| New TSP contribution limit: How much should I put in? |
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pandashark
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| New TSP contribution limit: How much should I put in? |
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I posted this in the TSP chat thread, but I thought I could solicit more responses if I made a new thread. Since TSPs are essentially 401k's, I guess the same advice that applies to those would be the same. Anyway, here was my previous post.
Regarding the new TSP contribution limit, I was struggling with how much I should put in. I do contribute to a Roth IRA, and intend to keep that maxed out. But my general situation is that in a few years, I would probably like to look into buying a house and/or car, among other things. I've read hear and elsewhere, that it's not good to borrow from a 401k (or essentially taking a TSP loan), for various reasons. So for last year, I was making the maximum TSP contribution of 15%, and for the moment I've just left it there. My salary isn't high enough where 15% takes me to the IRS limit, although I could probably afford to go up to that (or at least closer to that). But would it be wise to do that, if I should be garnering cash for large purchases in the next several years? I'm having trouble figuring out where the balance here is, especially since I probably wouldn't want to dip in for a TSP loan down the road (unlike the ROTH IRA, where I can take out the contributions if needed).
At the very least, I know I should put in 5% into the TSP in order to receive full agency matching contributions, but beyond that, I'm not sure how much to put in. When I get into the intricacies, it doesn't seem like it's necessarily worthwhile to throw everything I can afford into the TSP. Although being young and 4 decades away from when I could actually touch money in the TSP, maybe i'm letting youthful vigor interfere with sound financial judgement here.
I'm disciplined enough so that I won't fruitlessly blow money that I don't put into the TSP (at least I like to think I am)...so how would you all recommend I set my contribution % for the year? btw, let me know if I should move this discussion to a different thread on the BB...
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Wed Jan 11, 2006 7:30 pm |
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Fireant
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I am assuming you are relatively young to the work force(ie in your 20's) as you say you are saving for a house/car... My advice or recommendation would be to max out with the TSP if you can... as Sarah said it drops your AGI for tax purposes and once you start making the contributions they aren't as painful as you and your lifestyle get acclimated to your earnings amount... in regards to a car I would recommend buying used cars 5-8 years old unless you are in a profession that requires new vehicles and the like... I go to auctions and buy my 'work' car for a grand or less and if it runs for 2 years then I've gotten a buy... of course I could get a lemon but knock on wood so far I haven't... Now in regards to purchasing a house most of the so called experts say allocate 20% of the down payment as this would avoid the pmi... however almost 2/5 of all new home purchases are done with interest only loans and they take second loans out to avoid the pmi...I have always gotten fixed rate loans myself but to each his own... I guess it all depends on the type of home($amount) you are planning on purchasing as to how much you need to put aside... irregardless if you feel that you need to save at least 20% then lower the TSP but at least get all of the matching(ie5%)... anyway best of luck... FIREANT
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Wed Jan 11, 2006 9:51 pm |
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Jaszbo
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The recomendation used to be 10%, but that was when social security and pensions were a little bit more promising. Well you are in the government, so pension is still promising. If you are maxing out your Roth IRA each year and you were maxing out your 401k plan then you are pretty well off, but if you don't own a house and you are neglecting real estate I think you need to rethink your plan.
I think you need real estate as well as your retirement account to retire comfortably. Do you work for the Navy? You can get loans without paying PMI and one of the best rates if so.
Maxing out your Roth IRA I think is more important, as you mentioned about withdrawing contribtions and more options that the TSP offers. But for instance lets say you put in 4k a year for 30 years and it grows 10% a year in your Roth IRA. It will be up to 793,571.31, now this is tax free money. Let's assume you are using the 4% rule, which remember this is not being taxed. That means that you will have about $2,645 a month. You may ask about inflation, well using 4k for 30 years I think should take care of inflation, becuase we're going up to 5k and then probably 6k, so I don't think this is a bad assumption. I'm not saying that just maxing out your Roth IRA is said and done, but if you are taking away from real estate then I would say you should cut back and if there's a place to cut back it would be the TSP.
Even though you can do 15, you need to relieze that your salary at retirement isn't just money. If you are making 50k a year and you are putting in 4k a year into a Roth IRA and 10% int a 401k plan then you are really only living off of 38k, becuase when you retire you aren't contributing to a retirement.
So in my opinion you can't go wrong maxing out both, but in my opinion I think the order of priorities should be this
1) max out Roth IRA
2) matching 401k plan (TSP)
3) Increase 401k plan to 10%
4) Save for a house
5) buy a house
6) try to go to a 15 year mortggae
7) up to you (max out or out of retirement account)
Some people aren't good with real estate and they aren't good with investments outside of retirement and therefore some people are better off maxing out their Roth IRA.
