The Thrift Savings Plan is a wonderful defined contribution retirement plan for US government employees. But a lot of its members are unsure on how to participate in it and make their investment allocations. While each investor?s situation is unique , and we cannot offer individualized investment advice, what follows are general guidelines which may be useful in reaching your TSP retirement goals.
Determine how much money you need to get you through your retirement years. A good guideline is approximately eighty and 90 percent of your typical yearly expenses. Next, depending on the investing strategy that you choose, figure out a likely average expected return on your investments. Finally, convert this into your required monthly savings amount. Many investment sites on the Internet provide retirement calculators to guide you through these steps.
Determine how much risk you can take. It is extremely important that you pick a portfolio allocation and strategy which is compatible with your ability to tolerate investment volatility and occasional declines in your TSP account value. It is normal to experience some losses during periods of economic decline and bear markets. Failure to match your investment allocation to your risk profile often leads to behavioral investing no-no?s which are all too common, such as selling your risky investments like stocks at the bottom of bear market lows, and buying back in only after prices have risen and recovered substantially.
Decide on an investment approach. Choose whether you would like to be a passive investor or actively manage your investment portfolio. If you choose the former, decide on an appropriate allocation to the available TSP funds (always keeping in mind your own risk profile). If you decide to manage your investments actively, it?s up to you to choose a strategy that is likely to have good performance. As you review the options, look for a long-term performance record and clearly defined strategy rules that you understand. If you?re not sure, then you may be better off sticking to a passive asset allocation or investing your savings in one of the TSP Lifecycle Funds.
Always strive to consistently contribute to your TSP every month. While you?re early in your career and have not yet reached your full earnings potential, it may be challenging to meet your minimum monthly contributions. But take them seriously and cut your living expenses as necessary to meet your savings plan, since this is the best time to accumulate investments, while you?re still a long time away from retiring.
Let your retirement savings grow for as long as possible, to take full advantage of the power of compounding interest. This comes down to two things: start saving as early as you can, and try to avoid making any premature withdrawals before your planned retirement date, because you will owe the IRS a tax penalty on these.
Investors who stick to these principles are on the right track to meeting their Thrift Savings Plan retirement goals.
Learn about the benefits and disadvantages of investing in the Thrift Savings Plan and TSP funds.. Free reprint available from: Thrift Savings Plan Investing for Beginners.
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