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68 Main St., Rockport, ME 04856 

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5 Things to Consider about the Thrift Savings Plan (TSP)

March 14, 2017

 

1. Your annuity and social security are not enough

 

As you have probably heard, the TSP is one leg of the imaginary three-leg stool that you need to support your retirement for 30, 40 or even 50 years.  For Foreign Service Pension System (FSPS) retirees with 20-30 years of service that select the maximum survivor benefit (10% reduction), your annuity typically will replace between 31% to 40% of your highest three years of basic pay.  For higher income workers, Social Security will replace another 26% on average.  Adding these up, a typical FSO can expect to replace only 57%-66% of their income with those two legs.  That leaves the TSP to do the remaining heavy lifting to get you to a comfortable retirement lifestyle and, depending on your life expectancy (a great unknown), you are going to need a sizeable nest egg to make it last!

 

2.  Understand the basics of what you are buying

 

The TSP and 5% match (free money) is a fantastic offering. The funds are extremely low cost and cover wide swaths of the U.S. and world markets.  Let’s examine the underlying funds closer.  The C Fund – matches the performance of the Standard & Poor’s 500 Index of large U.S. companies (81% of the US market.)  The S Fund – matches the performance of the Dow Jones U.S. Completion Total Stock Market Index.  This covers the other 19% of the U.S. market (about 3,200 companies.)  The I Fund matches the performance of the MSCI EAFE (Europe, Australia, Far East) Index (21 countries.)  The F Fund matches the Bloomberg Barclays U.S. Aggregate Bond Index (U.S. bonds) and the G Fund invests in non-marketable short-term U.S. Treasuries with no risk of principal but does have inflation risk.

 

3.  What else do I need?

 

For all its virtues, there are some asset classes that the TSP does not offer.  For investors that want to diversify further, a traditional or Roth IRA is the perfect account to fill in some of the gaps.  For U.S. stocks, the C Fund and the S Fund have you covered.  Just remember that the S fund represents only 19% of the U.S. stock market – so check your allocation to make sure that your S Fund portion has not grown too large in recent years.  I am less enamored of the I fund, and not because of its recent poor performance compared to the U.S. markets (which will revert to the mean at some point).  My complaint is that the I Fund only covers 900 companies in 21 countries and is very concentrated in Europe (62%), Japan (25%) and Australia (7.5%.)  92% of the companies are large.   Choosing an international fund that includes some of the emerging markets and one that holds small and mid-size foreign companies would be a good complement to the I Fund.  The F fund has about 60% in U.S. government issued bonds, but does not hold some other types of fixed-income securities including Treasury Inflation-Protected Securities (TIPS), high-yield, convertibles and developing-market bonds.  Depending on your individual situation, some exposure to these areas may be warranted in your IRA. Finally, other investors will want to add Real Estate Investment Trusts (REITs) and possibly commodity funds as additions to the TSP offerings.

 

4.  Lifecycle funds – good or bad?

 

A Lifecycle Fund is not a bad approach when you are just getting started but I often find clients sometimes have a Lifecycle Fund (L fund) and allocations to the other TSP funds.  Just realize that by doing it this way, you have changed the risk, volatility and expected performance of your portfolio and that it may not be clear to you what percentages you own in each of the asset classes.  Once you get to the point where you want a more individualized solution, you should probably drop the lifecycle fund and build your asset allocation from the bottom-up.

 

5.  Should I rollover my TSP to an IRA after retirement?

 

You can keep your money in your TSP account until you are 70.5 years old and then you need to start taking required minimum distributions (RMDs) slowly over your life expectancy.   You can also do a one-time partial or full withdrawal or a transfer/rollover to an IRA after separation.  Before you consider a transfer/rollover, please read this article “Inside Wall Street’s Secret War Against American Investors” in Money Magazine about the fiduciary standard.  To protect your nest egg, proceed cautiously and work with an adviser who will only act in your best interest (a fiduciary), not one who will only pledge to a “suitability” standard.   Depending on your individual need, there are some really good reasons to move your money to an IRA, mostly centered around the desire for more investment choices - just go slowly and weigh all the options.

 

For questions, comments or to read other postings, please connect with me on LinkedIn.

 

 

Chris Cortese

Logbook Financial Planning, LLC

https://www.linkedin.com/in/chris-cortese

 

 

“Investment advisory services are offered through Logbook Financial Planning, LLC, a Registered Investment Adviser in the state of Maine.” ½ “All written content is for information purposes only.  It is not intended to provide any tax or legal advice or provide the basis for any financial decisions.”½“Logbook Financial Planning, LLC is not affiliated with or endorsed by the Social Security Administration or any government agency.”

 

 

 

 

 

 

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