Editor’s note: This column has been corrected to reflect the accurate maximum FERS contribution amount.
How much does 5% of your gross income translate into dollars and cents? A lot, right? So if it was in a lump sum what would you do with it?
Most experts say it is essential that people under the Federal Employees Retirement System put at least 5% into the Thrift Savings Plan. That guarantees they get a 5% match from the government, a 5% tax-deferred pay raise. A no brainer, correct, but what about the remaining 5% of salary they can invest on a tax-deferred basis?
Shouldn’t everybody under FERS put in the maximum 10% which, with the government matching money, means they are putting 15% of their pay into the TSP with 5% of it coming from Uncle Sam? The short answer is that in some cases there are other things workers should be doing with some or all of that 5%.
Shouldn’t everybody under FERS put in the maximum of up to $19,000 in regular contributions, and $6,000 in catch-up contributions if they are 50 years or older? The short answer is that in some cases there are other things workers should be doing with some or all of that 5 percent.
When it comes to employer-backed 401k plans, most experts say the TSP, with its 5% match and super-low administrative fees, is the best deal around — period. At the end of June there were more than 37,000 TSP millionaires out of 5.6 million participants. Account balances range from $140,000 to $150,000 for FERS and Civil Service Retirement System account holders. Most of the TSP millionaires weren’t rich to begin with. They started investing as soon as possible, most got the government 5% match, and most had their money exclusively in the stock-indexed C, S and I funds. They stuck with the funds through good times and bad and during the Great Recession they continued to buy stocks when they were, as it turned out, on sale.
But, as good as it is, should all your retirement nest egg money be in the TSP?
Earlier this year Arthur Stein, a financial planner in the Washington, D.C. area returned to Capitol Hill, where he used to work, to provide some pro bono advice to a group of Senate employees. Most of them were in the TSP, which is great. But in some instances he said they should consider other options.
How come? Stein said they should be investing less. Why?
“Many of them where investing as much as they could in the TSP. In some cases, I suggested that they invest less. ‘Why would I do that?'” Stein said. “Well, investing the maximum possible in the TSP is a commendable achievement, but many of these employees had significant debt and/or inadequate amounts of emergency funds and insurance — i.e. life, disability, long-term care, auto, homeowners and umbrella liability.”
He said it doesn’t make sense to build up TSP investments if those investments aren’t being protected by emergency funds and insurance. An illness or an accident resulting in disability, or death, could wipe out investments accumulated over decades.
“If there is another furlough, it could continue for a longer period of time than the last,” Stein said. “Someone paying 18% or more on credit card debt might find it more cost effective to pay down the debt by reducing their bi-weekly TSP investment.”
Stein said federal employees should invest at least 5% in the TSP — the percentage needed to obtain the maximum available matching funds. Beyond that, employees need to balance long-term investment needs against other needs, he said. Some federal employees may be in a situation where it makes sense to reduce their TSP contributions, but not below 5%. The funds that would have been contributed to the TSP could then be used for other financial needs: Paying off credit card debt, building an emergency fund, purchasing additional life insurance to protect a non-working spouse and children, increasing auto and homeowner liability coverage, etc.
“A few years ago, I met a federal employee who was making the largest possible TSP contribution. That might have been great if he had no dependents but he did — three young children and a spouse who was a more than a full time homemaker and mom, and did not work outside the home,” Stein said. “In spite of that, his [federal employees’ group] life insurance coverage was only three times his pay. If he died, the life insurance benefit might support his family for three or four years. After that, if his wife did not go back to work, his TSP balance was the only available source of funds.”
In other words, it may only last four years. If his wife did go back to work, she would still have to withdraw funds from the TSP to pay for the cost of childcare and any difference between her salary and benefits and his.
“That difference could be a lot since she had been out of the workforce for eight years,” he said. “One possible solution: Reduce TSP contributions and use the funds to purchase additional life insurance. Not because he wants to buy life insurance (no one does) but because he needs the extra insurance to protect his family.”
This is not a recommendation, he warned. It’s a financial planning issue. It will make sense for some, but not others. Stein will be our guest tomorrow on Your Turn with Mike Causey at 10 a.m. EDT on www.federalnewsnetwork.com or 1500 AM in the D.C. metro area. The show will be archived so you can listen again, listen later or pass it on to a friend of coworkers.
Harrison Schmitt, the NASA astronaut who was the last man to walk on the Moon, is allergic to moon dust. suffered from an allergic reaction to Moon dust, and he has warned that other future visitors may too. He was part of the Apollo 17 mission in 1972, and was responsible for collecting geological samples. The dust got stuck to his suit, boots and tools and when he took his helmet off, Schmitt became congested.