Normally, I write all of my blog posts, based upon research that I’ve personally done. However, last week I received a letter from TSP’s Executive Director, Greg Long. It accompanied the TSP year-end statement, and is normally the type of document most people throw away with junk mail. However, I actually read it. Moreover, I liked what I read, specifically the Myth/Answer section. In case you missed the letter (or threw it away, like I used to do), I’ve recapped the Myth/Answers below for your benefit. Keep in mind, this isn’t the entire letter, and I’m not sure where you could find a copy of it online. However, these points are ones that I wholeheartedly agree with, and hope that you appreciate.
Myth: Once I leave federal service, I have to leave the TSP.
TSP’s Greg Long: This just isn’t true: When you leave federal service, you can leave your account right where it is. If you do, you’ll keep more of what you save thanks to the TSP’s low costs. You can manage your investments and transfer other eligible money into your account. Even when it’s time to take withdrawals, you won’t have to take your entire account at once; you’ll have options like choosing monthly payments (Footnote: Once separated from service, the IRS requires you to start withdrawing your money by April 1 of the year following the year you turn age 70 1/2).
The TSP operates solely in your interest. Not all financial institutions and advisers do. I’ve personally received letters from former participants who deeply regret leaving the TSP. One participant wrote that rolling her money into an IRA was “probably one of the single worst financial actions” she’d ever taken.
If another plan is trying to convince you to move your money, dig deeper. It’s your decision to stay with the TSP or not, but you might find that the incentives other plans offer aren’t worth the fees you’ll pay. Learn more about how it can pay to stay at tsp.gov/stay.
Myth: I don’t need to set a goal until I get closer to retirement.
Greg Long: Making a plan early and sticking to it is essential to securing a comfortable retirement. In a recent survey, (Footnote: Aon Hewitt & Thrift Savings Plan. “2013 Thrift Savings Plan Survey Results.” Thrift Savings Plan, 2013) 70% of actively employed TSP participants said they did not have a specific retirement goal in mind. This was especially true for younger groups. Though identifying a ballpark number may seem overwhelming, it’s an important piece of the retirement puzzle. But where to start?
First, ask yourself some questions: When you reach retirement age, will big expenses such as your mortgage or your children’s college tuition be paid for? Will you have long-term care costs? What income can you expect from Social Security, a federal annuity, or a military pension?
Another helpful exercise is to think about your “replacement rate.” That’s the percentage of your pre-retirement income you’ll need when no longer working. Most experts believe that, altogether, you’ll need about 70%-80% (Footnote: Isaacs, Katelin. “Federal Employees’ Retirement System: Benefits and Financing.” Congressional Research Service, 2015). Use our “How Much Will My Savings Grow?” and “Retirement Income” calculators at tsp.gov to see how much of that amount your TSP account would provide.
Now that you know how much might be enough, how do you get there? Time is your biggest ally when it comes to saving for retirement, so save now and save steadily. Think about increasing your contributions each time you receive a pay raise. Depending on your investment earnings, raising your savings rate by as little as 1% of your pay could mean tens of thousands of dollars over time.
Myth: When the market goes down, I should shift my money to a safer investment.
Greg Long: Once you’ve established your retirement goals and a savings strategy that fits your needs, you’ll likely have the best results if you stick to your plan. Significant movements can occur rapidly in the stock and bond markets. By the time you react to the situation, the market may be moving in the opposite direction and you could miss out on significant gains.
Experts designed our Lifecycle (L) Funds to maximize gains and minimize losses based on when you’ll need your money. They provide a mix of our five core funds (G, F, C, S, & I) and grow more conservative over time, and they automatically rebalance every day. To find the L Fund that’s designed for you, pick the one that most closely matches the year you’ll need your money. For example, our L 2030 Fund is designed for those who’ll retire in about 15 years and need their savings around 2030.
If you’d like to change the funds you invest in, log into My Account at tsp.gov and visit “Online Transactions” on the left. To change the way new money coming into your account is invested, choose “Contribution Allocations.” For money that is already in your account, choose “Interfund Transfers.” You can also call the ThriftLine at 1-877-968-3778 and choose option 3.
There are other persistent myths circulating about the TSP, but I hope this note sheds light on some of the major ones. Remember-while the path to retirement is not always a clear one, our goal is to make sure you have the facts to help you get there.