Should Federal Employees Contribute The Maximum To Their TSPs?
“In 2021, federal employees can contribute up to $19,500 to their TSPs. There is also a $6,500 catch-up contribution per year for those over the age of 50. But, should ALL your nest egg be locked up in a TSP?”- George Politarhos
Most financial experts agree that the federal government’s Thrift Savings Plan (TSP) is the unequivocal champion when it comes to employer-sponsored plans. With around 5.6 million participants, the Thrift Savings Plan has been directly responsible for nearly 40,000 people having a million dollars or more in retirement savings.
However, as impressive as that is, some employees should ask themselves if it is the best course of action to put everything into a TSP. For example, most employees who manage to max out TSP contributions typically do so at the expense of funding emergency accounts, having adequate life and disability insurance, and protecting their savings with safe money products.
Inadequate levels of life, disability, and long-term care insurance can expose your investment to severe erosion of its value when emergencies strike. You could even wind up liquidating your entire account because medical and dental expenses can wreck even the most solidly constructed plans. Also, if you are carrying large amounts of consumer debt, you want to consider putting less into their TSPs. It is critical to focus on reducing or eliminating those debts to not drag them with you into retirement.
You should remember that although the TSP remains the cornerstone of your federal retirement benefits program, it has some limitations to consider.
Some of these limitations include:
- TSP funds have limited investment selections.
- TSPs lack the tax advantages offered by other options.
- There is market risk with a TSP
- There aren’t that many options when withdrawing money from a TSP account.
- Beneficiary choices are limited in a TSP.
TSP participants should, however, invest at least 5% in their plans to obtain available matching funds. Beyond contributing the amount needed to get matching funds, employees should consider meeting with an advisor who is well-versed in government benefits and can help them balance their long-term goals against other present and future needs. A seasoned federal benefits planner can help you discover if it makes sense for you to reduce (or increase) your TSP contributions. Your advisor should also look for other planning gaps and check for adequate levels of insurance and asset protection products.
The bottom line:
For federal employees, the TSP will always be the cornerstone of their retirement planning. Unfortunately, TSPs generally lack the diversification and flexibility needed by some employees. For many workers, contributing the maximum amount to the plan may not be an ideal approach. In some cases, workers may want to augment their TSP investing with safe money products or reduce their debt loads before making the maximum allowable contributions to a TSP. Therefore, it’s highly advisable to partner with a federal employee benefits specialist who understands the many nuances of the TSP and can offer objective advice and guidance.