Federal Thrift Savings Plan Guide 2016

We get it.

Retirement is just about the last thing on your mind when you’re in your 20s. However, starting to invest for retirement as soon as you finish school and begin earning income is a brilliant financial move. The reason is a magical little thing called compounding. It’s what happens when your interest keeps earning interest, year after year. 

If you start early, the effects of compounding can be huge. For example, suppose you start setting aside $1,000 a year (about $19 a week) when you’re 25. You put it in a retirement account earning 8% a year. Even if you stop investing completely when you turn 35 – that is, you’ve invested for only 10 years – your total investment will have grown to nearly $169,000 by the time you turn 65 and are ready to retire. That’s right: A $10,000 investment turns into $169,000.

OK, here’s where it gets really interesting. Let’s say you do the same exact thing, but you don’t start investing the $1,000 a year until you turn 35. And you keep on investing that much every single year until you turn 65. That is, you invest $1,000 a year for 30 years, rather than for 10 years as in the previous example. How much do you wind up with when you’re 65? Only about $125,000. That’s right: Even though you invest three times as much money, you wind up with less.

The earlier you start investing, the more you can benefit from compounding.

3 Reasons Why You Need To Start Investing Now

Whether we like to admit it or not, military and civilian pensions are both out of line with pension benefits available to the average worker in the private sector, and in some cases, out of line with each other across different categories of federal employment. The federal government continues to look for ways to reform the pension plans for their service members and employees. It is our belief we will see the day when government pensions are no longer.

The writing is on the wall, the federal government is looking to eventually unburden itself from providing pensions to its service members and employees.

According to the Employee Benefits Research Institute’s 2014 Retirement Confidence Survey, 60% of workers in the U.S. have less than $25,000 in total savings and investments, outside of their home value and a rare pension plan.

Will Social Security Be there?

Ah, the question everyone loves to debate. It’s true Social Security will soon start paying out more benefits than it receives in contributions, as the bulk of the baby-boom generation phases into retirement.

The government’s official position is that there is enough money saved to pay benefits at the currently scheduled amounts until 2034. The Social Security Administration admits on its Web site that benefits will likely be reduced after that, barring changes that improve the financial strength of the system.

Some critics say benefits could be at risk as early as 2016 or 2017, when Social Security cash flow turns negative. They claim since the money paid into Social Security over the last few decades is part of the government’s overall budget, it is available only on paper; other branches of the government have spent it and left IOUs. In order to pay benefits through 2041, the government would have to borrow.

You’re Going To Live Longer Than You Think

A recent report from the American Academy of Actuaries addressed the risk of living beyond your life expectancy.

  • A man reaching age 65 today can expect to live, on average, until age 84.3.
  • A woman turning age 65 today can expect to live, on average, until age 86.6.

Therefore statistically speaking if you reach retirement age (59 1/2) you have a pretty good chance of living until 80. Now the million dollar question, how do you plan to pay for those 20 years while you are not working?

The uncertainty surrounding how long you’ll live is one of the important challenges of planning your retirement. It would be a lot easier to estimate how much retirement savings you’ll need if you knew exactly how long you’ll live. But when developing sources of lifetime retirement income, it’s important to deal with this uncertainty.

Once you’ve estimated your life expectancy and find that you may be living another 20, 30 or 40 years, consider that it takes a boatload of money to be retired for that long. After all, how much money have you spent in the past 20, 30 or 40 years? Just suppose for a moment that you made and spent $50,000 in each of the last 30 years. Do the math — that’s $1.5 million!

While you’ll probably need less than that during your retirement, it doesn’t do much good to get frustrated about the amount of money you’ll really need — just accept this as an important factor in your planning.

Medical Costs

If you’re not factoring health care costs into your retirement savings strategy, you could be setting yourself up for a nasty financial shock. According to the latest retiree health care cost estimate from Fidelity Benefits Consulting, a 65-year-old couple retiring this year will need an average of $220,0001 (in today’s dollars) to cover medical expenses throughout retirement.

The good news: That figure has held steady since last year, down from a peak of $250,000 in 2010. The more sobering reality: For many Americans, health care is likely to be one of their largest expenses in retirement. What’s more, that $220,000 in estimated costs does not include any costs associated with nursing-home care, and applies only to retirees with traditional Medicare insurance coverage.

