Many federal employees are keen enough to invest enough in their included 401k plan in order to receive the government match. Because of this, a large number of long-time feds, working on varying salaries have become Thrift Savings Plan millionaires. The vast majority of these federal employees achieved this financial feat by investing in the TSP’s stock-indexed C, S and I funds.
However, when these individuals retire or simply leave the government for another job, many employees transfer their TSP to an outside IRA. Is this intelligent or short-sighted? The TSP is considered one of the best and lowest-cost funds in the business. A common criticism is that it appears to lack flexibility by not offering as many investment choices as most outside plans.
Most government officials who are either elected, appointed or regular civil servants, belong to the government’s in-house 401k plan. These individuals know what they are doing financially, and while they are busy trying to guide the nation through the current pandemic, watching foreign adversaries and the once-again spiking coronavirus cases nationwide, they are still millionaire politicians, in part because the TSP being a nice option. Additionally for the majority of civil servants, the TSP is their primary retirement nest egg, along with Social Security and a civil service annuity based on salary and length of service.
With this being said, when the federal Thrift Savings Plan was created, it was designed to be a low-fee, easy-to-use investment vehicle for active and retired civil servants for the entire spectrum of the federal workforce. It was created in such a way that the fees to users would be among the lowest in the investment business. And with 5 funds covering the U.S. and international stock markets (C, S and I), a bond fund (F fund) and a special Treasury securities fund (G fund), exclusively offered to feds. It in theory covers the investment options waterfront. Combine this with the government-matching contribution and the TSP, to many private sector investors, is extremely lucrative and financially sound.
However, when federal employees leave the government, be it for other jobs or to actually retire, more than half of all TSP investors take some (or all) of their money with them. These feds tend to invest their money elsewhere for a number of reasons.
This perspective is from a recently retired TSP investor who made it to the millionaire’s club from the TSP and this is what he did after leaving the federal workforce:
“I retired 30 April 2019 as a FERS employee, and was in the seven-digit TSP club. However, after careful research I moved 90% of my TSP balance to Fidelity investments. I kept the other 10% in the TSP because I’m not 59 1/2 and didn’t want to give the IRS the 10% early withdrawal penalty.”
This millionaire went on to say that “If I were a current federal employee, I would take the 5 percent match. Then I would open up a discount brokerage account with any of the big companies, (Vanguard, Fidelity, Schwab or Merrill Edge etc). Then invest the delta into ETFs. With no trade fees now, it makes a win-win situation.”
It is important to utilize the TSP while employed by the federal government, and also have an investment plan once you hit the age requirement to fully extract your retirement benefits. To learn more about the TSP, become a member today at Federal Benefits Service, or schedule an appointment with one of our trained and licensed financial advisors.