“Bought sense is the best sense” – Kimberly Cowan
Since coming over to the Foreign Service late last summer, life has been such a whirlwind of great moments. I found out that I’ll be starting my career as a Foreign Service Facility Manager in Bogotá, Colombia. I acquired a diplomatic passport, putting myself in a very elite category. I excelled in training—both in the trade and in the field. Yesterday, I received my housing assignment for the assignment in South America, and let’s just say that either Foreign Service diplomats get really great accommodations abroad or being a Facility Manager abroad has its privileges…or perhaps both. One of the best things about this transition from the Department of the Interior to the Department of State is the amount of information in the onboarding process…in particular, the financial aspect. During Orientation last September, my class had 4 sessions on financial aspects of the Foreign Service. Even though I’ve crossed over the 6-figure barrier for the 1st time in my career, finances can be very complicated in the Foreign Service lifestyle so I’m very thankful to the Department for giving me a crash course in how to navigate everything. One of those crash courses was the Thrift Savings Plan. Back in late October, I sat in on a session that explained the basics of the program and I had a one-on-one consultation afterward. I was completely blown away and in the months since, I’ve felt fantastic on one side and very disappointed on the other.
What is the Thrift Savings Plan? The Thrift Savings Plan, as they explain it on their website, “is a retirement savings and investment plan for Federal employees and members of the uniformed services”. It was established by the 99th U.S. Congress in 1986 as part of the Federal Employees’ Retirement System Act of 1986. President Reagan signed it on June 6, 1986, and it became Public Law 99-335 that same day. The Thrift Savings Plan—or TSP, as it is called by us in the Federal Government—is somewhat similar to the 401(k) retirement plans that are prevalent in the private sector and most public sector places of employment outside of the Federal level. It’s a contribution plan so what you eventually end up with in retirement depends heavily on what you and your agency put in during service time. These days, every U.S. Government civilian is automatically enrolled and each pay period, 5% of your base salary is deduced and deposited in your TSP account. When I started with USACE in 2013, that deduction was 3%. Within the TSP, you have 2 contribution categories: traditional contributions and Roth contributions. In the simplest terms, the difference between the two is that traditional contributions are pre-tax and Roth contributions are after-tax. Contrary to popular belief, you can actually make contributions to both. There are 3 contribution types: (1) regular employee contributions, (2) agency automatic contributions, and (3) agency matching contributions. Regular employee contributions are just that: employee contributions. Since the beginning of the current fiscal year on October 1st, the minimum employee contribution is 5%. However, employees can adjust this percentage to a higher number or set aside a specific dollar amount to be deducted each pay period. Employees do have to be mindful of the annual limit, which is $19500 for all employees in 2021…though employees 50+ can contribute an additional $6500 in “catch up” payments. Next up are the agency automatic contributions. This 1% contribution is automatically fed into your TSP account every pay period. There are a couple of things that one should take note of as it concerns the agency automatic contributions: (1) it is not taken from your pay and (2) you have to meet the vesting requirement—generally 2 years of Federal service—to be able to keep the contributions. Finally, you have the agency matching contributions. Every great retirement plan is great only when your employer matches what you put in. The Federal Government is pretty good about this. On the first 3% of pay that is contributed, agencies match dollar-for-dollar. For the next 2%, the agencies match at 50¢. Contributions above 5% are not matched nor are contributions matched if the employee stops contributing. Using the 5% regular employee contribution, the agency automatically contributes 1% and then matches the employee contribution with a 4% contribution. The result is a contribution of 10% of that employee’s base salary into the TSP. One of the unique things about the TSP is the different types of funds you can stash your contributions in. There are 2 categories of funds: lifecycle (or L) funds and individual funds. The lifecycle funds are basically target date funds—a collective of mutual funds or trust funds that provide a simple investment solution through a mix that becomes more conservative as the target date approaches. The TSP has 10 such L funds in 5-year increments from 2025 to 2065 plus the L Income fund, which is recommended for people receiving monthly TSP payments. On the other side are the individual funds. There are 5 of these: Government Securities (G Fund), Fixed Income (F Fund), Common Stock Index (C Fund), Small Capitalization Stock Index (S Fund), and International Stock Index (I Fund). Of these funds, the G Fund is the most unique in that payment and interest is guaranteed by the U.S. Government. Unlike any other retirement plan known to mankind, this is the only fund that guarantees that you won’t lose money. But while that is fantastic, the caveat is that your money won’t grow much in the G Fund. The other 4 individual funds all have varying degrees of market and inflation risk. As you invest in the TSP, there are a couple of options on how to manage those investments: contribution allocation and interfund transfer. The former allows you to configure how you want to invest new money directly from your pay while the latter allows you to configure money that has already been invested. According to what I’ve learned these last few months, the key to success with the Thrift Savings Plan is discipline…finding a groove for you and sticking to it. As unbelievable as it sounds, it is possible to become a TSP millionaire—that is to accumulate a cumulative value of over $1 million in your TSP account. It takes a while—the average is 28 ½ years—but it’s very much doable. Keep in mind this does not include the social security benefits or the agency pensions that are afforded to Federal employees in retirement.
What’s my experience with the TSP? My TSP experience started when I came onboard as a Federal civil service employee in 2013. Unlike the 5 months or so I’ve been with the Foreign Service, I didn’t get a whole lot of education on the inner workings of the TSP while I was hustling for the Charleston Corps or even at the DOI headquarters. At most, it was a slide or two during the 1-day onboarding briefings. I had an entire month of onboarding when I came over to the Department of State. Even more, I learned a lot from my classmates in Orientation and from my colleagues in the Bureau of Overseas Buildings Operations about the TSP. As a result, I learned that I made a very costly mistake. From my start in Federal civil service up until my proverbial “road to Damascus moment” in October, my TSP employee contributions were 3% and everything went into the G Fund. I was 28 when I secured my independence from the Air Force and started the GS-11, Step 1 gig in Opelika. At the time, it was just me in my 1 BR/1 BA apartment with monthly expenses that could be addressed in full using ½ of one of my biweekly paychecks. I didn’t have any debts and though I lived in arguably the best neighborhood in Opelika, I was still living well below my means. While my personal savings accounts definitely flourished, my TSP grew at a snail’s pace. In hindsight, I definitely could’ve taken on more risk and I would have had I known then what I learned last October. The financial consultation I had the one-on-one with ran some numbers just to see how much I lost out on by (1) not maxing out the contributions and (2) not spreading the contributions into higher risk funds and in a 7-year period, I missed out on just over $85000. That literally made me sick to my stomach to know that I missed out on a lot of “free” money as well as market gains. Though I’ve seen my TSP increase nearly 30% in the 4 months since I was properly educated, losing out on that money early in my career will haunt me. It’s unlikely I’ll be able to make that up…even when I can start making catch-up contributions in 15 years. It’s still possible that I can end up being a TSP millionaire but I definitely made it hard for myself. This is where Kim’s quote comes into play. My education on the TSP was definitely bought…and it was a sum that I wouldn’t have paid if I knew better.
EDITOR NOTE: If you are a Federal civil service employee or a military servicemember, pay special attention to the Thrift Savings Plan. Learn from the mistakes of my youth and take advantage of the money that’s out there to be had. Make sure you do the proper research and ask questions. If you need more information, contact the Thrift Savings Plan at 1-877-968-3778 or visit their website at https://www.tsp.gov/.