“Rising health care expenses are forcing people to make educated decisions now more than ever, ranging from the services they utilize to the age they choose to retire,” says Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business.

With America’s elderly population soaring, the nation’s long-term care crisis is becoming more acute. By 2030 more than 74 million Americans will be at least 65 years old, of which more than two-thirds will eventually need some form of long-term care.

Long term care costs vary by state and facility but I have found a great tool to help estimate costs.

The Basics Of The TSP Funds

The TSP G Fund (Government Securities Investment Fund) – The safest fund offered by the Thrift Savings Plan, hands down. The G Fund invests exclusively in a non marketable short-term U.S. Treasury security that is specially issued to the Thrift Savings Plan. This fund is a great alternative during bear markets and for retirees approaching retirement within 1-3 years. Outside of those two scenarios we would highly discourage anyone from allocating their contributions to the TSP G Fund. Inflation will likely cripple the growth of any future returns.

The TSP F Fund (Fixed Income Index Investment Fund) – This fund is invested in U.S. investment-grade bonds, as tracked by the Barclays Capital Aggregate Bond Index. Over the last decade this fund has been the best fund for individuals approaching retirement. However, we believe going forward the G Fund will offer the appropriate level of protection for individuals approaching retirement. The intent of the F Fund is to replicate returns of the overall bond market, this in theory would allow your money to grow without being eroded by inflation but also leaves you exposed to market risks such as defaults and changes in interest rates. Simply put when interest rates fall bond prices rise and when interest rates rise bond prices fall.

The TSP C Fund (Common Stock Index Investment Fund) – This fund was designed to mimic the Standard & Poor’s 500 (S&P 500) Stock Index, which can be considered the overall pulse of the U.S. Stock Market. In theory, TSP allocations to this fund will put your money parallel to the U.S. stock market. Therefore, when the overall market is doing well this fund will do well, when the overall market is plummeting so will this fund.

The TSP S Fund (Small Capitalization Stock Index Fund) – This fund is designed to mimic the Dow Jones U.S. Completion Total Stock Market Index which invests in the stocks of small and medium-sized U.S. companies. This fund offers one of the highest returns that the TSP has to offer during bullish markets. However, while this fund delivers high profits it also delivers significant losses during bearish markets. Individuals with a high risk tolerance are generally drawn to this fund. Nevertheless we would not recommend this fund for individuals coming close to retirement due to its cyclicality of booms and busts.

The TSP I Fund (International Stock Index Investment Fund) – This fund is designed to mimic the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index which invests in international stocks from 21 developed countries. We don’t recommend this fund for the simple fact that you can achieve similar returns simply investing in the S Fund with far less risk. In theory, investing in international stocks would offer more profit potential but do not require the strict reporting regulations of U.S. stocks.

TSP Funds Performance

As of 11/01/2016
 G FundF FundC FundS FundI FundTSP Investing
Last Price$15.13$17.84$29.19$37.30$24.27N/A
30 Day Return.12%-.69%-1.51%3.47%2.11%.12%
YTD Return1.43%5.09%7.52%7.75%2.69%1.43%
1 Year Return1.81%4.77%3.34%1.73%-2.96%1.81%
3 Year Return6.30%12.64%28.82%16.99%-1.88%15.80%
5 Year Return9.82%16.79%94.94%86.87%35.37%75.29%
10 Year Return30.23%60.72%93.70%108.85%15.99%194.00%
Value of $1000 invested on 1/1/2004$1,477.80$1,794.80$2,514.20$2,984.10$1,868.00$3,816.20

TSP Lifecycle Funds

The Thrift Savings Plan offers five Lifecycle Funds better known as the TSP L Funds, these funds have allocation strategies based on target retirement dates. These allocation strategies utilize a professionally designed mix of domestic and international stocks, bonds and government securities. Specifically, each TSP Lifecycle Fund invests in the five individual TSP funds (G, F, C, S, and I Fund) we previously mentioned. TSP members choose a fund based on their expected retirement date and/or when they plan to start making withdrawals from their TSP:

  • The TSP L 2050 Fund is for participants who will need their money in the year 2045 or later.
  • The TSP L 2040 Fund is for participants who will need their money between 2035 and 2044.
  • The TSP L 2030 Fund is for participants who will need their money between 2025 and 2034.
  • The TSP L 2020 Fund is for participants who will need their money between 2015 and 2024.
  • The TSP L Income Fund is for participants who are already withdrawing their accounts in monthly payments, or who plan to need their money between now and 2014.

