My Biggest Gripe/Concern With the TSP!

[BBBInvest]

There are a ton of knowledgeable individuals on this site but there is one thing that I feel should be addressed to all TSP investors in regards to their eventual retirement.

I am going to preference this post with the statement: I am not taking into account any supplemental income because in my opinion we do not know what the future holds. Social Security, Pensions, etc are just icing on the cake.

What about income?

When you retire what are you going to do for income!?

If you are financially responsible you should at the very least own your house and have absolutely no debts but at 59 1/2 you have one or two decades (probably longer) that you will need to finance and I highly doubt even a "mountain" of money in your TSP will be able to sustain your retirement. I want to point out a couple things for you to consider...

1. As of today, NO FUND OPTIONS offered by the Thrift Savings Plan provide a dividend or distribution to their investors. Instead those dividends are calculated into the share price. So despite your years of investing in a particular fund you do not obtain the benefit of building a stream of dividend payments for your retirement.

S&P 500 Dividend Payments

The S&P 500 has this option which is much more beneficial to investors. If you had 100 shares of the S&P 500 in 1990 your yearly dividend payment would have been $2038/year. Fast forward to 2014, if you never purchased another share your yearly payout would now be $3499 and that's if you didn't reinvest the dividends along the way. If you had, the payout would be much larger and keep in mind that's only on an initial account value of $50,000.

2. A TSP account value of $1 million won't last as long you think in retirement. First of all that account value is very rare, the average TSP account value is approximately $65,000. Please remember that a pile of money is finite. Once an individual loses their active income stream they either burn through their savings/retirement funds or have to downsize their lifestyle significantly. A steady income stream provided by the massive amount of capital you have acquired is the most efficient way to preserve your wealth/lifestyle. In short you never want to touch the capital only the money that is spun off from the capital investment.

3. What should you do? Take this time to increase your financial IQ. I know it seems daunting at first with all the terminology and the risk of losing money. But I believe if you educate yourself at your own pace it will produce much better results than investing blindly with a mutual fund and/or advisor. I'm not saying to disregard all advisors or mutual funds but at the very least you should understand the strategy they are implementing for your account.

I would also recommend looking into dividend investing and real estate. As with any investment or investment strategy there will be risk but please understand there will ALWAYS be risk with any investment and the only thing you can do is minimize it to the best of your ability.

4. What am I doing? I simply take advantage of the 5% matching from the government and utilize our method for riding trends. It is a simple and efficient way to minimize investment losses and maximize gains. Once I retire I will roll over every single penny from my TSP account and never look back.

The knowledge I have gained allows me to generate significant income at very low risk. Therefore it's much more beneficial for me to manage my own funds and I believe you can too.

Here's to our Wealth!

[Navig8tor]

While I don't disagree with your assessment, according to the TSP there were 1,656 TSP Millionaires as of this past December. Considering you quoted an "average TSP balance of $65,000," I think you pulled your info from the same place I did.

Either way, a TSP Millionaire is somewhat rare; however, it's not out of reach for many up-and-comers >>> IF they receive a proper and well-informed financial education and IF they make good financial choices throughout their working lives <<< Trying to get a "kid" to save money these days; it just doesn't happen. That frontal lobe isn't fully developed until they are in their mid 20's. They think for the here and now; most could care less what happens when they are 70 years old....and THAT is a problem that will plague the NEXT FEW GENERATIONS.

No doubt, we're getting hosed by the lack of dividends we see with in our TSP accounts as compared to other investing tools. One thing I think you should take to mind is your audience. I'm going to crawl out on a limb and say a large majority of folks on this website are CAREER-minded federal civilians and military members. With that in mind, you're talking to people who CAN have 20 to 30 year careers, then follow that up with second careers. My point is this: With the investing tools available today and the investing options that are out there, there's really no reason other than PERSONAL CHOICES that most of us can't retire financially secure whether we get dividends or not. If you spend 20 years(or more) in a federal or military job and leave with only $65,000 to your name...I'm gonna go ahead and say, "You didn't plan very well."

Of course, those properly addressed choices I speak of have to come early in our working lives through good financial education, solid practices, debt control...even family planning decisions ranging from getting married, or not, to how many kids you're gonna have. Rent a home; buy a home? Drive an over-priced vehicle to impress your friends, a used vehicle that does the job, or a "beater" that gets you to work. Save 5%, 10%, 50% or nothing at all. Keep up with the Jones's or do your own thing and sacrifice early in life to save for later???

I understand where you're coming from; however, ask an 18-year old kid what a "Dividend" is and you're likely to get, "Uhhh, something I get in return for NOT getting into trouble."

I think the biggest battle the past 2-3 generations has, is, and will continue to face is SAVING AT ALL. We're a society of "I want it now...someone else will take care of me until I'm 30, then again when I 60...I'm good...why save money now when I may not even live to be 70?" >>> That's what I hear from nearly every new-hire I interview and attempt to direct to the TSP. Over the past 28 years of my military service, I think I've swayed 6, maybe 7, people to the TSP. I've interviewed HUNDREDS. So yeah, I've failed in that mission...but I try!

