Throwback Thursday Classic Post – The Easiest Way to Figure Out Your Optimal TSP Investment Plan

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If you invest in the Thrift Savings Plan (TSP), you need to come up with a plan for how you are going to invest. Here is the easiest way to come up with that plan.

Step 1 – Figure Out Your Asset Allocation

In the TSP, you can only invest in two broad asset classes – stocks and bonds. Because of this, the first decision you need to make is how you are going to divide your TSP among these asset classes.

To figure this out, take this Vanguard survey.

At the top of the page it will give you a suggested allocation, such as 80% stocks and 20% bonds. Jot this down somewhere.

Step 2 – Find the TSP Lifecycle Fund That Most Closely Matches This Asset Allocation

Here are the current broad asset allocations of the TSP Lifecycle Funds as of 12 DEC 2020:

  • L Income – 22% stocks, 78% bonds
  • L 2025 – 49% stocks, 51% bonds
  • L 2030 – 60% stocks, 40% bonds
  • L 2035 – 66% stocks, 34% bonds
  • L 2040 – 72% stocks, 28% bonds
  • L 2045 – 77% stocks, 23% bonds
  • L 2050 – 82% stocks, 18% bonds
  • L 2055 – 99% stocks, 1% bonds
  • L 2060 – 99% stocks, 1% bonds
  • L 2065 – 99% stocks, 1% bonds

Step 3 – You’re Done

Pick the one that is closest to your suggested asset allocation from the Vanguard survey. For example, if the survey said you needed 80% stocks and 20% bonds, I’d pick the L 2050 fund because it is closest.

Seriously, it is that simple. I’m not saying this is the best strategy, but it is the easiest and in all honesty, if someone MADE me do this, I’d be fine with it. It is very reasonable way to approach saving for retirement, which is why I’m telling you about it.

Why do I make you take a Vanguard survey instead of just picking the Lifecycle fund that is closest to the year you want to retire? Because the Lifecycle funds are a little too conservative for my tastes and when you compare them with other target date funds. For example, the Lifecycle 2040 is 72% stocks and 28% bonds. The Vanguard Target Retirement Date 2040 is more aggressive at 81% stocks and 19% bonds, which I think is more appropriate.

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