TSP Quick-Start Guide

This article will try to give you a basic understanding of the TSP, and how I would use it if I had access to one. Disclaimer: I am not a financial advisor. Always do your own research.

The Thrift Savings Plan (TSP) is a government retirement program available to people who work for the government. Money you save into your TSP is not taxed until you take it out, and earnings of your TSP aren’t taxed either. Assuming you are in the 15% tax bracket, that means when you save \$1,000 into your TSP, your actual pay only goes down by \$850 and not the full \$1,000. When your TSP account earns \$1,000 in one year, that entire \$1,000 is added to your account. This is a huge advantage over saving money in a taxable account and the main reason to use this program. Another benefit of the TSP account is that it has some of the lowest fees available anywhere. Fees are calculated as a percentage of money you have invested, and is the one sure thing about investing. Your returns are unpredictable, but the fees are guaranteed. A 0.25% fee is considered good for a typical mutual fund, and fees as high as 1% are common. By comparison the TSP fees range from 0.04% to 0.05%.

Once your money is in a TSP account, it can be put into 5 different core funds. Each fund has a different expected volatility and return. Volatility describes how much a fund’s value will go up and down. Return tells you how fast your account will grow in the long term. Funds with a higher return also have higher volatility, so you can’t just put all your money in the fund with the highest return. A volatile fund might gain 10% tomorrow, but lose 20% the day after. If you are going to retire soon, a volatile fund is not your best choice, and you should pick a less volatile fund (which also has a lower return). If your retirement is a long way away, you can pick a more volatile fund which, in the long term, will have a higher return.

The core funds available in your TSP are (in order from lowest to highest return and volatility):

G Fund

Money in this fund is lent to the U.S. Government. They’re good for it. This fund should never go down in value.

F Fund

Money in this fund is lent to the U.S. Government and reputable companies. Some of these loans will fall through, but that doesn’t happen very often.

C Fund

Money in this fund is given to large and medium-sized U.S. companies by buying their stock. In exchange this companies will try really hard to increase in value and give you dividends each year. They’re not always succesful at this, and in a recession the value of this fund might go down several years in a row. The long term return for this kind of investment is quite good.

S Fund

This fund is the same as the C Fund, except your money is given to small and medium-sized U.S. companies instead of large and medium-sized U.S. companies. The long term return tends to be a bit better than the C Fund, but again the volatility is higher because smaller companies are more likely to go out of business.

I Fund

The same as the C Fund again, except the lucky companies are ones in developed countries that aren’t the U.S. There is the risk that these companies go out of business, and currency exchange rates add an extra layer of potential return and volatility. The return and volatility of this fund are similar to that of the S Fund.

You can divide your money up between those funds in any way you want. The further you are away from retirement the more volatility you should choose, because the more volatile funds also have the highest long-term returns. So when you’re young you should be mostly in the I, S, and C funds. As you get older, you should change your fund selection so that more of your money should be in the G and F funds. That requires you to do some work every year, and it also requires you to figure out what a reasonable allocation is each time. To save you from this hassle, your TSP account has L funds.

There is an L fund for every decade you might want to retire in. If you’re retiring in 2035 or later, the L 2040 is the fund for you. Currently it has money in (from most to least) the C fund, I fund, S fund, F fund, and G fund. As time goes on it will slowly change its allocation until, when it’s time for you to retire, it will have money in (from most to least) the G fund, F fund, C fund, I fund, and S fund. This is exactly what you want, and once you’ve set all your money to be contributed to the L fund you won’t every have to worry about it again. I recommend you move all the money you already have into the appropriate L fund, and change your contributions so that all the money you contribute also goes into that same L fund.

How much you should save in your TSP account mainly depends on how much you can afford. More is better. There is a limit (\$15,000 for 2006), and reaching that limit every year would be ideal. You should start out at a contribution rate that seems reasonable right now. Then every time you get a raise, increase your contribution rate enough that you still see some of that raise, but that at least a third of it goes to your retirement savings. So if you get a 3% raise, increase your contribution rate by 1 or 2 percentage points.

About the author

Living the good life in Seattle, occasionally sharing something interesting with the Internet.