#118 TSP Secrets: The Key to Starting Your Year Off Right

Christian Sakamoto  00:03

Welcome back to the Plan Your Federal Retirement podcast. My name is Christian Sakamoto, filling in for Micah today, and with me today is another awesome advisor, John Raleigh. John, how you doing?

John Raleigh  00:15

I’m doing great. Hey, Christian, it’s a it’s very neat to be able to talk from across the country, like we do, so this is, this is, great.

Christian Sakamoto  00:22

I know, I know you were, we were chit chatting earlier, you tell me it’s somewhere in the 80s, maybe pushing 90, and I’m just sitting here getting a little bit colder here in Washington, which I know is nowhere near how cold it is in Alaska, so we kind of pick our battles there, but yeah, excited to be talking today about the TSP, and we’re recording this sort of in the beginning of the November 2024 year, so we’re talking about what things to be thinking about for the beginning of the year for 2025 right? We think the TSP is a powerful tool, and we want to make sure you have some of those tips and tricks to start the year off, right? I would say just right off the bat, the contribution limit has increased for 2025 and every single year it’s been going up a little bit, it increased another $500 for the year, so the contribution maximum would be $23,500 if you’re under the age of 50, that translates to $903 at the period. Now, if you’re over 50, we get the extra 7500 or if you’re sorry, 50 and over, you get the extra catch up, which is a an additional $7,500 bringing the total contribution limit for the TSP up to $31,000 for 2025 for those who are 50 and over, that would be $1,192 per pay period if you’re 50 and over, so right off the bat, there’s some increases there, let’s take advantage of them, I always think that’s a good plan to try to maximize our retirement contributions, isn’t that right John?

John Raleigh  02:00

Absolutely right, and of course, Christian, you’d be doing the lesser amount, I’d be doing the greater amount that it’s really, really a powerful piece to be doing, so yeah, I think that’s there, that’s that’s definitely the case.

Christian Sakamoto  02:12

Yeah, and I would say too, if we’re not quite at that level to be able to max it, totally fine I get that. I always try to increase contributions just a little bit every year, with clients trying to, maybe it’s just increments of 20, 50, maybe $100 extra, to try to just push ourselves to saving a little bit more, so the bare minimum that you should be contributing, though, to the TSP. How much would you say would be the bare minimum John, to the TSP?  Yeah, yeah.

John Raleigh  02:40

Definitely the one, one thing people seem to forget is you have a 5% match that you have available. So if you miss that by yourself, and you do not put in at least the 5% you’re giving away free money. So in the back of your mind, that should be your basis, but like you just said prior, I think the ultimate goal, especially if you’re younger, is to do the best you can, to max it out, because it’s reducing your income as best as possible, and it’s also helping me give the money time to grow. The compounding effect of money is incredible, and I mean, I’ve told the story, it wasn’t a TSP that they used, but I had a client that when mutual funds first came out in the 30s, he started investing because his wife made him go to a seminar. And they started by putting $5 a month away, and by the time he retired, and the only additional money they added was every time they got every time they got a raise, they put a little more in it, they went through a long period of times, of ups and downs, and when he retired, there was over $1.4 million in that account that they had never paid attention to, they had just put the money away. So the TSP gives you that same sort of option there, to be able to sit there starting is 5% for sure, but matching it out as best as possible that you can do is extremely powerful and help you be very successful when you retire.

Christian Sakamoto  04:04

Yeah, so definitely, the minimum is putting in 5% to get that 5% match. Of course, don’t just stop there, try to encourage yourself to save a little bit more every single year to get closer to that maximum contribution limit, and that just talks about the power of the compounding interest, which so many people talk about, but it’s so important, especially if you’re getting started and you’re earlier in your career, the dollars that you’re putting in have so much more gravitas because of compounding interest, right? As opposed to as we get closer and closer to retirement, one of the things that we talk about and share with clients, it’s not about timing the market, it’s about time in the market, right? Time in the market, so if you have decades of time for your TSP to continue to grow until you start actually pulling from it, who cares if there’s a downturn in the market, right? We know that there’s going to be ups and downs as time goes on, but if we look out at another 10, 15, 20, 30, year time horizon, what’s the value of the market going to be? It’s going to be higher, right? So that’s the other thing to be thinking about.