TSP Lifecycle Funds Performance

As of 11/01/2016
 L IncomeL 2020L 2030L 2040L 2050TSP Investing
Last Price$18.20$23.95$26.01$27.64$15.66N/A
30 Day Return-.34%-.88%-1.26%-1.50%-1.72%.12%
YTD Return2.74%4.03%4.88%5.34%5.69%1.43%
1 Year Return2.08%1.86%1.83%1.70%1.50%1.81%
3 Year Return9.56%12.78%14.48%15.45%15.95%15.80%
5 Year Return22.24%42.69%52.38%59.45%65.72%75.29%
10 Year Return44.83%58.84%66.08%69.59%N/A194.00%
Value of $1000 invested on 8/1/2005$1,568.00$1,807.80$1,906.70$1,970.30N/A$3,331.35

TSP Contribution Limits 2016

Thrift Savings Plan contribution limits are calculated on an annual basis and can change based on rules set by the IRS.  Catch-up contributions are only available to persons aged 50 and up.

The following chart displays the 2016 Thrift Savings Plan contribution limits, with notes about each type of contribution. The combined maximum one can contribute, including all agency matching contributions or contributions from special pay and bonuses, is $53,000 ($59,000 for those who are eligible for catch-up contributions).

2016 Thrift Savings Plan Contribution Limits

2016 Thrift Savings Plan LimitsMax ContributionNotes
Elective Deferral Limit*$18,000Elective deferral contributions only apply to regular employee contributions that are made in before-tax (i.e., tax-deferred) dollars. For members of the uniformed services, this includes all tax-deferred contributions from taxable basic pay, incentive pay, special pay, and bonus pay.
Max Annual Addition Limit$53,000An additional limit imposed on the total amount of all contributions made on behalf of an employee in a calendar year. Uniformed service members become subject to this limit when tax-exempt contributions are made to their TSP accounts. This limit includes employee contributions (both tax-deferred and tax-exempt), Agency Automatic (1%), and Agency Matching Contributions.
Catch-up Contribution Limit$6,000The maximum amount of catch-up contributions that can be contributed in a given year by participants age 50 and older. It is separate from the elective deferral and annual addition limit imposed on regular employee contributions.

Historic Thrift Savings Plan Contribution Limits

YearAnnual Contribution LimitMax Catch-Up Contribution LimitAnnual Addition LimitAnnual Addition Limit w/ Catch-Up

The Best TSP Allocation To Set And Forget

75% C Fund & 25% S Fund

This is the best allocation you can make if you choose not to monitor your investments. Here is why:

Warren Buffett“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” ~ Legendary Investor Warren Buffett

We are not big advocates of setting and forgetting your Thrift Savings Plan allocation. However, if you’re going to do it, then a 75% C Fund & 25% S Fund allocation is your best bet. This gives you a large exposure to the overall stock market and a small stake in significant growth potential through small cap stocks as well.

If you look at the chart below it will become quite apparent the overall trend of the U.S. stock market is indeed up.

SP 500

Should You Choose Traditional or Roth TSP

In 2012 the Thrift Savings Plan board introduced a Roth TSP option.

What does Roth mean?

Quite simply, contributions to your Roth TSP are not tax deductible. However, after you reach qualifying retirement age your withdrawals are tax free. It’s also important to note, unlike a Roth IRA there is no income restriction on individuals who want to contribute to the Roth TSP.

For 2015 the maximum you can contribute to a Roth IRA is $5,500 or $6,500 if you are age 50 or older.

In regards to the Roth TSP, you can contribute up to $18,000 and an additional $6,000 in Catch-Up Contributions if you are age 50 or older, for total of $24,000.

3 Things You May Not Know About The Roth TSP

  1. Roth TSP contributions do not count towards your Roth IRA contribution limits. This means you can contribute to a Roth IRA and the Roth TSP at the same time.
  2. You cannot rollover a Roth IRA into your Roth TSP account. However you can roll a Roth 401k into your Roth TSP account
  3. Regardless of your contribution into the Roth TSP, the Automatic Agency contribution and all matching contributions are deposited into your Traditional TSP account.

