In the pleasant conversation we had. I shared a few points that I thought were important for him to know before making a decision regarding his TSP (Thrift Savings Plan).
This is a decision that could potentially cost him a significant amount of money over time.
That is why, in this blog post, we are going to share the main questions anyone with a Thrift Savings Plan should ask.
This applies whether they are thinking about retiring soon or are already retired.
Before we begin, for those who want to learn more about what the Thrift Savings Plan is, we could simply say that it is a retirement plan very similar to a 401(k), but built specifically for Federal Employees and members of the uniformed services.
In my sessions with many of these workers and retirees who hold a TSP, I see a substantial number of investors who have done an excellent job with their retirement plans.
Thanks to their service to the country, some have excellent pensions that help cover their living expenses in many cases.
This allows their account balances to continue growing over time, which is precisely why many investment advisors are eager to work with them.
Now, I am not saying that working with an advisor is a bad thing, but you must always be very careful about the type of advisor you choose to work with.
This is where you will hear me say, until I am blue in the face, that your best option will always be to work with a Fee-Only advisor, one who receives fees exclusively from you.
You want to avoid Fee-Based advisors, who receive commissions and third-party incentives that do not always align with what is best for you, but rather with what is best for their performance bonuses.
Let’s look at some of the questions and answers you should know before deciding whether or not to roll over your TSP.
1. Low Expense Ratios & The Core Strengths of the TSP
What are the actual expense ratios for TSP funds compared to typical retail funds?
The investment world is very much like the business world: a good business owner knows that the lower they keep their expenses, the more their profit or net return is optimized.
Many workers and retirees do not pay close attention to how much the investment funds holding their money actually cost them.
They rarely review a ratio of fundamental long-term importance: the fund’s Expense Ratio, which is simply the cost of that fund to you.
In several analyses we have conducted, we are amazed to see how low the expense ratios are for the funds inside the TSP.
In fact, these funds are specifically built for federal workers. Because they manage such massive sums of money, they can maintain an average expense ratio between 0.034% and 0.051%.
This means that for every $1,000,000, you would pay between $340 and $510 per year.
According to the Morningstar Annual U.S. Open-End and ETF Asset Flows & Fee Study Report, the average expense ratio for an actively managed fund investing in U.S. Large Capitalization companies typically ranges between 0.90% and 1%. That represents between $9,000 and $10,000 annually per $1,000,000.
Of course, you can already see why certain Fee-Based advisors might have a substantial interest in offering a fund that, in simple linear terms, without even accounting for opportunity costs or compound interest, could cost you around $100,000 ($10,000 × 10) over a 10-year period instead of $5,100 ($510 × 10). The savings by staying in the TSP could reach around $94,900 over that time frame.
On top of these costs, you would also need to add the management fees that a financial advisor might charge for their services, which we will discuss further below.
2. Debunking Advisor Pitches to Roll Over to an IRA
Many financial advisors claim the TSP is too limited. Why do commission- or AUM-based advisors push this idea?
This is the classic pitch you will almost always hear from sales-driven investment advisors, using arguments such as:
“Your TSP only has 5 funds, which doesn’t allow you to build a portfolio that can truly maximize your returns over time. That plan was fine for your early professional years, but now that you have a larger balance, you need to expand your investment options. For example, you can’t invest in Gold—and with inflation and a National Debt over $34 Trillion, it’s essential to protect yourself. Likewise, it doesn’t invest in new technologies because it doesn’t give you access to Crypto-assets or private funds. And if it’s true that we are in an AI Bubble, the TSP doesn’t offer an annuity with a guaranteed fixed return when the bubble bursts.”
As you can see, some investment advisors can be very skilled at selling based on fear, whether it’s fear of the national debt or an AI bubble. That is precisely when they offer financial products carrying high costs.
In the end, what I have seen time and again over my nearly 30 years in the financial industry is that the only one who truly does well and takes zero risk with these products is the salesperson who sold them to you.
At our firm, we have conducted multiple analyses showing clients in our hourly Financial Planning sessions that when we compare their sophisticated portfolios against a simple benchmark built with just 3 Vanguard ETFs offering broad diversification at a low cost.
This simple benchmark often outperforms portfolios filled with actively managed funds and high commissions, sometimes by a wide margin.
If I can share a big secret with you, it’s that the financial industry has always tried to convince investors that the more sophisticated and exclusive their portfolio is, the better it will perform.
Truth be told, that logic might work for a Golf Club where paying higher monthly dues or initiation fees gives you access to an exclusive world surrounded by more millionaires.
But in the world of investing, what has proven to make sense time and time again is that the 5 core funds in your TSP provide adequate diversification at the best possible cost.
I am sure a group of experts established that these 5 funds were precisely what federal employees needed, and nothing more.
I assure you that if historical or statistical data proved otherwise, countless actively managed funds or advisors would have already pushed their way into the TSP if they were truly better over the long term at lower costs.
My advice as a CERTIFIED FINANCIAL PLANNER® who provides hourly or subscription-based services on a Fee-Only basis is simple: do not be tempted by the sales pitch of certain advisors.
In the vast majority of cases, you will be far better off simply keeping your TSP because it is simple, broadly diversified, and low-cost.
Another suggestion: be extremely careful when a financial advisor or insurance agent tells you:
“The best thing for you is to buy an annuity so you can protect yourself from market downturns, pay no taxes, and best of all, it has zero cost to you because the insurance company pays me, and the annuity doesn’t have an expense ratio like your Fee-Only Financial Planner claims.”
Remember one of the very first principles taught in finance class: There is no such thing as a free lunch. Nobody gives you anything of value for free. Annuities carry massive costs that many people fail to realize, largely rooted in opportunity cost.
Remember, the insurance company takes the money from your annuity and invests it in the financial markets.
