The low fees inside the Thrift Savings Plan are well documented and it is true that understanding the impact of fees in relation to your investments is important. But does the Thrift Saving Plan’s investment choices provide the unequivocal strategy for all federal employees? Or should soon-to-be and currently retired federal employees consider additional options as they plan for retirement?
The TSP offers are 5 different funds (G, F, C, S, and I) that each represents a different investment category.
- The G Fund is a low risk fund whose return is directly based off of the 10 year Treasury bond. Generally, the nature of having rates tied to a long term investments while retaining the ability to move funds is a very positive attribute of this investments, but the consistency of low interest rates has put the G fund in serious risk of being outperformed by inflation.
- The F Bond is constructed mirroring a bond index. While it carries more default risk than the G fund, it provides the potential for higher long term gains.
- The C Fund is structured to mimic the S&P 500 which is a composite of the 500 largest companies in the United States. Keep in mind, due to the size of these companies, many of them do maintain a multinational footprint.
- The S Fund invests in small to mid-size domestic companies, caring more risk than their larger counterparts, but historically also maintain higher average returns.
- The I fund represents the TSP’s sole entry into international investing. Unfortunately the investments within this fund represent a political lightning rod, with elected officials questioning whether federal employees should be investing in Chinese companies and other emerging markets found within China’s sphere of influence. Limitations created by these concerns have caused the I fund to trail its international peers in returns since inception.
Finally, Target date funds (L Funds) were created to provide “set-it-and-forget-it” choices for federal employees where the risk of the portfolio is managed based on an employee’s anticipated retirement date. It is important to note that not all target date funds are created equal. The TSP, for instance, tends to maintain more conservative investment weightings than other target date fund choices and overweight investments towards international (I Fund).
Expanded Distribution Options created by the TSP Modernization Act of 2017
The TSP Modernization Act took a substantial step toward ensuring that federal employees would be able to take their TSP accounts into retirement without being hampered by unrealistic distribution limitations. Today, actively employed federal employees over the age of 59.5 are able to take up to four in-service withdrawals per year and retired federal employees are able to take up to one partial withdrawal per month. In addition, the TSP Modernization Act created more flexibility in the beginning and ending systematic withdrawals and created L Funds in 5-year increments (instead of the 10-year increments of the past).
Reviewing Your Investment Allocation
Considering that the vast majority of most federal employee’s wealth is captured within their TSP account, it is especially important to pay attention to both the seeking of returns as well as insulating your account from too much risk. Finding the appropriate balance between risk and return is one of the most important financial decisions you will make. During this process, understanding the strengths and weaknesses of the TSP becomes critically important. Is your TSP properly diversified? Can you achieve the level of diversification you desire using the TSP’s five passive funds? Will your portfolio benefit from the additional diversification of additional international funds, emerging markets, real estate, or actively managed bond funds. For most federal employees, there are strategies to ensure that you are invested in a portfolio which is thoroughly diversified.
In many cases, the distribution of your hard earn savings can be equally as difficult as saving. For conscientious savers, the idea of depleting assets in retirement can be a very emotional one, when the reality is that that is exactly what these accounts were designed for. For others, determining the correct amount and the account from which to distribute your assets can have a great deal of importance. If you are currently in retirement or are within 10 years of retirement, it is generally worth your time to conduct a financial plan.
If you do not have a trusted Financial Advisor with experience assisting federal employees to help you with financial planning, please feel free to reach out to GEBA Wealth at (410) 657-8060 or firstname.lastname@example.org and one of our advisors will be happy to assist you.