2016/11/102016/11/09 46,000 Reasons TSP is better than a 401(k) Recently the WSJ posted an article about all the bookkeeping, tax filing, legal, and administrative fees necessary to operate a company’s 401(k) program on behalf of its employees. This, by the way, is on TOP of the expense ratios charged within the mutual fund investments available inside the Plan. If you work for a small company, these administrivia fees add up (and NOT in your favor). Vanguard – the low cost provider of all things investing- estimates these charges as totaling 0.25% in a very large company plan, and 0.58% for a smaller company plan. Comparing Retirement Day balances from large and small plans, the employee working a lifetime inside a small company (who earns 6% average annual fund returns with overall plan fees of 0.5%) accumulates $727,000, while the large company participant (0.25% plan fees) accumulates 773,000 (for a difference of $46,000 in final value). $46,000 is a significant chunk of change. This is a full years’ retirement income for some folks. So what if you’re a current or former Fed or Veteran? Where do you fit in? The TSP charges you 0.029% all-in for fees, or essentially zero. So you’re paying near zero dollars in admin fees for TSP, versus a best-case employee at a large company who pays 0.25% in 401(k) admin charges. Result: Your Retirement Day TSP balance will likely end up $46,000 ahead of a large company retiree who has an above-average 401(k) plan benefit. Bottom Line: When you leave Federal or Military Service, don’t take all of your money out of the TSP. There’s more than 46,000 reasons to keep most or all of your Qualified Retirement Plan money in the TSP. Related Federal Employee Benefits FERS Retirement Retirement Thrift Savings Plan FERS BenefitsFERS RetirementSaving for RetirementThrift Savings PlanThrift Savings Plan Withdrawals
I’m about to retire in 9 months. TSP withdrawal options are not good. Monthly payments come out proportionately. Very stringent. Reply
Sue – Congratulations! Hang in there! TSP is going to implement more flexible withdrawal options in the near future. You’re already a reader of this blog, so you know how to make the most of the few TSP withdrawal options that TSP DOES allow you at separation/retirement. My guess is that it will be implemented in the next 12-18 months- TSP recognizes that the current inflexible withdrawal options are a key driver moving separated Feds to higher-cost brokerage-house IRAs and Rollover 401k’s. Bottom Line: Keep as much as you can stomach within TSP. If you need cash now or flexible payments now, I would transfer a few years’ worth of living expenses to a Rollover IRA (assuming you are older than 59 1/2). Stick with Fidelity/Schwab/Vanguard or USAA for the lowest fees/best short-term savings rates. Thanks again for reading! Reply
Hello. Sue Sealy here again. I am now 4.5 months away from retirement. I plan to leave as much as possible in the TSP and open an IRA for the flexible monthly paychecks I will be needing. Would you suggest a S&P 500 index fund for the IRA or something less volatile? This is my conundrum. Thank you. Reply
Sue – Congrats! If you’re over age 55 I would just start withdrawals from TSP. The C Fund is the S&P 500, but with much lower fees that can’t be beat- anywhere. If you feel hamstrung by the inflexibility of TSP withdrawals (ie you cant’ choose $1000 one month an then make it $1200 or $500 the next), then I would go with a target retirement fund (your target date is TODAY) from Schwab, Vanguard, Fidelity, or USAA. I would not use an S&P 500 fund exclusively for the paychecks you need over the next 3-5 years – That’s too short of a time horizon for a 100% stock allocation. Reply