You are in the first few years of your new career. Your whole life is still ahead of you but it is time to start planning for retirement. It may seem like it will never come but anyone near or in their retirement years will preach the importance of starting to save early. You don't want to be 70 years old and be forced to keep working in order to live. So do your future self a favor. You won't regret it, but you will regret the alternative.

This page holds information as to how get started and things to keep in mind to help you reach your financial goals as you get closer to retiring.


Setting up your TSP

After you've decided how much of your pay you would like to contribute to your TSP as well as what type of TSP you prefer(Traditional or Roth), you will complete form TSP-1 to elect a dollar amount or percentage of your pay that will be contributed to your TSP. Uniformed members will use form TSP-U-1 where you'll also have the option to contribute 1-100% of your incentive pay, special pay or bonus pay to your TSP. 

These forms will also be used for changing your contribution amounts or stopping contributions all together. Completed forms will then be returned to your agency personnel, benefits office, or any branch that is responsible for your TSP contributions.

FERS participants hired after July 31 2010 will automatically enrolled into TSP with 3% of your pay automatically contributed to a traditional balance of your TSP. Your agency will also contribute a 1% contribution (not taken out of your pay) that you  typically are vested in after 3 complete years of service. Your agency will also add a matching contribution of up to 4% of your pay. If you are contributing 5% or more of your pay to your TSP then your agency will be contributing an addition 5% of free money.

BRS members of the Uniformed Services who began serving on or after January 1st 2018 will automatically be enrolled in a 3% contribution of your pay after 60 days of service unless otherwise specified using form TSP-U-1.

To designate a beneficiary in the case of your death you will complete form TSP-3 and sign each page along with the signature of a witness before sending to the address indicated on the form.


Traditional or Roth

Whether you contribute to a Traditional or Roth TSP depends on whether you think your tax rate will be higher or lower today than when you retire.

With a Traditional TSP you defer paying taxes on contributions and earnings until you withdraw. This means less money is taken out of your paycheck because you will only be taxed on your income after contributions are made. This also means that you will later be taxed on any earnings made from your investment when you withdraw from your TSP. Eligible employer plans and traditional IRAs are allowed to be transferred into your Traditional TSP. In addition to those, transfers into eligible Roth IRAs are also allowed.

With a Roth TSP you pay taxes on your entire paycheck before contributions and you get your earnings tax free when you withdraw. This means you get less money from your paycheck than if you were in a Traditional TSP. Transfers are allowed in and out for Roth 401(k)s, Roth 403(b)s, Roth 457(b)s, and Roth IRAs.

It is also an option to mix a Roth and Traditional Contribution. The money will be kept separate for tax reasons but investments and any early withdrawals will include a proportional amount from each balance.

Deciding where to contribute  depends on your marginal tax rate now versus your rate at retirement. Traditional contributions are to your advantage if your tax rate will be lower at retirement. Roth contributions are to your advantage if your tax rate will be higher at retirement. Reassess your decision anytime your tax, income or personal situation changes.


TSP Fund Investments

Contributions from FERS and BRS participants who have enrolled after September 5th 2015 will be allocated to the Lifecycle (L) Fund that corresponds with your estimated retirement age. For example if you are planning on retiring between 2045 and 2055, then your contributions will be allocated into L 2050 which is the most aggressive and most risky L fund. L-2020 is  allocated for a participant who plans on retiring within the next 5 years and therefore holds less risk and moderate growth potential.

The logic of the Lifecycle Funds follow investing precepts that have become a rule of thumb for investors during their career. When you are entering your career it is likely that you do not have much or anything saved for retirement. So early on it just important to get started. Having little to invest can be an advantage. It allows you to hold riskier funds (C, S, I-fund) with higher potential of gains without a bear market having a devastating impact on your savings; because you didn't have much to lose in the first place.

The Lifecycle funds have predetermined allocations that will change as the expiration of the fund approaches. But sometimes your risk tolerance does not match up with the averages. Creating your own allocations is way to keep yourself involved in your investments and lets you determine your own fate. As your career, income, lifestyle, and goals change, so should your diversification across the TSP funds.

Some investing strategies, including our premium services, can involve interfund transfers on a regular basis. TSP has a limit on IFTs a month. There are two IFTs allowed to redistribute money among the TSP funds, and a third that allows for moving money just into the Government Securities Investment (G) Fund.

You can make transfers online at the TSP website or by telephone. For IFTs to take effect the following business day, the request must be made before 12 noon Eastern time.


Handling Debt

Paying off debt and investing both play an important role in reaching your retirement goals. Knowing which to prioritize is the key to maximizing your success. Both debt and your TSP investments accumulate interest. One adds money to your bottom line, the other takes money away. The simple solution is to prioritize the one that carries the higher interest.

Some, maybe most, of us accumulate debt early on. Student loans, car loan, mortgages, and consumer debt are all common but can add up to an overwhelming amount. In such a case it may seem wise to use all of your extra cash to get a handle on these instead of saving for retirement. This may not be the best strategy. By the time you get a handle on these and start saving you will miss out on the compound interest of your investments that go a long way while you're younger eliminating passive income in your later years and leave you will be playing catch up to keep your standard of living.

The better game plan is to first prioritize high interest debts such as credit card debt while still putting some money aside for your investments. Cutting your high interest debts will lead to more money in your pocket in the long run. There are also a number of ways to take on lower interest debt to pay off the higher interest debt. All the while its essential to also have an adequate emergency fund for life's surprises.

As I said, it is important to add to investment savings during your early years but there is one thing to keep in mind: Cutting debt is a guarantee way lift your bottom line for retirement, investing is not a guarantee. The risk of investing exposes you to lose money that could have been used to leave more money in your pocket.

Focus on eliminating high interest debt and be smart with your investments. This involves doing your homework and crossing the numbers between what you expect to earn from your investments versus which debt is growing too fast.
 

Thomas A Crowley


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