TSP have compound interest? Unbelievable example <chart> inside!

[Hybrid93Hatch]

Suntrust sent me an interesting flyer. I'm new to the technical part of investing even though I've been dumping $$$ into TSP for over 3 years. Are we getting compound interest with TSP?

The returns are almost unbelievable:

 

[tsptalk]

Hello Hybrid -

TSP is part of the miracle of compound interest.

Albert Einstein suggested that compound interest was one of the most powerful forces in the universe.

Tom

 

[Hybrid93Hatch]

Sorry to bump such an old thread. Here we are over 5 years later and I am still uneducated about how compound interest ties in to the account.

When you look at a TSP account balance I see number of shares owned, share price, and total balance. How does one know how much (dollar amount) of the balance is from compound interest? I see the balance is up and down from day to day and the PIP percentage for the past 12 months. Does the PIP include contributions or just the percentage the account has earned?

Thanks for any info on this!

 

[KevinD]

Your SunTrust letter "assumes 8% return." Good luck with that...

http://en.wikipedia.org/wiki/Compound_interest

Personal Investment Performance (PIP) — The rate of return earned by your entire account during the 12-month period ending on the date indicated on your annual statement or on your Account Balance page of the TSP website. The PIP is a time-weighted return that has been calculated using a modified-Deitz method (a method used by many financial institutions and an industry standard). The PIP adjusts for the distorting effects of cash flows into or out of your account. It is an estimate; therefore, your PIP may not be the same as the 12-month performance of the TSP funds, which are time-weighted returns.

https://www.tsp.gov/sitehelp/glossary/glossaryOfTerms.shtml

 

[Hybrid93Hatch]

Almost 2 years later and still have yet to see or understand TSP compound interest.
I just have a lot more shares which at the moment are worth a lot more...

Can someone provide an example of compound interest using one of the TSP funds?
Thank you for any help you can offer.

 

[Sensei]

Your picture of 7 years ago assumes a guaranteed return every year of +8%. So, once Jill turns 31, the balance is just multiplied by 1.08 every year. You can check it in about 20 seconds with a calculator.

TSP doesn't have a guaranteed interest rate - you get whatever the market gives. So I might be pulling in a return of 15-20% this year - while my balance is still only 5 digits. Later in my career, I might get 0-5%, or even a couple negative years. I'd look back on life and say I had an average return of 8%, but a loss at the end of my career would be far more damaging than a gain would be constructive at this point. At least that's the way I look at it.

 

[Sensei]

Just to illustrate my point, I worked out some numbers based on the original post. Using Jill's balance at age 30 ($31,291), I imagined she gained 20% every year for the next ten years, taking her through age 40. After that, I imagined she lost 4% every year until she was 50. That is an average return of 8% over 20 years. Here's how it comes out:

Age Yr. End Value
30 31291
31 37549
32 45059
33 54070
34 64885
35 77862
36 93434
37 112121
38 134545
39 161454
40 193745

41 185995
42 178555
43 171413
44 164557
45 157974
46 151655
47 145589
48 139766
49 134175
50 128808

Compare to the example from your attachment, which shows her at a balance of $145,846 at age 50. So, with the TSP - where we have no guaranteed return from one year to the next - it really makes little sense to think about one's average return throughout their career. It's all about what you are doing now.

 

[k0nkuzh0n]

Compounding interest isn't all its cracked up to be for for 2 years: 1- it assumes all returns are re-invested for YEARS (not an issue with a 401k, but big issue with savings accounts), 2- Inflation. Oh sweet your account will 'double' in 40 years? Well your dollars will also be worth half as much then as they are worth now.

 

[Hybrid93Hatch]

Your picture of 7 years ago assumes a guaranteed return every year of +8%. So, once Jill turns 31, the balance is just multiplied by 1.08 every year. You can check it in about 20 seconds with a calculator.

I now see how they got the year to year figures, thanks!

it really makes little sense to think about one's average return throughout their career. It's all about what you are doing now.

Thanks for the illustration and I agree with your statement.

Compounding interest isn't all its cracked up to be for for 2 years: 1- it assumes all returns are re-invested for YEARS (not an issue with a 401k, but big issue with savings accounts), 2- Inflation. Oh sweet your account will 'double' in 40 years? Well your dollars will also be worth half as much then as they are worth now.

I sure hope it does more than doubles in 40 years. I understand the concept of compound interest and that time is essential.

It seems like the bottom line is to buy and own as many shares possible then hope the share price(s) are through the roof to allow movement back to G Fund upon retiring. If buying & holding...

Thanks to you both for the input!

 

[k0nkuzh0n]

I sure hope it does more than doubles in 40 years. I understand the concept of compound interest and that time is essential.

It seems like the bottom line is to buy and own as many shares possible then hope the share price(s) are through the roof to allow movement back to G Fund upon retiring. If buying & holding...

Thanks to you both for the input!

Sure, I'd hope so too. I was just throwing out numbers, I hope you didn't miss the point. The only real growth is the return rate MINUS true inflation rate. When people talk about compound interest they rarely mention the word inflation

 

[Frixxxx]

Sure, I'd hope so too. I was just throwing out numbers, I hope you didn't miss the point. The only real growth is the return rate MINUS true inflation rate. When people talk about compound interest they rarely mention the word inflation

True K,
Compound interest = straight math
Inflation = economic based and it affects everyone different, based on lifestyle, location, etc.....

But, should never discourage investing for the future!