Retirement Plans, especially those sponsored by an employer (the 401K, 403b, and the TSP) are probably the most powerful and simple tool you have on your path to wealth. The TSP in particular automatically leverages the power of index investing for incredibly low fees. It has Roth and Traditional options, Targeted Retirement Funds, and starting in 2018 will come with a government match for those who opt in.
Why are there so many people out there advocating against the TSP or trying to game the TSP’s investing practices?
Greed. It is all about Greed.
Dave Ramsey, the famous radio financial guru, offers the following advice for the military on an un-dated article posted on his website:
“As a service member, you have the option to fund a Thrift Savings Plan (TSP), the federal government’s version of a 401(k). While a TSP offers the advantage of tax-deferred growth, you have limited investment options and don’t get a match from the military. That’s why Dave recommends skipping your TSP and investing in a Roth IRA first.
A Roth IRA is funded with after-tax dollars, so the money you invest grows tax-free. When you retire, your withdrawals are also tax-free. With thousands of mutual funds available to choose from, you can put the best performers to work for you. Spread your investment evenly across the four categories Dave recommends: growth, growth and income, aggressive growth and international.”
The date bit is important because as we all know the TSP offers a ROTH option, and has for many years now. As for Roth accounts and their tax-free withdrawals, Dave doesn’t mention the many potential reasons to use a Pre-tax Traditional account.
- If you are a high-earner now, and expect to make less in retirement, you could be paying extra taxes by using the ROTH.
- If you pay your taxes and then invest, you invest LESS. A smaller principal will grow less.
- Or, you might want to use the tax-deferred advantages of the TSP to lower your tax bill or qualify for things like the Saver’s Credit, which are only available to those with a lower Adjusted Gross Income.
There are good reasons to invest in a ROTH IRA, but none of them have to do with retirement. For example, under current rules, you can use contributions from a ROTH IRA to fund higher education before you reach retirement, penalty free. But Dave is writing about how to retire in his post.
Saving for retirement doesn’t involve planning to use the money early!
Investing in the TSP or and IRA -Traditional or Roth – has tax consequences coming and going. The decision to go either way should be carefully considered based on your income, goals, and personal situation. Without even mentioning these qualifiers Dave Ramsey instantly recommends the ROTH IRA as the only option.
1. Lesson Learned: Your financial situation is yours- only you can make choices for you.
What do we find at the bottom of the Dave Ramsey article? This little gem:
Call in Extra Support Why settle for a decent retirement when you can have a great one? Work with a financial advisor you can trust to help you retire with confidence. A true investing pro will take time to explain all of your options so you can make an educated decision about your future. Even Dave—a seasoned investor—knows the value of an experienced pro when it comes to growing his investments. If you’re looking for advice you can trust, we can put you in touch with an advisor in your area who Dave recommends.
There it is – the final (and revealing) piece of advice in Dave Ramsey’s column. Remember, his big problem with the TSP is that it doesn’t offer a lot of options. The Roth IRA has more choices, says Dave. More Choices = less simple, so…. Pay Dave’s network of financial advisors.
Follow the money! It is well known the Ramsey has a vast network of financial advisors he endorses around the county. Its my guess he gets a piece of their fee for the referral. Any fee you pay to an advisor is money you can’t invest. An advisor will shake up your portfolio, charge you high fees, and recommend you to expensive funds, especially as President Trump has placed the Fiduciary Rule, which mandates advisors have their client’s best interests in mind (not their own interests), on the chopping block.
Investing doesn’t have to be complicated, full of high fee’s, or run by an “expert.” A portfolio of 2 or 3 funds will beat those advisors 99.7% of the time over 30 years. Don’t believe me, I’m only 30 myself- believe the simple investing guru Jim Collins. Jim isn’t a big fan of 401k’s either and recommends everyone transfers their 401k to an IRA after they leave work… EXCEPT TSP members. The simple options and low fees of the TSP are exactly what Jim recommends.
2. Lesson Learned: Simple Investing absent fee’s is best – run from those who tell you otherwise.
Scammers and Gamers
Here is another website. www. TspInvesting. Com (I’m not linking to it so it won’t get more pull on Google)
It advertises a paid service which purports to capture 70-80% of the market gains while limiting your losses in the TSP, all for a low monthly fee of $14.95. The author makes it very clear that no-one can time the market, that his system is not swing trading (jumping in and out of funds frequently, a practice that is discouraged by the TSP’s rules), and that he is not a financial advisor. As we have learned, complicated investing and fees are the moves of a “sukka.” Apparently, this fellow has 300+ sukkas paying him monthly, if he is to be believed.
