Planning for a federal retirement may seem straightforward, with plenty of information available for anyone to learn and understand. Yet, why aren’t more people becoming TSP millionaires? Why do some federal employees, nearing retirement, suddenly realize they need to keep working longer than expected to afford retirement? The reason is that while the formula for a successful retirement is simple, maintaining the discipline required throughout one’s life and career is far from easy.
If someone starts their career with the federal government, works for 30 years, and consistently contributes to their TSP, they should have no trouble retiring comfortably. So where do people go off track? What steps can be taken to ensure they can afford to retire as soon as they’re eligible? Below is a list of important considerations to keep in mind throughout one’s career.
Build a Savings/Budget Plan and Stick to It
Most people can’t accurately say how much they spend each month, and the reasons for this vary widely. However, for those who recognize the need to cut spending and save more, it’s crucial to understand the underlying causes of their financial habits. While many articles offer advice on effective budgeting, a few key strategies can help: automatically earmarking money for savings before it reaches the checking account, steadily increasing TSP contributions with each promotion or raise, and regularly reflecting on the importance of saving for the future.
Life Insurance
Many federal employees are often unaware of the full range of benefits available to them through the government and, as a result, seek additional insurance in the private market. This leads to many people being overinsured.
Life insurance is especially important for those early in their careers, when savings are limited, mortgages are still substantial, and children are young. However, as employees build up savings, pay down mortgages, and children become independent, the need for life insurance typically decreases. While life insurance is a valuable tool in financial planning, the key questions to ask are: what is the purpose of the coverage, and how much is truly necessary?
Changing TSP Allocation
In many situations, including investing, it feels reassuring to ‘take action’ and make adjustments, as if doing so will improve our position. However, this constant urge to act often has the opposite effect. Numerous social media pages and organizations offer advice on when to move in and out of funds. While some may occasionally give helpful tips, following this type of guidance over the long term typically leads to poorer performance.
Choosing the right TSP allocation requires careful upfront research, followed by the discipline to stick to the original plan. It’s essential to tune out the noise of opinions predicting which fund will outperform or when the next market correction will take place.
Rebalancing The TSP
Rebalancing the TSP annually is a different matter and is something all federal employees should consider. For instance, if an employee determines that a 50% C Fund, 25% S Fund, and 25% I Fund allocation suits them best, they should revisit their TSP each year to rebalance to that original allocation. Over time, each fund will experience varying levels of growth or loss, and without rebalancing, the portfolio may drift, causing one fund to dominate the others. Regular rebalancing helps maintain the intended investment strategy.
Stay Disciplined in Bad Markets
One of the biggest mistakes is having a high stock allocation in the TSP, then panicking and moving to the G Fund when the market takes a downturn. Think back to early 2020 with Covid—those who stayed the course and weathered the storm were able to recover, while those who moved everything to the G Fund locked in their losses. TSP allocations should be changed sparingly, and often the people who see the best results are those who set their allocation and stick to it. Of course, this is easier said than done, especially when the news is constantly focused on negative market trends.
Work with a Federal Retirement Expert
Partnering with a trustworthy professional who has a deep knowledge of FERS can significantly accelerate the learning process. While it’s important to educate oneself and gain a solid understanding on their own, having someone to discuss strategies with and bounce ideas off of can help keep them on track and avoid common pitfalls. Before working with Dugan Brown or any federal-focused financial firm, it’s essential to understand the services they provide, how they are compensated, and whether they can demonstrate a deep knowledge of the Federal Employee Retirement System.