Don't get me wrong, I appreciate your topic and I'm sure the rest of our "established investors" do as well; however, I think we need really to dumb it down for the people who are going to be taking care of our country in the not-too-distant future. I have no doubt there will be scores of new millionaire TSP account holders in the decades to come, dividends or not. Just give me TWO MORE IFT'S PER MONTH

On another note; Theoretically that $65,000 account will last forever if one followed the 4% rule of thumb on withdrawals You probably won't be able to make a car payment on that $217/month "allowance" but....theoretically...it'll last.

[crondanet5]

1. Remember that dividends are taxed as ordinary income.

2. Many financial advisors are moving away from buy and hold approaches to sell high, buy low. With research and practice you may find you can make more money taking capital gains rather than holding the stock for the dividend.

3. I wish there was more effort made encouraging investors to work their invested cash hard and max out their gains rather than sitting comfortably in a lower rate of return.

4. Every investor should decide how much money they want to have when they decide to quit investing and work hard to make that figure come true. Most are happy with a 3,5% annual rate of return.

5. Even when you roll your TSP account out of the TSP you can still invest it in ETFs that mirror the TSP Funds, and thus you can continue to follow the leaders on this site to continue to grow your account balance. I maintain the greatest thing is to have to adjust your 401k withdrawal figure upwards each year because your account balance grew last year rather than declined.

6. Plan on supporting yourself for 17 years from your retirement. That can also be stated as 204 monthly 401k distribution checks. Nobody wants to run out of money so work hard to be sure you don't. Now accepting comments/questions from the audience.

[Tomanyiron]

Marvin and Navig8tor, and Cron I love you guys, we are truly blessed to have members that care about there fellow man/women. But that might have been what got us in this situation the start with.

And this is more directed toward your comments Navig8tor? We made them (the kids, you called them) that way by being good providers. Creating a life of few worries. Good fathers and mothers provide for there children,right? We could not stand to see them suffer. We are the biggest screw-ups. We created an almost non-worry financial world for them. And WE failed them. I believe no one really learns except through sufferings. But it pained us too much to watch it happen.

I say us because I did it to. Good father and good provider, I thought was the same thing. By the time I realized the error, it was too late to correct it.

Our fathers did not choose not to provide everything for us, they just couldn’t afford it. And we do not hate them for that. We on the other hand could afford it, and we spoiled our children.

Johnny Cash’s father, who named him Sue, knew what he was doing, even if it did make his son hate him.

[crondanet5]

Hold on there pardner. I don't think Nav said what you think he said but apparently NAV hit a hot button. There are different schools of thought as to how an estate should be divided and disbursed. I have read posts on this site as well as elsewhere in which the author declared their kids were getting nothing because they had gotten nothing from their parents. I personally am a great admirer of Mr. Buffett because he gave his kids millions of dollars to disburse through a charitable trust to whatever organization they chose. Do you have any idea how many groups came before them asking for money? What a way to learn to say "No!" and "Sorry." It also imbued them with a sense of frugality when it came to spending their own money. Wish I could have done the same for my kids.
Now if we apply the hypothesis that everything happens to us for a reason, then maybe you are where you are today so we could meet and learn from each other. And we can change. We don't have to hold our anger or old ideas. So let's move on. First, let me say congratulations to you on making money today, and to do that you had to change your allocation. See? Like Thomas Aquinas said, "Change means growth, and growth is the only evidence of life." Nice to know you are alive and can change. Now how will you leave your estate to your kids?

[Tomanyiron]

Well if I was a little too soap boxy, I apologize, it was nothing directed at Nav. I have said pretty much the same things he said before. I agree with him, and at the same time except part of the responsibility. After self-evaluation, I determined I help create part of the problems, I did it thinking with a big smile on my face I was doing the right thing.

There is no easy fix for the problems he described. It’s the dilemma of all parents, government and society as a whole.

Sorry Marvin, I know this was not the direction you intended the OP to go.

[crondanet5]

Tom you did not say how you are going to pass on your TSP millions. Anyhow. We've all sipped from that glass of bitterness and "Wish I'd done it differently". As for the topic, I stand by my position that it is better to reap capital gains than dividends, but if you forget to sell the day before the ex-div date and you get the dividend, well, that's okay because your stock will recover and then you can sell it and take the capital gain as well. Only my experience is that there's more to be made in capital gains before the ex-div than there is waiting for the div date. Once sold you can find another dividend stock and do the same thing if you want. Dividends do have their place. For those of us on the low end of the income bar there's nothing like reporting $6,000 in dividends to get a lender interested in you. But you pay less tax on capital gains.

