Dave Ramsey has commented on the TSP (Thrift Savings Plan) many times and most of his advice is rock solid.
But some things I had to read twice to just make sure I hadn’t misread anything.
Because with anyone’s advice (even mine), you never want to blindly accept it as scripture.
You always want to think through how it applies best for you.
Because only you are responsible for your future.
Here is the good, bad, and the ugly of Dave Ramsey’s TSP advice.
Traditional Vs. Roth TSP
Dave Ramsey is very fond of both Roth IRAs and the Roth TSP.
That is why, the vast majority of the time, Dave Ramsey tells people to just use the Roth TSP instead of the traditional TSP.
And I see his point, as the Roth TSP has Tons of advantages. Afterall, who doesn’t want more tax-free income in retirement, right?
But in real life, things are a little more complicated. For example, some people are simply going to be in a much lower tax bracket in retirement compared to while they are working.
For these people, using the traditional TSP can be a huge help in evening out their taxes over time (and saving a bunch in taxes over time as well).
Check out this article more on when the Roth TSP may not make sense.
TSP, IRA, and Then TSP Again?
Dave Ramsey’s advice is to save 5% into the TSP to get the full match, then max out a Roth IRA, and then put more into the TSP if you are able to save more after that.
And honestly, I see why he gives this advice as this is the best option when looking at most employer sponsored 401k plans because of the high fees and mediocre investment options.
However, The TSP has very low fees and high-quality funds to invest in. So in my opinion, there is no reason to start using a Roth IRA (except for the 5-year rule) until your TSP is maxed out.
Afterall, who wants to have to manage more accounts then they have to at the same time as this often just adds unneeded complexity.
If you have already maxed out the TSP then investing in an IRA as well can be a great thing to do if you have the money but you will want to watch out for the earnings limits for IRAs.
The only time that I see real advantages to a Roth IRA over the Roth TSP is in retirement but one can easily move everything to a Roth IRA at that point while enjoying the simplicity of the Roth TSP during their career.
Invest in What?
Dave Ramsey’s go-to TSP investment advice for everyone is:
-60% in the C Fund
-20% in the S Fund
-20% in the I Fund
Dave’s thought is that everyone should invest aggressively all the time, even in retirement because more aggressive investments tend to perform better over time.
And I agree that the problems associated with investing too aggressively are generally easier to deal with than the problems that come with investing too conservatively in retirement.
However, unless you have a wide margin of error in your retirement numbers you are going to want to take a more moderate approach.
This moderate approach generally includes investing your long-term money more aggressively and your short-term money more conservatively. This strategy is outlined in my bucket strategy.
