What is a Thrift Savings Plan?
The Thrift Savings Plan or “TSP” is a retirement plan for military members and Federal employees that is similar to a 401(K) plan.
The TSP was established by Federal law, and it is managed by the Thrift Savings Investment Board. The majority of Federal employee and uniformed service members are eligible to participate in the TSP.
Do I Have a TSP?
Enrollment in the Thrift Savings Plan is automatic for military members who have joined after 1 January 2018 as part of the Blended Retirement System or “BRS.” For those in the military who joined prior to 1 January 2018, participation in the TSP is optional, unless they elected to join the BRS.
In summary, participation in the TSP is available to most military members (to include the National Guard and Reserve) and its mandatory for those joining after 1 January 2018, as part of the BRS.
How does the TSP work?
The Thrift Savings Plan is what is known as a Defined Contribution Plan. This means, it is retirement investment account that grows based on: a) how much you contribute; b) how much the Government contributes; and c) how well your investments perform over time.
The TSP is a retirement investment account that grows based on: a) how much you contribute; b) how much the Government contributes; and c) how well your investments perform over time.
Contributions are made choosing a percentage of your monthly base pay to go to your TSP.
In other words, you can’t send a $100 check to contribute, but you can choose that 10% of your monthly base pay be contributed to your TSP.
Thrift Savings Plan (TSP) Funds
The TSP offers five individual funds: C, S, I, F, and G, and it offers Lifecycle funds with targeted retirement years that holds the underlying 5 individual funds in various proportions. Of the individual funds, C, S, and I hold stocks. The F fund holds private bonds and the G fund holds U.S. Treasuries.
These funds are where your money is held, regardless of whether you are in the Lifecycle fund. They each have a different way of earning you returns, and of course, they are all always subject to losses. Some funds aim to save more aggressively from stocks, while others are based on earning interest.
How Much Can I Contribute to my TSP?
Generally, your individual contributions to a TSP are capped at $19,500 per year, which does not include the total of what the Government contributes. For those age 50 and over, the annual TSP contribution is capped at $19,500 plus and additional $6,500 in catch-up contributions.
But, the $19,500 cap does not include any growth in your investments or what the Government contributes.
So if you contributed $10,000 throughout a year, which grew to $15,000 because your investments did well, you still could contribute $9,500 before the end of the year.
Blended Retirement System (BRS) Caps
If you are under the BRS, the Government automatically contributes 1% of your base pay, and will match your contributions up to an additional 4%. Meaning, the first 1% is on the house, and for each 1% you contribute the Government will also kick-in a contribution. The matching tops out when you’ve contributed 5%, at which point the Government will have contributed 5%, and you now have 10% in your TSP.
The default of BRS participants is an automatic enrollment in 3% contributions. Meaning, if you are a BRS participant and have never modified anything in your TSP, your TSP is getting 1% up front from the Government, you are contributing 3% and the Government is matching an additional 3% (a total of 7%).
It is recommended that you should contribute an additional 2% so the Government matches up to the limit. Virtually any financial planner would say that, at a minimium, a person should make sure to take full advantage of any employer matching scenario for his or her retirement account. This is free money, after all.
The BRS in Action
Now, let’s say you did take full advantage of this and contributed 5% and the Government contributed 5%, for a total of 10%. And, let’s say your annual base pay is $40,000. That means there has been a $4,000 contribution to your TSP thus far, ($2,000 from you and $2,000 from the Government) and you now have the option to contribute an additional $17,500 for that year ($19,500 – $2,000 = $17,500).
Can I Contribute too Much to the Thrift Savings Plan?
You might ask, “How do I make sure I do not contribute over the max to my TSP?”
Fortunately, DFAS won’t let this occur.
Whatever percentage you set up for your monthly base pay to contribute to your TSP will only affect the size of your pay check and the timing that your money hits your TSP investments, but once you reach the contribution limit, DFAS will stop further contributions.
A word of caution for BRS participants: service matching is based each pay period (up to 5% per month). To take full advantage of the matching, you need to contribute to your TSP each pay period, which the Government will match. If you don’t contribute in a given pay period, you won’t receive the service matching contribution for that period, with exception of the automatic 1%. Keep that in mind when setting up contributions percentages from your monthly pay. If you contribute too high of a percentage of your pay, too early in the year, you could hit your TSP contribution cap after a few months and you’ll miss out on the service matching for the rest of the months of the year.
How Many TSP Participants are Millionaires?
According to the Washington Post, there were over 55,000 Thrift Savings Plan participants who were millionaires based on the balance of their TSPs as of September 2020.
Granted, this number includes Federal employees who we may assume have been invested in the TSP for decades.
However, if you are planning to stay in the military or Federal government for the long haul, becoming a TSP millionaire is a very realistic goal.
If you are planning to stay in the military or Federal government for the long haul, becoming a TSP millionaire is a very realistic goal.
Contributing early in your career is the best step toward getting there.
Over the last 20 years, the average stock market return is around 5.59% annually. (This factors-in the dot-com bust and the 2008 recession). If you contributed $19,500 each year for twenty years, you would have contributed a total of $390,000. However, each year if you, on average, received 5.59% return on your TSP investment, you would realize $334,867 in gains, for a combined a total of $744,367!
Imagine doing this starting as an E-1 at age 18. At age 38, you’d have a military pension and three quarters of a million dollars sitting in a retirement account. Not too shabby.
Now is it realistic for an E-1 to sock $19500 away in his TSP? Probably not. Also, many readers might be thinking, “Darn, I missed the boat!”
Don’t give up so fast.
Let me introduce you to Father Time. Remember that even after your retirement or discharge from the military, your TSP growth isn’t over! In theory, you should realize the biggest gains much later or after your career.
Let me introduce you to Father Time. Remember that even after your retirement or discharge from the military, your TSP growth isn’t over! In theory, you should realize the biggest gains much later or after your career.
Think about it: a 5.59% investment growth in the $19,500 you start with is just $1,090. But 5.59% of $500,000 that you may have later in your career is $27,950! So it makes sense to let the money stay invested and realize gains long after your service has ended.
Let’s say you neglected your TSP contributions for the first 10 years of your career and until you were age 35, but you decided to buckle down and you start maxing your contributions for the remaining 10 years. At an average return of 5.56%, you would retire with $285,724 in your TSP at age 45. As long as you have at least $200 in your TSP at the time of retirement or separation, you can leave your money in the TSP, and you do not have to take a distribution from your account until age 72.
So after retirement, let’s assume you left the $285,724 in your TSP invested in the market. You can no longer contribute, since you are no longer in the military or Federal service, but TSP account is still growing due to investment. By age 72, based on a 5.59% average return, your TSP would be worth $1,240,972! That’s Father Time at work.
In summary, contributions to your Thrift Savings Plan is a potential path to becoming a millionaire. What is always unknown, of course, is how your investments will perform.
Final Thoughts on the Thrift Savings Plan
The Thrift Savings Plan is a highly beneficial investment plan for military members and Federal employees to save for retirement.
It is not a get rich quick scheme or a tool for a day-trader, but it offers a solid and reliable path to slowly save for retirement, with considerable tax savings along the way. Any military member in the BRS system is automatically in the TSP and its a no-brainer that, at minimum, you want to take full advantage of the employer match.
Contributing early and consistently will go a long way in helping you to realize a more comfortable retirement that can give you a nice compliment to a military pension, or fully fund a retired life.
Now that you know all the basics on a TSP, it is time to get saving!