Another big mistake federal employees make with their TSP

This is the third segment of “The 20 biggest mistakes federal employees make with their TSP”. Last week I wrote about two big mistakes; “Thinking you can take distributions from your TSP any time you want” and  “Wrong timing of your TSP contributions can mean Forfeiture of matching contributions”. Next week I will discuss the mistakes federal employees make by “Chasing Returns”.

1) Keeping everything in the G Fund

This is the flip side to chasing returns. It is another understandable mistake, but the results can be harmful.

The problem with keeping everything in your TSP account invested in the G fund, is that the returns in the G fund barely keep up with inflation – meaning that you are not gaining any ground after factoring in the impact of inflation. Most people need to generate a return above the rate of inflation in order to be prepared for retirement. If you only match inflation, you are not making any real return on your investments.

People who tend to keep most, or all, of their TSP in the G fund, usually do so because they are fearful of losing money. What they do not realize is that the G fund can be losing money even though their account balance is growing – in the sense that they have less purchasing power because inflation is eating away at their dollars.

There are times when being in the G fund makes sense – like moving into the G fund to avoid declines in other funds. But extended periods in the G fund, while protecting you from market risk, exposes you to other types of risk, most notably inflation risk.

2) Not maxing out the 5% matching contribution

For FERS employees, one of the most powerful benefits they have is the 5% matching contributions to their TSP accounts.

All FERS employees receive from their agency an automatic contribution to their TSP account equal to 1% of their salary. They can increase this agency contribution to 5% of their salary by contributing 5% themselves – through pre-tax payroll deductions. The 5% that the employee contributes comes out of their paycheck – but the 5% matching contribution is a free lunch!

If you don’t contribute 5% of your salary to your TSP, you do not get the 5% matching contribution – you get the 1% automatic contribution, but not the rest. If you contribute 3% of your salary, you will receive a 3% match – but not the full 5%. So, any time you do not contribute at least 5% of your salary to your TSP, you are leaving money on the table.

It is simple to adjust your TSP contributions so that 5% of every paycheck goes into your TSP. Don’t leave money on the table. Even if you have to juggle your budget in order to make contributions to your TSP – the dollar for dollar match up to 5% of your salary is a powerful incentive.