Posted on Friday, 22nd February 2013 by

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I received my annual TSP statement several weeks ago and each year I find it informative. It’s a good tool for evaluating your fund’s performance and comparing it to other investments.  The highlights this year pointed out one of the true benefits of the TSP; the low expense ratio that we pay compared to other private sector funds. In 2012 the expense ratio was only .027%, that’s just 27 cents for every $1,000 in your account. The TSP points out that, “Such low fees are very rare in defined-contribution plans, where the average fee is $8.30/$1,000 account, and in 10% of plans, you’d pay more than $13.80.”

The illustration they use shows the dramatic impact a larger expense ratio has on your investments long term.  A $50,000 investment, over a 30 year period, earning an average 7% a year with an expense ratio of .027% would be worth $377,954. This same account would shrink to $257,842 with an expense ratio of 1.38%. That’s a loss of over $120,000 due to an expense ratio of only 1.38%!  Expense ratios matter. You don’t have other account services fees, fund loads or 12-b1 fees to contend with either. Overall you can’t purchase a lower cost indexed fund than what the TSP offers.

The statement also provides a lifetime TSP single life annuity estimate for age 62 or your current age. You can use this figure to shop around and compare private sector annuities to what the TSP can offer. There are significant differences between plans. If you are contemplating converting your TSP to a private sector annuity READ the fine print. Use the TSP’s online annuity calculator to compare plans before signing on the dotted line.

Many, especially the younger new hires, don’t spend the time they need to fully understand their investment options and how they should invest to maximize their gains. Everyone that has an investment account of any type needs to understand the dynamics to avoid panic moves that could prove costly.  Understanding your TSP investment and withdrawal options, and how to maximize your contributions, can help you realize your retirement savings goals.  If you would like to learn more about investing consider joining the (NAIC) Better Investing and sign up for their free 30 day trial and sample copy of their Better Investing magazine.  I was a member of this organization for many years and found it to be very helpful throughout my career. This organization helps you understand and profit from investing. They have many tools; online and traditional courses, local chapters, and investment clubs that teach you the fundamentals and how to invest wisely.

Use the TSP’s annual report as a reminder to reevaluate your current investment mix. Those close to or in retirement that will need to withdraw funds from their TSP account, should consider having the majority of your account in the L Income or G fund.  The L Income fund invests 74% in the G Fund, 12% in the C , 6 % F, 3% S and 5% I and the fund is rebalanced daily to maintain that mix.  Over the past three years the L Income Fund has earned a 4.2% return, not bad considering the low interest rates now available for CDs and Treasuries.

If you are uncomfortable with investing and fear the potential price fluctuations associated with equities (stocks), then the G-Fund is a safe haven to consider. The G Fund assets are managed internally by the Federal Retirement Thrift Investment Board. The G Fund buys a nonmarketable U.S. Treasury security that is guaranteed by the U.S. Government. This means that the G Fund will not lose money. With interest rates at historic lows the G-Fund still earned 1.47% in 2012, more than double what you can earn on a CD today.

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, and financial information is subject to change. To ensure the accuracy of this information, contact your benefits coordinator and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice. Our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.

 

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