There is no perfect TSP strategy that is perfect for everybody but some strategies will help you reach your goals much better than others.
And how you invest in your TSP is only 1 of 3 things that will make or break your retirement.
Here are the 3 most important things to optimize to reach your TSP goals.
The Big 3
Here are the 3 things that affect how much money you have at retirement.
How much you put in (contribute)
Do you use traditional or Roth
How to invest it
If you get these 3 things right then you are well on your way to maximizing your TSP.
How Much to Put In
Some financial gurus will say to invest 15% or 20% into your TSP.
These are fine numbers for rules of thumb but it doesn’t mean that is the right number for you.
Someone who is 20 years old and starts investing right away will have to invest a much smaller percentage of their income compared to someone in their 50’s who hasn’t saved anything yet.
But put simply, the more income you want in retirement the more you’ll have to save now.
So whatever you are contributing right now, can you do a little better?
If you are doing 5% can you do 7% next year when you get that pay raise or step increase?
If you are doing 25% can you bump it up to 27%?
Always looking to increase your contribution will make a massive difference in how much you have at retirement.
Traditional or Roth?
There can be a lot to think about when making this decision.
If you want an in-depth look at the differences between these accounts then check out this other article here.
But here are the main differences:
Roth TSP: When you put money into this account you get no tax deduction now but the money can grow and be withdrawn 100% tax free.
Traditional TSP: This account is the opposite of the Roth. You get a tax deduction when you put money in but withdrawals are all 100% taxed in retirement.
Which One is Better?
There is a lot to consider but here is a simplified way to look at it:
The Roth may be Better if:
You are early in your career and have lots of time for the Roth money to compound tax free
You expect your income to be higher in the future so you’d rather pay the taxes now while you are in a low tax bracket
The Traditional may be Better if:
You are close to the end of your career and have less time for Roth money to compound
If you are at the peak earning years of your career and would rather push your taxes to a lower income time
How to Invest It
Now that you are contributing more into your TSP and have made a decision on Roth vs traditional, it is time to come up with an investment strategy.
The only 2 things that you need to know to do well in the TSP are:
Which funds are safer and which are more aggressive
When you need the money
Safe Vs. Aggressive
There are 5 core funds in the TSP: G, F, C, S, and I
The safer funds are the G and F funds and the more aggressive funds are the C, S, and I funds.
The safer funds aren’t as volatile in the short-term but won’t grow as much as the other funds overtime.
Here is a more in depth explanation of what the funds are if you want more details.
When You Need The Money
Generally speaking, any money you need soon from your TSP should be in the safer funds while money you don’t need for a while should be in the more aggressive funds.
For example, it makes sense for a 20 year old to invest almost entirely in aggressive funds because they probably don’t need their TSP money for 30+ years.
Conversely, if someone is retiring tomorrow then they are probably planning to withdraw/spend from their TSP soon so they will want more conservative investments to make sure that the money they need for that dream retirement vacation isn’t bouncing around in the market the week before they need the money.
As a rule of thumb, any money you need in the next 8ish years should be in conservative investments.
For example, if you are retiring tomorrow and are planning to withdraw 20k/year from your TSP then you would need about 160k (20k x 8 years) in conservative investments to get you through the first 8 years.
If you had a total of 400k in the TSP then 160k of it would be in conservative investments and the other 240k would be in more aggressive investments.
While Working
Most federal employees that still have 10+ years before retirement probably should have the majority of their money in things that are going to grow.
But as people get within 10 years of retirement the more important it becomes to introduce conservative investments.
As someone approaches retirement (and in retirement) it is important to set up the bucket system which this article shows you how to do.
Final Thoughts
If you are new to investments and planning for retirement then this can all be very overwhelming.
Wherever you are at, take things 1 step at a time.
Try to learn enough about a single topic until you feel comfortable making a decision in that area.
Trying to make a decision about lots of things at once often leads to indecision and inaction.
