The Thrift Savings Plan is very similar to the most common type of retirement plan offered to private employees known as the 401K. The difference between the TSP and the 401K is that the Thrift Savings Plan is being offered to federal employees while the 401K is being offered to private employees.
There are also some age limits that make the Thrift Savings Plan aspect a bit more favorable. But ultimately, the goal of both plans is to allow an individual working for a particular company or entity to take a portion of their salary and place it in a type of retirement bucket, something that will grow over the retirement years that an individual can leverage for their retirement years.
So if an individual is getting paid a salary let’s say $100,000 and they’re offered a thrift savings plan because they’re a federal employee. and they say okay I want to put 5% of my salary into my thrift savings plan. well that shows that this individual is placing $5,000 into that plan for the year.
That’s not necessarily the only thing this bucket grows. If you make consistent contributions, that bucket will grow. But the caveat, too, is the percentage rate that will come back that could add compound interest to this bucket.
What I mean is you’ll have different options. With these savings plans, you’ll have about 5 to 20 different options to link them to some kind of passive strategy, some kind of passive mutual funds or fixed accounts that you could allocate to.
If someone goes and puts five thousand dollars a year and they’ve invested them all in the G fund that’s paying a fixed percentage rate, well, they understand that they’re always going to get a gain in this bucket.
Contributions will grow this bucket, and that fixed percentage will grow this bucket so this bucket will grow bigger and bigger at the end of the year.
The problem is the G fund pays such low interest rates. So individuals start saying, I’ve heard great things about the stock market, let me go and invest my 5 to 20 different options available to me. I can go and invest my money in something called the C fund, which will be more common type stocks.
Mutual funds will be primarily equity bait. So let’s say if an individual ties their entire savings plan toward a more aggressive equity-based type strategy and the market does well they’ll get a positive interest credit to their Thrift Savings Plan.
So their buckets will grow by the individuals ‘contributions, then plus whatever that interest credit comes back to.
So we understand if someone puts dollars into that bucket and they’re in a fixed type account like the G fund, well then whatever they put in that bucket will grow because that percentage rate will always be a positive fixed percentage rate.
The problem with throwing it all in those fixed type contracts or fixed type allocation is you could run the risk of inflationary risk. So that’s the whole concept of why people don’t want to save all their money and hide under the mattress because the cost of goods and services will increase every year.
So it’s a rule of thumb inflation will increase by about 3 percent per year at the high end about 4 percent per year.
Also, inflation is tricky because you could have a few years when there’s no inflation where there’s no increase in the cost of goods and services, and then all of a sudden you see a big rise from nowhere.
So it’s not like you see a gradual 3% increase every year. One year, you could get 0 percent inflation hit with 5 percent inflation in a given year.
But to prepare for it on average, you want to successfully receive about 3% to 4% as a minimum rate of return on your account so you don’t fall victim to that inflationary risk.
Because an individual could go and save his dollar, just as in 1990 retired individuals lost over 40% of their purchasing power by 2010.
Because of that inflationary risk concept. Basically, the cost of goods and services grew even though these individuals were on a fixed income they had to change their retirement lifestyle.
Because they couldn’t go back to work, they were too old to go back to work, and you know it’s basically too fragile to go back to work.
The other side is more equity-based model. That’s why individuals they say I want to go with the other funding options available in my Thrift Savings Plan that are tied to the marketones that are tied to your bond mix, know my different options that might be like 80% stock allocation and 20% bond allocation.
So you could choose which route would suit your individual needs. Some say ‘I’m not a risk-taker. I just want to see a fixed percentage rate to go to the G fund. But they understand this inflationary risk associated with it.
If more of these variable type accounts go into the other options, they fall victim to something called market risk.
Market risk was very apparent in 2008, when people said they knew what I saw with my accounts from 1980 to 2000. I’ll just let it ride. I have faith in the market you know, just let me keep my money in the C-fund type aspect and everything should work out.
Well, what they didn’t do wasn’t scale. Typically, the rule of thumb is that when you start working early (in your 30s in your 40s) you can take a more aggressive approach by taking more risks because you have a longer horizon.