John Raleigh  05:12

And on the flip side of that, Christian, if you’re talking about we don’t have the time, that’s no reason not to do it either. What you have to remember is every dollar you’re putting in, unless it’s going into the Roth, which we’ll talk about a little bit, but if it’s if it goes into your TSP, your traditional TSP, you will then have that money will be put in at three tax dollars, which is powerful, because technically, what you’re doing is you’re investing more than what you’d be able to do outside of the TSP in a non qualified situation or a different taxable situation. So because of that, it makes sense to really pay attention, and even if you didn’t do it and you’re older like me, it still makes sense to do the best you can to get the money in there, because that tax saving and giving that a piece of time to be able to come back will make a huge difference also.

Christian Sakamoto  06:01

Yeah, absolutely, and it is kind of a double edged sword there, because more recent changes to the TSP over the years have now included Roth contributions, which, back in the day, that wasn’t an option, and now that we have the option for Roth, I would say, to your point, John, yes, the traditional is awesome to get that tax deferral, but we have to think about your taxes when we’re also doing our planning for how much to put into the TSP and retirement accounts as well, because if we think taxes are going up in the future and today, we’re putting in and getting the deferral, and we’re doing it pre tax into the traditional TSP, but we think taxes might be going up in the future, or maybe our tax bracket would be going up in the future, I want to rethink that strategy, right, John, because then we maybe we want to pay the taxes today knowing that they might be going up in the future, or the other myth I see is I think my taxes will be going down in the future, I don’t think I’ll be making as much money in retirement, so do you have clients that maybe have brought that, that concern up, or that that idea up, that they think their taxes might be going down in the future? 

John Raleigh  07:10

It’s so interesting, and I’ve been blessed being in Florida to work around retirees now for over 30 years, actually, and when people are taking money out, they’re taking it out in a train in the most tax wise situation, and if you employ your money in the traditional TSP, that means that your taxes are going to be at a certain rate, because everything you do is taxable, having the power of the Roth and like that will make sense, because of we don’t know what taxes are going to be in the future. The big myth is, though, if you work so hard through your lifetime to get to retirement, and you think you’re going to spend less money in retirement, what that does is that means you’re moving into a declining or a reduced lifestyle than what you’re used to now, and I will tell you, there is a, there’s a there’s a piece there that makes it very, very frustrating, because here you worked your whole life for this particular lifestyle that you’re looking to go to, and you think you’re going to spend less money, but a lot of the spending just changes on what you’re spending it on as you go to retire, and really, when you’re planning for this and you’re putting these tools together, like the TSP, that are so strong, it makes sense to make sure you understand that if you want a lifestyle similar to what you’re living right now, you’re probably going to need a similar amount of money, and that means, where does that money come from, is going to be so important, right?

Christian Sakamoto  08:39

It’s not to hit the nail on the head, too much, but the way that we can contribute to the TSP is just something to revisit. If we’ve only been doing the traditional contributions to the TSP getting pre tax. This might be a time where we reconsider and re evaluate, if we just flip the switch and go full Roth contribution, and forever, we’ve been doing a deferred contribution, and now we’re going to flip to do Roth, we’re going to have to address those tax withholdings as well, because you’re going to have that much more taxable income for the year, because you’re not going to get the deduction, so that’s another tip there. If we are going to be contributing to the Roth, and you think that makes a lot of sense, make sure you reevaluate your tax withholdings as well to make up for that additional income that’s going to show up on your tax return. 

John Raleigh  09:25

As old adage says, pay me an hour, pay me later. I mean, that’s what it does, making sure you’re doing what’s best for you and your family is and understanding that there’s going to be a point in time you’re going to need to live off this money or it’s going to help help your lifestyle be aware of what you want it to be, if possible, then you need to make sure you have those pieces in place for you.

