Thrift Savings Plans Can Be A Safe Retirement Option – Or A Springboard To A Better Investment Opportunity
Financial restraints top all the worries of government officers and military personnel these days. Although a wide range of savings plans are available for an easy retirement, the choice is still a difficult one to make as very few programs are risk free, and none can truly guarantee high returns that might make post-retirement life easier. While government and military workers need to ensure that their finances are handled carefully, and that they have enough funds to live comfortably in their later years, there are still many workers who are not aware of the options they have to save, nor how to maximize their savings productivity.
One of the most popular plans for military workers and civil servants in the US is the Thrift Savings Plan (TSP). This retirement plan has become an accepted choice for government workers and individuals recruited in the armed forces. However, before opting for a certain retirement plan, it is vital to understand how this particular plan works, and how profitable it can be. Here is a basic explanation of a Thrift Savings Plan.
TSP Funds In A Nutshell
The Thrift Savings Plan is a secure retirement investment program for government workers in the US who want to ensure post-retirement earnings. The program is simple and can be availed by all government workers. What makes it a popular choice for civil servants is that it guarantees a continuous retirement income and profits from their investment commitment.
A TSP account is issued to individuals by the Federal Retirement Thrift Investment Board, and can be applied for by members of the US armed forces and also, civil servants. The account allows workers to save their funds through a simple defined contribution method. This method is designed in a way that resembles the structure of a private sector 401(k), and functions in a similar manner.
The Inner Workings Of The TSP
The Thrift Savings Plan can be funded by cash, money transfers, cheques, IRA conversions, and rollovers. Created by the Internal Revenue Code of 1954, the TSP account allows users to defer a segment of their annual earning into the saving plan, and save it for their post-retirement life. But because TSP plans have a defined strategy and breakup for the contribution, the actual retirement income which TSP account holders receive can vary greatly depending on the amount of money which was added to the account during the working years of the government employee.
Many civil servant and military workers are very hesitant in applying for the TSP. This may be due to distrust and doubt in the particular saving strategy but moreover this hesitation is due to another underlying reason. Because the TSP is primarily designed for civil servants and employees of the armed forces; military workers are greatly concerned that if, for any reason, they decide to leave (or are made to leave) federal service, their savings would be lost – or no longer retrievable. The government has tried to counter this problem in order to assist new workers – see the TSP Advice page.
Who Can Benefit?
Although the Thrift Saving Plan has been designed to facilitate savings for people who serve the country, i.e. civil servants, the plan also takes into consideration the people who have a TSP account but might, for any reason, have to disassociate themselves from federal service. The TSP funds account therefore can be rolled over into any other type of qualifying retirement account suitable for civilians. This feature was added in the Thrift saving investment Plan in order to encourage young civil workers, who may be hesitant and indecisive about this type of investment strategy, to benefit from the plan.
The size of the Thrift Savings Plan account can vary greatly. The overall amount that is received depends on the contributions made by the account holder over the years of service. It also depends on the amount that the agency has contributed into your account, as well as the overall earnings from the amount that has been invested.
TSP Funds Explained – Breaking Down The Options
The TSP offers workers a range of 10 different funds from which to choose. These comprise five individual funds and five lifecycle funds. The Individual Funds are those that deal with government bonds and individual market indices. The balance in made up of the so-called Lifecycle Funds, exclusively created in order to alter the investment strategy throughout the stages of a government worker’s federal service.
While Lifecycle funds are a contemporary option, the most popular choice of funds are the Individual Funds, which include:
- Government Securities Investment Fund (G Fund)
- Fixed Income Investment Index Fund (F Fund)
- Common Stock Index Investment Fund (C Fund)
- Small Capitalization Stock Index Fund (S Fund)
- International Stock Index Investment Fund (I Fund)
How The Individual TSP Funds Differ
The G Fund is invested in the national Treasury Securities, are not available to the common public. They are backed with a guarantee by the government, and are very credible. The G Fund is oftentimes, referred to as being ‘practically risk-free’ as they provide they investor with the guarantee that they will not lose their invested amount.
The F Fund can be described as a bond index fund that performs very similarly to the private sector Barclays Capital Aggregate Bond Index, and can easily be invested in corporate bonds, as well as high grade government bonds.
The C Fund is a stock index fund in the TSP, which duplicates the pattern of returns of the S&P 500 index that comprise of mega corporations in the US. The returns replicate the SPDR S&P 500 ETF.
The S Fund is a fund that is invested in the stock of SME’s in the US. This fund has been designed in a way that complements the structure of the C Fund, and if an individual invests in both: the S Fund and the C Fund, they are likely to have shares in all the stocks over the US. The S Fund is closely related to the Vanguard Total Stock Market ETF.
The I Fund mirrors the net version of the MSCI EAFE index, and is allocated towards stocks that are international. This fund allows workers to diversify their individual portfolios and invest in international chains and organizations that are spread out globally.
Don’t Forget The Lifecycle Funds
The TSP also includes the Lifecycle Funds, which are referred to as the L Funds. These include:
- L Income Fund
- L 2020 Fund
- L 2030 Fund
- L 2040 Fund
- L 2050 Fund
Any of these Lifecycle Funds can be invested in the Individual Funds based on the allocation of the target portfolio that is adjusted quarterly. This allocation of the target portfolio may turn out to be a bit risky, because the TSP funds performance can vary. For example, as the predetermined target date comes closer, the L Fund tends to become more and more conservative. This is due to the shifting of investments into bonds of the G and F Funds. The funds can be selected based on the required target retirement date and individual circumstances of the worker. The TSP performance of various funds should also be considered.
This investment strategy functions on the basic theory that individuals who are young, and therefore have a long time before they retire, are willing to entail greater risks in the hopes of earning greater profits and increasing potential returns. It also assumes that civil servants and military workers who might be starting out in their career have a better chance of recovering from potential loss of their investment, and/of may make continuous contributions to their TSP accounts.
Should You Stay Or Should You Go?
While some of the benefits of choosing TSP funds as solution to your long term retirement goals are clear – you may want to think carefully about the potential upside of different choices available to you. For example, rolling your TSP into a self-directed IRA or other more flexible account could yield benefits in the long run. As with any investment, prudence and careful research should be your main focus before making changes to any accounts related to your retirement strategy.
