Back some time ago, the Thrift Savings Plan decided to increase the default contribution amount for new employees to 5% from 3%. The change became effective on October 1, 2020. This, of course, doesn’t apply to any of us who are already employed and contributing, but that doesn’t mean that we should get complacent about our level of contributions to the TSP.
The Thrift Board believes that a little change in contributions can make a big difference over a long period of time. They’re right in that belief. Let’s look at a new employee hired when the default contribution rate was 3% and compare him/her with one hired when the default rate was 5%. We will assume that the each employees’ starting salary was $40,000 and increased at the rate of 2% annually over a thirty-year career. We also assumed an investment growth rate of 5%. Neither employee made any changes in their contribution level throughout their career.
We used the “How Much Will My Savings Grow” calculator, which can be found on the TSP website at https://www.tsp.gov/calculators/how-much-will-my-savings-grow/#top. The calculator is not the sharpest knife in the drawer, but it can give you a rough idea of how much money you might have at a specified future date based on the assumptions you enter.
The employee who set aside 3% of their salary had a total of $239,904.38; representing $113,589.58 of their (and matching) contributions and $126,314.80 of earnings. Note that a 3% contribution rate will not result in an employee receiving the full employer match. The 3% employee missed out on an additional 1% matching contribution each year ($0.50 per dollar on 2% of their salary).
The employee who contributed 5% of their salary had a total of $342,722.52; representing $162,272.24 of their (and matching) contributions and $180,450.28 of earnings. The employee received the full matching contribution.
Imagine how much more an employee could have set aside if they contributed 10% of their salary; or it they contributed up to the elective deferral amount ($19,500 in 2020 and 2021). Don’t let yourself get stuck in a rut where you end up contributing less than you can afford to the Thrift Savings Plan. Each year, at the time of your “raise”, consider how much more you can contribute to the Thrift Plan. Don’t scoff (too much) at your annual salary increase; there have been far more years with an increase than there have been years without them.
As a federal employee, you are blessed with a defined benefit pension (FERS); and, as a working American, you are blessed with Social Security. You are, however, not blessed with a trust fund to make up the difference between those two sources of income and the amount of money you need for a comfortable retirement – that’s what the Thrift Savings Plan is for. The TSP is a valuable tool; be sure to use it.