Christian Sakamoto  09:46

Right. Another thing that we always talk about here on the podcast, but also with clients, is just our general investment rules and principles that we want to put in place. The biggest rule that you’ve heard us talk about is the five year rule with money, that any money that you plan to spend in the next five years, we don’t want that to be in the stock market, and so, as I was hinting at earlier, if you have a time horizon between now and five years from now, where you’re still working right we’re not retiring in the next five years, we might consider having more of our money in the CS and I funds inside the TSP or more on the higher lifecycle funds that aren’t then made up of the CS and I and GF, but making sure that our time horizon allows for more of that growth, but as we get closer and closer to that retirement window, if we’re within five years of retirement, we want to start building up our cash reserves, we want to start building up what our fixed income would be, and inside the TSP, that would be the G fund, and then the F Fund, so as we’re like I said, we’re recording this in the beginning of the November 2024, record highs with the stock market, and this is a good time to just be taking a look at this, taking a look at how your accounts are allocated between the five core funds, the G fund, the F Fund, the CS and I, and maybe it’s time where we take a look to see if we need to make any adjustments, and when we call this rebalancing right, maybe we have too much in the growth, maybe we have too little in growth, and we just want to look at this this time of year to make any adjustments for the following year.

John Raleigh  11:27

And that’s so important, because if you’re out of balance for what your your tolerance is for the ups and downs of the market, the being out of balance can actually have you taking more chances than you’d like to take. The flip side of it is you also have to remember, as advisors, I know Christian we assume life. I mean, we hope, and a lot of the calculations are now telling us to calculate to 115 because that’s what this new generation is going to live in those sort of things, and I will tell you, as long as I’ve been in the business, when I first started with retirees, you retired at 65 and you were dead by 75 so how much money did you really have to have set aside because you were only talking about thinking about a 10 year window? Now it can be 30, it can be three years since you’re retired, if not more so in your balancing it in your thinking, the tools you have in the TSP are there, but there’s always should be some money out there in the stocks, reason being is we have to assume you’re going to live and how are you going to maintain your purchasing power, how are you going to keep refilling the buckets for the next one to three and four to four or five years, those sort of pieces there to make sure that you’re able to keep living the life that you’re accustomed to.

Micah Shilanski  12:47

One of the mistakes that I see as a financial advisor after federal employees go to retire is not understanding how it’s different when you’re in accumulation mode, saving money for retirement, building your TSP to you’re in the distribution mode, pulling money out of the TSP, sometimes we think that we can manage everything the same, then it comes to retirement, and we all of a sudden, we have this flood of different types of emotions, and it only happens to people that generally aren’t emotional about investments, and if you are, it happens to you even more, so we put together a guide for you, a free guide in order to help know what questions you need to ask, know what learning lessons are out there, and how should you build a proper distribution plan with your TSP? This is so important, because how you got here in order to be able to retire is not how you’re going to stay retired. There are some differences that we need to keep in mind, more supporting, we have to come up with a plan that not if, when the market goes down for a long period of time, how do we say dispassionate investors, how do we hold for the long run? But have a plan that you won’t run out of money. In order to get your free guide, jump on our website at planyourfederalretirement.com/tspafterretirement, that’s planyourfederalretirement.com/tspafterretirement. Take control of your retirement savings. Get this guide so you can make smarter decisions about your retirement. Till then Happy Planning!

Christian Sakamoto  14:15

Absolutely, absolutely, and that’s really the point I made earlier about not timing the market, but time in the market. So if you look at your TSP allocations right now, and you’re like, you know what, I think I have maybe a little too much in the safe side between the G fund and the F Fund, and we say, hey, I think I should have a little bit more in growth. You might think, well, the market’s as high as it’s been. It’s record highs right now, maybe this isn’t the best time to go in, so then we delay doing that, and six months later it’s higher, and then six months later it’s higher. I’m not saying that that’s going to happen. I’m just saying it’s easy to get in the mode that I’ll just buy it when it goes down, with it going down, and did that already happen and now it’s on its way up? That’s the big question mark is timing the market, and how many times is that effective? Not often, not often, that people get that and nail it, right? So if we find ourselves in a position right now where we need to move a little bit in one of the strategies that we’ve talked about before and with clients, is to dollar cost, average, some of that money in, so one of the things I love about the TSP is the fact that we can dollar cost average dollar, you know, every two weeks, from our paychecks in and be buying into the into the market, or into the G and F Fund. We could do the same thing with our rebalancing approach, so if we know we need to move X amount of dollars from the G fund back into the market, we don’t have to do that all at once, we can do that over a period of months, over a period of time, to sort of spread out the risk that we might be buying at the high and I like that take, to take that approach when it comes to that rebalancing, is maybe we think about dollar cost averaging if we need to move more money in.

