The Thrift Savings Plan: A Strategy For 2021

A lot has changed in the last 12 months, but not everything.

Last week, I wrote about what I think are the foundations of military wealth-building. Following that, I can’t think of a better way to kick off the second edition of the Military Wealth Builders newsletter than by talking about the #1 most asked question on military finance forums and Facebook groups: What do I do with my TSP?

There are as many different answers to that question as there are financial experts out there. As one example, Dave Ramsey has stuck by his 60/20/20 rule for TSP recommendations for literally years: Invest 15% of your income every year, and make sure at least 5% of that (for those enrolled in the Blended Retirement System) is in TSP. Of that 5-15%, Dave says to put 60% in the C fund, 20% in the S fund and 20% in the I fund. Others recommend 100% in the C fund, to replicate the performance of a Vanguard or Schwab-style Total Stock index fund (but with even lower fees).

There are people who even try to use TSP to “time the market” and when they feel a downturn a’comin’, they move EVERY PENNY over to the G fund to minimize loss, then when they feel that the market is swinging back to the positive side, they return to their previous C/S/I allocations.

(As a side note, it’s worth mentioning that very few financial advisors recommend being in a TSP Lifecycle Fund. The simple reason is that they are far too conservative and the sacrifice of performance is not outweighed by the avoidance of risk.)

But, which one is THE BEST?!

The highly unsatisfying answer is that it depends. Again, a lot of it depends on your time horizon. A 25-year-old single E4 should not be making the same financial decisions as a 45-year-old O5 with two kids in high school. Additionally, for us as military members, whether or not you’re in the new Blended Retirement System (BRS) makes a HUGE difference in how you contribute to TSP. Any “advisor” who says that your investing style shouldn’t change with your age is trying to sell you something.

For myself, I used to exclusively follow the Dave Ramsey 60/20/20 rule. Then, I began to go heavier in the S fund, because I found that the S fund outperformed the C fund approximately every other year, and usually by a significant margin. I don’t have much in the I fund, but it’s a nice little hedge against an overheated US market (such as we are looking at coming up in 2021.) Overall, while it’s nothing revolutionary, I feel like that’s a pretty good mix with a long track record of performance to support it. Also, I’m not enrolled in BRS, so there’s no employer match for me in TSP.

Where I want to spend some time in this post, however, is on this one fact: Far more people stress out about the second part of Dave’s formula than on the first part. Let’s look at it again:

First, Dave says to invest 15% of your gross annual salary, across all your investment platforms and vehicles. Then, for servicemembers eligible for the match, he suggests that you invest enough into TSP to get the full amount of the employer match (5%, matched up to 10% by TSP) and then fully fund a ROTH IRA. If, due to your income level, you still have money left over (i.e., if you max out your IRA before you reach 15% of your salary) then, go back and top up your TSP until you hit 15%.

Second, within TSP, Dave doesn’t recommend lifecycle funds (and neither do most other financial advisors), but recommends setting your contributions at a 60/20/20 split between the C, S, and I funds, then forgetting all about TSP.

The reality is that, for most of us, we aren’t hitting the 5-15% number, so it really doesn’t matter what our percentage split is.

Therefore, regardless of what percentage you want to put in what fund, the most important thing that you can do this year to grow your wealth and repair your finances from the ravages of 2020 is to make sure that you’re contributing as much as possible to your investments. Try for that 15% number. If you can’t get there, get as close as you can.

Simply put, you’ll never build wealth, regardless of what mix of funds you have within TSP, if you aren’t contributing enough of your paycheck to TSP to begin with. But most people gloss right over that first part, and spend their time devoted to the second part. First, hit 15%, then worry about your allocation.

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