You can also compare real estate at a 15 year mortgage at an intrest rate of say 5.25%, which I'm seeing now to a 30 year mortgage of 6%. The difference if you do the math on the average house is about 250 dollars, yet if you estimate an average of 10% it almost breaks even. Most articles and books I've read that puts down 15 year mortgaes compares it with the exact same rate, which is not a fair comparison.
I promise you, if you max out your Roth IRA each year until retirement and you have a decent allocation and you do 10% in your 401k plan that alone will most likely be more than enough. If you buy a house with a 15 year mortgage and do say biweekly payements then after 12 years the house will be paid off. You could then move into a similar house and rent out your current house, which if you want be completed paid from your first house rent collected or very similar payments. The point is that you shouldn't neglect real estate and think only about your TSP.
You'll find a lot of people who only concentrate on their 401k, Roth IRA and even stocks, all different types of paper assets and then you'll find a lot of people who think it's only about real estate. Listen in just one house I made 150k in two years where I live, but how often is this going to happen? I think you should play every angle.
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Wed Jan 11, 2006 10:16 pm |
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SkyPilot
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| All you can! |
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I don't think one can over save. How you invest your savings will again, be determined by risk tolerance, time horizon and determined eventual need or desired lifestyle. Regarding the tax question, ultimately this is anyone's guess as we cannot fully predict our situation accurately through all the years of one's retirement, in addition to how the tax code will be structured at that time. So, the only safe bet is to save, save and save. You can determine later how much you need, and if you saved more than that, you will not grieve the surplus.
However, if you employ the basic principles of investment of active management, diversification and personal sacrifice, you may achieve your goal. However, we are offered no guarantees, but we have very few enforced limits either.
and on a sobering note... very few caskets have pockets, and hurses have no trailer hitches, that is to say, you can't take it with you. It is my hope that we live long enough expend our accumulated resources, and in that we retire with more than we can reasonable expend.
Cheers! 
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Wed Jan 11, 2006 10:43 pm |
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Rolo
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Sarah, Fireant have important points.
Something critical that is overlooked here: TIME.
The formula is:
MONEY ^ TIME = WEALTH
Time is the most important factor here and by putting in $15K NOW means that $15K compounds longer. Marotta just posted his article that waiting five years generally cuts your retirement in HALF.
Max it out now while you can for as long as you can.
re: buying house, car. Having assets (hefty retirement account) works in your favour for getting loans...you are less of a risk when you have all this cash. Why make a down payment when your money grows faster than the loan's interest rate?
"Expect me when you see me."
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Thu Jan 12, 2006 5:33 am |
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pandashark
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There were a lot of good points there, so I'll probably miss a few. I'm near the top, but not over the 20-70k (not the exact numbers, but I think it's something like that), so the TSP doesn't really change my income bracket. That's not to say I don't get tax savings though.
I guess what I realized, is that I kind of lost sight of retirement and the whole compounding thing in my line of thinking. It's kind of daunting to think that I can't touch any of that for another 40 years or so, but then again, I suppose that's the whole point of saving for retirement.  At least I still have a pension under FERS, but it really isn't much of one (unless I remain in the employs of the government for the next 30 years)...So I'm expecting a small sum of a pension when I retire, but not really counting on it too much.
So far, I'm just leaving my TSP at 15%, and I think the legal limit i can put in is between 20 and 25% of my salary (so I'm really not too far off that at this point. I supposed when I am one day making car an house payments, I could drop down my TSP contributions down to 5% then to make the payments, if necessary.
I'll just try to address a couple other things I saw, in no particular order. I am relatively young, and saving up for property in the san diego area is going to be an interesting (if not impossible!) task I know I need to save up some, but buying property probably isn't a serious consideration for at least a couple more years for me, depending on what happens to the housing market here.
Also, what I read before regarding TSP/401k loans, is that while it seems lik e a good idea because you "pay interest" to yourself, in reality, what you are doing is borrowing pretax money out of your 401k, and having to repay it with after tax money. If I thought about it more, I could probably explain it in more detail, but I'll take the financial experts word for it, that this results in quite a bit of loss. That's the whole reason why I started thinking whether I should try and go up to 15k on my tsp, because I was afraid of putting in too much and possibly needing some of the money later. And I guess the dilemma boils down to realizing the whole point of saving (so that there will be enough to live off during retirement way down the road).
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Fri Jan 13, 2006 1:21 am |
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SkyPilot
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PandaShark (cool name by the way...), congratulations on a worthy excercise. The big point is to think things through, that way you avoid becoming a victim of retirement, and arrive having purchased your own ticket and reserved your own seat (so to speak). This thread will live on as a practical tutorial for many who will come later. Far to few of our comrades in TSP are really thinking critically regarding these issues, until it is very late in the game.
You, my friend, are to be applauded for your efforts.
Peace, 
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Fri Jan 13, 2006 1:35 am |
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pandashark
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Thanks! (I forgot to check this thread for a while)
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Mon Feb 13, 2006 4:45 pm |
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