John Raleigh  16:04

Dollar cost averaging is powerful. It doesn’t work all the time, but for what you have available with your TSP, it is extremely powerful, and it simply means that when you put money in systematically, if the market’s up, you buy less shares of what you’re buying because they cost more, and if the market’s down, you buy more shares when, when the market’s there, and I don’t know about, I mean, I don’t know about you Christian, but I know if I go into the supermarket and something’s BOGO, because we have a lot of those down here in Florida, buy one, get one free as you’re coming in, and it’s something we use regularly, I will tend to buy it just because so we have it because, technically I’m buying it half off commercially, if it’s not BOGO, unless I need it, I’m not going to buy it because I don’t want to spend the additional money. Dollar cost averaging gives us the exact same pattern there, when the market’s down, you’re buying more, when the market’s up, you’re buying less, and ultimately, it lets you get more money invest, or the same money invested more efficiently compared to what it would do is, if you just love something money in.

Christian Sakamoto  16:07

Right, right, because it’s, we’re focused on the amount of shares that we’re buying, essentially, not the price of which we’re buying it at. 

John Raleigh  17:17

That’s correct, yeah, and systematically investing. 

Christian Sakamoto  17:20

Right, well another thing to talk about, too I hinted at this was the life cycle funds, so I think these are a pretty good strategy for clients, and for those listening to the podcast the life cycle funds, we have the L Income Fund, we have the L 2025 the L 2030 and it goes up in five year increments, I think the latest one is maybe L 2070, the whole premise is designed for the whole the whole idea of a life cycle fund is the year in which you plan to retire that that’s the fund that you choose to have your investments to be allocated between the five core funds. The life cycle doesn’t include any more funds than the G, F, C, S and I, it just has a way to reallocate them depending on your time horizon for needing that money. That all sounds awesome, that all makes sense, and if we look at some of those, L 2070 funds, L 2060 funds, most of it, if not, I’m not gonna say all of it, but most of it’s just in the CS and I funds, because there’s so much time between now and actually spending that money and taking distributions from, but something happens when we get closer and closer to the actual year in which we are right now, so if we look at like the 2030 fund or the L 2025 fund, John, what are you seeing there as that gets closer and closer to the year that we plan to retire? 

John Raleigh  18:48

Unfortunately, those funds, the closer you get, seem to take into account that all your money is in one basket, and if you go back to us with our bucket system and saying, okay, how much money is going to be used over the next two years, how many is going to be used for year three, four, and then how many is how much is going to be there in five years plus? Well, the closer you get to retirement, the 2025, funding like that, the more and more money goes to the G and the F funds, and the more conservative funds, and while, if you’re looking at your investments in one big package that can make a lot of sense if you’re looking at your investments on what’s right for you, it really is, is is counterintuitive to our philosophy, saying that the longer term money needs to be allowed to grow so that you can keep pace with inflation and we can maintain that lifestyle that you’re looking to through your life. Now there’s no guarantees, but that is a powerful way to do it, and when you run through a market, run like we’ve had the past couple of years, and you’re in one of the life cycle funds that’s five or little bit more years away from the, you know, the the due date, or the date that you for, you’re actually losing out and all that potential growth during that time, because of the way it’s allocated.

Christian Sakamoto  20:10

Now, if the market was down, then you’d say, well, good timing, right? It just happened to be that good timing, but again, we’re not trying to time the market with this, one of the things we say about the L, L cycle funds, as we I’m a big fan, I just think they get too conservative too quickly, so if you find yourself where you aren’t super savvy with investments, and you just want to find a fund that works the life cycle, funds can be a good option. We just have to pay attention to the fact that, again, I think they get a little too conservative too quickly, so I just took a screenshot and looked at the L 2025 fund for example. This would assume that people in the year 2025 are planning to retire, so people thinking about retiring next year, if we look at it, the G fund has about 63 almost 64% and the F Fund is five, almost 6% so that’s like 70% of your money that’s outside of the stock market, and then the rest is in the CS and I funds that might be relative to your individual and unique financial goals and retirement goals, that might be the right strategy, but I find that just in general, that ends up being a little bit too conservative for our retirement portfolio, again, you might be unique, you might think that, or might be maybe your retirement income needs are different, therefore you can take on less risk, less money and growth, but I just think that might be a little bit too conservative. If we push it out to the L, 2030 fund, this one has about 34% in G, 5 to 6 in F, so that one becomes about 40% out of the market, and 60 that is in the market. So even that 2030 fund that’s six years away, five years away from retirement, remember that five year rule with money if we’re planning on retiring within five years, we want to make sure we’ve got some money set aside, this one’s got 40% of your money outside of the stock market. Maybe that’s right again, as I said, but we just have to pay attention to if we’re going to use those life cycle funds, just how conservative they get over time.

