Thrift Savings Plan (TSP) Has Taken a Beating Like the Rest of the Stock Market

October 25, 2008

Because the mutual funds that comprise the federal government’s version of a 401-k, the Thrift Savings Plan (TSP), are essentially index funds that mirror large indices like the S&P 500, Wilshire 5000, and others.  The TSP has been in lock step with the current stock market downturn and many members of the federal government and the military have seen their retirement portfolios significantly decline like most civilians. 

C Fund.  The common stock investment fund, or C Fund, closely follows the S&P 500 index.  The fund has lost 21.9% over the past twelve months.

S Fund.  The small capitalization fund, or S Fund, is designed to closely follow the Wilshire 4500 completion index.  The Wilshire is a broad index that tries to capture the shares of smaller companies that are not included in the Standard & Poor’s 500 index.  The fund has lost 18.9% over the past twelve months.

I Fund.  The I Fund, TSP’s international mutual fund, was established to follow and benchmark the Morgan Stanley Capital International EAFE (Europe, Australia, Asia, & Far East) Index.  The fund has lost 29.0% over the past twelve months.

G & F Funds. The TSP’s G & F Funds invest in government bonds and cash equivalent funds and are the safest and lowest interest earning funds in the group that are offered to investors.  These funds have been the only ray of light during the market upheaval returning 4.05% and 3.89% respectively over the past twelve months.  That is no surprise since they are ultra-safe, boring, and can barely keep up with inflation.  The F Fund is for fixed investments such as high grade bonds.  The G Fund is full of short-term government treasuries.

So, what should you do with your TSP balance and contributions?  Keep investing!

  1. Now is the perfect time to pour money into the retirement program.  The stocks that make up the indices that are followed have never been cheaper.
  2. Use your January pay raise to boost your contributions.  I’m actually raising my contribution level right now by 1% to take advantage of the low share prices.  I figure that I was going to do it any way in January, and I will barely notice an extra 1% missing from my paycheck.
  3. Keep the right asset allocation.  The end of the year is the perfect time to rebalance your funds inside your TSP.  In order to be diversified, you should consider investing in a mix of the funds that are offered depending on your age and risk tolerance.  I am a huge fan of having a solid mix between the C, S, and I Funds in TSP.

Try not to panic about the recent downturns of the market and the federal Thrift Savings Plan.  They will both bounce back over the long term.  Keep investing!

*** All percentages were calculated through October 1st, 2008.

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Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is Better?

September 22, 2008

Should members of the military, their families, and U.S. Government Federal employees invest in a Roth IRA or the Federal Thrift Savings Plan (TSP)? Both investing options are great choices to invest for retirement, but there are certain strategies for members of the military and their family to consider when investing. There are several fundamental differences between the two plans which point to where you might want to invest first. A Roth IRA allows investors to contribute “after tax” dollars to the investment and then withdraw the principle and earnings tax free during retirement. The Federal Government’s Thrift Savings Plan (TSP) functions like a civilian corporate 401(k) plan or public 403(b) plan. Money contributed to TSP is “before tax” dollars and withdraws in retirement are then taxed at your normal income tax rate.

There are many differences in the two plans, and you need to understand the intricacies to get the most out of your investments. Below is a list of the common features of both:


Thrift Savings Plan

Roth IRA

Contribution Limit $15,500 per year $5,000 per year
Minimum Age to Begin Withdraw 59 ½ years-old No Minimum Age
Age for Mandatory Withdraws 70 ½ years-old Never
Taxed When? When Withdrawn Before Invested
Getting Out of the Military? Contributions must stop Contributions can continue

Most members of the military are in a low income tax bracket while serving in the military and then usually move into a higher tax bracket towards the end of their careers and in retirement. Because TSP money is taxed when you withdraw it, you would then end up paying more in taxes using a 401-k retirement plan or TSP rather than a Roth in most scenarios. There is a distinct tax advantage to maxing out your contributions to a Roth IRA first, and then investing in the TSP with any additional savings after that.

For example, say you had $1,000 to invest and are in the 25% tax bracket right now. Your one time investment of $1,000 will go straight into TSP and grow to a little over $4,600 in twenty years (8% growth a year). Then, you withdraw it and owe taxes. But, now you are in the 38% tax bracket twenty years into the future. So, you get to keep $2,880 of your hard earned money after taxes. If you had invested that $1,000 twenty years ago in a Roth IRA, you would have $750 to invest after 25% was taken out right away for taxes. That $750 would grow into $3,500 in those twenty years and can be withdrawn tax free.

