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How to Maximize Your TSP Retirement Fund

TSP Retirement Fund

Maximizing Your Thrift Savings Plan Retirement Fund

All government employees are uniquely positioned to set themselves up for a great retirement. How? Through the Thrift Savings Plan (TSP). The TSP offers the same type of savings and tax benefits that many private corporations provide their employees under their 401-K plans. (Learn the full ins and outs of the TSP here.) Not sure how to best utilize your TSP? Here are some tips…

Why Is The TSP So Great?

The government doesn’t have a 401-K plan or normal retirement funds like an IRA or Roth IRA. (In 2020, the limit for contribution to your Roth IRA is $6,000.) However, the limit for contributions for the TSP in 2020 is $19,500.

Basically, the more you contribute to your TSP, the better off you’ll be when it comes time to tap into your retirement savings. If your retirement fund has a higher limit for contributions, you’ll be able to save more.

How to Make The Most Of Your TSP

‘Maxing out’ or contributing the full limit to your TSP ($19,500) year after year is the best way to make the most of your TSP retirement fund. Nothing seems to be guaranteed anymore and that is why we suggest taking matters into your own hands and preparing for retirement yourself by getting as close to maxing out your TSP yearly.

“I Can’t Afford To Put $19,500 Away”

Not everyone is going to be able to save $19,500 every year because of life situations, income level, etc. However, by starting to put away as much money per year into your TSP as early as you can is going to significantly help you when you are looking to retire.

Life situations change. This year might not be the year for you to start investing heavily because of car payments, but maybe next year you are getting a raise or a promotion. Put some or most (if you can) of that raise into your TSP instead of increasing spending.

How to Contribute Effectively

Set up automatic payments that transfer money from your bank account to your brokerage account regularly, such as every two weeks or once a month. This way, smaller increments of money are being put away as opposed to one large chunk of money all at once. This way you can also become accustomed to & comfortable with regularly saving smaller amounts, if you aren’t already.

Setting up these periodic contributions has another benefit, too. You’re adopting the practice of “dollar-cost averaging.” That’s when you buy investments in small periodic payments, rather than in one big lump sum. Doing this means you buy no matter what is going on in the market and over time (we’re talking long-term here) the differences in prices eventually average out.

The opposite of “dollar-cost averaging” is “market timing.” Market timing is when people try to figure out when prices are low, thus indicating the best time to buy. The problem is that no one will actually know when the best time is, so it’s best to dollar-cost average and set your sights on long-term retirement savings.

What Will $19,500 Saved Be Worth At Retirement Age?

The average return on investment over the long term for someone investing for retirement is 7%. (That means that some years will be better than 7% and some will be worse, but by the time you retire you are likely to have had an average of 7% return on investment each year.)

Let’s say you invest $19,500 in your TSP for 2020 and don’t touch it or add to it for 35 years. That $19,500 is projected to be worth $208,193.34 based on a 7% yearly return. That’s a lot of money. But if you can’t ‘max out’ or invest to the $19,500 cap that doesn’t mean that you can’t still reap major investment payouts. A single investment of $10,000 in 2020 that sits for 35 years is projected to be worth $106,765.81.

Investing in your future (literally) is extremely important to have a comfortable retirement. Why not take advantage of the ability to put more away for your future when given the opportunity?

What If I Wait 20 Years To Start Investing In Retirement?

Every year that you don’t put money in your TSP (even if it isn’t a lot), you’re missing out on money that your money makes for you by just being invested.

For example, if you invest that same $19,500 that we spoke about earlier and invest in into your TSP 20 years from now (we’re pretending that from 2020 you can retire in 35 years) it will only have 15 years to sit in the stock market. After 15 years, that one-time investment of $19,500 will be worth $53,801.12.

Compare that $53,801.12 to the previously mentioned $208,193.34 that your one time investment could be worth if you invest $19,500 into your TSP this year.

How Much Are You Putting Away For 2020?

Now is a great time to check your retirement investment totals as well as your disposable income. Could you increase your investments slightly to get you closer to ‘maxing out’ your yearly contribution? Tip: You have until the tax filing deadline, April 15, 2020, to contribute to your TSP for 2019 (whose limit is $19,000.) You have until the tax filing deadline, April 15, 2021, to contribute to your TSP for 2020.