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Thread: TSP have compound interest? Unbelievable example <chart> inside!

  1. #1

    Question TSP have compound interest? Unbelievable example <chart> inside!

    Suntrust sent me an interesting flyer. I'm new to the technical part of investing even though I've been dumping $$$ into TSP for over 3 years. Are we getting compound interest with TSP?

    The returns are almost unbelievable:


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  3. #2

    Default

    Hello Hybrid -

    TSP is part of the miracle of compound interest.

    Albert Einstein suggested that compound interest was one of the most powerful forces in the universe.

    Tom

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  5. #3

    Default Re: TSP have compound interest? Unbelievable example <chart> inside!

    Sorry to bump such an old thread. Here we are over 5 years later and I am still uneducated about how compound interest ties in to the account.

    When you look at a TSP account balance I see number of shares owned, share price, and total balance. How does one know how much (dollar amount) of the balance is from compound interest? I see the balance is up and down from day to day and the PIP percentage for the past 12 months. Does the PIP include contributions or just the percentage the account has earned?

    Thanks for any info on this!

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  7. #4

    Join Date
    Sep 2008
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    Default Re: TSP have compound interest? Unbelievable example <chart> inside!

    Your SunTrust letter "assumes 8% return." Good luck with that...

    http://en.wikipedia.org/wiki/Compound_interest

    Personal Investment Performance (PIP) — The rate of return earned by your entire account during the 12-month period ending on the date indicated on your annual statement or on your Account Balance page of the TSP website. The PIP is a time-weighted return that has been calculated using a modified-Deitz method (a method used by many financial institutions and an industry standard). The PIP adjusts for the distorting effects of cash flows into or out of your account. It is an estimate; therefore, your PIP may not be the same as the 12-month performance of the TSP funds, which are time-weighted returns.
    https://www.tsp.gov/sitehelp/glossar...yOfTerms.shtml

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  9. #5

    Default Re: TSP have compound interest? Unbelievable example <chart> inside!

    Almost 2 years later and still have yet to see or understand TSP compound interest.
    I just have a lot more shares which at the moment are worth a lot more...

    Can someone provide an example of compound interest using one of the TSP funds?
    Thank you for any help you can offer.

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  11. #6

    Join Date
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    Default Re: TSP have compound interest? Unbelievable example <chart> inside!

    Your picture of 7 years ago assumes a guaranteed return every year of +8%. So, once Jill turns 31, the balance is just multiplied by 1.08 every year. You can check it in about 20 seconds with a calculator.

    TSP doesn't have a guaranteed interest rate - you get whatever the market gives. So I might be pulling in a return of 15-20% this year - while my balance is still only 5 digits. Later in my career, I might get 0-5%, or even a couple negative years. I'd look back on life and say I had an average return of 8%, but a loss at the end of my career would be far more damaging than a gain would be constructive at this point. At least that's the way I look at it.

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  13. #7

    Join Date
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    Default Re: TSP have compound interest? Unbelievable example <chart> inside!

    Just to illustrate my point, I worked out some numbers based on the original post. Using Jill's balance at age 30 ($31,291), I imagined she gained 20% every year for the next ten years, taking her through age 40. After that, I imagined she lost 4% every year until she was 50. That is an average return of 8% over 20 years. Here's how it comes out:

    Age Yr. End Value
    30 31291
    31 37549
    32 45059
    33 54070
    34 64885
    35 77862
    36 93434
    37 112121
    38 134545
    39 161454
    40 193745

    41 185995
    42 178555
    43 171413
    44 164557
    45 157974
    46 151655
    47 145589
    48 139766
    49 134175
    50 128808

    Compare to the example from your attachment, which shows her at a balance of $145,846 at age 50. So, with the TSP - where we have no guaranteed return from one year to the next - it really makes little sense to think about one's average return throughout their career. It's all about what you are doing now.

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  15. #8

    Default Re: TSP have compound interest? Unbelievable example <chart> inside!

    Compounding interest isn't all its cracked up to be for for 2 years: 1- it assumes all returns are re-invested for YEARS (not an issue with a 401k, but big issue with savings accounts), 2- Inflation. Oh sweet your account will 'double' in 40 years? Well your dollars will also be worth half as much then as they are worth now.

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  17. #9

    Default Re: TSP have compound interest? Unbelievable example <chart> inside!

    Quote Originally Posted by Sensei View Post
    Your picture of 7 years ago assumes a guaranteed return every year of +8%. So, once Jill turns 31, the balance is just multiplied by 1.08 every year. You can check it in about 20 seconds with a calculator.
    I now see how they got the year to year figures, thanks!

    Quote Originally Posted by Sensei View Post
    it really makes little sense to think about one's average return throughout their career. It's all about what you are doing now.
    Thanks for the illustration and I agree with your statement.

    Quote Originally Posted by k0nkuzh0n View Post
    Compounding interest isn't all its cracked up to be for for 2 years: 1- it assumes all returns are re-invested for YEARS (not an issue with a 401k, but big issue with savings accounts), 2- Inflation. Oh sweet your account will 'double' in 40 years? Well your dollars will also be worth half as much then as they are worth now.
    I sure hope it does more than doubles in 40 years. I understand the concept of compound interest and that time is essential.

    It seems like the bottom line is to buy and own as many shares possible then hope the share price(s) are through the roof to allow movement back to G Fund upon retiring. If buying & holding...

    Thanks to you both for the input!


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  19. #10

    Default Re: TSP have compound interest? Unbelievable example <chart> inside!

    Quote Originally Posted by Hybrid93Hatch View Post
    I sure hope it does more than doubles in 40 years. I understand the concept of compound interest and that time is essential.

    It seems like the bottom line is to buy and own as many shares possible then hope the share price(s) are through the roof to allow movement back to G Fund upon retiring. If buying & holding...

    Thanks to you both for the input!
    Sure, I'd hope so too. I was just throwing out numbers, I hope you didn't miss the point. The only real growth is the return rate MINUS true inflation rate. When people talk about compound interest they rarely mention the word inflation

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  21. #11

    Join Date
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    Default Re: TSP have compound interest? Unbelievable example <chart> inside!

    Quote Originally Posted by k0nkuzh0n View Post
    Sure, I'd hope so too. I was just throwing out numbers, I hope you didn't miss the point. The only real growth is the return rate MINUS true inflation rate. When people talk about compound interest they rarely mention the word inflation
    True K,
    Compound interest = straight math
    Inflation = economic based and it affects everyone different, based on lifestyle, location, etc.....

    But, should never discourage investing for the future!
    THIS IS WHERE I WOULD PUT SOMETHING TO REPRESENT MY THINKING, BUT THEN THEY SHOW UP!
    Tracker =
    100%- I Fund

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