Federal Employees and military members, you’re in luck! You have access to one of the most powerful retirement accounts offered in these United States. The Thrift Savings Plan (TSP) is analogous to a 401k. Unlike many 401k’s out there, the TSP has rock bottom fees and very flexible options. There are very simple options for hands off investors, low volatility options for the risk averse, and plenty of index funds for folks like me. You may have questions about what the best TSP funds are, or maybe you just want some general TSP investing tips. Rest assured, I’ll provide all the tools and resources that you need to rock your TSP in this Ultimate-ish TSP Investing Guide.
But First, Risk Tolerance
Studies have shown that when it comes to investing, time in the market beats timing the market. You need to structure your portfolio so that you won’t panic sell when there’s a market correction or crash. Do some soul searching to understand your risk tolerance. Being 100% in stocks gives the best opportunity for growth, but can you gut it out if your account balance drops by 30% overnight? It’s okay if the answer is no. It’s not worth the extra growth if you’re constantly stressed about the market. Figuring out how much risk you’re willing to take on is an important step when planning your TSP investing.
How Much Should I Invest in my TSP?
That’s a great question. The answer is to invest as much as you can. Investing early and often is the best way to unlock the power of compound interest. You can contribute up to $19,500 every year in your TSP and you should try to get as close to that as you can. If you’re looking for the absolute minimum, you should be putting 5% of your salary into it every pay period. The government matches contributions up to 5%. This is the only 100% guaranteed return on investment that you’ll find! By contributing less than 5%, you are not getting your compensation.
This is an important point, so I’m going to say it plainly and in bold text. You get an automatic 5% raise by putting 5% of your paycheck in your TSP.
Investing in the TSP
There are many options at your disposal for investing in the TSP. It’s very simple, all you do is invest in one of the TSP Funds that are available. Each fund serves a different purpose and is good for a different type of investor. The two categories of funds are the Life Cycle Funds and the Letter Funds. We’ll start by explaining the Life Cycle Funds. Even though there are a lot of them listed, they all follow the same strategy. The Letter Funds are all different index funds and we’ll cover them a little later.
The Life Cycle Funds
The Life Cycle funds are ideal for the hands off investor. Don’t want to worry about allocation and learning about different index funds? The Life Cycle Funds are for you. The Life Cycle Funds are invested in a mix of stocks and bonds. The exact allocation depends on the year displayed in the fund name. Say you want to retire around 2065. Right now, the L 2065 Fund holds 99% of its assets in stocks. It’s very aggressive because it’s meant for long term investors that have a long time before retirement. Over time, the allocation becomes more conservative. The L 2025 Fund is over 50% in bonds, and the L Income Fund (meant for retirees) is over 75% in bonds! Folks close to retirement age typically want the stability that bonds give. For those that want more control over what they’re invested in, building your own mix of TSP investments with the Letter Funds is the best choice.
The Letter Funds
I personally like having more control over my investments, so I invest in individual “Letter Funds.” Each fund is analogous to an index fund. By owning one, you own a small piece of a bunch of different stocks(or bonds). Each fund has a different amount of risk/potential upside associated with it. Some are all stocks, one is all bonds, and one is a government securities fund. Each has its advantages and disadvantages.
The Bond Funds: F Fund and G Fund
The F Fund matches the US Aggregate Bond Index. Like all bonds, this fund is a hedge against a market crash. When the stock market crashes, bonds are typically worth more. See the chart below for how the bond index reacts to the stock market. This year the F Fund is down 1.5 percent. Over the past 10 years, it has an average return of ~3.6%, which is a little more than the US’s average inflation rate over the same period.
The G fund is invested in short term government securities (think government savings bonds). It’s meant to be a “wealth preservation” fund, which seems to be shorthand for consistently losing to inflation. Only the most extreme risk averse individuals would find comfort in losing 1% to inflation every year in exchange for missing future market crashes. The reason that it is this low right now is the historically low interest rates being offered during the pandemic. In the future, these interest rates may go up and make this fund more desirable.
The Stock Funds
These are my favorite, as I am an avid index fund investor. The C Fund is your S&P 500 index, invested in all the companies in the S&P 500. With annual 10 year returns of almost 15%, this is a good fund for wealth building. Keep in mind that this fund is highly susceptible to stock market crashes. If the stock market crashes 30% like in 2020’s black swan event, this fund will drop by roughly that amount.
The S Fund is made up of the medium and small cap companies on the US stock market. It follows the Dow Jones US Completion Total Stock Market Index. It includes small and medium companies that aren’t on the S&P 500 list. The average annual return over the last 10 years is smaller than that of the C Fund. These smaller companies go through periods of time when they outperform the big companies though. One example is the past 12 months, when this fund increased by an insane 61.7% compared with the C Fund “only” increasing by 40.77%. The rapid recovery was REALLY good for stocks. This fund will be hit a little harder than the C Fund when the market crashes. Personally I have more allocated in the C Fund.
The I Fund is an international fund. It matches the performance of the MSCI EAFE Index, which has companies from around the world and excludes the US. It’s a good way to get exposure to other companies not in the US. As of late it has underperformed the other two stock funds.
Keep in mind that past performance is not indicative of future performance. Stocks have had a great time since the market chew shed in March of 2020, but there’s no guarantee that will continue. I have reason to believe that stocks will rise over the long (based on 100 years or so of data), but there are plenty of crashes and corrections that happen in the short term.
What TSP Allocation is Best?
This is a hyper personal question, there’s no one size fits all answer. All I can do is give a general picture of what allocations will do. Having a stock heavy allocation (mostly C Fund, some S and I Funds) will give you much more growth over time. However, they will drop in value significantly during big crashes. If you can’t stomach seeing the number go down by 30% or more when a crash happens, do not pick this allocation.
Going bond heavy will make your contributions stay pretty close to what you contributed. However, you will most likely lose to inflation. This is especially true right now, since interest rates are at or near record lows.
A mix of both will give some growth and some hedge against a crash. There are many resources out there that explain the benefits of different percentages. For me, I’m a while away from retirement and I only care about long term growth. My portfolio is exclusively in the stock funds. But everyone has different risk tolerance. Find the balance between growth and letting you sleep at night.
Utilize Your TSP!
The TSP is a great investment vehicle. The expense ratios are wicked low, especially when compared to the average 401k. The first step is taking advantage of your agency’s full matching of 5%. If this amount is not being invested in your TSP, you are leaving free money on the table. TSP investing is a powerful tool, so make sure you take advantage of it! And if you found this helpful or have any other questions, leave a comment below.
Still interested in investing? I highly recommend picking up a copy of The Simple Path to Wealth by JL Collins from your local library (or via my affiliate link). I also have more post on investing topics such as index funds, dividend investing, and more!
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