Pay Attention: Nobody Else Is Going to Fund Your Future

It's never too early to start planning for retirement. 

I recently was copied on a letter from a dad (federal employee, Scott Stoddard) to his four children after a recent family reunion.  Here is what he said:

Dear Kids,

Please seek retirement counseling ASAP–as early on in your career as possible. 

All four of you are extremely bright but I know from my own experience that retirement didn’t factor into my career choice.  Now with another 5-10 years to go before your mother and I want to live out our retirement, it is the one MOST important benefit that is on my mind constantly.  Find out who is responsible in each of the companies you work for and schedule an appointment.  It will be WORTH IT!

Again it was great to be with each one of you and your precious children at the reunion. 

Thanks Again – Love You All!

SCOTT/Dad

This is great advice to any young person starting out in their career. There are so many demands on young millennials who are beginning their adult life that they’ll need all the help they can get to properly prepare for their future retirement years.

TransAmerica Center for Retirement Studies put out a report, “15 Facts About Millennials’ Retirement Readiness...and 7 Steps for Long-Term Success,” that confirms my observations about the recent grads who are just beginning their careers. They know their future retirement is up to them and they are preparing by saving and learning how to live on a budget. They realize there are no guarantees that a lifetime pension benefit awaits them at the end of their careers and they know that Social Security won’t provide the same benefit as it did for their parents or grandparents. According to this report, they are learning how to invest and understand the importance of planning for future financial needs. This is very encouraging news. 

To reinforce the message from Scott and others who want to share their hard-earned wisdom, here are some suggestions for those just getting started in their career:

First, take the time to review a few websites that can help anyone understand how to save and invest for the future:

• Savings Fitness:  A Guide to Your Money and Your Financial Future
• Choose to Save
• My Retirement Paycheck

There are also many books to help workers prepare for retirement financially and mentally. Retirement isn’t just about having enough money, but it is also about living a life that is rewarding. Here are a few of my favorites:

• “The Truth About Retirement Plans and IRAs,” by Ric Edelman
• “You're Only Old Once!:  A Book for Obsolete Children,” by Dr. Seuss
• “How to Retire Happy, Wild and Free:  Retirement Wisdom That You Won't Get From Your Financial Advisor,” by Ernie Zelinski
• “Women & Money: Owning the Power to Control Your Destiny,” by Suze Orman
• “The Total Money Makeover:  Classic Edition:  Proven Plan for Financial Fitness,” by Dave Ramsey

I recently adapted the article “Retirement planning: 12 practical tips for Millennials,” by Jinny Olson, for those covered under Federal Employee Retirement System:

1. Get to know your plan. In fact, you have three plans: The FERS basic retirement benefit is administered by the Office of Personnel Management and provides not only retirement, but disability and death benefit protection and is the means to continue your health and life insurance benefits into retirement. The Thrift Savings Planand Social Security should also be considered part of your plan. Social Security provides not only retirement, but also disability and death benefits.  
2. Contribute, contribute, contribute. No one else is going to fund your retirement. This applies to the Thrift Savings Plan. In my opinion, the minimum contribution should be 5 percent. If you contribute 5 percent of your biweekly paycheck, your agency will contribute an equal amount to your TSP account for you. In addition, if you contribute to the traditional, pre-tax TSP, you will lower your taxable income by 5 percent.
3. Consider Roth. The TSP began offering a Roth option in 2012.  Roth deferrals are contributions made to the plan on an after-tax basis. According to Olson, this may be a good choice for you now when you’re in a lower tax bracket. In essence, the taxes paid while you are working may be less than if you contributed on a pre-tax basis and paid the taxes in your retirement years in a higher tax bracket.
4. Increase your deferral percentage every time you receive a raise.  This holds true for any savings goal you have. According to Olson, you were surviving on your income prior to the raise so you’ll manage without the extra income. Think of it this way: If you never see the money, you will never miss it.
5. Establish an IRA. Although the TSP is simple, low cost, and provides matching funds, you may still establish an IRA.  Doing so would allow you to save more than the maximum permitted in the TSP. If you still live with your parents, this is your chance to max out your TSP before you have to pay your own living expenses. In addition, an IRA will provide a wider range of diversified investment options.
6. Take the free money. Review tip No. 2.
7. Consider your own risk tolerance. Everyone has a different comfort level with investments and the stock market. Don’t know what kind of investor you are? The TSP offers lifecycle funds to help provide the best allocation of investments based on when you might need the money. 
8. Know when the money will be yours. In the TSP, your own money and any matching funds are vested immediately. The 1 percent agency automatic contribution is vested after three years of federal service. There is no excuse not to save even if you don’t plan to make the federal government your lifetime career choice. By the way, the FERS basic retirement benefit is vested after five years of civilian federal service. 
9. Don’t treat your TSP like a glorified savings account. There are stiff penalties for using the money prior to your retirement years. Read about the tax consequences here.  
10. Avoid taking loans and hardship withdrawals. As tempting as it may be to borrow some fast cash, don’t do it, Olson advises. The money you contributed to the plan was put there for retirement and, unless you’re in dire need, that’s where it should stay.
11. Move all of your retirement money into the TSP eventually. Olson suggested moving all of your retirement money into an IRA, but the TSP offers low cost investing and simplicity. Remember how great it felt when you consolidated your nine student loans into one payment? You have similar options with retirement accounts as well. You’ll want to keep in mind that there are some restrictions on what can be transferred into the TSP.
12. Most importantly—budget and live within your means. Most people in their twenties can afford to contribute to the TSP or a 401(k), it’s just a matter of finding the will to do it.

If your agency offers retirement planning seminars, take advantage of them to establish flexible financial planning goals. Retirement is hard to envision when you’re young, but it can be a frightening concept when you’re eligible to retire and find you haven’t planned properly.

(Image via Nina Buday/Shutterstock.com)