The Thrift Savings Plan (TSP) serves as one of the three key components designed to ensure financial stability for retired federal employees. For many, it plays a vital role in supplementing Social Security and FERS annuity benefits. While the TSP offers several advantages for growing your retirement savings, its drawbacks become more apparent when you begin to rely on those funds in retirement.
The Benefits
The TSP comes with several perks. It boasts low administrative fees, an agency match of up to five percent of your contributions, and a variety of funds to suit different risk tolerances. If managing your investments isn’t your preference, the TSP offers lifecycle funds that automatically adjust asset allocations based on your retirement timeline.
With automatic payroll deductions set at a fixed percentage, you also benefit from Dollar Cost Averaging. Instead of trying to predict market fluctuations, you consistently invest a set amount, purchasing fewer shares when prices are high and more when prices drop. Over time, this strategy can help grow your wealth and create a strong financial foundation for retirement. However, challenges arise when it’s time to start withdrawing funds.
The Drawbacks
Once you start tapping into your TSP for supplemental income or Required Minimum Distributions (RMDs), you’re essentially selling shares. This may not pose a problem in a strong market, but it can be costly during downturns. Ideally, you would only sell assets with minimal volatility, such as the G Fund, to protect your savings. Unfortunately, the TSP doesn’t allow selective withdrawals—your funds are liquidated proportionally based on your overall allocation. For example, if your portfolio consists of 60% G Fund and 40% C Fund, your withdrawals will be taken in that same proportion. In a declining market, this means selling more shares to meet your income needs, ultimately reducing your investment holdings and amplifying potential losses.
Planning to withdraw $2,000 per month in retirement? Keep in mind that 20% of your withdrawals must be withheld for federal taxes, even if your actual tax rate is lower. To net your desired amount, you’ll have to sell additional assets, further decreasing your available shares and limiting future growth.
Exploring Alternatives
One option to enhance flexibility in managing your withdrawals is rolling over your TSP into an IRA, which allows for more strategic distribution planning. Additionally, the TSP offers a Life Annuity, a growingly popular option. However, if an annuity interests you, it’s worth exploring other products that may better align with your financial goals. Consulting with a Federal Retirement Consultant® can help you navigate tax implications and investment strategies to maximize the retention of your hard-earned savings.
