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  • Pat Schultz

One simple way to maximize your TSP

At 7 feet tall, Nick Billings was built for basketball. Hailing from the great state of Alaska, he was a member of the undefeated Kodiak Bears 2001 4A championship team before he became a college basketball teammate of mine.

Nick was very athletic. Combining that with his 7’ height made him an excellent basketball player, especially when it came to blocking shots. In 2003 he was ranked #5 in the country for blocked shots.

Many days during practice one of the coaches would work with him one-on-one to do in-depth shot blocking training. The rest of the team would be working on other skills, but for Nick it was all about blocking.

He was the only team member focused on that skill. Since he was so good at it, the team delegated that responsibility to Nick. No one else worked on that skill, especially not me. Being the smallest guy on the team I knew it was something that I’d never excel at.

We delegated our team’s blocking ability to Nick because it’s what he did best.

That’s what delegation is for. You don’t need to be able to do everything. Instead, find someone who specializes in what you need.

We often hear from federal employees that they’re frustrated because they don’t know what they can delegate. You’re juggling your career, family, friends, traveling domestically or overseas for work, and the list goes on.

At some point you’d probably like to retire and have your TSP as your nest egg to lean on for income. But you have a problem. There simply isn’t enough time to dedicate to figure out how to allocate and invest your TSP.

Maybe you do somehow find the time to figure out how to allocate and invest. Then you still have the struggle of deciding what to invest in.

What you need is a Nick. A specialist. Someone who can help you allocate and invest your TSP while you focus on everything else in your life.

Until now there hasn’t been a great solution. There hasn’t been a specialist you could outsource to. We have current clients who are still federal employees, and until now we haven’t been able to help them manage their TSP.

But that has changed.

This is where the TSP Management Program comes in.

The TSP Management Program

The TSP Management Program provides a way for active federal employees to delegate the day to day management of your TSP. This allows us to execute our proprietary investment process on your behalf.

When you’re considering outsourcing your TSP, there are two key points to consider.

  1. Why it may be beneficial for you, and

  2. When is the proper time to outsource.

Why is outsourcing beneficial?

A study by Aon Hewitt, a leading human capital and management consulting company, found that professionally managed 401(k) plans have outperformed non-managed 401(k)’s by 3.32% annually. Since the TSP is the federal version of the 401(k), the results of the study are also applicable to professionally managed vs. non-managed TSPs.

3.32% probably doesn’t sound like much, but let’s play out what that can look like.

Say you have $500k in your TSP and you’re 10 years from retirement. If you average 6% growth for the next 10 years, you’ll retire with $895,423. Not a bad amount of money.

But now let’s say the same $500k is professionally managed and invested, and that professional management adds an additional 3.32% growth, resulting in average growth of 9.32% over the next 10 years.

After the same 10 years, your TSP is now worth $1,218,894. That’s a difference of over $320k simply by delegating management of your TSP to a specialist.

When should you outsource?

The most important time to delegate management of your TSP is five years out from retirement. This is due to something called sequence of return risk.

Sequence of return risk comes into play once you start taking withdrawals from your TSP. Once you start taking withdrawals, annual return rates become vitally important. It’s possible that the wrong timing on your withdrawals could significantly and negatively impact the overall rate of return on your investments.

An experienced TSP advisor understands sequence of return risk and knows how to account for it as part of your overall financial strategy.

Again, let’s play out what this can look like.

If you’re reading this, most likely you were working and investing through the financial crisis of 2008-2009. During that time the S&P fell over 50% in six months.

Imagine you planned on retiring in 2010 and your TSP was cut in half. If you had $1 million in your TSP at the beginning of 2008, that amount would have been slashed in half and only worth around $500k when you retired in 2010.

If you follow the 4% rule of retirement distributions, your $500k nest egg would only produce around $20k per year.

On the other hand, let’s say you decided not to retire in 2010 and continued working for five more years. Not only did you not start taking distributions in a down market, you likely would have continued contributing to your TSP. You had time on your side as the stock market recovered.

On average most investors got back to even in about 5 years, so your TSP in 2015 would have been back to the $1 million it was worth before the 2008 crash.

Follow the 4% rule again, and instead of the $20k per year your TSP is now generating $40k per year. That’s double the amount in the previous example and creates a definite difference in the lifestyle you can live! But without the help of a financial professional you probably wouldn’t have realized the long term difference those five years could make.

When my teammate Nick specialized in blocking shots, he could do what he did best while freeing up the rest of the team to do what we did best. That’s why at IFR we specialize in helping federal employees like you invest their hard earned TSP accounts, freeing you up to do the things you do best and allowing you to live your Intelligent Federal Retirement.