Front-Loading Your TSP

If you have ever sat down with a financial advisor, you may have heard of a front-load or sometimes referred to as a front-end mutual fund.  What is this and why does it matter to me?  Because if you invest outside of your TSP, this is a product that you may be presented with from a financial advisor.  Most mutual funds have fees.  What a financial advisor will sell you on is how a front-load mutual fund is better.  What he is NOT telling you is exactly for whom it's better.  Yep, you guessed it, the financial advisor!  Because they know that most people on average only hold mutual funds for 3-5 years.  So why would they advise you to buy a front-load mutual fund?  Because that front-load is mostly made up of their commission!  If you may only hold onto it for 3-5 years, then they want to get paid up front.  Even if you do hold onto the mutual fund for a longer period, your earning potential is greatly reduced due to paying so many fees/commissions up front.  This is the exact opposite of that.  

I want to introduce you to a new concept in TSP investing.  I call it Front-Loading your TSP.  As I have talked about in my other blog articles, TIME is a critical component in investing.  Especially for the Special Category Employees (SCEs) who have a shorter retirement time horizon and/or any federal employee that may have gotten a late start to prioritizing their retirement.  What if there was a way that to increase the amount of time your "Army of Dollar Bills" have to work for you?  

By front-loading your TSP, you can do exactly that!  If you invest the majority of your annual contributions in the first six months or less of the year, you will be compounding the earnings on your contributions for an extra six months or more each year that you use this concept.  Over a career, this can make a HUGE difference.  It does not increase your annual ROI as a percentage, but it does increase the size of your "Army of Dollar Bills" that are earning for you for a longer period of time.  Using this strategy, you can put 75-85% of your contributions to work for you on the front-end of the year!  Assuming you normally spread your contributions out evenly over 26 pay periods, using this method can put 25-35% more of your contributions to work earlier for you.

Your contributions equally divided over 26 pay periods has just always made sense.  It is easy for budgeting purposes and we all just follow the yellow brick road when the path is made that easy for us.  Front-loading your TSP is "outside the box" thinking.  The hardest part of this concept is implementation.  Once you run your numbers, you will see what I mean.  The front-loaded contributions will be a hurdle for most.  The nice part of this concept is that after you have front-loaded your contributions, it will be like giving yourself a "raise" the rest of the year!  We'll call those back-end contributions.  And you can do this even if you're implementing a buy and hold strategy.

I realize that not everyone is financially able to max out their TSP contributions each year.  And maybe you think you can't either, but you are willing to try front-loading?  Front-loading could be your gateway drug into maxing out your TSP contributions.  Once you make the sacrifice the first half of the year by front-loading your TSP, you may realize that you can survive without that extra money in your net income, and then boost your total annual contributions?  Sometimes, all you need to do is just change your habits and the rest will fall into place.  It comes down to priorities and delayed gratification.  Sacrifice a little now, for a huge pay-off later.  Also, remember that by increasing your contributions in a traditional TSP account, which are deducted from your salary pre-tax, this will reduce the amount of taxes you pay in that pay period, which will also help off-set the net take home.  And if the contribution amount for the first six months (13 pay periods) is too much, don't get discouraged.  Play with the numbers and use eight months (17 pay periods) instead.  You're still getting your money to work for you at a much faster pace than spreading it out over 26 pay periods.

So how does it work and how do I ensure that I still get the 5% government match?  Unfortunately, if you were not aware, the government does not match your TSP contributions as soon as you've contributed your 5%.  That would be awesome if they did, because then we could get the government's 5% match in ASAP as well and get compound earnings on their portion as early as possible too.  The government does it on a pay period by pay period basis.  I'm not sure why, but since we do not want to leave any money on the table, this must be accounted for in our calculations.    

Remember:  The 2024 annual TSP contribution limits are $23,000 and an additional $7,500 for make-up contributions for employees over the age of 50.  These limits are usually increased every year.

Here is the formula:  I'm going to use round numbers for easy math and give several examples so that you can see various scenarios.  Note:  You do not have to account for 5% on the front-load portion of your contributions since you will be contributing more than 5% by default.  Also, this strategy can only be implemented if you're actively contributing more than 5%.  If you're only contributing 5%, then I do not recommend front-loading as you will miss out on the government match on the back-end.

