Snooty Retirement Advice

This evening I read TSP 8 Critical Mistakes by Gary Melling & David Melling.  [For those of you unfamiliar with TSP, it is the federal government’s equivalent to the 401k plan].

Anyway, mistake #6 is Failing to max-out TSP contributions.  Melling & Melling elaborate as follows:

Too many employees fail to maximize their allowable TSP contributions – – and their rationalizations are many and varied.  Some say (especially FERS workers) that they’ll only contribute to get the government’s 5% match and they will invest the rest in Roth IRA’s etc.  This often fails because of bad spending behavior.  Once a contribution is made to the TSP the amount is “out of sight, out of mind” and the money is seldom missed.  Programs outside of the TSP often require much more discipline to make installment payments because they lack similar automatic contribution mechanisms.  (In the case of Roth IRAs, which allow withdrawal with no further taxes or penalties, it’s too easy to withdraw those invested dollars to cover relatively minor emergencies, or to pay for vacations, a new car and so on.)

But the most common rationalization is “I can’t afford it because . . . .”  Virtually anyone who has the desire to can afford to contribute the maximum to the TSP.  It’s simply a matter of spending priorities.  The real statement should be: “I don’t want to set aside that much to the TSP because I have other things I want to do with my money.”  Accept this reasoning and you’re really saying that you are willing to postpone retirement to buy something you want now!

[BTW, FERS stands for Federal Employees Retirement System.]

I consider the above advice snooty for a few reasons.  #1 – it is not hard at all to set up an automatic deduction from your paycheck to make contributions to a Roth IRA.  I’ve been doing this for over a year now.  #2 – The Mellings seem to poo-poo Roth IRAs because people can be tempted to withdraw money for what the Mellings consider “frivolous things.”  I personally think it is wiser to establish a Roth IRA and pull out your contributions if an emergency arises, than to make a withdrawal from your TSP.  #3 – The Mellings must not live in the real world.  When people say they can’t afford to contribute the maximum, the Mellings presume people are spending their money recklessly. Do the Mellings have any idea how much it costs to rent or own a home in the Washington, DC metropolitan area?  Have the Mellings not heard that in high cost of living areas, housing can consume 40, 50, even 60% of an employee’s paycheck?  And, if one does not have an emergency fund in the amount of six months of living expenses (Dave Ramsey), eight months’ worth (Suze Orman) or one year’s worth (Chris Farrell of Market Place Money), how stupid would it be to max the retirement contributions and not have any money for ordinary expenses or unexpected expenses?  Under such circumstances, the employee will likely turn to the fat TSP account to make a withdrawal.

And, I haven’t even begun to address child care or child rearing expenses (including funding a 529 plan for your child’s [children’s] college education).

It’s easy to preach that employees who are not maxing out their TSP contributions lack discipline or proper spending priorities.  But dig a little deeper and there are typically valid reasons why.  Maybe the approach should be to encourage employees to contribute a fixed percentage and then build from there.

Just my two cents.


1 Comment

  1. May 3, 2012 at 7:26 am

    Reblogged this on The Money Heifer.

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