Now think of that $1,000 on a larger scale. If you maxed out a Roth IRA (currently $5,000 per year if you are under the age of 50) from the time you were 22 until 65, you would have $1.9 million tax free. Don’t believe me? Check out this easy to understand MS Excel spreadsheet where you can plug in your specific circumstances and see how much a Roth is actually worth. The spreadsheet gives you a comparison between a Roth IRA, a 401-k plan like TSP, and a standard mutual fund. Take a look at the spreadsheet and see how much each letter of the word Roth could be worth to you.

There is one last thing to think about with respect to the TSP for all the non-military Federal employees. The U.S. Government contributes a match of up to the first 5% you put into TSP. That is equivalent to a 100% return!! You should always put the maximum the government will match in TSP first or else you are just throwing away free money.

As of 2008, a person can put up to $5,000 in a Roth IRA or $10,000 in a joint fund if married. To open a Roth IRA, an investor has to have earned an income and file taxes. High wage earners making over $114,000 a year or $166,000 if filing a joint tax return cannot contribute to a Roth IRA. People over the age of 50 can invest an extra $1,000 as a catch-up payment for a total maximum investment of $6,000.

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What Is Your Retirement Dream?

August 31, 2008

I have talked a lot in this blog over the past several weeks about investing and saving, but what is our goal in the end?  What are we sacrificing now in order to have in the future?  Too many of my Soldiers, both young and old, see retirement as nothing more than a pipe dream that they will never reach.  They think that they will have to work until the day they die.  That is incredibly sad.  When I retire, I want to do something that I love or work that I’ve always wanted to do.


In My Retirement Dream I Want To:

  1. Teach part-time at a local community college
  2. Start my own small business
  3. Invest in residential real estate as a landlord
  4. Visit all 50 states and travel overseas more
  5. Play a lot of golf


What is your retirement dream?  You need a long term goal to aim for now.  You can change it along the way, but you still need something to motivate you now to keep you on track saving and investing.


In 2001, my parents got up one day, sold their house, and bought a houseboat.  I have to tell you that most of my family though that they were a little crazy, but they didn’t care.  I guess that is one way to know that you are on track to live like no one else.  I have never seen my parents happier.  Their goal is to one day soon sail the “Great Loop”, a 7,500 trip up the eastern seaboard, into the Great Lakes, down the Hudson, Tennessee, Ohio, and Mississippi Rivers, and back around Florida.  It’s an awesome idea and a fantastic retirement dream.  Because my step-dad invested carefully, planned, and never lost sight of their goal, they are now living “The Dream” in retirement.  I can only hope and pray that we are all so lucky and blessed one day.


Don’t waste one second more.  Figure out your retirement dream with your spouse or loved ones (you can change it as your life changes), tell a lot of people (peer pressure is a great way to keep you on track), and never lose sight of your goal in the end.  It will make all the sacrifices along the way well worth it.

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Increase Your Investing with Your January Pay Raise

August 22, 2008
Members of the military receive an annual pay raise every January.  For the past several years, Servicemembers of the U.S. military have received at least a 3% pay raise per year.   

What do you do with your pay raise?  What do you do with the extra money you earn every two years of service when you earn a raise?  What do you do with your new salary when you get promoted?  For many promotions, the pay raise is quite substantial.  When a captain in the United States Army gets promoted to major around the ten year mark of commissioned service, he or she can expect approximately $650 more per month.  Many of us go on a spending spree and/or go further into debt with our new found money.  I can’t lie, when I was promoted my wife decided that my pay raise was exactly equal to the car payment for the new car she had her eye one. 


There is a better use of this new found money.  While we should enjoy a portion of our hard earned promotions and pay raises, we should also increase our retirement investing with the money. 


Here is an idea: pay yourself a raise.  Increase your contributions to the federal Thrift Savings Plan (TSP), the governments version of a 401-k, by 1%.  Keep doing this year after year, and you will quickly squirrel away enough money for retirement.  Most financial planners agree that you should save 15% of your gross pay every month for retirement.  So, an E-6 with 9 years in the Army makes approximately $54,750 per year including his or her basic allowance for housing and food subsistence, or about $4,500 a month before taxes.  The E-6 should be setting aside approximately $680 for retirement every month.  Not there yet?  Don’t worry…you will be when you start paying yourself first with portion your annual pay raises.


I personally increase my contributions to my TSP account by 1% every January.  My personal goal is to eventually save the $15,500 yearly maximum allowed by the IRS by increasing my contribution one percentage point at a time.  With a 3% raise, 1% is something that you will never miss.  This January’s 3.5% military pay raise will give that same Army Staff Sergeant we talked about earlier an extra $100 in his pocket every month.  That’s free money that he wasn’t really expecting.  Can’t you afford to save that money for retirement?  If you haven’t started saving anything yet, can you afford not to save it? 

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