How to Help Maximize Your TSP for a More Secure Federal Retirement

When planning for retirement, federal employees will rely on three key sources of income: their pension, Social Security, and their Thrift Savings Plan (TSP). While the first two are relatively straightforward to calculate, the TSP plays a crucial role in bridging the gap between those income sources and the monthly cost of their desired lifestyle in retirement. How much you need in your TSP account varies based on your individual situation, and there is no one-size-fits-all answer. To help with retirement planning, here are some key factors federal employees should consider as they prepare:

Minimizing Your Debt, But Not at the Expense of Your TSP

Having less debt when you retire means your fixed income will stretch further. However, it’s usually not a good idea to tap into your TSP to pay off debt in one lump sum. For example, if you withdraw $70,000 to pay off a mortgage, you would actually need to withdraw around $84,000 because TSP withholds 20% in taxes. Additionally, taking such a large sum out could push you into a higher tax bracket. It’s often better to let your TSP continue growing and focus on managing your debt in other ways.

Focus on Quality of Life, Not Quantity of Payments

Retiring a bit earlier with slightly lower monthly payments can lead to a higher quality of life. Many retirees find that leaving the stress of work behind while they’re still young and healthy provides more fulfilling years in retirement. If you retire early, consider taking Social Security benefits sooner, even though the monthly payments will be smaller. By doing so, you’ll reduce the amount you need to take from your TSP, allowing it to continue growing with compound interest. Plus, if something happens to you, the remaining balance of your TSP can be passed on to your beneficiaries, while Social Security benefits do not extend beyond your spouse or dependent children.

Retiring at 62 vs. 61

If you’re planning to retire soon, waiting until age 62 might be worth it. At 62, your pension will be calculated at a higher rate (1.1% of your high-three average salary, compared to 1% if you retire earlier). For example, if you make $100,000 and retire at age 61 with 20 years of service, your pension would be $20,000. If you wait until 62, your pension could increase to $23,562 (assuming a 2% raise). This means you’ll have a higher pension and potentially take less from your TSP.

Becoming a TSP Millionaire

While most federal employees have about $200,000 in their TSP accounts by age 60, many aim to reach $1 million or more. It’s not easy, but it may be possible by trying to follow a couple of simple guidelines:

1. Take Advantage of the Government Match: The government will match up to 5% of your pay that you contribute to your TSP. This is essentially free money and can be a crucial part of your retirement planning.
2. Invest Wisely During the Growth Phase: When you’re younger and further from retirement, it may be worth it to take on some risk by investing in stock funds, especially the C Fund, which has historically outperformed other options. As you approach retirement, reduce your exposure to risk to protect your savings from large market losses.

Seek Professional Guidance

Planning for retirement, especially with TSP, can be complex. If you’re aiming for optimal growth and a comfortable retirement, consulting a retirement professional can help you make the best decisions based on your unique situation.

We’re here to help! Don’t hesitate to reach out with any questions, big or small. We want you to feel confident as you head into retirement.