Recently there was an article about financial advisors recommending taking 401k/IRA withdrawals after age 59 1/2 rather than waiting until age 70 and 1/2. The reasoning was that with Social Security and any other life income streams due you your tax bracket may jump so why not take earlier withdrawals and pay less taxes? I leave that to y'all, but I offer the suggestion if you don't need it, don't spend it. Put it in a taxable brokerage account and work it as hard as your other investments to improve your wealth situation. The goal is to not run out of money before those 17 years have passed. And I think that was BBB's concern as well.

[Tomanyiron]

Cron, I liked you better when you only had 1, 2, or 3 words in your post.

I'm in the S-erious fund. I ain't in the "G-ot no problems" fund like you.

And you're making my head hurt.

[John316]

Cron and Navigator, I enjoy reading your posts - there is so much wisdom on this website! There is however one thing that I read from Cron that makes me wince - you said the goal was "not to run out of money in 17 years" - I disagree. Our goal should be to enjoy every single day that the Good Lord gave us. We should invest a little, spend a little, and give a little away. While I agree that our children don't save as much as we would like, there is a danger of falling off the other side of the swinging pendulum. One should also not save so much and fail to enjoy the flowers today that he die with a massive amount of money in his/her TSP and fail to have done anything that resembles living. Anyhow, my two cents.

[crondanet5]

Good to hear from you John. Of course everyone should smell the flowers every day. But do you remember the Aesop tale about the grasshopper and the ant? As for wisdom, do you remember Solomon lamenting he had asked for the wrong thing? Instead of wisdom he wished he had asked for a son who would listen to him. So we must choose the flowers we enjoy carefully to make sure we can indeed enjoy them every day of our life. Now here is a question for you. Is not the best flower of all spiritual? Doesn't that flower give the best joy of all? That might be your sermon this Sunday.

[Relevant]

Great posts folks - Just want to set the record straight. BBBInvest stated in his original post that "NO FUND OPTIONS offered by the Thrift Savings Plan provide a dividend or distribution to their investors. Instead those dividends are calculated into the share price."

This statement is a bit misleading and may even contradict itself. Just because the C-Fund chooses a different mathematical method to record dividends doesn't mean you aren't receiving dividends. The C-Fund reflects the same dividends that SPY or any of the S&P 500 Index funds receive.

For example: If SPY & C-Fund shares are both valued at $10 per share on Jan 01, 2013. On December 31, 2013 a C-Fund share is now valued at $13.3245 and the SPY Share is valued at $12.9744.

But, while your TSP account only shows you owning 1 share of the C-Fund, your SPY account shows you owning 1.021 shares. Your account balance is the same in both accounts. The .021 additional shares in SPY are the dividends.

[TSPKip]

Sluggard refers to a habitually lazy person, and no one on this website is a sluggard.

When we leave this world, we don't wish to leave behind debt for a funeral. etc.

With all our national debt, inflation may hit our cost of living.

[BBBInvest]

Great posts folks - Just want to set the record straight. BBBInvest stated in his original post that "NO FUND OPTIONS offered by the Thrift Savings Plan provide a dividend or distribution to their investors. Instead those dividends are calculated into the share price."

This statement is a bit misleading and may even contradict itself. Just because the C-Fund chooses a different mathematical method to record dividends doesn't mean you aren't receiving dividends. The C-Fund reflects the same dividends that SPY or any of the S&P 500 Index funds receive.

For example: If SPY & C-Fund shares are both valued at $10 per share on Jan 01, 2013. On December 31, 2013 a C-Fund share is now valued at $13.3245 and the SPY Share is valued at $12.9744.

But, while your TSP account only shows you owning 1 share of the C-Fund, your SPY account shows you owning 1.021 shares. Your account balance is the same in both accounts. The .021 additional shares in SPY are the dividends.

If you reinvest the dividends then yes your SPY account would own 1.021 shares but if you simply took the dividends as cash you would have passive income.

[BBBInvest]

I see this message might have been received the wrong way as I intended.

My intent was to simply make individuals think outside the box for when they retire. Everyone's situation will differ:

- We all live in different locations
- Come from different family dynamics
- Desire different things
- Value certain things over others

The big question you should be asking yourself after reading this post is what do you plan to do for income when you retire. What will you do when that active income for decades has stopped?

It has been my experience that everyone plans for a big retirement account but doesn't stop to think how they will will utilize that account for income during their retirement.

Thanks for all the responses.

[BBBInvest]

Cron and Navigator, I enjoy reading your posts - there is so much wisdom on this website! There is however one thing that I read from Cron that makes me wince - you said the goal was "not to run out of money in 17 years" - I disagree. Our goal should be to enjoy every single day that the Good Lord gave us. We should invest a little, spend a little, and give a little away. While I agree that our children don't save as much as we would like, there is a danger of falling off the other side of the swinging pendulum. One should also not save so much and fail to enjoy the flowers today that he die with a massive amount of money in his/her TSP and fail to have done anything that resembles living. Anyhow, my two cents.

I agree, there is much more to life than money!