TSP mistakes could cost money

  • Published
  • By Staff Sgt. Ben Mota
  • 434th ARW Public Affairs
GRISSOM AIR RESERVE BASE, Ind. --  The phrase "plan for the worst and hope for the best" is often used when referring to retirement savings, but for many hopes are placed in the hands of others with little planning, often resulting in retirement losses.

Each year federal employees and military members contribute to Thrift Savings Plan, but many are not aware of plans investment options, or the fact that upon enrollment employees are automatically placed in low interest earning government funds.

"Knowing where your money goes is a key aspect to TSP savings because each individual has different needs and capabilities when it comes to retirement savings," said Katina Dimitro, a Department of Defense contracted personal financial counselor.

TSP is a tax-deferred retirement and savings plan for Federal employees and all military members, similar to 401(k) accounts in the private sector, and offers six different funds.

"The government securities investment fund is the default fund, because it is set up by Congress that way," said Dimitro. "It is up to the individual to contact TSP and change their allocations to a fund that meets their financial needs."

Leaving your TSP investments in the government fund is not suggested, because interest rates related to the fund often fall below the average annual inflation rate, added Dimitro.

According to the TSP web site, the average annual inflation rate from 1926 to 2010 was 3 percent, a rate that would reduce $150,000 in today's dollars to the purchasing power of $61,798 in 30 years. The G fund has not provided annual returns above inflation rates since 2008.

Depending on an individual's financial needs, Dimitro suggests that employees place their financial contributions into a life cycle fund.

"The life cycle funds are what are commonly referred to 'one size fits most,' and are based on your projected retirement dates." explained Dimitro. "For instance, if you want to choose the lifecycle 2050 funds it might be more aggressive because you have more time before you will need the funds."

The annual returns statement on the TSP website indicated that the lifecycle 2050 funds earned 26.20 percent interest rate in 2013 and 15.85 percent interest rate in 2012, but those funds also come with greater risks.

"Percentage rates are higher for the lifecycle 2050 funds because there is more risk involved," said Dimitro. "But, investors using the fund are able to take more risk because their retirement dates are further away, allowing them to recover from any losses that might occur."
In addition to the funding allocations, members have to determine if they are going to use a traditional TSP savings or Roth TSP savings.

The TSP website states that Roth contributions are taken out of pay after income is taxed. When funds are withdrawn from the Roth balance, the contributor will receive their Roth contributions tax free, since contributions would have already been taxed.

"The Roth TSP was created in 2012," said Dimitro. "Many people don't even know that it is an option, due to its recent availability."

TSP contributors must keep in mind that each individual has different needs, and each financial situation is unique before investing in a particular type of TSP fund.

"Everyone has different financial situations, and their investment strategy will be different," explained Dimitro. "That is why it is critical to meet with a personal financial counselor if you have questions to determine what options are best for you."

Additional information about TSP is available on the TSP Web site at http://www.tsp.gov.