There are many benefits to moving your money out of TSP, when eligible. I have highlighted some of those benefits below. Those closest to retirement have the most to gain by looking outside of their TSP.
#1 Flexibility – In most investment options outside of TSP there are no limitations on withdrawals. Companies such as Fidelity, TD Ameritrade, Charles Schwab, etc…impose no restrictions on withdrawals. However, the TSP still has withdrawal restrictions, see below:
“Under the new TSP withdrawal options, all participants can take one withdrawal every 30 days.”
I cannot even begin to count the number of times someone has called me and requested a withdrawal because something came up. Things happen in life and people need access to their money. If I were to say “sorry you just took a withdrawal 10 days ago, you need to wait 20 days, I would not expect that person to remain a client much longer”. Why be in a place with that kind of restriction?
#2 Choice – It is 2023. The amount of investment options available are virtually endless. You can buy an ETF (Exchange Traded Fund) for just about anything. Such as: precious metals, the price of livestock, the spending habits of Millennials, the current trends on social media, the list goes on. Linked accounts, Structured Notes, Alternatives, etc... The individual investor has access to almost all investment types. Some of which used to only be available to large institutions, hedge funds or high net worth individuals. However, TSP is just now offering mutual funds? I haven’t used a mutual fund in the 14 years I’ve been a Financial Advisor. Mutual Funds were popular in the 80’s and 90’s but it’s 2023. ETFs are superior to mutual funds in almost every way imaginable. Lower costs, more liquidity, more choices. You can buy an ETF that only has an internal cost of .10%. The internal cost of mutual funds ranges from .2%-1.5%. On top of that, TSP has added the below cost and fees:
- $55 annual administrative fee to ensure that use of the mutual fund window does not indirectly increase TSP administrative expenses for TSP participants who choose not to use the mutual fund window
- $95 annual maintenance fee
- $28.75 per-trade fee
- Other fees and expenses specific to the mutual funds you choose
A $55 fee to use the mutual fund window to cover the people who don’t use the mutual fund window. Huh?
#3 Freedom – Once you move your money outside of TSP into an IRA or ROTH IRA you have officially taken ownership of it. You have the flexibility and choices of any investment option out there. You are no longer limited by the choices of the TSP. Right now, the biggest advantage in the private sector over the TSP is in G fund and F fund type investments. Coincidentally, these investments become more crucial when you reach age 59.5 or retirement. Generally, folks within 5 years of retirement should be lowering the risk inside their portfolio. Unfortunately, the return of the G fund and F fund over the last 10 years was 2.08% and 1.29%. The G fund returned 2.98% last year. However, in the private sector you can get a similar investment paying 5% or more. The F fund last year returned -12.83%. Having a negative return on your “conservative” money is never a good thing. Especially, if you are close to or in retirement. Due to the poor performance of traditional “conservative” investments over the last decade, people have been using Linked Accounts, Structured Notes, and various Alternative investments for years. These are not available inside the TSP.
The glory days of mullets, mutual funds and 60/40 portfolios are long gone. Successful investors in the private sector have made the switch to ETF’s, Linked accounts, Structured Notes and Alternative investments. Meanwhile, your TSP is stuck in the 90’s.
I am not saying to go run and cash out your entire TSP balance. What I am saying is the more knowledgeable and aware you are of all the options out there the more successful you will be. The biggest benefit right now outside of TSP is in “conservative” investments. This impacts those closest to retirement. Your financial situation is unique to you and what is best for someone else may not be best for you. The best thing you can do is speak to several Financial Professionals, learn about all your options, and decide what is best for you.
“Change is not always for the better but to do better always requires a change”
Investment Advisory Services offered through Spyrnal Wealth Management, LLC. Insurance products and services are offered through Timothy J. Spyrnal. Snowbird Retirement does not render legal or tax advice. Be sure to consult with a qualified tax and/or legal adviser regarding the best options for your circumstances. Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company and are not offered by Spyrnal Wealth Management.
The foregoing content reflects the opinion of Snowbird Retirement. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful