TSP

John Grobe

Before his long music career, Mick Jagger was a student at the London School of Economics. Perhaps that is why one of the Rolling Stones’ biggest hits is You Can’t Always Get What You Want. Imagine that Jagger is talking about the value of budgeting when he sings, if you try sometimes, you just might find, you get what you need. Budgeting in order to “find” the money you need to invest is the topic for another article. In this article, we will look at another pronouncement of the long-haired economist – Time Is On My Side.

Yes it is! Those who start saving early for retirement (or for any goal, for that matter) will have more at the end and won’t have to play catch-up near the end. When we’re talking about saving for retirement for a federal employee or member of the uniformed services, we are talking about the Thrift Savings Plan.

It’s true that civilian employees have a pension from FERS and members of the uniformed services have a pension from either the legacy retirement system or the blended retirement system. It’s also true that both civilians and military will get a retirement benefit from Social Security. Both the pensions and Social Security are mandatory programs, and both have formulae that determine what benefit the participant will receive. But, in all but a few cases, both together will not result in enough income; the type of income that would allow one to get what they want. Oh yeah!

The Thrift Savings Plan is an integral and important part of the retirement income of a civilian employee or a member of the armed services. And, the TSP is voluntary. Though automatic enrollment is in place for new hires/enlistees, people are allowed to drop out of the TSP and many auto-enrolled participants do not increase their initial contributions. We’ll look at a few examples that prove time really can be on your side.

These examples are from the TSP calculator and are overly simplified. I’ll list some caveats after the examples. For our example we’re using a new employee whose starting salary was $45,000 p/a. The employee received annual pay increases of 1.5% per year and retired after 30 years. Their investments averaged 5% growth each year. They chose to follow the “4% rule” (which would allow annual inflation adjustments) in taking monthly withdrawals from the TSP after retirement.

One new employee opted out and never contributed to the TSP. At the end of 30 years they had a balance of $36,318.15 (due to agency automatic 1% contributions). They received a monthly income of $121.

Our second new employee didn’t change from the default contribution of 5% of their salary. (NOTE: The default auto-enrollment rate increases to 5% next year). They wanted to get the full agency matching contributions, but did not want to contribute any more. When 30 years were up, the balance in their TSP account was $363,167.29. Their monthly income was $1,210.

The third new employee set aside 10% of their salary. $544,749.03 was what they had in their account when they retired 30 years later. Their monthly income was $1,815.

Here are the caveats. 1) The scenarios assumed no promotions for the employees. That is highly unlikely; a person hired as a GS-5 might retire from a GS-14 position. 2) The assumption of a 5% annual return might be too low – or too high. And it wouldn’t be earned evenly each year; some years would be better and some would be worse. 3) Inflation was not taken into account. After 30 years it is not at all out of the realm of possibility that the purchasing power of a dollar would be cut in half.

Imagine how much less the two employees who actually saved for retirement would have had if they had waited for 10 or more years before starting. The earlier you start, the better it will be when you finish. If time is on your side it is possible for you to get what you want.