The Formula

1.  Base Pay (including AUO/LEAP) x .05 = 5% of salary    ($100K x .05 = $5,000)

2.  Divide 5% of salary by 26 pay periods = amount you must contribute each pay period to receive match    ($5,000 / 26 = $192.30/pp)

3.  Decide your total contribution dollar amount    (10% = $10,000)

4.  Decide number of pay periods to front-load    (13)

5.  Subtract the number of pay periods to front-load (step 4) from 26 = # of pay periods to contribute only 5%    (26 - 13 = 13)

6.  Multiple the sums of step 2 x step 5 = back-end contributions    ($192.30 x 13 = $2,499.90)

7.  Subtract your back-end contributions from step 3 = amount to front-load    ($10K - $2,499.90 = $7,500.10)

8.  Divide front-load amount by step 4    (7,500.10 / 13 = $576.93)

9.  Implement the change using the Employee Personal Page (EPP)

More Examples:

1.  $80K x .05 = $4,000

2.  $4,000 / 26 = $153.85

3.  20% = $16,000

4.  17

5.  26 - 17 = 9

6.  $153.85 x 9 = $1,384.65

7.  $16,000 - $1,384.65 = $14,615.35

8.  $14,615.35 / 17 = $859.73 

1.  $130K x .05 = $6,500

2.  $6,500 / 26 = $250

3.  $23,000 (approx. 17.5%)

4.  13

5.  26 - 13 = 13

6.  $250 x 13 = $3,250

7.  $23,000 - $3,250 = $19,750

8.  $19,750 / 13 = $1,519.23

Full disclosure:  I did not use this strategy while working as I only came up with it at the very end of my career.  I wish I would have thought of it sooner.  However, I am one of those feds that when I knew I would be getting a paycheck with a lot of overtime, I would "99" my deductions for a pay period (back when it was easy to do!) in order to have less taxes taken out.  Now I think it is a bit more complicated.

What I did do:  When I was on six-week southwest border details, I thought to myself, rather than "99" my taxes (actually, in addition to) since I was not maxing out my TSP at the time, I increased my contribution amount for the next six weeks or 3 pay periods so that it lessened my tax burden AND contributed more money into my TSP.  Since it was all OT and I didn't need the money for my monthly budget, it wouldn't be missed.  Now, that OT is still compounding nicely in my TSP....I wonder what the ROI on those six-week southwest border details is now lol?

Also, I did this:  At the beginning of my career, I started contributing 10% and increased it by 1% annually when I received either a GS level, step increase or COLA.  I took the long road starting out as a GS-5, but fortunately, what I did know then, was to get as much money in my TSP as early in my career as possible.  So, when I say front-load your TSP, I am also talking about getting as much money into your TSP account on the front-end or early in your career even if you can only spread it out over 26 pay periods.  Because those are the dollars that will work the longest and hardest for you!  

Putting it into perspective:  For each $1 you invest at the beginning of your career (assuming a 10% return, compounded annually), after 30 years will be worth $17.45.  Every dollar you invest later in your career will net you less each year.  A dollar invested with only 10 years from retirement will only net you $2.59!!!  And the same concept applies over a career with front-loading, I contributed as much money into my TSP as I could over the first 21 years of my career until I hit my retirement goal in my TSP.  So, what did I do then?  I dropped my contributions down to only 5% (making sure to get government match) and I gave myself a raise for the last several years of my career!!

Do you have a side hustle or does your spouse also work, but not have a 401K to save?  How can you get some of that money into your TSP?  Unfortunately, you can't.  However, if you imagine all of your different buckets of money pooled into one bucket, then you could increase your TSP contributions and then use money from your other buckets to pay for things for which your salary was ear-marked.  Even if you can't implement front-loading your TSP, when you know you're going to be earning extra money, "think outside the box" and get it working for you by increasing your "Army of Dollar Bills"!!  

Jerome R. Moyer

T$P Money Tree