WASHINGTON –
You have probably heard that it is important to save for retirement – that period where you are no longer working or scaled back from full-time work, and you are living off saved resources to fund your lifestyle. How you plan for that period now will determine the quality of your lifestyle later.
Retirement can be expensive, especially with medical advances helping us to live longer. You may be in retirement for 30 years or more! A pension may or may not be an option (you must serve 20 years to quality for a military pension or 5 years for a federal pension) or it may not provide enough income for retirement. Social Security may also not provide enough to meet your needs. Lastly, inflation constantly threatens to erode your buying power if you have not saved enough. With all these factors, prioritizing and saving for retirement early is key; however, it is never too late to start a retirement plan. To learn more about the importance of retirement planning, visit: Know the 5 W's for Military Retirement Planning
Investing is a powerful way to save for retirement because it allows your money to grow through compound interest. Albert Einstein is noted for saying “compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn't … pays it.” Simply put, compound interest is interest you earn not only on your initial contribution, but also on the accumulated interest from previous times. This principle applied over a long period of time allows your money to grow exponentially, possibly into millions of dollars. For example, if you contribute $200 a month beginning at age 20 until age 65 (contributing a total of $108,000), and earn an 8% rate of return, you will have total earnings of $1,054,908. That’s the power of compound interest! To learn more about investing and compound interest, visit: TSP Investing Strategies, and FINRED Saving and Investing
The Thrift Savings Plan (TSP) is one way for you to begin investing for retirement. The TSP is a defined-contribution plan, which simply means that the contributions that go into the account are what define the plan. If contributions are made, you have a plan; if no contributions are made, there is no plan! The TSP is similar to a civilian 401k plan, because it follows the same IRS rules that governs 401k plans. Here are a few interesting facts about TSP:
- Only available to military service members and federal employees
- Largest 401k provider in the world
- Legendary for having low expense ratios
To contribute to a TSP, you must answer three questions:
- How much will you contribute?
- How will you pay your taxes?
- What investments will you purchase with your contributions?
How much will you contribute?
For 2024, the most you can contribute to a TSP is $23,000 (those over the age of 50 can contribute an additional $7,500 called catch-up contributions). If you are federal employee or in the military Blended Retirement System (BRS), the government will contribute to your TSP account. Ideally, for you to get the full government contribution of 5%, you want to contribute at least 5% of your own money. Therefore, you will have 10% contributed to your TSP (5% participate + 5% government). Don’t stop there! You want to increase your TSP contributions over time depending on your retirement income needs. To learn more about TSP contributions, visit: Making TSP Contributions
How will you pay your taxes?
All TSP participants must elect how to pay taxes on their TSP contributions and earnings. If you make your contributions to a “Traditional TSP,” that means you are deferring your tax payments (not paying them now) until you are eligible to begin making withdrawals, which is at age 59 ½. Alternatively, a “Roth TSP” contribution allows you to pay taxes on your contributions now. However, the earnings that are growing in the account will not be taxed if you had the account for more than 5 years AND you make withdrawals after the age of 59 ½. To learn more about Traditional and Roth TSP contributions, visit: TSP Traditional and Roth Contributions
What investments will you purchase with your contributions?
TSP took the entire stock market and divided it into five individual mutual funds (G, F, C, S, I). TSP offers participants three ways to invest their money:
- Individual TSP funds - build your own portfolio using a mix of the five individual TSP funds
- Lifecycle funds (L funds) - select from ten professionally designed portfolios that are diversified in a mix of the five individual TSP funds that will automatically adjust over time to balance out risk and reward until your retirement target date (new L 2070 fund launches July 26, 2024)
- Mutual fund window – if you meet eligibility requirements and pay necessary fees, you may elect to invest a portion of your TSP savings in other mutual funds outside of the TSP individual funds
To learn more about TSP investment options, visit: TSP Investment Options
Retirement planning plays a significant role in helping you maintain your lifestyle in your golden years. The TSP can help you meet your retirement goals.
This is a great time to schedule a confidential financial counseling appointment to assess your retirement plan and to learn more about the TSP.
V/r
Valerie Purvis, AFC®
Email: PFC1.DC@MagellanFederal.com