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TSP Tips/Tricks

Discussion in 'General' started by SNation412, Nov 21, 2017.

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  1. SNation412

    SNation412 Chow Runner

    This is my 3rd year in the agency (25 yrs old) and I currently have tried to put as much as I can into TSP (10%). I currently put 100% into the L2050. Older controllers today have tip that I put more into riskier funds while I'm young like the C. Although there's the tsp website to educate about fund allocations, risk/reward.. I was wondering if there are any controllers out there with more experience or knowledge/close to retirement that have any helpful tips. Any information is appreciated, thanks.
     
  2. Stinger

    Stinger Certified

    50% C and 50% S.
     
    DankVectorz likes this.
  3. DankVectorz

    DankVectorz Certified FAA

    FAA Facility:
    N90 New York Tracon
    This. Although a lifecycle fund like the 2050 is still far enough out that it's pretty much balancing between the c and s automatically and geared for more risk at this time. As 2050 gets closer it will start getting more and more conservative.
     
  4. Stinger

    Stinger Certified

    I was in either the 2040 or 2050 fund, can't remember, and thought about the same. But then I actually looked at the return rates of the C and S compared to the L fund. It was a pretty significant difference.
     
    SNation412 likes this.
  5. breakaway2000

    breakaway2000 Moderator Staff Member

    Prepare for a wall of text

    Get out of the L2050 ASAP.

    Outlined Steps and I'll go into detail below...

    1. Allocate 50% in the C and 50% in the S. Set it and forget it.
    2. Max out your TSP as soon as practical ($18,000 per year EDIT: $18,500 starting 2018.)
    3. Allocate 50% in a traditional TSP (pre-tax, taxed on withdrawal) and 50% in a Roth (Taxed going in, earnings are untaxed).
    4. Upon retirement, keep your money invested, withdrawal 5% per year.

    Detailed reasons

    1. Allocate 50% in the C and 50% in the S. The C fund mirrors the S&P 500 which is a collection of 500 stocks which best represent our US economy as a whole. The average annualized return of the S&P 500 over the last 90 years is 9.8%. It's the basis in which all mutual funds are compared (did they outperform the S&P? etc.). The S fund mirrors the Dow Jones completion stock market index, which is a collection ~4,500 small to mid size stocks (excludes the 500 stocks in the S&P 500). By investing in both equally you have the security of the C fund and the potential for growth in the S fund. The I fund has consistently underperformed both the C and S fund for decades. I would not advise putting a cent into the I fund.

    2. Max out your TSP as soon as possible. To be frank, each year you don't, you cannot get back. Given the fact we can retire when we're 50, those early years are so vital. For instance, you're 25. Lets say this year you're able to contribute 10k. It's not that you didn't contribute the additional 8k this year, you didn't contribute 8k x 25 years of compounded interest. Assuming 10% interest, over 25 years that 8k would've turn into $86,678. I'd encourage anyone getting into the agency to try to adjust your budget/spending while in training. While in training, with each step you achieve D1/D2/D3/CPC, pay yourself first. Put it in your TSP.

    3. Allocate 50% to a tradition TSP and 50% in a Roth. A Roth = a traditional if the tax rates are equal. In a traditional TSP, the amount you put in is pre-tax, when you withdrawal the amount, it will be taxed. As a traditional lowers your taxable income, the amount that is taxed comes off the highest part of your income. As most of us will be making more while working then in retirement, there is a strong possibility that your tax rate will be lower in retirement then while you're working (which would favor a traditional). You can view historical tax brackets adjusted for inflation if you want a deep dive. Now, if you believe tax rates have the ability to increase in the future, investing in a Roth helps mitigate that risk. Money you put into a Roth is post-tax. All your earnings that you withdrawal are tax-free. Why you should invest 50/50? We do not know what tax rates will be in the future. Anyone who tells you otherwise is lying to you. Unfortunately, you cannot withdrawal directly from the Roth or directly from the traditional portion of your TSP, the amounts have to be withdrawn proportionally. Even with that, it helps to mitigate risk as some years would've have been beneficial to be entirely in a Roth and others years would've been beneficially to be in a traditional TSP.

