Through my talks with servicemembers about the BRS and retirement savings, I’ve found that many are uncertain when it comes to the Thrift Savings Plan (TSP) fund options. Many people simply chose a Lifecycle Fund, set it, and forget it without really understanding the components that make up those funds or the riskiness of the portfolio that they’re signing up for. Today, we’ll decode the TSP fund options and hopefully this will guide your decision on which option(s) is best for you! We’ll also look at the difference between the traditional and Roth TSP as well as a couple of other nuggets of wisdom regarding the TSP program. Lastly, I’ll discuss whether or not TSP is right for you at all! Lets get started!
The TSP has five basic fund options G, F, C, S and I. Lets take a look at each of these funds before we discuss the Lifecycle Funds in detail.
The G Fund is the Government Securities Investment Fund…aka Treasury Bonds…aka the maybe keep up with inflation fund. The G Fund provides limited exposure to market risk and aims to at least keep up with inflation. If the G Fund is functioning as advertised, you’re not going to become very wealthy but it should maintain your wealth as living costs rise. This fund is best suited for folks very near or in retirement who can’t afford to “ride out” another market downturn.
The F Fund is the Fixed Income Index Investment Fund…aka the G Fund’s slightly hotter (but just barely) cousin. The F Fund attempts to mimic the return of the Bloomberg Barclays U.S. Aggregate Bond Index which is comprised of bond funds from various sectors in the US bond market. The F Fund yields slightly higher returns while being just a tad more aggressive than the G Fund. Like the G Fund, the F Fund is best for individuals nearing or in retirement.
The C Fund is the Common Stock Index Investment Fund…aka the stock market fund. The C Fund attempts to provide the rate of the return of the Standard and Poor’s 500 (S&P 500). The S&P 500 is comprised of 500 large to medium sized companies and is considered by most to be the barometer of “market rate of return.” Historically, the S&P 500 averages 7-10% during any 20+ years stretch in time. The C Fund is best for people who have a retirement time horizon that allows them to ride out market corrections (aka recessions).
The S Fund is the Small Cap Index Investment Fund. The S Fund seeks to mimic the return of the Dow Jones U.S. Completion Total Stock Market Index. As the name suggests, the S Fund provides exposure to many different sized companies to include smaller growth companies. The S Fund will be more volatile than the C Fund but it has also produced nice gains as it has averaged over 9% annually since 2001. The S Fund is best for investors with a good amount of time to retirement.
The I Fund is the International Stock Index Investment Fund. As the name suggests, this fund gives investors access to international stocks and it replicates the MSCI EAFE (Europe, Australasia, Far East) Index. In addition to market risk, the I Fund is exposed to political and doctrinal risks of other countries and this fund will often be more volatile than the C or S fund. Like the C and S fund, significant exposure to the I Fund is best for investors with a longer time horizon.
The Lifecycle Funds provide five different options with a target retirement year from now out to 2050 (the 2060 fund hasn’t launched yet!). These funds give investors a percentage blended portfolio of the G, F, C, S and I funds that is appropriate, based on their metrics, for an investor with that time horizon. The Lifecycle Funds shift their percentages in the different core funds over time moving from more C, S and I when a person is younger to more G and F as a person approaches retirement.
BEST FUND FOR YOU?
For my peeps out there that are not going to hit 60 years of age until about 2045 or beyond, the Lifecycle 2050 (L2050) Fund is not a bad option. It’s easy and you don’t have to pay attention to it at all. Just continue to make your contributions consistently and you’ll get a nice rate of return over a 20-30 year period of time. If you don’t want to put any brain bites into your TSP for the next 20+ years, grab a L Fund and go with it. But, I think you’re leaving some money on the table.
Personally, I think the L Funds put too much money into the G and F funds for young investors and stymie long-term growth potential that can be gained through the stock market funds, primarily the C Fund. The G and F funds will certainly soften the blow of a recession, but you’re still going to average less than 5% at best over a long period of time and more like 2% with the G Fund. Even with recessions, the C Fund can be expected (based on historical data) to return 7-10% annually over a long period of time. If you’re asking me…I’ll take the volatility in the short term for bigger gains in the long term.
This is where risk tolerance comes in to play and you can use a risk tolerance calculator to help you gauge your personal appetite for risk. If you are going to be watching the market and your TSP every day during the next recession and freaking out, even though you’re only in your 20s, then the L Funds are probably your best option since you have the comfort of knowing your money is being managed for you. If you view the next recession as a great buying opportunity and decide to put a little extra cash aside for retirement when it comes, then I recommend using the L2050 fund as a starting point and then adjusting the percentages according to your risk preference. Personally I’m setting mine up at 65% C Fund, 20% S Fund and 15% I Fund…if you want to sprinkle in some F Fund then I’d subtract from the S and I fund percentages. I can’t personally recommend any investor under the age of 50 to put any money in the G Fund because at roughly 2% annual gains you’re simply not going to make enough over a long period of time.
