Being a TSP Millionaire is not as hard as you would think.
One of the big problems with the TSP is how confusing it is. It has different funds than a 401k or IRA.
But that shouldn’t confuse you. It is easy to follow these three simple (but not always easy) steps to ensure you will be a TSP Millionaire.
In fact, each one of these TSP strategies has the power to more than double the size of your TSP. Imagine what doing all three strategies will do!
The three strategies to ensure you will be a TSP Millionaire are:
1. Pick the right investment strategy and stick with it.
2. Don't time the market.
3. Contribute the maximum amount from early in your career.
If you don’t already live by these three crucial strategies, read on and I’ll explain the importance of each one in making you a TSP Millionaire.
Pick the Right Investment Strategy – and Stick with It!
Picking the right investment strategy is a crucial part of attaining millionaire status in your TSP.
How can you be sure you are picking the right strategy?
Let’s turn to the teachings of likely the best investor on the face of the earth.
No, not me!
Warren Buffett’s Bet
In 2007, Warren made a bet.
He challenged any hedge fund manager to outperform the S&P 500 index fund over the next 10 years.
This is a significant challenge. Many investment managers measure their success against the S&P 500 index.
It’s the classic choice of active vs. passive investing.
Warren Buffett’s reason for this bet was his long-standing belief that almost no one, no matter how talented, can invest in a way that will outperform what the S&P 500 index does over the long-term.
When it came to the results of this bet, he was right.
He didn’t have many takers for this challenge. Just one.
The one hedge fund manager placed a million dollar bet with him.
Not even close.
Over the next 10 years, the S&P 500 index would average about 7.5% per year.
The hedge fund averaged a little more than 2%.
This is an important lesson for investing the right way in your TSP.
Passive investing using something like the S&P 500 index fund is almost always superior to any actively managed investments.
In the rare cases where certain investors outperform the S&P 500 index over periods of 10 years or more, I would contribute that largely to chance.
The possibility that you will pick that rare winner is not worth trying.
Another important Warren Buffett lesson…
Warren Buffett, who is 89 years old, has a plan for how the money he will leave to his family should be invested.
No, he’s not investing it in Berkshire Hathaway, the company that he owns.
He’s directed that the money be invested in the S&P 500 index.
Let’s read his words in a message to his shareholders from 2013.
My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.
The takeaway from this is two-fold:
- He favors passive to active investment.
- He favors an index fund over individual stocks.
Telling these two stories about Warren Buffett to you is to drive the point home that simple index fund investing yields superior results to any form of active investment.
All you need to do is pick a passive index fund investing strategy, and stick with it over the long term.
Yes, you could just do what Warren Buffett does and invest in the TSP “C”fund, which is essentially the S&P 500 index fund.
That is, however, not your only choice.
There are several variations of this strategy that can be done inside your TSP account.
For several investment allocation options, see my most popular post.
Don’t let the name fool you. There is no best allocation. I list several options that you can choose from.
Don’t Time the Market
This is the second strategy. Remember, each of these strategies has the power to at least double your TSP by itself.
Timing the market is essentially believing that you or others can pick the correct time to buy and sell investments over the short-term.
It is one of the most common and biggest mistakes investors make.
I want to cover two different versions of timing the market.
- Selling during a downturn
- Changing investment strategies over the short-term
I’ll cover each of these separately, as they are different methods of attempting to time the market.
Selling During a Downturn
Selling during a downturn is a very natural tendency, but it also has devastating consequences on your TSP balance.
Another thing that sometimes happens with this scenarios is selling everything because you think a downturn is about to happen.
When you try to time the market this way, it is extremely difficult to do it in a way that saves you money.
This is because, in your decision to sell or buy, you have to be right twice.
The first time you have to be right is in your decision to sell. You have to sell before things drop too much. Then, once you sell, things need to continue to drop for a while.
Next, you need to realize when the price is down to almost the lowest point and buy again.
After you buy, prices need to go back up again. If they continue to sink, then you didn’t sell at the bottom.
It is very difficult to make both of these decisions correctly. Sometimes, there are false drops in the market that end up shooting back up. This is a common occurrence when people try to time the market.
Getting both decisions right is extremely uncommon.
In studying people who try to time the market, a majority of them lose money vs. if they had left their accounts alone.
You don’t know how low or high the market will go. Let your money ride, and don’t get screwed by trying to time the market.
This also applies to selling everything when you think the market might go down soon.
A lot of people sold their assets when President Trump was elected.
They were sure the market would crash.
The market has went on to rise greatly while he’s been in office. The graphic says the market was up 40%, but this graphic is a little old now. It’s from March 2019.
As of January 2020, the market is up more than 50% since his election.
