It may be odd to hear this but it’s quite possible that it is easier to mess up your TSP retirement assets than it is to prepare a great one. Not encouraging? That’s ok, using my decade of experience helping Feds retire I can make sure YOU do not end up in that group. In this article, I will share the top 8 ways I have seen people easily mess up their federal retirement and I will share 10 easy ways to get counter them and get on track.
1. Lack of Vision
Failing to have a retirement goal in place can lead to uncertainty and financial insecurity during retirement. It's essential to have a clear vision for your retirement goals, including savings targets, investment strategies, and income sources. Easier said than done right? Life can easily get in the way and derail our best intentions. Let’s start with something simple. Pick a retirement date. For FERS employees you are eligible for a full, unreduced pension at the following age and service combinations: MRA & 30, 60&20, age 62 and 5 years of service.
Simple Step #1
So, let’s keep it simple – based on your current age and years of which of those three options do you qualify for soonest? Set that as your earliest retirement date. Now we can run some scenarios to tell us if we are saving enough to be on track to retire at that age. There are some tools on TSP.gov and OPM.gov that allow you to estimate growth rates and withdrawal amounts needed to support you financially. Are they super detailed and take into account all the details that go into a financial plan, no, but it’s not a bad start for some quick, easy, and illuminating.
2. Underfunding TSP, Match Only
Relying solely on the employer match in the Thrift Savings Plan (TSP) may result in inadequate retirement savings. It's crucial to contribute enough to your TSP account to maximize its benefits and ensure sufficient savings for retirement. It is always surprising to me how many people I encounter that are doing just enough to get the match or not even enough to receive the full match! Yes, you are maximizing the “free money” option of TSP, but are you maximizing your benefits with TSP by only contributing 5%, I would suggest no. For 2024 Federal employees under age 50 can contribute up to $23,000 and over age 50 can contribute an additional $7,5001. If you are not contributing those amounts annually to TSP you are leaving some tax deferred, or even tax -free benefits on the table. TSP is the only benefit that you will have complete control over in retirement. Having a larger balance will allow you to have more options in retirement. As a financial planner, if I can get more money into your pockets, I will fight to do so.
Simple Step #2:
Increase your TSP contributions by 1% or $50 today. Unless you are contributing close to $845 or $1,173 respectively each pay period, you aren’t in danger of over contributing, don’t think just do, act now. You’ll feel good about it!
3. No Asset Allocation Strategy in TSP
Without a proper asset allocation strategy, your TSP investments may be too risky or too conservative for your retirement goals. Developing a well-diversified asset allocation plan tailored to your risk tolerance and time horizon is essential for long-term investment success. Asset allocation is more than “not putting all your eggs in one basket”. Asset allocation is about decreasing your risk but ALSO increasing your return. Sounds too good to be true? Well, that’s exactly what Harry Markowitz won the noble prize for in 1990. He mathematically proved you could do both with proper asset allocation2. Unless you have a dedicated investment strategy you are probably not maximizing your return for you risk tolerance.
Simple step #3
Consider the L funds. Are they perfect? No, but what they do is provide diversification and try to mitigate risk. This move could also help manage your emotions in periods of market volatility. This is also where working with your Financial advisor can help determine the PROPER diversification for YOU.
Investing in mutual funds is subject to risk and loss of principal. There is no assurance or certainty that any investment strategy will be successful in meeting its objectives.
Investors should consider the investment objectives, risks and charges and expenses of the funds carefully before investing. The prospectus contains this and other information about the funds. Contact Wes Battle at wes@finadvinc.com or 301-200-9277 to obtain a prospectus, which should be read carefully before investing or sending money.
4. Wrong Risk Tolerance
Misjudging your risk tolerance can result in investments that are too aggressive or too conservative for your comfort level. It's essential to accurately assess your risk tolerance and align your investment strategy accordingly to help avoid unnecessary stress or loss of potential returns. Isn’t this the same as the previous point? Similar but different, this point builds on the previous, even if we have the right allocation, we may have selected the wrong allocation between stocks and bonds. Why is the bad? If I had bet, I bet your mind went to “oh I’m not too aggressive” but believe it or not having the wrong risk tolerance can ALSO be being too conservative too. What no way?! Yes, part of having the right allocation is understanding what your appetite for risk. All too often I see people wanting to retire as soon as possible, yet not having the proper growth allocation in their TSP. They are allocated more like someone who is already retired yet want to retire early, that can’t happen. Having the appropriate amount of risk in your profile is key to limiting emotional responses to the short term.
Simple step #4
This fix may require a little more work than the other points as these terms may be newer to you, but the time spent here could be priceless in the amount of retire it could provide. Start at TSP to learn about some general guides to risk management https://www.tsp.gov/investing-strategies/.
5. Not selling high and buying low: aka Rebalance
Ok now this is just regurgitating the points above Wes… No it’s not I promise, but we are starting to see that proper investment management responsibilities are starting to add up right? Allowing your investment portfolio to become imbalanced by neglecting to periodically rebalance can expose you to unnecessary risk or hinder your ability to achieve your financial goals. Regularly reviewing and rebalancing your portfolio helps maintain a suitable asset allocation and risk profile over time. Did 2022 hurt? For many of folks I see coming through for planning admit it was very comfortable handling the market volatility, why? What was the common string? All were Overweighted to the C Fund. Wait what are you saying Wes? I’m saying that while the C fund has done well, in proper asset allocation one should not OVERWEIGHT an asset class just because it has done well recently. Building on point 3 AND 4 when you are targeting a specific allocation tied to YOUR risk tolerance, if you get out of balance, what are you essentially doing? You are taking more risk than you are getting “paid” for. In our recent market the C fund has been on an unprecedented growth over the last 10 years, so what do we do as emotional investors? We pile more into what is doing well, hoping it will continue to go up, when we should do the opposite and rebalance back to our targeted percentages. This will help prevent us experience a major loss in a market downturn.