John Raleigh  22:18

And paying attention to how close you are to your retirement and taking that money out, because there’s nothing wrong with getting more conservative the closer you get to retirement, I understand it, 

Christian Sakamoto  22:28

not at all, yeah.

John Raleigh  22:29

The thing you have to remember, though, is when you’re saving for retirement, it’s very different than your withdrawing money during retirement, and those lifestyle funds do a wonderful job helping every life cycle, sorry, helping you get to retirement. The closer they get, though, the more it becomes an issue, because you’ve got to learn to transition, how to take the money out, and they may not be the best source there for you, but it’s just another tool you have available, and if you want to do all the research, it’s probably better to use the non life cycle funds, if you don’t want to do the research, that’s fine, then use them.

Christian Sakamoto  22:30

Yeah, or maybe you work with an advisor like ourselves, that we can help you pick out the right allocations for you, if that’s the case, if that’s the direction you wanted to go? John, anything else on the TSP side before we wrap up this pod?

John Raleigh  23:24

Yeah, no, I think we’ve covered pretty much a lot of what we thought we were going to be going through. I can’t even think it’s a wonderful tool, and it’s an extremely powerful tool. I wish for my clients that are outside of the federal system, if they have available similar sort of tools like this, because it really allows you to do powerful things, and I really think every stretch should be taken advantage of this fully.

Christian Sakamoto  23:50

Yeah, yeah. I mean, if we combine this with the pension, I mean, that’s a dynamite retirement plan, plus keeping health insurance, it’s, it’s so, so good. Yep, if we look outside, you know, if we look in different companies in the private space, sure they might have a 401 K or a 403 B, but oftentimes it’s not combined with the pension, so I always like to remind our Feds how, how good of a deal they have on their on their retirement.

John Raleigh  24:16

But they’ve worked hard for it, they’ve put up with a lot of frustrations at times, and it is a wonderful it is a wonderful system that they have in place for sure.

Christian Sakamoto  24:25

Yeah. Well, as you know, this podcast is all about taking action. So we’ve been talking about the TSP today, the first action item that I would have would be review your current TSP pull up, this most recent statement, I would just log in online and see where it is at today, to see the current allocation and make sure it’s set up to meet your needs, maybe we need to rebalance again, maybe we have too much in growth CS and I or maybe we have too much in the G and the F to good time of the year to be looking at rebalancing the TSP.

John Raleigh  25:00

Making sure you’re comfortable you’re comfortable with how the money is placed based on what your needs are. That’s very important.

Christian Sakamoto  25:08

What’s another action item John, for our listeners today?

John Raleigh  25:12

Make sure you’re taking advantage of that 5% that’s available to you. It’s money I’ll give away if you know, I know, I mean, I love it when I have a discussion with individuals that have the match available and they’re not using it, yes, why they’re not using it? That just, well, they don’t think about like, well, write me a check for the 5% then, if it’s not that important, it’s free money. Yeah. I mean, why not take advantage of it. It’s going to help you get to your goals quicker.

Christian Sakamoto  25:45

Well, last couple actions, I’d say, because we’re talking about the TSP, review those tsp beneficiaries on your quarterly statement, they’ve now added it back that it lists beneficiaries. I was just reviewing some with our recent meetings with clients, and a few of them still have that yellow triangle saying no beneficiaries are listed, and there was a recent change where it went from, you know, paper to digital, and there was a change on the TSP website, and they lost lots and lots of beneficiaries as a result of that switch, so just a good time to be reviewing beneficiaries, and as always, leave us a like, make sure you’re downloading our podcast, I did nice review it always helps us. Our goal is to impact another 1 million federal employees plan their federal retirement, so we couldn’t do this without you. Allright John, this is a lot of fun, so until next time, Happy Planning!

John Raleigh  26:37

Happy Planning!