Why should I contribute 5% to TSP instead of 3%?

The part people miss

Most explanations of the match stop at “contribute 5% to get the full match”, which sounds like a target to reach eventually. It is not a target. It is a per-pay-period test.

The agency contribution has two parts, and they behave differently:

• The automatic contribution arrives whether or not you contribute anything.
• The matching contribution is calculated against what you actually contributed that period, on a tiered schedule that tops out at 5% of basic pay.

Nothing about the second part is retrospective. There is no annual true-up.

Why “I will raise it later” costs more than it looks

Two costs stack, and people usually count only the first.

The obvious one is the forgone match itself. The larger one is that the match you did not receive is also the match that did not spend the next twenty years compounding. A dollar missed in your fourth year of service has far longer to grow than a dollar missed in your eighteenth — which is exactly backwards from most people’s instinct that early-career contributions matter least because the amounts are small.

What this does not mean

It does not mean 5% is the right contribution rate. It means 5% is the rate below which you are declining money that is already budgeted for you. Whether to contribute more than 5% is an ordinary savings question with an ordinary answer that depends on your debts, your emergency fund, and your other goals.

It also does not apply to Legacy High-3. There is no match under Legacy — the pension multiplier is higher instead, which is the trade the two systems make.

What to check on your own LES

Look for your contribution percentage and the agency contribution lines. If the agency matching line is smaller than you expect for your rate, the usual causes are a recent rate change that has not taken effect yet, or a contribution that hit the annual elective deferral limit early in the year and stopped — which can silently end the match for the remaining pay periods.