Should TSP be your retirement nest egg’s only basket?

For most federal and postal workers choosing the Thrift Savings Plan as their primary retirement nest egg is a no-brainer. What’s not to like? Many even consider it the best 401k plan. Period.

Max out your contributions, invest through good times and bad.  Don’t panic when the market turns from bull to bear. Get the 5% matching contribution from Uncle Sam—the equivalent of giving yourself a tax-deferred 5% pay raise each year. Sit back, and with some luck you may become a member of the millionaires club.

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. At the end of May 2019 the TSP had 5,666,894 participants. The average account balance for FERS employees fell around $140,350 and for CSRS workers, it was $149,145.

A growing number of people have moved into the TSP millionaires club. The vast majority did it the old-fashioned way, investing regularly in the TSPs stock indexed (C,S,I) funds for an average of 29 plus years. Outstanding, right?  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 DC 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? Here’s what he said:

“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 asked. “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 (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 says 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.

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“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 am EDT on federalnewsnetwork.com or 1500 AM in the D.C. metro area, though it will be archived online.

Note: Individual situations vary; therefore, this information should not be relied upon as individual advice relevant to any person. This material is meant for illustration and/or informational purposes only and it is not to be construed as tax, legal, financial or investment advice, Stein said. For information on your specific situation, consult a professional.

Nearly Useless Factoid

By Amelia Brust

A laser beam can get trapped in a waterfall. This is called total internal reflection, which occurs when a beam of light hits a medium boundary, such as the edge of the water spout, at a particular angle so that it reflects, rather than passes straight through. This happens over and over again as the light hits each boundary, so the laser remains caught in the waterfall.

Source: Science Alert

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