Someone will retire at age 65 and is now 40 years old and the market takes a dip, they still have those extra 25 years to recover all those different gains.
So when someone is now let’s say at age 63 and stay consistent with that risk well the market has a decline well you only have two years to try to recover that backup.
And the right when you’re going to retire you’re starting to pull money out of an account that could potentially go down that you’re also paying fees on and you’re also having that longevity risk that you’re having that inflationary risk that’s compounding against it and that’s where you could see a retirement disaster happening.
So that rule of thumb is to say okay I’m going to be more aggressive in my earlier years because I could take that risk, but then I want to make sure I’m reallocating things that the closer I get into my 50s I want to make sure they’re more conservative, meaning more towards funds that won’t be tied to that volatility on the stock market.
In 2008, there were individuals who lost over 50 percent of their portfolios within one year. So if an individual walked into the year with $500,000 and then walked out of the year with $250,000 that’s going to change your lifestyle.
That’s not something I walked into the $500,000 I walked out of the year with $400,000. Something you could still prepare for. That wouldn’t really change your lifestyle that much.
When you take a big hit because of that downward market loss and because of that downward dollar cost an average effect of paying the downward market loss fee when it’s time to retire well now you have to retire from a $250,000 bucket as opposed to that $500,000 bucket.
So you always want to be aware of where you are now and how close to retirement? What exactly is your retirement number, so you can plan successfully and actually plan a strategy that matches your individual needs.
So let’s say a very common example that an individual is currently 60 years old and they’re still working for the federal agency and they say okay, I know for sure I want to retire at 65. I want to stop working at 65.
What they typically do is they say I’m going to leave my money in this TSP fund and then my TSP plan, and I’m just going to try to pick out the best allocations.
Now the problem with the Thrift Savings Plan is that you’re limited to the funding options available.
And yes, they’ll be cheap options, but typically you get what you’re paying for. So you’ve got crapper options available through that Thrift Savings Plan.
If you’re well below the age of 60, you might just try to pick the best you know what the best strategy available is to really grow that account until you know that retirement age.
If you hit 60 or 59-and-a-half, the government allows individuals to take it as an in-service withdrawal and take a portion if not all of their TSP money and segment it into properly designed IRA contracts.
Why exactly is that beneficial, why would someone do that, why would someone take their TSP and roll it into an IRA?
Well, everything depends on what their goal is. Let’s say at age 60 and say I want to retire at age 65. I have $500,000 in my savings plan account now. And I need some income goal at age 65. Maybe I’ll try to take Social Security a little earlier and trigger that at age 65, maybe I’ll get a federal government pension at age 65.
And then I want to make sure that I’m siphoning out the correct dollar amount for my thrift savings plan, which is exactly what that gap is quarterly.
So the number one goal is your income. If you have that ideal retirement age at 65 and let’s say with this scenario this person doesn’t have any other retirement savings they just have some money in you know savings account checking account, but basically as a retirement plan goes they have this $500,000 savings plan.
What happens is, after making the budgeting analysis, let’s say that they understand that their expenses are currently at $60,000, but in retirement these expenses will be reduced by around $50,000.
Let’s say at 65 this individual will receive $30,000 in social security income and then they’ll also receive pension income as a hypothetical $10,000 example.
What this tells us is that at age 65, their goal is to earn $50,000 that they need to suffice. This tells us they already received $40,000 guaranteed income sources.
So what’s a $10,000 gap?
So what a person can do at age 65 because they’ve reached that age that basically requires that qualification that allows them to take a portion of the Thrift Savings Plan, they can go and roll it over into a specific IRA contract.
It would produce them with a 5-year deferral, produce them guaranteed lifetime income, and they could use it by leveraging insurance companies through their annuities, in particular their hybrid annuity contract, which allows them to receive guaranteed lifetime income based on the insurance company’s ability to pay claims.
And God forbid if something happens to them, and whatever remains in the account value goes to the beneficiaries.
So let’s say in this very quick example of this $500,000 it’s only going to be a $150,000 requirement to place a specifically designed IRA annuity contract for a 5-year deferment that will yield $10,000 in income.
