Throwback Thursday Classic Post – Does the TSP G Fund Count as a Bond or Cash in my Asset Allocation?

Posted on December 24, 2020 Updated on December 19, 2020

A reader wrote in and asked the following question:

Hi there. I thoroughly enjoy your website! When determining what my current asset allocation is, should I consider the TSP’s G Fund as “cash” or as a bond fund? I have a Vanguard account, and their website shows you these great “pie charts” reflecting one’s asset allocation. But what’s the best way to think of the G Fund in this context? Thanks a lot!

The Answer – It’s a Bond Fund

I can see why people might consider the G Fund a cash equivalent in their asset allocation, but I think it is best considered a bond because it is not liquid and is paying intermediate-term interest rates.

What is a cash equivalent? Here’s what Investopedia says:

Cash equivalents are one of the three main asset classes, along with stocks and bonds. These securities have a low-risk, low-return profile and include U.S. government Treasury bills, bank certificates of deposit, bankers’ acceptances, corporate commercial paper and other money market instruments.

The G Fund invests in “a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP.” That makes it sound like a Treasury bill, which is listed as a cash equivalent above, but remember that the G Fund offers you a free lunch. It is a short term security but the interest rate it pays is:

based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. As a result, participants who invest in the G Fund are rewarded with a long-term rate on what is essentially a short-term security. Generally, long-term interest rates are higher than short-term rates.

In other words, it is really a hybrid between a short and long-term Treasury.

The other aspect of the G Fund that makes it a bond and not a cash equivalent is that it is not liquid. In other words, because it is in a retirement account you can’t sell it and use the proceeds to buy a car, deal with an emergency, or whatever else you need it for. Cash equivalents like CDs, money market accounts/funds, checking/savings accounts, or cold hard cash are all accessible and could be used for these purposes. Unless you are retirement age and withdrawing from your TSP account, the only way to get to the G Fund would be to take out a TSP loan, which I would not recommend.

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

Posted on December 17, 2020 Updated on December 12, 2020

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.