TRADITIONAL VS. ROTH
TSP gives you the option to choose a traditional or Roth account. This decision comes down to taxes now versus taxes later. With a traditional TSP, your annual contributions will reduce your taxable income for that year (aka taxes later). With the Roth TSP, your contributions do not decrease your taxable income (aka taxes now) for the year but you won’t pay taxes on your TSP when you pull the money out in retirement. If you believe your tax rate will be higher in retirement, then the Roth option is likely best for you. But, if you feel your tax rate will be lower in retirement, then the traditional option may be best. Obviously it’s difficult to predict where tax rates will be in 20-40 years or to know how much income you’ll have in retirement on top of your TSP. Personally, I’m doing a traditional TSP but I’m also maxing out a Roth Individual Retirement Account (IRA) every year…so basically putting a little bit in the taxes later basket and most of my retirement money in my taxes now basket. If you’re not sure, talk to a financial professional.
OTHER NUGGETS OF KNOWLEDGE
- TSP has the option to pull money out prior to retirement via a loan or in-service withdrawal. Both have specific rules and implications to your retirement savings. It’s important to understand the rules regarding early withdrawal and/or access to your retirement savings. NOTE: This is why it’s also important to have an emergency fund so that you can avoid having to touch your TSP contributions.
- TSP has annual contribution limits. For people under 50, the limit for 2018 is $18,500 from your military paycheck and a maximum of $55,000 per year from all income sources (if you’re deployed, you can exceed the $18,500 from your military pay and the extra would count towards that $55K max).
- You can rollover an IRA or 401k from a previous employer in to your TSP if you so desire. The TSP cannot accept transfers or rollovers from a Roth IRA. If you’re going to do a rollover, make sure you coordinate appropriately through the TSP staff. DO NOT liquidate your current retirement account and deposit the check in to TSP…there will likely be significant tax repercussions if a transfer is done in this manner.
TO TSP OR NOT TO TSP
Should you even be using the TSP? If you have opted-in and are under the Blended Retirement System (BRS) you should ABSOLUTELY be contributing 5% of your base pay to TSP in order to get the free 5% from the gov’t…that’s free money bro! What you do beyond that 5% for retirement savings is up to you…see discussion below.
If you’re not under the BRS and beyond the 5% contribution for BRS members, then the answer isn’t so clear. A traditional or Roth IRA can offer the same tax benefits as the traditional or Roth TSP but it provides way more investment options than the five fund options you get with TSP. If you’re a hands-on investor or simply don’t care for the TSP fund options, then an IRA is likely a better choice. Within an IRA you can invest in just about anything …including real estate (through a self-directed IRA). You can open an IRA with just about any financial firm…personally I use Fidelity and have been very pleased with their platform and zero fee ETFs and Mutual Funds. IRA limits are $5,500 per year per person so it limits a married couple to $11K total. Should you be in the fortunate position that you can afford to invest more than $11K per year toward your retirement, then TSP on top of IRAs is the way to go (unless your non-mil spouse has something better through his/her work with matching…always take the matching!).
If you’re not under the BRS but you don’t want to deal with the hassle of managing an IRA, then sticking with TSP is probably a good option for you. The TSP funds provide some decent investment options and it’s easy and convenient to have retirement contributions come directly out of your paycheck. If you’re super passive, consider an L Fund…if you’re willing to put in a bit more work in the hope of higher gains, choose your own percentages between the G, F, C, S and I funds (again, my personal preference is no G or F fund action for people under 45-50 years of age…returns are TOO LOW).
Well, I tried to be short and concise but this article is still long af! We quickly covered a lot of very important topics regarding TSP and saving for retirement. I hope that this article makes the fund options, TSP as a whole and saving for retirement a bit more clear. Retirement planning is a long journey, but the sooner you get started, the easier that journey will be. I’ll sound like a broken record, but I highly recommend talking to a financial advisor when planning for retirement and your financial future. I know for most people this topic is overwhelming, so don’t feel like you have to go it alone… working with a financial professional isn’t only for the rich and it doesn’t have to be a scary process…call my buddy Dennis Lott or ask successful people you know for a recommendation.
Before purchasing any stocks or ETFs, you should do your own research and consult a financial professional because, disclaimer, I’m not a paid finance professional. You can research stocks and ETFs for free on websites like Seeking Alpha and MarketWatch among other free online sources.
Hit me up with questions! See ya! ‘Merica!