While they might be earning an average return of 12% on your money, they pay you 4% or 5%.
You feel happy because it seems like a decent rate, while over time, they keep the spread, which can easily be 6% or 7%.
In the next question. I will show you how much you can lose for every 1% in fees, so you can do the math yourself and see why that advisor is pushing so hard to sell you an annuity and move your TSP into an IRA.
How much does a 1% AUM fee actually cost a federal retiree with a $1,000,000 TSP?
As we have discussed, keeping costs low is fundamental to being a successful investor. We already saw how switching to a different type of investment can cost a massive amount in fund expense ratios alone.
However, those fees do not stop there. While your TSP portfolio practically manages itself today, some advisors will tell you that if you let them manage your retirement plan instead, they can offer returns well above what you have earned all these years.
That is why they suggest a rollover from your TSP to a Traditional IRA, where the advisor will manage the portfolio and charge an average fee of 1% AUM (Assets Under Management).
Since you are practically a TSP expert by now, you know that moving from near-zero fees to paying 1% over time means that, on a $1,000,000 balance, you would pay about $10,000 annually in management fees.
According to research highlighted within the Advice-Only and flat-fee advisor network, this fee doesn’t just cost you $10,000 multiplied by 20 years ($200,000), as many would assume.
When you factor in the growth lost on the money used to pay that fee year after year, assuming a hypothetical, non-guaranteed portfolio growth rate of 7%, the true cost of that 1% fee over 20 years can exceed $663,000.
This is why our recommendation is to pay a flat fee rather than a percentage of your wealth just to manage a portfolio.
This is especially true given that many AUM advisors do not include comprehensive complementary services within that fee where you would see real added value, such as advanced Tax Planning.
Real tax planning goes far beyond simple tax-loss harvesting; it involves strategies like Roth Conversions, which, when applicable, can save eligible clients hundreds of thousands of dollars in taxes over their lifetime.
3. Roth Conversions & Tax Strategy for TSP Retirees
Why should federal retirees consider Roth conversions during their lower-income tax gap years?
Because you are retired or about to retire, your tax bracket is currently substantially lower than when you were earning your full salary.
Furthermore, because saving and investing is in your DNA, something tells you it will be very difficult to spend down your entire TSP balance.
You might be concerned about what will happen when Required Minimum Distributions (RMDs) kick in, and the IRS forces you to withdraw money, pushing you into a much higher tax bracket and causing your Medicare Part B and D premiums to surge monthly (via IRMAA surcharges).
This is precisely where a strategic Roth Conversion strategy becomes highly beneficial for TSP retirees. It helps determine the optimal amount to systematically convert into a Roth account so your wealth continues to grow, but now with the benefit of tax-free withdrawals in the future.
If you are like most of my hourly Financial Planning clients, you have lived comfortably without spending more than you earn.
You have saved and invested in your TSP throughout your career, eventually opened a taxable brokerage account where you contributed over time, and now find yourself retired.
You are receiving a pension, often with an annual cost-of-living adjustment (COLA) that largely covers your monthly living expenses.
However, if you are thinking about executing this strategy entirely on your own or relying solely on Artificial Intelligence, I would caution against it. While AI can assist with basic calculations, there are numerous personal nuances and tax planning factors that AI cannot properly evaluate.
Time and time again, we see that it is far better to hire a Fee-Only CERTIFIED FINANCIAL PLANNER® working on an hourly or flat-fee basis to build a custom strategy tailored to your situation.
While you might spend $2,000 to $3,000 on advisory guidance, the lifetime tax savings for clients with substantial balances can exceed half a million dollars.
(Note: Every case is unique; potential tax savings vary and are based on projections, not guarantees).
4. Choosing Fee-Only, Hourly, or Advice-Only Financial Guidance
Why does an hourly, flat-fee, or flat-subscription model make more financial sense for a TSP retiree?
By now, it should be clear why Fee-Only structures, whether hourly, flat-fee, or flat-subscription, are among the few models that eliminate conflicts of interest regarding your TSP savings.
The reason is simple: a Fee-Only planner operates like a barber. You pay them for a specific service, they deliver clear value, and that’s it.
If you need them again, you schedule another session. Or, if it’s more convenient, you pay a flat subscription fee for ongoing access without the cost changing as your wealth grows.
A Fee-Based advisor, on the other hand, is like a barber who tells you the moment you sit down that you need expensive proprietary hair treatments, treatments that aren’t inherently better, just far more costly.
While cutting your hair, they continue selling you products you don’t need, proposing a contract where they charge you a fee for every millimeter your hair grows.
Under that model, they might not even want to cut much hair, so you have to come back more often!
Our clients across the country, we serve from Boca Raton in Palm Beach County. They experienced the benefits of our hourly Financial Planning services.
We help them review their retirement roadmap and Roth Conversion strategy. They know our baseline advice is usually to keep their TSP intact. This is due to all the low-cost, high-efficiency benefits described in this article.
Ready to Optimize Your Federal Retirement Strategy?
If you would like to learn more, we invite you to schedule an introductory consultation. You can discuss working with a Fee-Only CERTIFIED FINANCIAL PLANNER® on an hourly or flat-fee basis. This can provide truly personalized guidance. This approach avoids the high costs or rotating advisors typical of large corporate firms.
Notice: This case study is presented for illustrative and educational purposes only. Past performance and the specific tax results achieved by certain clients (including 0% capital gains tax optimization) do not guarantee future results or similar outcomes for other clients. Capital gains tax optimization depends on specific IRS income thresholds, tax laws, and individual circumstances. Advise Financial and its investment advisory representative (IAR) do not provide legal or tax advice. We offer financial planning services and strongly encourage our clients to always consult with their Certified Public Accountant (CPA) or a qualified tax specialist regarding their tax needs.