Traditional vs Roth Pros & Cons

Let’s state the obvious….

With the Traditional TSP, your contributions are pre-taxed and your withdrawals at retirement age are taxable. Bottom line up front, you receive the tax break on the front end and pay taxes on the back end on all your withdrawals during retirement.

With the Roth TSP, your contributions are taxed on the front end and your withdrawals throughout retirement are tax free on the back end as long as you meet the minimums for a “qualified withdrawal.” Qualified withdrawal meaning you have held a Roth TSP for five years or longer.

Here’s the dilemma most people encounter when making their decision:

If you contribute to the Traditional TSP you take a tax break now which can help alleviate your current tax situation. But if you contribute to the Roth TSP you pay taxes right now, which nobody likes doing, but you get to withdrawal from your retirement tax free.

This brings us to the million dollar question (pun intended), will your tax bracket be higher or lower when you retire?

Generally speaking, you’re better off in a traditional TSP if you expect to be in a lower tax bracket when you retire. This would likely include individuals who no longer work and simply live off their retirement. This assumes expenses for your retirement will be low and not require you to withdrawal more money than the lowest tax bracket. Your overall goal is to stay in the lower tax bracket and give as little money overall to the tax man.

If you expect to be in the same or higher tax bracket when you retire, then you may want to consider the Roth TSP which allows you to settle your tax bill now and not have to worry about taxes later. This scenario would likely include individuals with second careers or individuals who simply plan on working all the way up until the day they die.

The Roth TSP may or may not be a great option for you. You have to weigh your own current situation against the potential benefits we presented to you. Keep in mind you likely have a long time for those earnings in the TSP to build up. We find it hard to believe anyone would regret their decision to contribute to the Roth TSP.

Quite frankly we sleep better at night knowing we won’t have any tax obligation in retirement when we withdrawal from our Roth TSP.

At the end of the day, if you’re contributing $18000/year to the Traditional or Roth TSP you are on the road to success. There’s no need to beat yourself up over small details.

The Truth About Personal Finance

The thing we love about personal finance most is the “personal” factor.

Every single person has a different set of goals. These can be based on a number of things:

  • Values
  • Principles
  • Perspective
  • Time
  • Education
  • Family
  • Responsibilities

The list is endless, but all of these factors will shape an investment strategy and investment goals. However, it is important to understand and recognize that no two goals need to be the same. Just because one person’s goals/objectives differs from another does not necessarily mean they are wrong.

When it comes to investing these are the first four things you need to do:

1. Know Why You Are Investing – Determine why you want to invest. Being able to point to a specific reason for investing can help you set the right goals, and can provide you with a way to stay motivated as you move forward.

2. Be Realistic – You need to be realistic with your investment goals. Whether you are investing money in a tax-advantaged retirement account elsewhere, you need to acknowledge the realities of your situation. You also have to be realistic about what you can do right now. Don’t grandly proclaim that you’re going to invest $500 a month when you aren’t even sure if you have enough money for groceries. Really look at your situation, and set goals that are realistic.

3. Break It Down – Break down your investment goals into achievable milestones. Investment success is hard to come by if you find yourself constantly frustrated about your lack of progress. Start out small, with a reasonable monthly goal of saving $100 a month to invest. Also, keep your focus on making slow, steady progress rather than amassing some specific amount years down the road. Instead of telling yourself you need $1 million in your retirement account, break it down to a monthly investment (with a realistic expectation of returns). This will make the goal much more manageable, and you’ll set yourself up for success.

4. Start Simple, With Something You Know – Before you invest in any asset, you should understand how it works, and the forces that influence it. Starting simple allows you to find regular success with something you understand, and make progress as you learn about other opportunities. Once you have established your foundation you can branch out.

We hope you enjoyed our Federal Thrift Savings Plan Guide. We will continue to add content to this guide as the TSP evolves. If you have any questions regarding the TSP  we didn’t answer please feel free to reach out to us via email, marvin@brickbybrickinvesting.com



  • Timothy O'Connor

    Reply Reply November 18, 2015

    Can you please sign me up for this news letter. It is amazing. Thank you.

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