Thrift Savings Plan Mistakes

There is always a chance of making a blunder with the Thrift Savings Plan, just like with any other type of savings plan. Thrift Savings Plan is an investment program for federal employees and members of the uniformed services, including the Ready Reserve, to save for retirement. The DC plan provides federal employees with many of the same advantages enjoyed by private-sector workers. In addition, it is somewhat similar to a 401(k) plan provided by private companies.

If you want your retirement savings to grow tax-free in the future, you should steer clear of the following mistakes commonly made with your Thrift Savings Plan:

1. Not updating your beneficiary forms

When it comes to your Thrift Savings Plan, this oversight can have far-reaching effects. These beneficiary designation forms take precedence over any beneficiary designations made in a will. In the event of your death and failure to submit the appropriate paperwork, TSP will distribute your funds as follows:

Your spouse, your children, and their descendants; your parents, if you have any living parents; your executor or administrator of your estate; and your next of kin, according to the laws of the state in which you were domiciled at the time of your death.

If you have already submitted a TSP-3 but would like to change the beneficiary, your new form will take precedence over any previous ones.

2. Contributing less than 5% of your income

By not contributing at least 5% of your salary to your TSP, you are passing up free money that your employer is willing to provide as a matching contribution.

Many people who participate in the TSP believe that contributing the minimum required amount of 5% to get the full Government match is sufficient. While this is a nice incentive, no federal worker should stop at 5% because it won’t provide enough for a comfortable retirement.

If you can afford to contribute more than the minimum, that’s great, but at the very least you should. At the very least, people should put away fifteen percent of their yearly income for retirement. To save at least 15% with a 5% contribution from the employee’s agency, you must set aside at least 10% of your annual salary each year. Federal employees can take advantage of this through the Federal Employees Retirement System (FERS).

3. Investing solely in the G fund

Government Securities Investment Fund, or “G Fund” for short, is the preferred investment vehicle for the vast majority of government workers. They reason that they consider it to be the safer choice. The fund is backed by the U.S. government through principle and interest payments from short-term US Treasury securities issued specifically for the TSP. When the stock market is unstable, the G fund is a secure investment.

Unfortunately, your retirement savings might be at inflation risk if you put all of your money in the G Fund. However, spreading your money across multiple funds increases your chances of seeing a return and reduces the risk of losing all of your money in one. Both of these advantages will protect your retirement savings from the eroding impacts of inflation.

4. You’re taking loans from your TSP

Avoid tapping into your Thrift Savings Plan with a loan. Don’t think of your contributions as a down payment on a new automobile. If you leave federal service and still owe money on a TSP loan, you must repay the whole amount within 90 days.

The major problem with taking out a TSP loan is that the borrowed funds will no longer be contributing to your TSP’s growth. Forget about hundreds, maybe even thousands of dollars in missed growth if this happens. Therefore, in many cases, you are doing nothing more than robbing your future self. In addition, if you still have a TSP loan when you reach retirement age, you will have to include that amount in your taxable TSP distribution.

To prevent tapping into your TSP for unanticipated expenses, it’s a good idea to have a well-stocked emergency fund.

5. The lack of an investment strategy

The potential of TSP to produce income in the future is highly dependent on the investment strategy chosen with its funds. When managing TSP assets, there are a few factors to bear in mind; nevertheless, the optimum investment plan for any federal employee will depend on their unique circumstances. To begin with, it’s not a good idea to make too many trades. Market timing may be counterproductive and moving money across accounts might entail fees. You should ideally rebalance your TSP holdings at least annually, and no more frequently than four times each year. However, a good investment plan is necessary for rebalancing to be successful. In such a situation, the assistance of a reliable financial advisor might be invaluable.

Summary

The key to a successful retirement is proper planning. Your retirement years are when the TSP pays off for you. If you want to get the most out of your TSP, you need to learn all of the ins and outs of it. Let’s hope, you will avoid many of the common pitfalls associated with thrift savings plans and get the most out of your investments.