Pay in Today, Pay out Later

UNDERSTANDING YOUR DEFINED CONTRIBUTION PLAN

Retirement planning can create a sense of anxiety; the market falls and rises like waves crashing against grainy sand. In our daily activities we constantly hear the S&P 500 did this today or the Dow did that, even when we pass the newest digital billboard we see ticker symbols of VIX, Russell, and so on flashing like a strobe light in a disco. Other times we may see a person on television with his sleeves rolled up shouting, “buy this stock,” and, “sell this stock! “. This persistent noise becomes chatter in our busy lives.

But one has to wonder: what does it all mean to a federal employee?

Retirement Systems

Federal employees are covered by the Federal Employees’ Retirement System (FERS) or the Civil Service Retirement System (CSRS). In the case of CSRS or military service, the Thrift Savings Plan (TSP) is a supplement. For those covered by FERS, the TSP is a three-part retirement package that also includes your FERS basic annuity and Social Security.

Where did this TSP come from? It was established by Congress as part of the FERS Act of 1986. To put this in perspective, the 401(k) was created in 1981.

Difference between TSP and 401(k)

Employees of the federal government contribute to the TSP (Thrifts Savings Plan) which is the counterpart to the 401 (k) of the private sector. Since your TSP is a defined contribution plan it means the retirement income you receive will depend on how much you and your agency (if you are eligible to receive agency contributions) put in. Translation the more you put in, the more you will receive in your golden years.

How does the TSP work?

The Thrift Savings Plan is like owning a suitcase, the contents inside give ultimate value to it. In a TSP your contents are usually a G Fund, F Fund, L Fund, C Fund, S Fund, and I Fund. Six different pair of socks if you will! The overall Risk-Return Tradeoff is considered lower in the G and F Fund and higher in the C, S, I Fund. So if you’re early in your federal career, you may opt to diversify your TSP by spreading your allocation across the C, S, and I Fund. If you’re later in your career you may choose to be more conservative with the G and F Fund. Others may opt for the L Fund a.k.a. target-date fund which determines your investment mix for you depending on when you expect to leave Federal service.

Comparing Apples (TSP) to Oranges (401 (k))

In short, the C Fund (matches) is like the S&P 500 Index, the S Fund is like the Dow Jones, the I Fund replicates international equities. When you begin your federal career make time to understand your retirement planning and all the papers pushed your way on the first day. Yes, your HR Office is there to assist you in locating the resources you need but you have to ask.

Relief

We all make sacrifices in our day-to-day lives. Whether it’s putting in extra hours at work, losing an extra hour of sleep to catch up with an old friend or juggling family time. When the time comes, you want to know you can live your “golden years” out to the fullest.

For more information about TSP, please visit www.tsp.gov.