First Quarter Financial Tips

By Ian Burgess, Command Financial Specialist

While tax return checks begin to fill our mailboxes, most people are filling their wish lists with flat-screen TV's and cruises. When I rhetorically asked my wife what she wanted to do with our return, she had a dozen ideas, none of which were on my list.

My top two items were to pay off student loans or invest in my Roth IRA. After my tax return last year, I paid off my smallest student loan. It wasn't that big of a payoff but I was able to save almost $200/month which I then used to make bigger payments against my larger loans. I could do the same this year but if I put it into my IRA while stock prices are low, it could pay off after growing over the next 40 years. Since stocks took a huge hit as investors withdrew their investments over the last two years, I think chances are good that my IRA will be successful.

My money spring cleaning brought me to the My Pay website. The first thing I did was increase my W-2 exemptions so that I don't get such a big return next year. A good rule of thumb is to take an exemption for each person in the household. I also like to claim an exemption for the mortgage payment! I expect that to save me about $200 per month that I can use towards paying down debt or beefing up the emergency fund. While at the My Pay website, I confirmed that all my personal information was correct and ensured that the new raise had taken effect.

After hitting up My Pay, I suggest visiting the TSP website to rebalance your account and future contributions. Most service members sign up for TSP in boot camp with a typical contribution of 1-3% which is defaulted to the G fund. If you are one of those with a bunch of money in CD's or the G fund, consider transferring it into one of the stock funds. Or if you just got a big tax return, you can live off it while you increase your TSP contributions. Nobody can accurately and consistently time the market. All you can do is control how much you put in and when and I think now is a good time to double down. Your Command Financial Specialist can help you decide what allocation works for you. A financial advisor can help you decide what allocation works for you.

When choosing between paying off debts or investing, it's really up to you. Consider what's more important to you. Most financial gurus will recommend that you payoff any debts with double-digit interest first. Then it's in your hands. The earlier you start investing, the more time your money has to grow. But on the other hand, the earlier you pay off debt, the more money you will have to invest. Things to think about are type of debt, interest rate, and your monthly cash flow. Whether you're paying down debt or saving for retirement, you can't go wrong as long as you live within means.

By the way, we're taking a cruise, but I got a great deal on it!

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Why are Administrative Expenses Important?

By Miriam Darden Settles, CFP, Federal Retirement Thrift Investment Board

When it comes to their investments, most people seem to focus only on the rate of return they are getting. That's because it's a lot more interesting to talk about, especially in up markets. But no matter what the market is doing, it's important to know what you are paying for your investments. Investing isn't free; there are expenses involved and, as a TSP participant, you share the costs of administering the plan.

The TSP's expense ratio
The costs associated with administering the TSP include:

• The management fees for each of the TSP's investment funds,
• The costs of operating and maintaining the TSP's record keeping system,
• The cost of providing services to the TSP's 4.3 million participants, and
• The printing and mailing of notices, participant statements, and publications.

Fortunately, some of these expenses can be partially offset by any forfeitures of Agency Automatic (1%) Contributions. These are contributions that participants in the Federal Employees' Retirement System (FERS) have received but are unable to keep because they leave Federal service before meeting a time-in-service vesting requirement.

However, forfeitures are not sufficient to cover all of the TSP's expenses. TSP participants share in the remainder of the costs.

Interpreting the expense ratio
The TSP's expense ratio is expressed as a percentage. For 2009, it was .028%. That means you were charged 28 cents for every $1,000 that you had invested in the TSP. By comparison, the industry average for mutual fund expenses is .63%. That's $6.30 for every $1,000 invested*.

Today, the difference between 28 cents and $6.30 may only amount to lunch or a couple cups of premium coffee. But over time, excess costs can really add up.

Costs matter. A lot.
Every dollar you pay in fees reduces the returns you get to keep. The TSP's expenses are very low and that means more money stays in your account working for you. Even small differences in fees can translate into large differences in returns over time.

Take the following simple example: If you invested $10,000 in a fund that produced a 7% annual return before expenses and had annual operating expenses of .63%, after 20 years you would have about $34,386. But if the fund had expenses of only .028%, then you would end up with $38,495 - a sizable difference.

When you pay more for your investments, you should ask yourself if you are being compensated with consistently higher long-term returns to make up for those higher costs. You may find that, often times, you're not.

So continue to put money into your TSP account, and know that you are keeping more of your money than just about any other investor out there.

*Deloitte. 401(k) Benchmarking Survey 2008 Edition.

Next month: What Do Inflation and Taxes Have to Do with My TSP Account?

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