So this tells us that we didn’t just let it ride, we just had to leave it in those TSP funds and fall victim to that cost-average reverse effect.
What you did was set up a systematic strategy that says $150,000 I’m segmenting into today’s income contract that guaranteed $10,000 of income at my age 65.
I’m going to trigger my social security, I’m going to trigger my pension income and you could trigger your annuity income.
Of this $150,000, let’s say this person is just for very easy math purposes let’s say they’re only living for two years. And God forbid them to come down with a grief they pass away at 67. And there’s nothing happening with their accounts. They just drew ten thousand ten thousand, so now you’ve got a hundred thousand dollars in that IRA annuity contract.
Because we use hybrid annuities with an income rider, this one hundred and thirty thousand would still be left to the beneficiaries.
So what we’re doing is scaling down we’re saying what’s the smallest amount of dollars out of this lump sum we could put into a specifically designed revenue-producing vehicle that’s going to tackle that individual’s life.
So something that exactly correlates with that individual’s life that says they can trigger at the age of sixty-five if that person lives at the age of 120 that income begins to reach them.
If that person passes before their break, whatever remains in their account value would go to the beneficiaries.
So that’s what’s the income phase and what are we doing?
This concept is really easy to fix.
Now we’ve left three hundred and fifty thousand dollars in the Thrift Savings Plan we haven’t touched.
So we only use the smallest amount of dollars and as much as necessary to achieve that goal.
That’s important because you’ve got a lot of advisors out there, what they’re trying to do is take the full five hundred, and they’re saying, yeah, that’s going to give you ten thousand dollars, but if you took five hundred thousand and put it in an annuity that’s going to give you an extra thirty thousand dollars, an extra thirty-five thousand dollars.
And if your goal doesn’t match that extra thirty-five thousand dollar income, it’ll give you more income. But you won’t just throw your money into an annuity. Only the correct portion of the IRA Annuity Contract will be leveraged.
So we have the income sources as our number one goal.
We’ve got $500,000. And we said that’s a requirement. It’s hypothetical.
A $500,000, and $10,000 of income. In Social Security, they receive ten thousand in pension income, ten thousand in IRA annuity income.
And the reason it must be in the IRA is because the Thrift Savings Plan is known as pre-tax. So that’s money you’re never paying tax. So when you go and rollover it’s going from a thrift savings plan that’s a qualified retirement account to a traditional IRA, another qualified retirement account.
So when you’re doing that rollover, it’s not like you’re paying taxes on that 150 and then IRA. What you’re doing you’re just rolling over to a type of transfer from qualified to qualified, so every time you’re taking out that $10,000 that’s when you’re going to pay tax.
There is no way to get around this tax. Uncle Sam needs money anyway you want to make sure you do it effectively.
Some mistakes we see are an individual saying oh it’s going to be a $150,000 let me just go and throw that money into my checking account and then I’ll write a check to the insurance company and that’s your shooting yourself in the foot, because that individual has to pay taxes of 150 grand all within that one shot.
When you rollover what you’re doing, you keep it within qualification. Qualified to qualified accounts.
The second is to make sure that you are planning to retire or, at the very least, have confidence in the retirement planning of the emergency fund.
The rule of thumb is that an individual is expected to keep some 6 to 12 months of his savings expenditure in something liquid. This means something they could easily access. So if we use one hundred and fifty thousand for an IRA annuity, and we have $350,000 leftovers, and we say that this person has a goal of $50,000 of expenses in a given year, well then in this example, we could use fifty thousand dollars and roll that over into an IRA cash position or IRA money market account.
So something that won’t attract interest, hardly any interest, because interest rates are so low right now. But something that if they’ve ever come to that oh my gosh moment, that a tree comes and falls off the house and needs repairs, or that they’ve got some kind of a health condition that they need to spend money because they’ve got this bucket sitting there.
So, what are we going to do? We’re now using 200,000 out of 500,000. At the age of 60, we preserve those monies. We didn’t wait until we were 65, so we could figure it out. But we said we’re going to leverage our age right now, we’re going to leverage what’s the best deferred contracts right now, and make sure we’re scaling it right across.
