Just how financially savvy are you? Raise your hand if you feel financially secure and ready for retirement.
Retirement is that time of life when we decide to leave our professions behind and "embrace a less cumbersome lifestyle." Many have spent a long time working and saving to reap the benefits of their hard work.
A question I frequently ask those I counsel who are considering retirement is, "What will be your sources of income once you are no longer employed?" For many, retirement income might include Social Security, a FERS government annuity (pension) or military retired pay -- or both, VA disability and the Thrift Savings Plan, among others.
In a recent Army Benefits Center retirement planning seminar, it was stated that the TSP will make up the largest portion of total retirement income, Social Security being second, with the FERS Annuity or Army pension making up the "smallest component of total retirement."
This year marks the 30th anniversary of the TSP, a plan that can help prepare you for retirement. This retirement plan functions much like a 401(k) and is available to both federal employees and the military.
"As of Aug. 31, 2017, there were more than 5.3 million participants and more than $500 billion [in] assets under TSP management" having grown to be one of the largest retirement plans in the world.
The purpose of TSP is to give one the ability to participate in a long-term retirement savings and investment plan. It allows many advantages to increase retirement income: automatic pay deductions; choice of tax options; diversified choice of investment options; and low administrative costs. Speaking of low costs, do you know what you are paying for your TSP fund management?
TSP's net administrative expense is $0.33 per $1,000 compared to a 401(k) plan that averages $4.10 per $1,000. Certainly this is something you want to consider because the cost you might be paying in other investments will mount up over time.
You also want to review other charges that brokers charge, such as brokerage fees, trade commissions, mutual fund transaction fees, expense ratios, sales loads, management or advisory fees, 401(k) fees, averaging 1 percent and higher, information that may not be conveyed to you initially.
So, what does this mean to me?
If your portfolio was 6 percent for a year and you paid 2 percent in fees and expenses, your return is actually 4 percent. Over 30 years this equates to more than $178,000 you would give up.
The advantage I like the best is matching. Why? Because matching equals free money. Who doesn't like free money? There is a matching option for both FERS and those service members who have opted into the Blended Retirement System.
For example: If you "opt into BRS, you will receive an automatic 1 percent that is a Service Automatic Contribution and a Service Matching Contribution up to an additional 4 percent of your pay, depending how you contribute. If you contribute 5 percent, you will be matched 4 percent. If you work less than the 20 years in the military and opt in to the BRS, you will be able to take with you service matching contributions to offset your pension. Take advantage of this and maximize your return.
Like a 401(k) plan, TSP offers two tax options that can be used when making an election -- Traditional or Roth Individual Retirement Accounts (IRAs).
The Traditional TSP is made up of with pre-tax contributions, meaning taxes are deferred until the money is withdrawn. Those who select the Roth option would make "after-tax contributions," meaning you are paying your taxes as you contribute. You would gain tax-free investment growth and earnings would be tax-free at retirement. The tax benefit allows the retirement savings contribution credit to reduce your taxable income.
You can reduce your risk by diversifying your funds. In other words, "Don't put all your eggs in one basket"-- the L Funds are automatically diversified. The amount of risk you sustain largely depends upon your investment time horizon. The more time you have before you need to withdraw your money, the more risk you can take.
TSP uses the following examples to illustrate the impact of compound interest:
Scenario 1 -- a saver that invests $200 every month for 40 years assuming a 6 percent annual rate of return. The accumulation at age 65 would be $400,289.
Scenario 2 -- a saver does not begin saving until age 30. Saving $200 a month at 6 percent annual rate of return would save $286,367 by age 65. This five-year delay would cost the second saver $113,922.
Consider Scenario 3 if you have not begun your savings plan. Saving $280 a month for 35 years at 6 percent annual rate of return, you would accumulate $400,289 -- the same as scenario 1.
What's new with TSP?
Executive TSP Director Ravi Deo said, "TSP is constantly changing and growing to serve you better and enhance your experience with TSP."
Did you know new TSP withdrawal options are coming soon? On Nov. 17, 2017, the TSP Modernization Act of 2017 was created to provide more flexible withdrawal options. The law is expected to take effect in the upcoming year.
Remember, the sooner you begin to save, the more money you will accumulate for your retirement needs. Time is your greatest friend; it is your best asset. Time allows you to weather the bad days. Whereas waiting makes it more difficult to achieve your goals. Don't miss out on the power of compound interest from the early years and make saving a habit.
For more knowledge about TSP, developing a retirement plan or questions pertaining to other financial needs, call (502) 624 5989 to schedule an appointment with a Financial Readiness program counselor. We provide financial instruction for the Fort Knox military community.
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You have the benefit of selecting from five index funds or lifecycle funds:
G Fund --- The Government Securities Investment Fund. This fund is a short-term US Treasury security and offers the lowest risk, with the least opportunity of losing your principal investment.
F Fund --- The Fixed Income Fund is invested in government, corporate and mortgage -- back bonds. This fund aims to match the performance of the Barclays US Aggregate Bond Index and offers low to moderate risk.
C Fund --- is the Common Stock Index fund that matches the S&P 500. This fund is comprised of medium and large US Companies. The risk is moderate to aggressive and offers the potential to earn high investment returns over time.
S Fund -- is a Small Capitalization Stock Index Fund that is riskier because it invests in small to medium size companies and tracks the Dow Jones Stock Market Index. One "has the potential to earn even higher investment returns over the long term than the C Fund."
I Fund --- the International Stock Fund invests in the stock index that tracks the Morgan Stanley Capital stock index from 21 internationally developed countries. The risk is moderate to high.
Lifecycle Funds (L Fund) -- is similar to target-date funds based on your retirement time horizon. "These funds are professionally rebalanced according to a mix of stocks, bonds and government securities." This fund will gradually shift from aggressive to conservative the closer you reach retirement. The Lifecycle is invested in a "mix of funds. The objective is to provide the highest possible rate of return for the amount of risk selected. The expected return will be approximately to that of the individual returns."
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