If you are in the first few years of your career, you can take advantage of the best asset available to you: time. When you start saving for your retirement early, you have many years to weather short-term market fluctuations and to gain the maximum benefit from the power of compounding.
When to Start Contributing
The best time to start contributing to your TSP account is now. This way, saving becomes a habit. Also, you are "paying yourself first" by setting aside retirement funds before you are tempted to spend the money on other things.
The table below illustrates the impact of saving early for two savers, both age 25. The first scenario depicts a saver who invests $200 every month for 40 years. Assuming a 6% annual rate of return, this saver would have accumulated $400,289 by the age of 65.
The second scenario shows a saver who does not start saving at age 25, but decides to wait five years. At a $200 per month savings rate and a 6% annual rate of return, the account value by the time this saver reaches age 65 is $286,367 — a significant amount less than in the first scenario because the five-year delay means five years of forgone earnings and compounding. In fact, under this set of assumptions, a saver who waits five years would have to save almost $280 per month to achieve the same results as the saver in the first scenario.
| Savings Per Month | Years of Investing | Rate of Return | Account Value at Age 65 | |
|---|---|---|---|---|
| Scenario 1 | $200 | 40 | 6.00% | $400,289 |
| Scenario 2 | $200 | 35 | 6.00% | $286,367 |
| $280 | 35 | 6.00% | $400,289 |
Remember that starting your retirement savings early is important because the longer you wait, the more difficult it can become to reach your financial goals. By waiting, you may find yourself having to set aside a higher proportion of your income for retirement. Also, you will have forgone any earnings that could have compounded during those missed early years.
Your TSP Asset Allocation
The way in which you distribute your money among the TSP funds should reflect your time horizon and your risk tolerance. Since you have many years ahead of you, you can probably afford to take some risk. That is, you can consider investing in the TSP's stock funds (C, S, and I Funds) in addition to the G and the F funds. The TSP stock funds, while more volatile, offer the opportunity for potentially higher returns over time.
Also, by spreading your investment across the different funds, you become less susceptible to dramatic losses that might be associated with having all of your money in a single asset.
Visit Investment Funds to learn about all of the TSP funds, their features, and past performance. The information available will help you to determine an asset allocation that is appropriate for you.
Your Tax Treatment Options
You have the option of making traditional (pre-tax) contributions and/or Roth (after-tax) contributions to your TSP account. For more information on these options, visit Tax Treatment of Your Contributions.
