Top 10 things to know about the Thrift Savings Plan
10. This is your spouses’ plan, so why should it matter to you? Odds are you will outlive your spouse and will need a secure retirement to provide for your life expectancy. As of 2010 there are 40,000 people in the US over the age of 100 and 85% of them are women.
9. Why contribute to your TSP? Even if your spouse earns a military retirement it may not be enough. As it stands military retirement is 50% of base pay after 20 years, increasing 2.5% per year thereafter. If your spouse retires in 2012 at 20 years as an O5 this is approximately $45,000 per year pre-tax, depending on inflation, pay raise assumptions and how you calculate the retirement. As an example, if you were a 20 year active duty O5 with dependents living Colorado Springs you just got a 63% pay cut from your previous compensation of $121,608.
8. The good news! You probably need to save less than families that don’t have a military pension. If you want to live on approximately $100,000 pre-tax at age 65, how much should you have saved today to be on track for that? Assume you are 35, you are on track for a 20 year military pension, you should have about $90,000 saved for retirement based on the above hypothetical assumptions. If you are 45 you should have about $278,000 saved. This assumes a 15% savings rate for retirement and a projected annual growth of 5% to achieve your goal at age 65, including Social Security. If you don’t think Social Security will be around for you in the same form it is today, start saving about 5 - 10% more.
7. The most your spouse can contribute to the TSP is $17,000, $22,500 if over age 50, in 2012. If you contribute the maximum, this comes out to $1,416 pre-tax per month, $1,875 if over 50. A little trick that I like to use is to max it out over 11 months and have approximately an extra $1,000 of take-home pay in December, a consistently expensive month. If your spouse is deployed to a tax-free combat zone they have the potential to save $50,000 to the TSP in 2012!
6. If your spouse has not filled out Form TSP-3 at the time of their death, the money in the TSP will go to you. If you are not alive it will go to your kids, if any kids have passed to their offspring. If you don’t have kids then to your spouses’ parents equally. If this is not how you want it or you have a non-traditional family, make sure to fill out Form TSP-3.
5. Your retirement assets are excluded in the calculation of your Expected Financial Contribution (EFC) when applying for financial aid for college. So, any money in your TSP will not be counted as an asset you are expected to contribute.
4. The TSP has 10 investment options. The Government (G), Fixed Income (F), Small Cap (S), Common Stock (C), International (I) and the Lifecycle Funds (L) - Income, 2020, 2030, 2040 and 2050. The L funds are just different combinations and weightings of the G, F, S, C, and I funds. While they are called funds, they are not actually mutual funds. You cannot buy the C fund in your own Roth IRA and they are only available in this form through the TSP. These are trust funds that are managed by BlackRock Institutional Trust Company.
3. The TSP is an investment account, not a savings account. You need to understand what your risk tolerance and time horizon is for retirement to determine how you should be invested.
2. The Thrift Savings Plan is introducing a Roth TSP in spring 2012. The TSP vs. the Roth TSP will be addressed next month in detail but this may be a very good option to consider for your family’s retirement savings.
1. Be the financially secure 65 year old couple that you admire today. Start saving now and be a happy family for years to come. Remember, the best financial gift you can give to your kids is that they won’t have to take care of mom and dad.