Avoiding the Biggest TSP Mistakes AS A FEDERAL EMPLOYEE The TSP is a great retirement savings tool, but making these mistakes could cost you when it comes to retirement. TSP Withdrawal
As a federal employee, you probably know that the savings-related benefits of a Thrift Savings Plan (TSP) are essentially the same benefits enjoyed by privatesector workers and their 401(k) plans, but for the public sector. However, there are some differences. If you want to get the maximum benefit from your TSP and make vital decisions, you need to pay careful attention to it. Because we believe the more you know and understand about your TSP, the more you’ll enjoy this fantastic retirement savings vehicle. Unfortunately, we’ve seen many people over the years make the same mistakes, and even a simple error has the potential to cost thousands of dollars. Here, we’ve put together some pointers so it doesn’t happen to you. To make things easier to follow, we’ve broken our advice into three sections: pre-retirement, postretirement, and general. 2 Avoiding the Biggest TSP Mistakes as a Federal Employee TSP202012AVOIDING www.tsp-withdrawal.com [email protected]
1. NOT SPEAKING TO A FINANCIAL PROFESSIONAL When our car breaks down, we see a mechanic. When we have a problem with our teeth, we see a dentist. For some reason, we don’t seek a financial professional’s assistance with matters such as the TSP. Even though we make decisions with our TSP that have the potential to impact our future significantly, we still try to do it without help. This probably isn’t a surprise at this point, but this is a mistake. With an advisor by your side, it’s possible to identify the best investments for you and your family. For those close to retirement, professionals have the experience to assess the many TSP rollover options and have your wealth as the main motivating factor for decisions. Rather than a general advisor, we recommend seeking a professional with experience in federal retirement as this field has many intricacies to navigate. When speaking with a potential professional, ensure they understand TSP rollover and TSP withdrawal decisions. The right advisor will put your needs first and have knowledge of more than just annuities and investments. Pre-Retirement Mistakes 3 Avoiding the Biggest TSP Mistakes as a Federal Employee TSP202012AVOIDING www.tsp-withdrawal.com [email protected]
2. COMPLETELY IGNORING THE TSP While some federal employees are unaware of matched contributions, others simply choose to ignore the TSP completely. Since this is in a list of mistakes to avoid, you’ve probably guessed that you should set up your TSP immediately. If you think that it’s a difficult process, you’re mistaken. It shouldn’t take long at all. Remember, don’t reduce the contribution percentage to 0% because this will prevent your retirement account from growing. Sadly, many federal employees have made the mistake of ignoring the TSP until it’s too late to do anything about it. Regardless of age, we recommend researching your options today. If you’ve turned off TSP contributions, all you need to do is log into your TSP account and elect into contributions once again. 4 Avoiding the Biggest TSP Mistakes as a Federal Employee TSP202012AVOIDING www.tsp-withdrawal.com [email protected]
3. BORROWING FROM A TSP UNNECESSARILY In some cases, it’s wise to take in-service withdrawals and roll TSP savings into an IRA. However, there’s a difference between these times and taking money for unnecessary purchases. We understand the temptation of having money sitting there when it could go towards a large purchase or clearing debts. Yet, you need to remember that this is your retirement money. There are two problems with using your TSP as a piggy bank: LONG-TERM DAMAGE When you withdraw from the TSP regularly, you might as well have this money in a bank account. Money in the TSP is used to generate growth for retirement, not to fund purchases. TAXES AND PENALTIES Not only is the money not growing as quickly, failing to pay back TSP loans in time will lead to taxes and penalties. Why? Because it’s seen as a distribution. One withdrawal and failure to repay could lead to higher taxes, in addition to a 10% penalty. Starting to think against borrowing now? 5 Avoiding the Biggest TSP Mistakes as a Federal Employee TSP202012AVOIDING www.tsp-withdrawal.com [email protected]
