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10 TSP Mistakes Federal Employees Make

 For federal employees, the Thrift Savings Plan (TSP) is a big piece of the retirement puzzle. To make the most of your TSP you need to contribute, but it’s also important to avoid common mistakes. Here are 10 mistakes we see.

1. Not having a plan  

The saying goes, ‘If you don’t have a plan, you are part of someone else’s’. As advocates for financial planning, we think it rings true. Do you know how the TSP fits into your overall retirement plans? 

 A few questions to ask: What does retirement look like to you? How much money will you need at retirement? How much risk do you want to take with your investments? How much do you need to contribute? What rate of return is needed to reach your goals?

If you’re married, talk to your spouse about what they envision the day-to-day being like. It’s surprising how many couples have entirely different ideas on the retirement years. 

2. Contributing less than 5% 

If you are a FERS or BRS employee, your agency will automatically contribute 1% of your pay to your TSP account. However, you are also eligible to receive an additional matching contribution on the first 5% of pay you contribute. Your agency will match the first 3% you contribute dollar-for-dollar, and fifty percent of the next 2% of your contributions.

That’s up to an additional 4% of basic pay being credited to your account each year.  

3.  Investing 100% in the G fund

The Government Securities Investment (G) Fund is the TSP plan’s most conservative investment option. Its objective is to preserve capital and return more than short-term U.S. Treasuries, making it attractive for those interested in avoiding risk. 

The G fund is great at protecting from loss, but it limits the ability of your account to grow and exposes your nest egg to inflation risk.  If you have a longer time horizon, consider a diversified approach that includes equity exposure. 

 4. Choosing and forgetting a lifecycle fund

The TSP’s lifecycle funds are comprised of a diversified mix of the five core funds (G, F, C, S, I) and designed to automatically adjust, shifting to more conservative allocations as you approach your intended retirement date.  While this is an easy way to get started and diversified, there are some drawbacks. For one, age isn’t the only factor in deciding the right investment mix and target date funds do not account for personal risk tolerance. Also, Investors often don’t understand what they own inside these funds and the bond and international equity allocations can be high. One size doesn’t fit all, you and your co-worker may both want to retire in 2030, but does your retirement look the same?

5.   Having an outstanding loan

 If you leave federal service with a TSP loan balance, you can pay it back within 90 days of the date of your separation. If you can’t pay it back, the loan amount becomes a taxable distribution that can subject you to significant taxes and penalties. Delays in repaying the loan may also affect the processing of a withdrawal if you make a withdrawal election after retiring.

6.     Not coordinating your TSP and other investments

 The TSP is a valuable retirement account, but it shouldn’t be your only investment account.  A good financial plan should include retirement and non-retirement accounts and coordinate account types and underlying investment mix to help you meet your goals.

7.     Updating Beneficiaries

 When is the last time you reviewed your account’s beneficiary designation?

 If you don’t have a Designation of Beneficiary form on file with the TSP, the account will be distributed following order of precedence required by law:

  1.  To your spouse;
  2.  To your child or children equally, not including step-children or adopted children
  3.  To your parents equally
  4.  To your appointed executor or administrator of your estate
  5.  Next of kin living in your state of residency at the time of death

 The TSP will not honor a will, prenuptial agreement, separation agreement, property settlement agreement, court order, or trust document when distributing your account. By law, they must pay the properly designated beneficiary or beneficiaries on Form TSP-3 or, if no form is on file, follow the order of precedence by law. 

 If you haven’t looked at your TSP-3 for a while, you’ll want to make sure that it reflects your current wishes.

 8. Understanding withdrawal options

The TSP has gotten more flexible in recent years and there are several options for withdrawing from your account including:

  • Partial or full lump-sum amount. You can withdrawal a portion or all your TSP account balance. There is no limit on the number of withdrawals you can take in your lifetime and the minimum amount of this type of distribution is $1,000.
  • Withdraw money with monthly, quarterly, or annual payments based on a specific dollar amount or life expectancy tables.
  • Purchase a life annuity

You can also have funds transferred into an IRA or another employer-sponsored retirement savings plan, preserving a tax-favored status. After age 72 you are required to take minimum distributions.

9. Investing Based on Past Performance 

It can be tempting to pick a top performing fund based its recent performance, especially if you don’t quite understand all the options. 

The good news is that the TSP has a limited selection of just 5 options that are intended present broadly diversified asset classes. Your decision should reflect your time horizon, risk tolerance, and goals for the account. 

10. Not Rebalancing

Maintaining the proper structure of your TSP investment portfolio is important. Once you’ve created an asset allocation that fits your unique situation rebalancing helps you stay on track. Rebalancing can help reduce portfolio volatility and that can have a positive impact on growth.  

The positions in your account appreciate or lose value at different rates and this changes the overall portfolio allocation. In time your account positions can look a lot different than when you started and may no longer be an optimal mix or reflection of your goals. Consider rebalancing your account at least once a year. 

If you’d like to discuss your TSP or financial plan please reach out.

-Justin holtz

*The content is developed from sources believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.