$150,000 went to the IRA annuity, $50,000 went to the IRA money market account, so what do we have now?
We’ve got $300,000 left. And that’s where inflationary protection comes in.
And you could tackle this in two different ways.
You could use this where individuals could leverage annuity ladder strategies where they’re taking micro portions of that $300,000, and what they’re doing is scaling it up, and they’re saying all right about my 65-year-old expenditures, maybe forty thousand dollars, going to be fixed expenses, and ten thousand dollars going to be inflationary type expenses.
What we’re going to do is every couple of years, maybe this goal has to be raised to $53,000 at age 67, and then at age 70, there’s going to be $55,000 of income goal.
You could either tackle this by making sure that you’re setting up laddering strategies out of annuity contracts, or you could set up your money to be more on a tactical-type approach, rather than letting it ride on limited funding options with those very cheap financing options through the Thrift Savings Plan, and the individual could use the $300,000 and place it in tactical money.
So, rather than you know, take that guess and say all right, I’m just going to let it ride the market what a tactical approach is that allows someone to monitor their accounts every day and place them with the best possible mutual funds, ETFs, stocks, bonds.
So instead of those five to twenty different options through the Thrift Savings Plan, what they do is roll over the remaining $300,000 into what corresponds to their risk tolerance, and now you have thousands of different options available to them that will correlate to what the best recommendations are.
To say all right, if we see certain indicators of economic indicators, we see certain indicators on the market that we’re going to make sure your money is scaled down.
You know, if we’re going to see that the waters are clear, then we’re going to be more aggressive, because all of our indicators show that you know it makes more sense to leave your dollars in a higher aggressive type strategy.
So it’s more like you’re taking a tactical hands-on approach, or that’s what the consultant would do, rather than just saying, oh well, you know, let it ride, yes, it’s a great market if the market doesn’t know you, oh well.
You know you just want to make sure that what happens with the Thrift Savings Plan is more of a systematic strategy than a passive type approach where you’re limited to how much growth potential you could put your dollars into unless you’re actually monitoring that account yourself and you’re reading up and learning all these different aspects of what’s going on with the Thrift Savings Plan.
And understand this irony as to what kind of annuity it’s not just like a random annuity contract you’re seeing through like a TV commercial, and you’re calling that the agency’s going to correlate exactly to what your age is, exactly, to what your deferral growth is, whether you want to have a single life income or whether you want to have a joint life income with you and your spouse.
Each state will be different; it must be appropriate to your exact situation.
So that’s going to be the top recommendation.
$50,000 in that money market example is just going to say that your liquid cash isn’t going to be affected if you know the market goes down.
Now and then you have the remaining 300,000 that we usually recommend in a tactical type approach to really grow your types of accounts.
Now you could put it in different indexing strategies once that market game goes up I don’t lose when the market goes down.
Or you could take a more variable-based portion of it to make sure that you also have those consultants who monitor that account appropriately or say that you know that we have market trends that, although markets are going to be declining, you just want to protect yourself at all times.
So instead of a question mark or just saying yes, you don’t worry about that plan when I get to it and just leave my money in the TSP. If you reach the age of 60, you are eligible to go and roll over and set up an actual plan.
There are different eligibility requirements when you are out of work. So, let’s just say that if someone worked for a federal agency and they stopped working there and now they’re working for a new company, a private company, they have access to an old TSP account so they can roll it over.
Let’s say if someone is 55 years old, and they say all right, I just retired from my federal agency, you have access to, or even if you’re in your 60s, you have access to their savings plan money now that you could roll it over properly into whatever the top three strategies might be.
But what we’re not doing is taking that approach or saying that we’re fine with the Thrift Savings Plan, let’s roll it over 100% into a money market account. We’re going to roll it over a hundred percent into an annuity. Let’s put a hundred percent of the money into tactical money management.
You want to make sure that you segment it properly so that you can leverage each piece properly.
So it’s taking that thirty thousand foot view where you’re right now, where you want to go, and how you get the most effective way to get there.