TSP

For most people, in most normal investment return environments, it’ll take a bit more than 25 years to build a million dollars in today’s value, with the TSP’s contribution limits in mind.

Lyn Alden

As of Q3 2020, there are over 55,000 TSP accounts with over a million-dollar account balance, and well over 300,000 TSP accounts that have at least half a million:

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With a long enough timeline, involving consistent large contributions and decent long-term stock returns during the period, it’s possible to become a millionaire from compounding a middle-class or upper middle-class income, including most jobs in federal service.

Due to inflation, a million dollars isn’t quite what it used to be decades ago, but most folks would surely be happy to have a million dollars today. The Federal Reserve aims for a 2% average annual inflation target over the long run, meaning that each dollar buys less than it did years ago.

Here is a chart I put together a few years ago that shows how much you need to contribute monthly vs how much you need your investments to earn per year on average, if you want to achieve a certain wealth target within 25 years. All of the blocks shaded in green represent a million or more:

Chart Source: LynAlden.com

For example, if you invest $1,000 per month for 25 years, and earn an average 6% annual return on your investments, you’ll have $451,000 by the end of that period in today’s dollars.

The chart is adjusted for 2.5% annual inflation. This means that if you contribute a monthly number on the left axis and compound a rate on the top axis, it’ll actually end up with more money than the chart shows after 25 years, but when that sum is backward-adjusted for 2.5% annual inflation between now and then, that’s what it would be worth in today’s dollars.

At the current time, up to $19,500 can be contributed to the TSP in a year. So, on that chart, $1,500/month is about the maximum. If you earn 9% on your money per year (which is historically pretty hard for a combined stock and bond portfolio to do), you can turn that into a million dollars within 25 years.

It’s no wonder, then, that the average contribution years of a TSP millionaire is over 29 years. For most people, in most normal investment return environments, it’ll take a bit more than 25 years to build a million dollars in today’s value, with the TSP’s contribution limits in mind. If a period involves much lower than normal investment returns, it could take significantly longer than that.

Of course, the TSP is one component of someone’s net worth. Savers can also have home equity, rental properties, IRAs or other investment accounts, private business equity, savings accounts, and precious metals or other alternative investments.

With all accounts combined, if a saver has a high enough income (or if their spouse contributes to household expenses as well, and thus assists the overall household saving rate), they can potentially contribute much higher annual amounts, and achieve millionaire status faster.

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Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.

FERS Retirement Guide 2021