Thrift Savings Plans -- Not a Bakken Story

Earlier I posted that I might post a note about Thrift Savings Plans if I found time. I found time: the granddaughters are out with their parents, and the NFL playoff games don't start for a couple of hours.

So, here's a bit about TSPs.

The article can be found at the WSJ: inside the self-driving index funds that finish first. 

This is how Jason Zweig starts the article:

Can you beat the market by not even trying?

Yes, if you are among the 4.6 million people fortunate enough to invest in the Thrift Savings Plan, a series of funds run exclusively for federal employees and members of the U.S. military. Even if you can't invest in these funds, you can take a page from their book by reading the fine print and keeping your investments simple and cheap.

I retired from the USAF in 2007. I believe I was contributing to the TSP the first year it was available, which I think was back in 2000. I seem to recall that I invested the maximum amount that could be invested for seven years, but I can't remember for sure.

I remember a military colleague questioning the value of the TSP. He was concerned that the funds would be tied up because they could not be withdrawn once deposited until one left the service. In fact, the funds are not tied up. One can take money out of the funds at any time, but withdrawals prior to leaving the service results in a loan against one's account. So, strictly speaking, one's money was tied up. But for those who have trouble saving/investing, that could be considered a plus: yes, you can your money out to use as a down payment on a house or to buy a car, but "we" ("the fund") will treat the withdrawal as a loan. A loan that you will pay back to yourself, not to someone else. [I have long forgotten the nuances of the military TSP, so I may be wrong on any one of these points, but I think I'm pretty close. I forget the rules for withdrawing funds.]

I can't remember the specifics of the program any more, but I do remember one could invest a certain amount of one's monthly paycheck into the fund every year. I simply took my pay raise, or cost of living, or combat pay, or hazardous duty pay, or specialty pay, or whatever pay I was receiving on top of the previous year's basic pay and placed it in the fund, up to the max. If I could live on the previous year's pay, I did not miss that "new" money. It was absolutely incredible how fast that account grew -- even if the return had remained flat, the amount of "forced" savings was huge.

So, how did the returns work out?

The record of these funds is remarkable. In 2012, the bond fund beat its benchmark, the Barclays U.S. Aggregate Bond index, by 0.07 percentage point—the sixth year in a row that it has outperformed. The large-stock fund also outpaced the Standard & Poor's 500-stock index by 0.07 point last year; it has beaten the market in four of the past six years and tied it the other two.

Both the small-stock and international funds surpassed their benchmarks in 2012 for the third year in a row.

Jason Zweig describes how others can mimic those returns.

Some idle chatter: back in the late 90's there was talk of major changes in the military retirement program. Were the general officers (active duty and retired) thinking about that when they came up with the idea of the TSPs? Did military officers come up with the idea and take it to BlackRock, or did BlackRock pitch the idea of general officers? I know military intelligence is an oxymoron, but, in general, individual specialists in the military are tops in their fields. I'm thinking specifically of the finance officers. Wow, we had some smart finance officers. And many of them provided free seminars on investing for fellow military members. The military itself provided mnay money management courts, from the very basic (how to balance a checkbook) to the very sophisticated for its contracting officers. Two things about military personnel: a) when it comes to electronic gadgetry, they are early adopters; b) when it comes to investing, they take it seriously. My hunch is that some very smart military finance officers, active and retired, came up with the idea and pitched it to investment firms like BlackRock.

When the TSP was introduced, there were concerns voiced by those of us in the trenches that it would replace the retirement system or significantly change the military pension. It hasn't. And I don't think it will.  And it shouldn't. Money invested in the TSP is taken directly from one's paycheck. As Jason Zweig says: non-military members can do the very same thing.

Oh, which reminds me. I might be wrong, but the TSP program sounds exactly similar to what President Bush was thinking when he talked about "privatizing" social security. Wouldn't it have been cool had Congress not reinstated the 2% social security give-back (or whatever it was called) during ObamaCliff talks and instead directed that the 2% social security give-back would be given back to workers, with one significant change: that 2% now going for more Congressional spending would instead be invested in a TSP.  [I guess I answered my own question: Congress would prefer that the money go to Washington where they could spend it, rather than into private investment. And yes, it's being spent, not going into social security -- remember Al Gore's lock box? There is no box. And if a box for social security existed, it would not be locked. Smile.]

Based on polls, younger workers assume the money they are paying into social security won't be there when they retire anyway.