Thrift Savings Plan for Idiots and Dummies
January 26th, 2008 by Ana
Continuing my “Investing for Complete and Utter Idiots” series (and for anyone else who feels intimidated by the subject of investing!) I’m gonna tackle one that I actually knew a little bit about: the Federal government’s Thrift Savings Plan (TSP) which is offered to the military, the post office, and most federal employees.
Back when I was in the Army, we used to say everything was written on the 8th grade level. The Army doesn’t want anyone to have the excuse that they just didn’t understand a technical manual or op-order. Believe it or not, the TSP isn’t too terribly hard to understand :) After all, I think I have a pretty good grasp of the basics!
The Thrift Savings Plan started out in 1988 with only three funds. They came out with two more parts of the TSP back when I was perpetually hung-over private, and explained it to us as the military’s equivalent of a 401(k) without the matching. I’ve since heard that some civilian federal employees get the matching, but the Army doesn’t. TSP contributions are pre-tax, like a 401(k). The TSP has six funds to choose from: G, F, C, S, I, and L. Here is a chart of what they are, what their objective are, and the risks associated with these TSP funds.
If you never tinker with your TSP, all money will be put into the G fund. This is government securities (bonds), the least risky and least growth. It is also the default setting…so apply for your login for TSP.gov and change that one! If you’re not comfortable with doing it online, I think they still let you fiddle with things on paper…but the government is really trying to go paperless and online is actually very easy.
There is also the F fund, which is Fixed Income. Not as “bad” as the G fund, but still low risk and low return. It is designed to match a bond index fund ( a whole group of different bonds that have different interest rates).
The C fund is “common stocks” like an S&P 500 index fund. It’s mostly stuff you’d find in any standard mutual fund. Getting this fund is like playing most of the stock market, and can provide good returns…but if you’ve been anywhere near the news lately you know the market has been up and down a lot recently. Overall it goes up long-term.
The S fund is small and medium-sized company stocks. You can make a lot in this area, but the risks are higher as well. Everyone hears about how so-and-so should have bought Microsoft stock back when Bill Gates and Steven Jobs had the business in their garage…well, this is the fund that is supposed to be finding the Next Big Thing. It’s also kind of like watching someone dribble a basketball: up and down and up and down.
The I fund is for international stocks as in non-U.S. companies. This one’s been doing great lately. It mostly covers Europe, Australia, and the “Far East” part of Asia.
Then there’s the new L funds, which stand for Lazy…er…Lifecycle. It’s the newest fund, since it came out after I left the Army. It’s a combination of the other five funds and they have it broken up into target retirement dates. If you pick the furthest out retirement date, it will be more risky than a closer retirement date. The closer the L date, the more G funds it has, so “go long” if you want to get decent returns. If you don’t yet understand the how, what, or why of the other five funds, set your money to go into the L fund to give yourself time to do some research.
So, what do I have hubby in as far as his TSP goes? Since hubby plans to do his twenty years and get his military retirement pension, I decided to go aggressive with his TSP: 40% C fund, 40% S fund, and 20% I fund. Yeah, it’s “pretty ballsy” but both hubby and I are getting late starts on the retirement savings idea so I figure maybe we can make up for lost time a little. I’m debating the idea of kicking some into an L fund as we start to amass more, but right now I think that’s the basic proportions of the furthest out L fund when you subtract out the G and F portions.
I’m sure I have oversimplified something here, but this is just a “q-ref” version of the Thrift Savings Plan. Those of you who know more than I do, feel free to add to or correct :) This is after all a learning process for me!
Posted in investing |
January 26th, 2008 at 2:37 pm
First off I really enjoyed reading your article. I also a member of the Military and I’ve been contributing to to the TSP for about 6 years now. Reciently, I’ve been thinking about my options and whether or not I should be contributing to the TSP or if I should be contributing to my Roth with USAA. I have my Roth with USAA and currently contribute $200 per month plus I also contribute 8% of my base pay to my TSP every month. I know the roth has a better tax advantage, but at the same time I never see the money that goes into my TSP, so there are advantages to both for me. I’m just wondering what your take is on the TSP V.S. A Roth IRA?
January 26th, 2008 at 10:11 pm
Actually Will I would say it depends on your rank. If you’re lower enlisted and barely pay taxes, then hit the Roth. If you are an NCO or officer I would say hit the TSP until you are in a lower tax bracket and see from there if you still have income left over to sock into a Roth. It’s my understanding that the Roth IRA offers the best tax benefits for those in lower tax brackets, while the TSP is considered to be good no-load fund options for those who are middle to high tax brackets.
January 27th, 2008 at 11:25 pm
I saved money in the TSP for about 7 years… then I got out of the Army. I left my money in the TSP account, spread out over different funds, much like you have. I don’t even check it that often; about twice a year now, just to see how it is doing. Even without contributing any more money into the TSP I have “made” money.
When I was in and a NCO, I managed to get all of my Soldiers to start putting money into the TSP within the first few months of having them. Most of my Soldiers were straight out of training and 19 years old. Out of the ones I still remain in contact with, none of them have stopped contributing. When they get raises or promotions, they still get an increase in pay, but since they never “saw” the TSP money anyway, they do not feel like they are losing out on anything.
They are all going to be in a much better place when they are my age because of the TSP. I strongly urge ALL service members to look into this program.
January 28th, 2008 at 7:39 am
Katie: That was a truly great and life-changing thing you have done for all those privates! They might not realize it yet, but as long as they don’t “raid” their TSP you have made them wealthy int heir old age. I really really wish I had had a sergeant do that for me way back when.
January 28th, 2008 at 10:35 am
I’m sooo confused, G fund, C fund, I fund. Can’t the government dumb this down ANY more?!??
Why can’t they just give me money when I retire so I can survive?
No wait,..
January 28th, 2008 at 11:12 am
Randall: I hope you are being extremely sarcastic! Considering this is the SAME government that has given us the IRS tax codes…I prefer “dumbed-down.” I don’t want them getting any ideas about mucking it up by trying to complicate things.
February 3rd, 2008 at 7:10 am
[…] With the permission of Ana from DebtFree Revolution, I’m going to show you a similar snippet of source code she used for a recent article titled Thrift Savings Plan for Idiots and Dummies. […]
February 4th, 2008 at 7:07 am
Good TSP allocation choices, ana.
Bonds are less risky? Low risk? You do not understand risk. Bonds are highly risky because over time, inflation eats their lunch. You lose purchasing power. For long term investing, the biggest risk of all is outliving your money, and the chances of doing that are higher if you invest in bonds.
Stocks/stock funds are the only safe choice for the long haul, for any hope of beating inflation and preserving purchasing power (much less building wealth).
People think stocks are risky, but they are actually just volatile. Big difference.
February 16th, 2008 at 10:29 am
[…] couple weeks ago when I broke down the federal and military Thrift Savings Plan, kentuckyliz left a comment about my remark that bonds are “low risk.” She said: […]
February 17th, 2008 at 7:38 pm
[…] presents Thrift Savings Plan for Idiots and Dummies posted at DebtFREE-Revolution, saying, “A brief primer on the government’s Thrift […]
February 18th, 2008 at 11:38 am
Is there a way to determine what your paycheck will be after you start contributing to TSP?
March 15th, 2008 at 9:52 am
[…] funds, or the L Funds. I didn’t cover these very well back in January when I did my overview of the TSP, so I thought it might be a good idea to line these babies up and look under the hood of each one […]