The people that sold when he was elected lost a lot of money.
I’m not making a political statement, but illustrating a point about timing the market.
Changing Investment Strategies over the Short Term
The other side of strategy #2, Don’t Time the Market, is to avoid buying and selling decisions in the short-term.
This is important in understanding the advice I gave earlier, which is to pick a long-term investment strategy, and stick with it.
Let’s hear again from the Oracle of Omaha (Warren Buffett) on his thoughts of buying and selling investments with a short-term focus.
“Now if they think they can dance in and out [of the market] and buy and sell stocks, they ought to head for Las Vegas. I mean, they can’t do that. But what they can do is determine that there’s a number of solid American businesses, a great number of them, and if you own a cross section of them and particularly if you buy them over time, you basically can’t lose.”
When he talks about “owning a cross section” of American companies, he’s talking about an index fund like the S&P 500 index.
I would agree with Warren Buffet that making buying and selling decisions on a weekly, monthly, or even yearly basis greatly reduces your chances for success in the stock market.
Wall Street Exposed
There is a multi-billion dollar industry out there that is built around selling people information about where investments are expected to move in the short-term. This comes in the form of investment advisers, stock-picking newsletters, newspapers, websites, companies, TV, blogs, etc.
They want you to pay for their advice.
NEWS FLASH: This is all bullshit.
It’s useless information. Nobody knows with any surety where prices are going to go in the near-term. They will take your money, however, for the privilege of trying.
What I do believe is that prices overall will be much higher 20 to 30 years from now.
That’s how I recommend you invest your money.
Any attempt to circumvent this simple strategy with guessing on short-term moves is destined to be met with failure.
TSP Investment Advice
There are also companies that specialize in short-term strategies for TSP investing.
These companies like to look at the past performance of funds and tell you which ones are poised for growth in the near future. They’ll tell you how much to invest in which fund, and when to make changes.
This comes in all the same forms I mentioned above. There are subscription sites, newsletters, Facebook groups, blogs, you name it.
I can tell you how I feel about these companies, and I can guess how Warren Buffett would feel about them.
I’m not saying these companies are purposely misleading you. They may not know how bad their advice is, or how negatively it can affect your long-term growth.
But now you do.
These two crucial tips of picking the right investment strategy as well as not timing the market will make a massive difference in the size of your TSP.
But it’s missing a crucial step when it comes to harnessing the magic of compound interest.
Invest the Max in your TSP
Yikes! I can’t afford to max out the TSP, especially with my salary!
I hear you.
In 2020, the maximum contribution for TSP as well as 401ks is $19,500. This is up from $19,000 last year.
How many of us can afford to save that much money for retirement each year?
First, let me put it this way.
If you figure out a way to save the maximum contribution amount each year from early in your career, you will be able to shorten your working life by 10, even 20 years.
How would it feel to have that many years given back to you? Years that you can could do what you want with.
That’s the difference that is made by contributing the maximum amount from early in your career.
$19,500 a month divided by 12 months = $1,625.
That’s what you need to contribute a month to make this happen.
I made a HUGE mistake with my TSP.
I had the capacity to save the maximum amount from day 1 in the military, but I didn’t realize how important it was.
I’ve done the math.
If I had been contributing the maximum amount from the beginning instead of waiting until halfway through my career to start maxing, it would have far more than doubled the size of my portfolio today.
Even though I was doing everything else right with investing that money.
The money you invest early in your career is far more important than you invest later because of the magic of compound interest.
That money has lots of time to grow and compound. That is what makes a TSP millionaire (or 401k/IRA millionaire).
Investing early and often.
I know it’s hard to invest $1,625 a month, but there are options.
- Find ways to make extra money.
- Have a budget.
- Live more frugally.
- Get your spouse, if you have one, on board with your financial goals.
You are probably saying you can’t afford to do this. That might be true, but take a hard look at your finances, and find ways to contribute more and spend less.
It’s worth changing your lifestyle for.
Your biggest expenses are your house and car. Find ways to cut back in these areas.
What is your debt situation like? How much do you spend on memberships, vacations, shopping (Amazon), etc.
You get the point.
If you don’t contribute the maximum amount, get as close as you can. Every little bit makes a huge difference early in your career.
What if you are reading this at the end of your career?
Start investing correctly from today on. There’s no time like the present.
Pass on your knowledge to others who are earlier in their careers and put them in a better position.
These three rules can be the key to your financial independence.
Separately, they all have the potential to make you a TSP millionaire.
All together, these rules have the potential to explode your earnings!
Remember, this advice applies just as well to any retirement account.
401ks, IRAs, it’s all good.
Rich on Money
Make sure to read my post on how to be a military millionaire.