How many times have you heard a co-worker say that they can’t afford to contribute (or contribute more than they already do) to the Thrift Savings Plan? Probably quite a few times; in fact, you might have said it, or at least thought it, yourself. And then, an old-timer like me would pipe up and say “You can’t afford not to contribute.”
You might think that you’ve read the above paragraph before. If you’re a subscriber to FEDweek’s TSP Report, you have; it appeared in an article I recently wrote about contributing as much as you can to the TSP. That article had examples of how much a person would have at retirement using different scenarios. To refresh your memory, I’ve included those scenarios in the next few paragraphs.
The assumptions are that we have three new hires that start out making $45,000 per year and receive annual raises of 1%. They work for the federal government for a period of 30 years. One of them contributes the default 3% of their salary; another contributes 5% and the third contributes 10%. They never increase their contribution rate. The growth of their account averages 5% per year (all of the TSP’s basic funds, save the I fund, have beaten that return since their inception). I used the TSP calculator How Much Will My Savings Grow to come up with the figures below.
The employee who contributed 3% of their salary had $42,269.98 at the end of 10 years; $115,546.26 at the end of 20 years; and $239,790.53 at the end of 30 years.
The employee who contributed 5% of their salary had $60,386.70 at the end of 10 years; $165,068.56 at the end of 20 years; and $342,562.64 at the end of 30 years.
The employee who contributed 10% of their salary had $90,580,04 at the end of 10 years; $247,601.61 at the end of 20 years; and $513,841.65 at the end of 30 years.
What wasn’t covered in the previous article was how these employees are going to find the money they need to set aside in the TSP.
In a typical year, on that has 26 pay periods, the employee who was contributing 3% of salary would have had to find $52 a pay period; the one who was contributing 5% would have had to find $87; and the one contributing 10% would have needed $174. Keep in mind that the effect on take home pay is somewhat mitigated by the fact that, if our employee had chosen to contribute to the traditional portion of the TSP, they would not have paid as much in taxes.
If you look at the contribution amount and divide it by 14 calendar days (the length of a pay period), the above employees would have had to save $3.71, $6.21, and $12.42 per day respectively. That’s really not too hard. Here are some things that all of us can do to find more money for our future:
I can cut back on purchasing expensive coffee each morning. I love Starbucks as much as the next person, but I could save money by buying my coffee at McDonalds or Dunkin Donuts – I could even join the office coffee club.
I can get a less expensive cable package. Do I really need all the channels that I currently have?
If I still smoke, I can quit, or at least cut back. A pack of cigarettes costs more than what our 3% contributor needs to set aside on a daily basis.
I can choose to keep my car another year or two, unless it is unsafe or unless repair/maintenance costs are as large as a new car payment would be.
I can avoid credit card debt and work on reducing my credit card balances. Strive to pay off your credit card balance each month.
I can plan my shopping more carefully and take advantage of sales.
I’m sure you can come up with more ways to save money for retirement if you study your own financial situation. The statement in the classic personal finance book, The Millionaire Next Door, still rings true: “The secret to wealth is living below your means.”
Be aware that the temptation of continue as you currently are will be strong. You’ll need some will power and determination, but the future reward will be worth it.