Not taking full advantage of your TSP Benefit? Hope you like the taste of these in Retirement.
IRS recently increased the amount employees may contribute to their employer’s ‘Qualified Plan’ (That is, 401k, 403b, 457b, TSP… Just about any Defined Contribution Plan that starts with the number ‘4’) to $18,000 per year in 2015 (up from $17,500 in 2014).
Hey, Feds- Does anybody care? It appears fewer than 1 in 4 of you do…
While TSP participation rate hovers around an all-time high of 88 percent, fewer than 1 in 4 Feds make the most of their TSP Benefit. Making the ‘most’ of your TSP benefit means contributing 5 percent of your salary in order to receive the maximum TSP match of up to 5 percent.
Rather astonishing, considering TSP provides better than a 200 percent guaranteed rate of return on your investment, and that newly-hired Feds are already automatically enrolled in the TSP with a 3 percent salary deferral rate.
I’m probably preaching to the choir here, since most loyal readers of GubMints keep a watchful eye on Veteran and Federal Employee benefits, so that they can make the most of what is offered to them.
But in case I have not made this point before (or if you want to pass the info on to ‘Someone You Know’ at work), here’s the math:
1) You make a dollar in salary. However, you are in the 25 percent Federal and 8 percent State marginal tax brackets. So for every incremental dollar you earn, you actually keep (‘take home’) 67 cents:
1 – (.25 + .08) = $0.67
2) Instead of pocketing this particular dollar bill (or actually pocketing what the IRS lets you take home -The $0.67), You invest the 1 dollar bill in the TSP. Uncle Sam puts the entire pre-tax dollar bill in the TSP, and then gives you another dollar bill to match it.
In other words, your after-tax investment of $0.67 cents just grew to $2, an instantaneous return on investment of 298%.
You can’t do this with all of your income- The maximum TSP match of ‘even money’ ends at 5 percent of your salary. The TSP does not match salary deferrals exceeding 5 percent of your income.
So why would anyone forsake a 298% guaranteed rate of return? I can confidently say ‘Guaranteed’ because TSP participants have the greatest fund in the world available to them – The G Fund, which, as the TSP Executive Director likes to say, ‘Has never had a Bad Day’. You’ll probably do better in one of the TSP’s Lifecyle Funds over time, but if you did nothing other than max out the TSP match every year and stick it in the G Fund, you’d still be in decent shape saving for retirement.
So, 3 in 4 Feds, give it a thought. 2 bucks in retirement savings will only cost you about 67 cents…
So stop being such a Girlie Man and max out your TSP!
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