Let's discuss a few reasons why the TSP, or Thrift Savings Plan, isn’t always the perfect investment vehicle for every service member and federal employee just because of the low TSP expense ratio. There's far more to consider than investment costs of the index funds and average net expense of your TSP account.
We're told by all sorts of entities that TSP is one of the best benefits that the military can have, and as a financial planner, of course, I've had to say that line for years solely because of the low expense. Sometimes I even believed it because, oh shit, they're right. It's very low cost for TSP expenses. You can't get any more low cost when you talk about an investment account, so therefore, it's the best deal.
The less percentage that you have coming out of your money every year, the more opportunity there is for your money to grow. When Tony Robbins and all these book marketers talk about how to do investments better, they're always talking about cost.
What is the TSP Expense Ratio?
The administrative cost for TSP is a miniscule 0.04%! Yes, the TSP expense ratio is cheaper; but since when is something cheap the best option? Sure, if you have a scarcity mindset, you need to be cheap and avoid fees. If you're not good with your money, you need to go with the cheapest option. I'm not saying that just because it's cheap that the TSP is bad. I'm just saying that we should look at what our mindset is around that. Looking for something cheap, always trying to cut a deal or get a bargain doesn’t allow us to think outside of ourselves about how we can create abundance.
If you're just hoping that over 40 years that the cheapest option will give your money some sort of growth, great. But at the same time, who's managing your TSP? Are you? Are you paying attention?
How many people do you know who say they've been investing in a TSP for years and years, and it turns out that they just had their money in the G fund only earning 1% investment returns? What good does it do you to be cheap, then, when your money hasn’t even grown over the years? You could have easily invested in a Vanguard ETF or even Fidelity mutual funds with high administrative expenses and still gotten more bang for your buck.
Or maybe you have had your money invested. Maybe the market’s been making killer returns for you last year and you say, "You know, my TSP's been doing great for me, so I don't want to touch it." Okay. Let's talk about that. Your TSP's doing great for you now that the stock market's at an all-time high – so you’re just going to stay with the status quo? Do you not see the risk in that? Don’t you find it scary?
But those questions are just about money. Let’s shift gears. What's your intention for you life? Are you investing in a TSP, or a Roth IRA, or a 401(k) just because you’ve been told that's what you’re supposed to do? Because Suze Orman or Dave Ramsey said that's the best thing for you to do? No, that's the best thing for millions of people to do, as a whole.
What do YOU need to do? What is your intention for your life?
Is your primary goal in life simply to retire 40 years from now? Is your “plan” to bank on the probability that if you average a 7% return over those 40 years, you'll have a nice nest egg to retire on and finally achieve financial independence? Oh God, that's exciting...I don't think so. What could you actually have an impact on TODAY? Being cheap doesn't really allow you to have that much impact or that much control in the now. What can you influence in your next couple of years that could bring you real value down the road? Do you want to wait for 40 years and hope your TSP works out, or do you want to go out and get the career of your dreams and do work every day that you love?
Find a profitable interest that you can get behind and start earning a higher salary. Maybe you can start a business and make more money. Whatever you decide to do, you’ll be happier because there will be some meaning behind it, something more than just hoping year after year after year that your financial situation will “work out.” Give yourself something to do besides freaking out every time the stock market crashes, selling at the wrong times, and waiting till the market rebounds before you get back in. There's no value in that other than “the TSP is a bargain.” You should want more for yourself than just a bargain. You can take control.
That's why I like to follow a reality-based military financial planning model and this goes for service members and federal employees. Especially veterans considering federal service in post-military life. The reality is, you have no idea what's going to happen over the next 40 years. Sure, we can set up a portfolio based on “realistic probability,” and yeah, you probably should. You probably should have some of your money in some sort of long-term investment vehicle.
Military TSP is NOT a benefit: it's a government vehicle.
They set it up to make it seem like it's a good thing for you because as they have openly admitted, they can't fund your retirement pension anymore. Anyone joining the military today is offered TSP savings, just like government employees, for whom the TSP replaced the pension. The TSP option isn’t really a lie, but it's a mistruth. They're taking away benefits that they had previously promised as a condition of service. Now, whether or not we should realistically expect those benefits is another story.
Our country's in a state of crazy, crazy financial and economic hardship, but hardly anyone realizes it. Maybe as individuals we should all take more ownership of our futures and not just get into the military because we expect them to pay for everything for us for the rest of our lives. And in the meantime, when we eventually come out of the military, we’ve lost our intention about who we are and why we joined the military in the first place. We joined it to serve our country, but we also joined it for ourselves, to make ourselves a better person, to gain those skills.
If we just hope that our military “benefits” are going to “work out,” we're passing ownership of our lives to the military for the rest of our lives, and that's not the military's job. The military's job is to fight and win wars. When you are on active duty, you are a small piece of that mission; an important piece, but a small piece. Once you leave the military, we all know the military is not going to really remember us, not on an individual basis, and they’re certainly no longer going to tell us what to do and where to go on a yearly, monthly, daily, and even hourly basis. No. Once you separate from the military, we have to make our own orders.
We need to stop and think about our future and about what's important to us. But we can’t get so fixated on a goal like retirement, which is way down the road, that we don’t put in any effort into building a life for ourselves NOW. We need to rethink our future and what's important to us in a way that doesn’t require us to sacrifice our lives now. We need to think about our future AND our now. What do you want to do? What can you control?
Don't Just Risk Your Future Being Cheap
Maybe the best option for you isn't just putting the majority of your savings and investments into one of these long-term retirement vehicles or the low TSP expense ratio that you can't touch till age 60. What can you influence NOW that matters to you? Think about that. And for God's sake, don't just listen to the guy down the hall, who had a great month or a great year with his TSP and who therefore thinks he’s now qualified to dispense financial advice. Think about yourself, and YOUR life, and what YOU want, and be intentional with your decisions. And when you’re leaving the military with an existing TSP and not sure what to do with it then you should consider Rolling your account into the Veteran Retirement Rescue Strategy. Book a call today to learn more!