    4. Upon retirement, keep your money invested in the market and withdrawal 5% per year. This is how you create generational wealth. If you transfer your money into the G fund or remove it entirely and put it into a savings account, your money has an expiration date. It will run out. If you withdrawal 5% a year, that's a 20 year lifespan. With the market, on average, earning over 9% interest per year, if you withdrawal only 5% of your investment yearly, your money will continue to grow over time. For most of us, our goal is 30 years. Retire at 50-55, hope to live til 80-85. Since the great depression, there has never been a 30 year span where if you withdrawal 5% of your income per year, you're left with less then what you started with. Think about that. You start out with 1,000,000, withdrawal 5% a year for 30 years and at the end of 30 years, you still have more then 1,000,000 invested.

    I'm glad you brought this up. It's a great conversation to have and too many people are not educated about it early enough in their career to truly make a difference.
     
    Last edited: Nov 21, 2017
  6. Stinger

    Stinger Certified

    Does the state you retire in have any effect on tax rates?
    Like would retiring to California be worse than retiring to Texas? (talking only about traditional/roth, and not cost of living)
     
  7. MJ

    MJ Administrator Staff Member

    Ah a topic near and dear to my heart... money.

    First and most important piece of advice: don't listen to anyone else tell you "the best thing to do..." The only person in your exact life/financial situation is you, and no one else is able to consider all of those variables. You don't need to get a CFP license, but you should learn enough to at least have a basic understanding of what everything is.

    Some quick points to start further research:
    Roth/Traditional:
    Roth
    Contributions are post-tax (at your income tax rate)
    Earnings are tax exempt

    Traditional
    Contributions are pre-tax (tax deferred until withdrawn, then taxed)
    Earnings are tax deferred

    Why you would use each
    Roth: Pay taxes now (preferably in a low tax bracket), never pay again for any withdrawl
    Traditional: Put off taxes now, and pay taxes later (hoping you're in a lower tax bracket later in life). Also, potential tax savings now as contributions are not taxed as income, potentially lowering your current tax obligation.

    Both of these are available outside of TSP as well, with lower contribution limits. TSP limit is 18,500, outside is 5,500/yr for people under 50.

    Funds
    People like to throw the letters around without even knowing what they stand for. Learn about the indexes they track at the least, so you have an idea of what they are. You can google them. The TSP funds aren't unique, but the really great thing about them is the fees; they're nearly non-existent. Can't get that outside of TSP.

    G: US Government bonds
    . People hate on this because its normally the "lowest" returns. But its for a reason: the TSP is given the ability to buy non-marketable US Govt T-bonds. Meaning they can't be sold. T-bonds are the baseline for any investment valuation, as they are basically considered "risk-free" (the gov't can't go bankrupt). They are non-marketable, so only held to maturity; there will be no loss on principle, ever. Cannot have negative returns.

    F: Fixed income. Bonds from corporations. Not risk free. Higher yielding than T-bonds, because they are higher risk. The value can fluctuate (IE go down or up) from the principle investment. Can have negative returns.

    C: Tracks the S&P500. Largest companies in the US. Turn on CNBC to see how its doing.

    S: Small cap stocks. Tracks the Dow Jones U.S. Completion TSM. More volatile than large cap. Dependent on the health of the economy (Bad economy kills smaller businesses).

    I: International stocks. MSCI EAFE. Companies outside the US, in the developed world (Europe, Asia, Australia)

    Basic overview: TSP: Fund Comparison Matrix

    The L funds are simply a mix of the above funds. They automatically allocate based on the standard industry practices for your age (IE: 25 years from retirement, hold 80% stocks, 20% bonds). Funds like this are marketed as "set it and forget it." If you have no desire to ever think about your account, this would be the "recommended" way of investing it.

    As I mentioned above, your entire financial situation needs to be considered. The TSP is only a piece of the whole, and you should at a minimum figure out where it fits so you can use its benefits and avoid its weaknesses. So many people throw out "max your TSP asap", and it's not always wise advice. The only universal advice I would give for anyone, would be to contribute the 5%. It's literally an extra 4% pay raise (they give you 1% no matter what).

    My Federal Retirement - FERS / CSRS / Thrift Savings Plan
     
    Last edited: Nov 21, 2017
  8. breakaway2000

    breakaway2000 Moderator Staff Member

    Thanks for bringing this up. It does. A traditional TSP will not withhold state or local taxes on your withdrawals. You'll be given a 1099-R and required to pay local and state tax from your traditional TSP withdrawals. A Roth tsp is exempt from state and local tax. If you work in a state with a local/state tax and plan to retire in the same area, I'd still advise a 50/50 because it's all relative, BUT if you plan on moving one way or the other, see below.

