Investment Question - US Government Thrift Savings Plan

I’m asking this in IMHO as I think it will eventually veer off into opinion based answers, and I’d like to welcome that input as well. But I’m also curious for an unbiased, factual comparison between the return rates shown here versus expected returns from traditional stock market investing. Are the fund performance summaries on any of those TSP options actually a good investment? Is the TSP actually the great benefit for government employees that it claims to be? Would a person (okay, me) be better off investing $40,000 into one of the TSP funds versus, say, Alphabet or Apple or Amazon or something like that? Or some other market fund? For the sake of the question, assume only a 10-15 year investment.
Also, some of my student loans are at 6%. I’d figure it would be better to pay that off, rather than invest in something that might only return 5%. But recently, someone was very adamant that it is better to invest than to pay off those loans, even if only getting 5%, and also that the average return on the market right now is about 8% anyway so it is definitely better to invest it. 8% sounded high to me, and I’d think that anything returning 8% would come with an equal amount of risk. What’s the Straight Dope?

If your student loan interest is deductible, you should figure that into your calculations.

Every investment fund has a table like the table linked to - you’d need to compare, and realize that past performance is not an indicator of future returns. What kind of things to these funds invest in?

It is almost always better to invest in a fund than in individual stocks. You only hear of the success stories, not the failures usually. If the stock is good enough the fund will invest in it, and they can get in and out of positions a lot faster than you can. I’m assuming you don’t want to invest your life following stocks on a minute by minute basis.

As for paying off your debt, that return is guaranteed while any short term return from the market is far from guaranteed. Investing at the high is often not a good idea, no matter how many people will tell you that this time is different and there is unlimited room for growth. Long term, for retirement, is a different story since you can go by historical averages. 401Ks are good because they support dollar cost averaging - while you may invest while the market is high, you will also invest when the market is low.

TLDR: It depends on your goals and where you are in your life.

We both contributed to the TSP because the government matched up to 6% if you were fully vested (this was in the 90s), and contributions came out pre-tax. So assuming investment in the common stock fund, you’re already up 6%, and with another 8% in returns, you’re earning some real money. Our nest egg increased dramatically in the six years we contributed.

To follow up on this point, it is not accurate to think of the question as, “Should I put $40,000 into TSP or just use the money to buy funds through E-Trade or whatever?”

First, if you have $40,000 in savings that you are looking to invest, except in special circumstances you can’t just put it in a TSP account.

TSP is built on taking a certain amount from your paycheck, at your election, having it matched by varying amounts of Government funds, and then having that invested in your choice of index funds.

So let’s say you want to set aside $10,000 out of your next year’s pay to invest in your retirement. You can either set that money aside yourself, and then send $10,000 to your broker to buy stocks, funds, gold, or whatever.

Or you can have Uncle Sam take that $10,000 out of your paychecks, to be matched with substantial Government matching funds. So the amount you invest in the various TSP index funds may be in the neighborhood of $15,000, maybe more maybe less in various circumstances.

If you know of a brokerage who adds 50% to your investment right off the bat, then you have some thinking to do as to whether you want to go with them or TSP.

If you don’t know of such a brokerage, I would suggest that someone must have a hole in their head to turn down so much free money, especially with the miracle of compounding interest.

The military doesn’t match funds, unfortunately. Retirement options will change next year, which will include matching contributions up to 5%. This is part of the effort to ensure everyone who serves in the military to earn a little retirement; not just those who stay for 20. The previous all-or-nothing approach to military retirement is going away. I’m eligible for, and staying with, the former High-3, system, though. It’s a much better deal for me. But it means no matching contributions. I’m currently deployed, so my pay is not being taxed. If I max my Roth TSP contributions to roughly 100% of my income, I won’t have to pay tax on the contribution or any of the earnings. In just a couple months, I will have the annual maximum of $18,500 in the account. That is for the tax year, though right? So I could max out December still, and then have nearly $30,000 in Roth contributions, and then add the rest in there as Traditional Contributions.
No matter what I do, I know I will regret it in some way. Thanks for the input, everyone.

Just echoing Ravenman, it’s a complete no-brainer to put into the TSP up to the amount of matching funds by your agency. You cannot possibly do better in any other legal reasonably safe investment, compared to immediately doubling your money and getting the returns on the doubled principal.

And confirm your options on whether you can add other personal funds into TSP. I imagine you can roll over an existing 501k into TSP; not sure about post-tax funds. Whether it makes sense to roll over an existing retirement account, well, I don’t think you’ll get dramatically better results without significantly more risk. At 10 years to go, more risk might not be what you’re looking for. And eliminating the hassle of having to track another account might make a roll-over the best choice.

And 8% in the stock market now? That seems kind of high, especially since paying off the student loans is zero risk, so paying them off is really worth a bit more than 6% in the market would be, after accounting for risk.

Looks like 65% Roth Contribution was the limit, with no option to go over it with Traditional Contributions. Actually, I think that’s a good move. That will let me keep some liquidity.
I’m impulsive tonight. I better stay off

That would definitely be a no-brainer. I don’t get the matching contributions, though. I would have done this years ago, if that were the case.

You have a couple of different separate decisions mixed up in here:
Question the first, is should I invest or pay off student loans.
Two parts to that - should I invest up to the maximum allowed (~$18000) in the TSP, which is a tax-deferred vehicle like a 401-K. Then if you have the money a second part of the question is whether you should invest in taxable accounts or pay off student loans.

To me, the answer to that is that you should always contribute to the TSP the amount required to get the match. Whether you should invest past that depends on your marginal tax rate - if very low I would probably pay off student loans, if very high contribute the maximum. Marginal tax rate being what the last dollar you earn is taxed - so as high as 39.6% for some people or as low as $0 if you don’t even earn enough to exceed the exemptions. As far as if you could max out your TSP and had money left, then I personally would pay off the loans rather than putting it in taxable.

Question the second is, are the investments in the TSP better or worse than some other hypothetical investment ?
The way to answer that question is to look at two things imo: The stated fees of the investment and the return vs the benchmark they follow (IE s&p 500, total stock market, or whatever index). Lower fees matter and the return should be very close to the benchmark or there are issues with the fund holding too much cash or similar.

The TSP fees are quite low, though you can get similar fees with low fee fund providers like Vanguard on your own. But compared to the crap in most people’s usual 401ks or 403bs they are fantastic. VS the average crap in most 401ks the low fees alone are probably worth 5 figures to you in retirement over a full working career.

Edit to add, and for me personally, my wife is eligible for the TSP and I have her maxing out her contribution and putting 100% into the L 2050 fund FYI.

Thank you, Jacobsta811! I still need to dive deep into the Student Loan stuff. I am positive there are federal service loan forgiveness options and such for must of them. I will be finishing up my Master’s soon, so I will have to start taking care of all that mess. Not sure what the total will be after all program options are exhausted. And then I hope to just pay off the balance with a lower interest loan.
My wife was an Air Force civilian for a couple years and she was eligible for the 5% matching. That was an easy decision to make! Me personally, I am only just now at the point where I am practically debt free and money is actually starting to accumulate in the bank. I’ve never had to think about what to do with extra money.

This is a free book I wish I had read as I started my working days. Also free in Kindle form on Amazon.