TIP: Maxing Out Your TSP (Revisited)
Lately I have been talking with people and hearing a recurring theme. People keep giving me reasons why they can't increase or max out their TSP contributions. I have to now say, "Stop finding reasons why you can't fund the TSP and start finding reasons how you will fund the TSP."
This is a defining moment for YOUR post-retirement life. If you don't fund the TSP correctly and start RIGHT NOW, you will be hurting on retirement day. Then it will be too late and you will have to find another income stream to help you finance the lifestyle you have become accustomed to. Maybe that means you now have to get another full time job you didn't plan on. Maybe that means selling your house because you can't afford the payments. Maybe that means not doing the things you really planned on doing during your well deserved retirement or leaving a little money for the kids or grandkids.
Lets be clear about some TSP realities before we get to any TSP funding options. Congress is trying to mess with your retirement. It is very clear what they are trying to do. You see it in the news all the time. Here's a sample of what they keep trying to do:
1. Get rid of the Retiree Annuity Supplement (RAS), also known as Social Security Supplement or Bridge.
2. Get rid of the High-3 for the High-5 of your salary for the Pension (Annuity) portion.
3. Get rid of COLA's for current and future retirees.
4. Make new employees pay more and more into their retirement.
Congress just keeps attacking our retirement system and they will ultimately succeed. Not necessarily this year or all at once. But eventually and a little at a time. I give it about 5 to 10 years (or sooner) for a new retirement system. (How that actually will happen we can discuss at another time).
So what does this have to do with funding your TSP? Absolutely everything! If you have a healthy TSP (and by healthy I mean above $500,000 and getting closer and closer to that magic number: $1,000,000) you can pretty much counteract all these issues. A healthy TSP will absorb many of the tactics that Congress is trying to initiate. So you have to ask yourself a question:
Do you really want to be at the mercy of a bunch of politicians playing games with your retirement for their own political careers or do you want to determine your own financial future?
Lets try looking at how the TSP affects the High-3 versus the High-5 issue. If Congress changes that, that means about a 1%-2% reduction in your pension. For most people that would be around $1,000 - $3,000 per year or $83 - $250 per month. A healthy TSP balance can absorb that. It's not ideal or fair but at least you can make that up.
Lets look at how the TSP can affect the RAS if they take that away. If the RAS goes away, people stand to lose around $12,000 - $15,000 per year from their pension until age 62. That equals to about $1,000 - $1,250 a month loss. So again, a healthy TSP would be able to absorb that adjustment as well. Again, this is not a perfect answer for all your retirement issues but at least you can still finance your retirement to a comfortable level until Social Security kicks in for you between ages 62-70, and then back off on your TSP and figure out how you want to use it for the rest of your retirement.
Now you get the picture? The higher you get the TSP before its time to retire, the less these issues can make a major impact on your financial situation. So the decision on how you want to approach these issues is completely yours. You can't do anything about Congress, except maybe write a few letters and support different organizations who advocate for us, which helps. But it won't stop politicians that want to balance the budget off the backs of all the hardworking federal government employees. That is the sad truth but you don't have to be a victim to this. TAKE CONTROL OF YOUR RETIREMENT AND PROTECT YOURSELF.
So now that I gave you my version of the TSP political situation, lets look at some other TSP funding possibilities. In my March blog I went over some different strategies to fund the TSP but I realized that I missed an important point for you to consider when figuring out how much money you can deduct from your paycheck.
Think of your TSP contributions like this: The goal is to try to increase your TSP funding each your and get to approximately $18,500 per year before age 50 and then put in the extra $6,000 from 50 to 57 for Special Category Employees (SCE) and 50 to 62 for everybody else.
So I come back to what I said earlier. YOU HAVE TO FOCUS AND MAKE THIS A PRIORITY, NOT AN OPTION IN YOUR FAMILY BUDGET. You can get to these numbers but you have to concentrate. Here is an idea for the traditional TSP (Non-Roth):
Lets say you want to increase your yearly contributions by $1,000 per year or $39 per pay period. Not a bad idea but you say, "I can't afford that coming out of my paycheck." Well $1,000 is not coming out of your after-tax paycheck! If you are married and in the 24% tax bracket, then only $760 (after-tax) is coming out of your paycheck, about $29 per pay period. The other $240 (24%) or $10 per pay period you will never see anyway. That is tax money.
That money either goes to the IRS or you can have it go into your TSP. It's your choice but you can see that every year you can now increase your funding without as big an effect on your after-tax paycheck as what you may have believed. An additional $29 per pay period per year is not so bad to get you closer to those max out amounts.
Also, if it really doesn't sound reasonable to put in $18,500 or $24,500 a year when the actual amount of your yearly salary is just not high enough to realistically sustain those amounts, here is another idea. Whatever your salary, you want to try to get closer and closer to contributing 15% of your before-tax income.
Remember, BEFORE-TAX is what actually goes into your TSP. AFTER-TAX is what comes out in your paycheck after the IRS has taken their portion. This difference might make your increasing contributions more acceptable and reasonable for your financial situation. Getting to 15% of your income for 20 - 30 years is a standard formula to get you close to maxing out your TSP over the course of your working years.
One final thought about maxing out contributions. The years from 50 - 57 for SCE and 50 - 62 for all other federal employees are the years of highest growth for your TSP balance. I show people on paper how their TSP balance will double, YES DOUBLE, between those years if they stay in their government jobs and keep contributing to the TSP, especially the max!
The amounts get so big and keep growing at a staggering rate that all of a sudden that $1,000,000 balance becomes possible for some people who never thought that possible. If you are maxing out the TSP, the growth rate is about 12% (L2020/2030 Fund) with your contributions included. Once people realize this, it becomes very clear how important it is to try to get closer to those max out amounts of $18,500 to $24,500.
Even if you decide to retire at age 50 and get another job until around age 60 - 62, if you don't touch your TSP it will still be growing at a pretty good rate and you might get to the same place if you give it enough time. Thats why your TSP balance has to be at an optimum level when you leave government service. Once that period is over, you can't put any more in and manipulate the final balance. Don't get complacent about funding your retirement. You have control over that. Take it now. Then you won't have to worry about what Congress is doing or not doing to you!