Simple Step #5
Use an L fund or set a reminder to rebalance every 6months in your calendar, in your phone, on your fridge -whatever you need to make sure you do it! This will take your mind away from the short-term volatility, remind yourself you have a plan and hopefully be less likely to make an emotional move.
6. Letting the tax tail wag the Investment dog
Sounds backwards right? How about choosing to wear the one outfit for the rest of your life based on the weather today. That doesn’t sound right. Same can be said about rejecting ROTH contributions solely based on what your income is today or to retirement. Overlooking the benefits of Roth contributions and conversions in your retirement accounts can result in missed opportunities for tax diversification and potentially lower taxes in retirement. Consider incorporating Roth contributions or conversions into your retirement savings strategy to take advantage of tax-free growth and withdrawals in retirement. Did you catch that? Tax-free growth AND withdrawals. Yes, you pay taxes on the money when it goes IN to the ROTH TSP but everything you put in and everything it earns comes out tax free if you meet the 5-year qualification. If we implement the simple strategies above to max out TSP, allocate it more effectively our TSP balances SHOULD be more than before, right? Well now imagine if we were to grow a TAX-FREE portion like that – incredible opportunity. You must be excited about this!
Simple Step #6
That amount you were going to increase your contributions in Step 2, put it toward the ROTH TSP ** You should consult with your tax professional or financial advisor on your individual situation**
7. Not taking advantage of your advancing age
Aging like fine wine, of course…Delaying or neglecting to increase your retirement savings contributions as you approach retirement can make it challenging to catch up later and may result in insufficient savings for retirement. Take advantage of catch-up contributions available to older workers to boost your retirement savings and bridge any savings gaps. Not much to add here, except typically in our 50’s we’re reaching our peak earning year. Maybe the kids are on their way out of the house now too. Consider putting more into TSP to reward yourself with the retirement you deserve. This catchup can be implemented the beginning of the YEAR you turn 50, not your birthdate, big point to remember. So for example, if your birthday is in December, yes, you can increase your contributions January 1st and start putting in the catch up contributions.
Simple Step #7
Very similar to #2 put more in when you turn 50. Use technology to remind you. Set a reminder in your calendar for the December before the year you turn 50 to remind yourself to increase your TSP contribution. You can start the catch-up contributions the Jan in the year you turn 50, you do not have to wait until your actual birthday.
8. No Withdrawal Strategy for TSP
Failing to have a withdrawal strategy for your TSP account can lead to inefficient or unsustainable withdrawals during retirement. Developing a withdrawal plan that considers factors such as tax implications, income needs, and longevity risk is critical for managing your TSP assets effectively in retirement. TSP is a ok accumulation vehicle, but as noted in my other article “should I stay or should I go” there are plenty of reasons to note why TSP may not be the best place to keep your money in retirement. Highlighting one reason here, is how money comes out of TSP. Funds are sold pro-rata to how you are invested when drawing income. This could have a devastating impact on the portfolio if there is a prolonged downturn period in the market. Also, you may have heard TSP just made it easier to do withdrawals. The 30 day waiting period between withdrawals was removed, great right?! Yes I would agree with that, but also keep in mind, there could be the temptation to pull money more frequently because that barrier has been removed.
Simple Step #8
Consider doing a direct rollover to an IRA and withdrawing your income there. I’m not saying this is the best option for everyone and there are multitude of additional considerations, but it is a simple way around the limitation noted above.
Bonus Risk: Picking Unrealistic Retirement Date
Unfortunately, bad news, You may have already messed up by picking the wrong date in Step #1 Setting an unrealistic retirement date without considering factors such as financial readiness, healthcare costs, and longevity risk can lead to financial strain or forced early retirement. It's essential to carefully plan and evaluate your retirement timeline to ensure a smooth transition into retirement. You can get points 1-8 absolutely spot on, but if you are targeting the wrong retirement date it could all be for nothing. Well not really, you’ll still probably have more in your TSP than you’ve another way. The point here is though, you have to be serious about what is REALISTIC for you. If the plan is to retire at MRA, you could be potentially added 10-15 YEARS to your retirement income need. This could be devastating for your future, older self. Where, as a recent study has shown “Older workers who are 10 years away from retirement and who decide to work one month longer at the end of their careers can get the same increase in retirement income as they can by adding one percentage point to their retirement saving rate over 10 years3. What?! That’s mind blowing that one month could have such an impact on your retirement security.
Bonus Simple Step
Not sure there is a simple answer here, expect if you have probably gone through all 8 steps above, many stay 1-2 months more. Thinking about going on your birthdate, that is not in December? Maybe stay to the end of that year and take advantage of the massive impact working one more year has on your retirement.
This list provides some insight into the potential consequences of each mistake and emphasize the importance of proactive retirement planning and informed decision-making to help avoid ruining your federal retirement. As extensive as this is, we have barely scratched the surface on what goes into investment management. If this is overwhelming, reach out! We help our feds head off mistakes every day.
Prepare. Plan. Propser.
Sources
- https://www.tsp.gov/bulletins/23-6/
- https://www.investopedia.com/terms/m/modernportfoliotheory.asp
- https://www.nber.org/digest/may18/working-longer-can-sharply-raise-retirement-income
The views depicted in this material are for information purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. A diversified portfolio does not assure a profit or protect against loss in a declining market. Asset allocation, which is driven by complex mathematical models, should not be confused with the much simpler concept of diversification. Rebalancing may be a taxable event. Before you take any specific action be sure to consult with your tax professional.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of the FINRA website for additional information.