Is the TSP a Wise Investment

The federal government is always boasting about the benefits of the Thrift Savings Plan. But is it truly a worthwhile, long-term investment for federal workers?

We’ll turn to federal workers to answer that question for us: nearly 50 percent of federal workers who retired or separated from employment in 2012 withdrew their entire TSP balance account.

“There’s a good chunk of our participants that are firing us and one of the reasons for it is a desire for more investment flexibility,” TSP Executive Director Greg Long said, according to The Washington Post.

The mass withdrawal of federal workers hard-earned pay from their TSP investments amounted to $10 billion. Also, actively employed federal workers over the age 59 ½ opted to take $2 billion from their TSP accounts as lump-sum payments.

Federal workers worries about their TSP investments are tied to many legitimate concerns. According to the TSP executive director, nearly a quarter of retired and actively employed federal workers said they are troubled by the limited investment options of the TSP. They want more choices — which the TSP doesn’t offer — like placing their money in real estate, emerging markets, and mutual funds.

With the TSP, federal workers can only select from a tiny buffet of investment options: only six major funds which offer potential risks and potential rewards.

The TSP also severely limits and dictates how much of your money you can withdraw and also when you can take it. With the TSP, you only have a few options: making lump-sum withdrawals or taking equal monthly payments, for example. This is in contrast to an IRA, which offers a wide variety of flexibility when it comes to how much of your money you want to withdraw and when you want to take it.

Many federal workers consider the TSP withdrawal rules to be incredibly strict compared to other investment tools in the free market.

Federal employees who have left the workforce because of retirement or separation of service are choosing to roll over their retirement money into IRAs and other investment funds because of the possibility of higher returns and greater flexibility in comparison to the government-sponsored TSP.

Investment wise, the TSP also focuses more on stocks to derive returns, which can be subject to highly varied valuation fluctuations as compared to other investment instruments.

Lastly, federal workers are concerned about the government’s ability to borrow money from the TSP during financial crises like the debt ceiling crisis or other arguably manufactured financial calamities in Washington that are unfortunately happening every year.

By law, the U.S. Treasury Secretary has the authority to tap the TSP’s G-Fund account balance when the federal government is running out of money and does not have enough cash on hand to pay for salaries and general operations.

“The reality is that even while the G fund was used for a short time, the government has in the past decided it can use the money that belongs to these TSP investors for this purpose,” according to FedSmith.

We all know federal government isn’t flush with cash and more than likely it won’t be in the near to long-term future. Unfortunately, this is the way things are and the way things will be for some time.

With all of this being said, you may want to reconsider your TSP investment, particularly what it means for your financial outlook and whether it will truly secure your retirement.

Please contact one of our benefits experts for a free consultation. We can help you understand your TSP. Depending on your situation, we may recommend other approaches to manage your TSP and get the most value out of it.