The Thrift Savings Plan is a defined contribution plan similar to a 401(k) plan in the private sector, and has been in existence for over 30 years.
It is considered a “qualified plan” – or a type of retirement plan that is established by an employer (in this case, the federal government) for the benefit of their employees. Qualified retirement plans not only allow us to defer a portion of our salary (thereby reducing our taxable income for the year in which we make our contribution) they also give employers a tax break for the contributions they make for their employees.
As a defined contribution plan, the TSP is different from defined benefit plans like our CSRS and FERS pensions. In our pensions, the benefit we will receive upon retirement is defined by already known factors. The factors that define the benefit we receive from CSRS or FERS are our length of service and our high-three average annual salary.
There is no defined benefit in our TSP; the only thing that is defined is how much we contribute. We can elect contributions of a percentage of our salary, or as a fixed dollar amount per pay period. FERS employees receive employer matching contributions up to the point where they contribute 5% of their salary. CSRS employees do not receive a matching contribution.
So, if the benefit we receive is not defined by a formula, how do we know how much we will receive from the TSP once we begin taking money out? We don’t know. The amount of money we will receive from the TSP is based on three major things:
– How much we contribute to the TSP
It stands to reason that, if everything else is equal, a person who puts more money in the TSP will receive more in TSP payments than a person who contributes less.
– How we allocate our TSP balance among the available funds
Historically, some TSP funds have done better than others. Of course, with 20/20 hindsight we know how well funds have performed; we don’t know how they will perform. We can make assumptions based on past performance, but they are just that – assumptions.
– How we withdraw money from the TSP
There is no guaranteed benefit from the TSP unless we elect the annuity option, which is the least popular of the withdrawal options. If we’re taking monthly payments (the most popular of the options) we have the possibility of running out of money before we run out of time. Conversely, we can be so cautious in our withdrawals that we die with more money remaining in the TSP than was our original intention.
Because there is no guarantee that we will receive money from the Thrift Savings Plan for the rest of our lives, we cannot just put our TSP on autopilot and hope that we have enough money when we retire. We have to pay attention to the TSP while we are contributing and then again when we are withdrawing money from it.
FEDweek’s free TSP Investment Report is intended to help you be more informed of the features of the TSP and of how to best make use of those features. We hope you like it!