What can we learn from this scam to protect ourselves in the future?
My favorite parts of this site are when the author outlines a “real” TSP scam. The audacity!
Second favorite: He uses statistics, or as Mark Twain would say- damned lies- to show that we should be really scared about positive market returns. His evidence? I’ll paraphrase: People say the market earns 8%-12% per year, but looking back over the past 145 years the market only made 8-12% a dozen times. 60% of the time it made less than 8%! Success is impossible!
This is a deliberate misuse of numbers. Market returns are an average. You don’t see 8% every year, you might never see 8%. This fella is trying to scare his readers into not believing that the market can make a healthy return by misstating numbers. He doesn’t tell you that the market can return 20% or even 30% sometimes. If he told you that you wouldn’t need to pay for his… advice.
3. Lesson Learned: Know numbers and do your own math!
Another telling tab on his website is a rosy description of how to take a TSP loan. No person concerned about your financial well-being would tell you to borrow money from your retirement fund. My guess is he wants you to borrow your TSP money to invest elsewhere. That’s crazy talk! Borrowing money to play the stock market is always a bad idea. See 1929. Borrowing money you have invested in a low fee, simple plan, to invest in a high fee, complicated plan while still paying interest…sounds fishy.
4. Lesson Learned: Don’t borrow money from your retirement, even to invest somewhere else.
Here is a recent comment on The December 2016 blog post:
December 2, 2016 Mighty Marvin! As always, I appreciate the calm, deliberate, and well-articulated analysis — no fluff or emotion, just facts. I’m holding steady in G, per your guidance, but am investing in some inverse, leverage European ETFs to diversify. I’m aiming for Euro to take a hit and for FTSE Developed Europe All Cap Index to dive over the weekend and into Monday, based on Italian Referendum vote and associated european/EU fallout. This is my first exposure to leveraged (both are 2x multiplier) ETFs, but I kept my investment small and will watch EPV & EUO tickers closely for the next couple days … my understanding is that leveraged ETFs aim to provide a 2x daily-inverse performance can diverge quickly due to compounding effects. My only concern that I don’t quite fully grasp is the impacts of different trading open/close with the US/European markets being separated by 6 hours (I’m sure that an opportunity/risk in and of itself, but I can’t study and grasp everything–at least not yet). Thanks for newsletter and great content. Your analysis is solid and deep, but your present it simply and straight-forward.
Marvin Reply December 2, 2016 Thank you for the kinds words. Not many people know about the Italian Referendum taking place December 4th but if it the vote is the same as the BREXIT we might see a shock through world markets. Only time will tell!
Let’s break this out: Marvin, (the site owner whose avatar is a greedy Scrooge McDuck) has somehow convinced his readers to get in and stay in the G fund in December 2016. (The G Fund invests in government bonds, and makes almost no money, but is very safe.) He has also apparently given advice to his readers to invest in some European ETF’s they don’t fully understand. His readers are looking for a drop in the market based on a vote they can’t predict.
Bad advice. In December 2016 the Markets shot up, and the vote in Italy barely ticked the markets down before they rebounded. Anybody in the G Fund lost out on big gains, especially if they sold during some of 2016’s dizzying lows.
Marvin’s big scam is market timing. He advertises jumping out of the market as it tanks, and simply buying back in after its obvious it has bottomed out. The problem is, no one can tell when those times are. But wait- Marvin and his crack team back-tested his theory over the last ten years.
Ten years can’t be enough testing to see if your “market timing strategy” works. You could have had a lucky ten years (and excellent hindsight). Besides, if you could time the market you wouldn’t be telling us how….
5. Lesson Learned: No-one can time the market, but thanks for reminding us guys.
Here is Marvin’s best promo for himself: Investors made 32% in the TSP in 2013! Woohoo!
That’s right, had you been in the C or S fund (two nice index funds focused on growth) and just left it alone, you would have beat Marvin by 0.45%- 8.35%. And you would have had all those fees’ you didn’t pay Marvin to invest instead.
6. Lesson Learned: Basic research can stop a scammer. Do it. Don’t believe you can’t be scammed.
7. Lesson Learned: When I started this project I was convinced the biggest problem with personal finance was lack of personal education. The more I’ve read up, the more I see Charlatans and thieves out on the prowl giving out false advice to benefit from your trust our trust inexperience. Please don’t believe everything you read, not even here. Do your research, know your situation, and learn how to maximize your money to achieve financial freedom!