    This also brings up a decent debate as far as 'tax dodging' is concerned. For instance, if you're currently living in a state with higher local/state tax and plan on retiring to a state with no local/state tax, it makes sense to invest a higher percentage in a traditional TSP. You avoid the local/state tax going in and avoid it on the way out. The inverse is also true. If you're currently living in a state with no local/state tax and plan on retiring to a state with a local/state tax, I'd be hard pressed not to invest 100% in a Roth.
     
    Last edited: Nov 21, 2017
  9. Uscolt45

    Uscolt45 Certified

    My recent NATCA retirement seminar recommended 100% into Roth. While your tax brackets and rate are unknown when you retire, your gains aren’t taxed. Money made on the money you have in is all yours. How else are we going to fix the deficit? Nobody wants to cut programs and spending.

    Your 5% matching goes into the traditional no matter your choice.

    The breakdown they gave for funds was:

    C - 60%
    S - 20%
    I - 20%

    Lifecycle funds are too safe and low yield in the speaker’s opinion.
     
  10. Uscolt45

    Uscolt45 Certified

    MJ if you want I can scan in the briefing binder they gave me to add to the site. I’ll try and find it at work tomorrow.
     
    breakaway2000 likes this.
  11. rugbydog11

    rugbydog11 Certified FAA

    FAA Facility:
    MSY New Orleans Tower
    17% in 12 month pip in and I'm usually 100% L2050. Just went to 10 L2050 45 C and S... We will see how it goes. I'm 100% Roth. Had to stop maxing last month until I can get my house sold, rent and mortgage is tough.
     
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  12. breakaway2000

    breakaway2000 Moderator Staff Member

    24.59% 12 month pip going 50/50 in the C and the S. Glad to see you're making the jump out of the L.
     
    Last edited: Nov 21, 2017
    rugbydog11 likes this.
  13. SNation412

    SNation412 Chow Runner

    you guys are MVPs thanks a lot for putting in the time to answer
     
  14. SNation412

    SNation412 Chow Runner

    So say I do 50% C & S now at 25 yrs old, at what age would you suggest to change your allocations to prevent risk/be more conservative?
     
  15. SNation412

    SNation412 Chow Runner

    That breakdown, is that a suggestion for people of all ages or a specific stage in your career?
     
  16. RL

    RL Certified FAA

    FAA Facility:
    TWF Twin Falls Tower
    This is my setup but currently traditional. Do have some previous Roth contributions
     
    corn4ahead likes this.
  17. DankVectorz

    DankVectorz Certified FAA

    FAA Facility:
    N90 New York Tracon
    19.5% PIP in 50% c/s. One of the posts above said max is $18k a year but it is $18,500 now. Think it's like $692 a paycheck or right around there for 26 pay periods.
     
  18. Uscolt45

    Uscolt45 Certified

    I attended the early in your career seminar but they said that those combinations were the best if you set em and forget em. Don’t get scared by downs and pull your money to a lower risk fund etc. I’ve been in about 8 years. Unfortunately I wasn’t able to attend the other seminar that was geared towards people closer to retirement.

    I’m at 20% PIP and I didn’t change until after the seminar. Less than 5 months in. My old setting was a lifecycle 2040 and it was hovering around 13% I believe.
     
  19. breakaway2000

    breakaway2000 Moderator Staff Member

    18k max currently for 2017 ($693 a paycheck). 18,500 starts in 2018 ($712 per pay-period). Thank you for the reminder to update my contributions shortly.
     
    Last edited: Nov 21, 2017
  20. breakaway2000

    breakaway2000 Moderator Staff Member

    In reality, this is where personal preference, current lifestyle, and what you want out of retirement comes into play. At that point there's no real right or wrong answer. I'd expect someone who's single, married with no kids, or married with a small army of kids to have 3 completely different viewpoints.

    For me, I have a small army of kids and have no intention of ever moving it from 50/50 C & S. I'll withdrawal 5% a year when I retire and be able to leave my kids/grandkids a few million after I'm gone.
     

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