This is one of the top questions I receive, especially from individuals new to the military or the government. As I always say, there is no single or blanket answer when it comes to finance. Instead the more important questions to ask generally have to do with your personal situation and goals.
Government Employee TSP Contributions
I’m going to contradict myself right away here folks. I said there is no single or blanket answer in the world of finance but now after thinking about it I should have said there is “hardly” ever a single answer. But in this case there is! If you are a government employee under the FERS retirement system then the government matches 5% of your salary. With that being said you need to have a concrete solid reason as to why you are not taking advantage of this benefit and contributing at least 5% of your salary to the TSP. It’s free money, think about it like this, if you contribute 5% of your salary to the Thrift Savings Plan it’s as if you were contributing 10% of your salary to the TSP. It just makes sense!
I understand life throws us all curve balls and certain situations may arise where we feel we can sacrifice contributing to the TSP during tough times but I strongly urge against it. Please try to avoid doing so at all costs unless it’s absolutely necessary. That extra 5% will compound your TSP portfolio significantly over time.
Military Personnel TSP Contributions
It’s no secret and many of my subscribers have known this for years but I am not fond of the Thrift Savings Plan in general. I feel the funds that it offers are limited and a far cry from the opportunities available to individuals with 401Ks or IRAs. Couple this with the fact of no matching for military personnel and I absolutely loath the Thrift Savings Plan.
I believe that the Thrift Savings Plan offers no true value for service members. Without a matching incentive the TSP only differentiates itself from an IRA in regards to the amount of money you can contribute on a yearly basis. As I stated previously the options available to an investor are far greater in an IRA than the Thrift Savings Plan.
With all that being said, as an Army officer I maxed out my IRA before I even considered contributing to my Thrift Savings Plan. This was a personal decision but I concluded that I could do more with my money in an IRA than was possible in the TSP. Therefore it made perfect sense for my personal situation, but please remember this contribution strategy may not be everyone.
Max Out Thrift Savings Plan
Some individuals are fortunate and have the discipline to contribute large amounts of money to their TSP. This is typical towards the end of an individual’s career. Again it all depends on the individual’s personal situation. What I have seen in general in regards to individuals who are able contribute the maximum amount to their TSP is a “catch 22.” The individuals are generally older, if they have a family the kids are typically out of the house, and there is a significant amount of excess money available to the individual. This is a good thing! But at this point in their life, these individuals are no longer willing to take on a significant amount of risk and typically start moving their portfolios into bonds.
Now this isn’t always the case but as I approach retirement before I start maxing out my TSP I’m going to ensure that I eliminate all my debt. Yes, even my mortgage, I know there is a huge debate in the financial community about that topic but we can discuss it at a later time. I personally prefer to have absolutely no risk and having a mortgage moving into retirement is one of the biggest liabilities you can have.
In short it depends on your personal situation. This is why we always publish a “How Much Can You Lose” section in our newsletter. It is designed to help individuals assess their personal situation and really ask themselves if they’re willing to risk X amount of dollars while being exposed to the market.
Making a TSP contribution decision isn’t an easy one and shouldn’t be taken lightly. You should take the time to sit down and assess your own personal situation and the goals you have for the future. If you’re a government employee under the FERS retirement system it makes perfect sense to contribute at least 5% of your annual salary. As for military service members, you have to decide if an IRA or the Thrift Savings Plan works for you. In regards to maxing out your TSP, it’s a much more in depth decision as you move towards retirement, weigh your options and contemplate eliminating all of your debt before maxing out retirement plans.
Here’s to our Wealth