The statistics for Thrift Savings Plan participation by employees covered by the Federal Employees Retirement System show that younger employees are less likely to participate and, when they do, usually contribute less than their older counterparts. If you are covered by FERS and are not contributing at least 10 percent of your pay each period to the TSP, I urge you to consider the following.

Based on my experience and analysis over the years, it is reasonable to expect that a properly managed TSP account can support withdrawals, before taxes and adjusted annually for inflation, of about 5 percent of the beginning balance during a period of about 30 years. So, if you’re planning to retire in your early 60s and are married or in reasonably good health, you can expect to withdraw about $5 per year during retirement for each $100 in your TSP account on the day you retire. You can adjust this amount each year for inflation.

Every dollar you or your employer contribute to your TSP account will ultimately contribute to the balance at retirement and the amount you may withdraw for retirement income. Let’s take a look at what these contributions can be expected to produce over different investment periods. To do this, I’ll use probability modeling to account for variations that might occur in the year-to-year performance of the financial markets and TSP’s investment funds. I’ll assume that all TSP funds are invested in a portfolio consisting of 55 percent C Fund, 26 percent S Fund, 9 percent I Fund and 10 percent F Fund. This fairly aggressive mix should produce an expected annual return of about 12 percent, with considerable variability from year to year.

To illustrate, a participant who becomes eligible to participate in the TSP at age 27, and who expects to retire 40 years later at age 67, could contribute $1,000 to the plan during the first year, and expect to draw $1,287 from her account each year in retirement, while adjusting for inflation, after the first year. But if she waits 10 years to make the contribution, she’ll have to contribute an additional $305 to compensate for inflation and can then expect to withdraw only $771 during her first year of retirement. Waiting 10 years to make the contribution will likely mean a 40 percent reduction in her income during retirement.

When you consider the government’s contribution to FERS employees’ TSP accounts, the true cost of waiting to contribute is amplified, since it includes missed opportunities for matching funds.

Admittedly, these results are made more dramatic by assuming the use of a fairly aggressive investment strategy, instead of investing everything in the G Fund. The trend of the cost of waiting would be similar, although not as severe, and the income/investment ratio would be dramatically lower. Being too timid in your investing strategy fails to counteract the cost of waiting to contribute and dramatically reduces your expected retirement income from the TSP. Investing earlier to earn less — not what I would call prudent investment management.

The TSP is critical to producing high levels of retirement income for FERS-covered employees. Invest early and aggressively to get the most from this important benefit program.

Written by Mike Miles
For the Federal Times
Publication October 24, 2005