4. CHOOSING A FULL OR SURVIVOR ANNUITY At the point of retirement, the first mistake is electing a TSP annuity. In many cases, it’s an unwillingness to research that leads to this decision, because it’s easier to simply accept a TSP annuity offer. Now, we might be dropping a bombshell on your retirement plans: did you know that the TSP annuity is a product from MetLife? With this in mind, what you should do is compare this product to others from alternative providers. We aren’t saying that MetLife offers the worst products and you should avoid them, but income from this option is typically unattractive. After making this decision, you could essentially sacrifice potential future liquidity and assign ownership of savings to MetLife. In exchange for lifetime payments, you’re essentially giving your retirement savings to MetLife. In our experience, there are competitive products that offer a better return, and this is why you shouldn’t just blindly accept the TSP annuity. If possible, explore your other options and talk to a TSP withdrawal consultant. Post-Retirement Mistakes 6 Avoiding the Biggest TSP Mistakes as a Federal Employee TSP202012AVOIDING www.tsp-withdrawal.com [email protected]
5. MAKING POOR DECISIONS Although it might not seem it at the time, your future financial health is dependent on the decisions you make when leaving federal employment (even if you’re taking a new job elsewhere). Generally speaking, not even discontinuing employment with your agency should lead you to cash out the TSP. By doing this, you will be subject to all sorts of penalties and taxes. Whenever you take from the TSP, you need to have a plan to pay it back. Instead, one of the better strategies is to choose an IRA rollover. This option allows for more investment options, and when all is said and done, it should allow for more income in retirement. 7 Avoiding the Biggest TSP Mistakes as a Federal Employee TSP202012AVOIDING www.tsp-withdrawal.com [email protected]
6. NOT UTILIZING THE AGENCY MATCH Did you know that employees in FERS (Federal Employee Retirement System) can have a portion of their contributions matched by the agency? That’s right, you could have 5% of your contributions matched by the agency. If you aren’t taking advantage of this, you’re missing out on potentially thousands of dollars that would make retired life more comfortable. How much will you receive? Well, this all depends on the money you deposit into your TSP. Either way, there’s no reason not to choose at least a 5% contribution amount from your agency, because it’s free money. General 8 Avoiding the Biggest TSP Mistakes as a Federal Employee TSP202012AVOIDING www.tsp-withdrawal.com [email protected]
7. MAKING POOR TSP FUND SELECTIONS For those without a financial professional, the responsibility for TSP fund investments is all yours. Do you have the confidence and the knowledge to make decisions like this for your financial future? Often, we see people leaving their TSP investments in one allocation, and doing this for too long could be a big mistake. Of course, this is why the L-Fund was introduced, right? Well, it’s not as simple as it may seem. Yes, the fund automatically adjusts. No, this doesn’t mean it will meet your needs and make the correct adjustments. Elsewhere, staying in the G-Fund for many years can also cause problems later down the line. We aren’t saying that you need to take unnecessary risks just to meet your retirement savings goals, but there are options away from the L-Fund and G-Fund. In many cases, G-Fund interest rates can drop below the average annual rate of inflation. The problem with this is that the “guarantee” you have on the money loses value because it will have less purchasing power in the future. 9 Avoiding the Biggest TSP Mistakes as a Federal Employee TSP202012AVOIDING www.tsp-withdrawal.com [email protected]
8. IGNORING NON-TSP OPTIONS The benefits of choosing the TSP are the matching contributions from your agency and low investment expenses. However, this doesn’t mean that you should leave all savings in the TSP – this is even more important for those over 59½ and closing in on retirement. As soon as you hit this age, you can take in-service TSP withdrawals and put this money into a non-TSP option. Depending on your position, this can open up more doors and increase both safety and retirement income. Please don’t make any drastic decisions before speaking with a TSP withdrawal expert. They will tailor their advice to YOUR position. Disclosure: Not affiliated with the Thrift Savings Plan or any government agency. Content is not personalized financial advice and should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed. Tax and legal information provided is general in nature and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Scarily, TSP mistakes are easy to make. Thankfully, with these tips, they’re also now easy to avoid! Questions? Contact us! www.tsp-withdrawal.com or [email protected] 10 Avoiding the Biggest TSP Mistakes as a Federal Employee TSP202012AVOIDING www.tsp-withdrawal.com [email protected]
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