outliving your retirement funds due to the lack of conservative growth. Today, this risk is again increasing as additional stimulus comes in and rates continue to lower. In March 2020 the G-Fund fell to a 1.25% annualized rate of return and is likely to fall even further in April. This return is sure to be less than inflation, indicating that the investor’s gains are not keeping pace with the increasing cost of goods. As of March 25, 2020, the F, C, S, and I funds were all negative year-to-date. Retired TSP participants are finding themselves between a rock and a hard place. 

Most advisors will tell you to not take money from a falling account as it hurts your ability to ride the market back up. However, even if you diversify your funds within your account to mitigate the various forms of risk, TSP will force an equally weighted distribution from all your funds. Said another way, you cannot simply draw from your conservative funds and let your aggressive funds stay intact. 

Another glaring disadvantage with distributing funds from TSP is the mandatory 20% federal tax withholding. If you’re like the vast majority of retiring federal employees, this is an excessive withholding that inevitably leads you to drain your account faster than necessary while providing the government with a 0% interest loan. 

Biggest Takeaway TSP is a wonderful accumulation tool but fails to give a retirement-aged participant any advantages over competitors in distribution. For anyone entering retirement, it’s worth your time to consider a TSP alternative.

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