Are You Overinvesting in the TSP?

Are You Overinvesting in the TSP?

April 29, 2019

Last year I spent a day on Capitol Hill providing pro bono advice to Senate employees. Many of them were investing as much as they could in the TSP. In some cases, I suggested that they invest less.

Why would I do that?

Well, investing the maximum possible in the TSP is a commendable achievement but it was not the best strategy for everyone. Many of these Employees had significant debt and/or inadequate amounts of emergency funds and insurance.

It does not make sense to build up TSP investments if those investments are not being protected by emergency funds and insurance. An illness or accident resulting in disability or death could wipe out investments accumulated over decades.

Examples where it might be more cost effective to reduce bi-weekly TSP investments (but not below 5%):

  • Not enough in emergency funds to survive a furlough as long or longer than the last furlough
  • Someone paying 18% or more on credit card debt.
  • Hypothetical employee with three young children and a spouse. Spouse is more than a full time homemaker and cannot work outside the home. Large amounts of life insurance (5 to 10 times salary) might be needed to protect the family.

Reducing TSP contributions provides funds that could then be used for other financial needs: paying off credit card debt, building an emergency fund, purchasing additional life insurance to protect a non-working spouse and children, increasing auto and homeowner liability coverage, etc.

This is not a recommendation! It is a financial planning issue. Reducing TSP contributions will make sense for some Employees but not others. Consult with your financial planner to help you decide the best strategies.

Note: Individual situations vary, therefore this blog should not be relied upon as individual advice relevant to any person. This material is meant for illustration and/or informational purposes only and it is not to be construed as tax, legal, financial or investment advice. For information on your specific situation, consult a professional.