personal finance
Do the TSP Target Date Funds Miss the Mark?
Blooom is an on-line financial advisory service that will manage your Thrift Savings Plan (TSP) and other retirement accounts for only $10/month. On another blog I wrote an article about them and some readers got into a Twitter dialogue with them. During this dialogue it was suggested that an investor doesn’t need to pay $10/month for an advisor because you can always just use target date funds if you don’t want to manage your investments yourself. Blooom’s response pointed to a blog post of theirs about target date funds and all the problems associated with them. Let’s take a look at their post and see if the points they raise are valid when compared to the TSP’s target date funds, the Lifecycle Funds.
What’s a Target Date Fund?
According to Investopedia, a target date fund is:
A fund offered by an investment company that seeks to grow assets over a specified period of time for a targeted goal. Target-date funds are usually named by the year in which the investor plans to begin utilizing the assets. The funds are structured to address a capital need at some date in the future, such as retirement. The asset allocation of a target-date fund is therefore a function of the specified timeframe available to meet the targeted investment objective. A target-date fund’s risk tolerance become more conservative as it approaches its objective target date.
The Lifecycle or L Funds are the TSP’s version of target date funds. You can read my deep dive on them if you like for more information.
Are the Lifecycle Funds Too Conservative?
Yes, in my opinion, the L Funds are too conservative when compared to other target date funds and the fact that many of us will have an inflation-adjusted pension. To compensate you can always just pick a L fund that targets a later year. When I used the L funds in my TSP, that is what I did.
For example, if you want to retire in or around 2030 you would normally pick the L 2030. Instead you could pick the L 2040 or L 2050 to get more aggressive. That said, the most aggressive you can get with the L Funds right now is the L 2050, which is 82% stocks and 18% bonds. If you want less than 18% bonds, you can’t do that with any of the current L funds.
Do the Lifecycle Funds have High Expense Ratios?
This is a definitive no. While other target date funds can have high expenses, the L funds are composed of funds with the lowest expenses you will find anywhere. You probably cannot find a target date fund with lower expenses than the TSP L Funds.
Do the Lifecycle Funds Lack Personalization?
Yes, they do. There’s no way around this one. You can personalize them a little bit by adjusting the target date you invest in, as described above, but they are by definition standard for all investors.
I would argue that these standard asset allocations are good enough for just about everyone to come up with a reasonable investment plan. If you want a personalized plan, though, you may have to get some help or use a financial advisor.
The Bottom Line – Do the L Funds Miss the Mark?
I think it depends. They are definitely low cost, so they hit the target there. I do think that they are too conservative, but as long as you are OK with a minimum bond allocation of 18% you can just adjust that by using a fund with a target date that is further off. They are definitely not personalized, but I don’t think they need to be. The asset allocations they use would do for 99% of the people investing, including myself.
Finance Friday Articles
My favorite article this week:
Pizza Delivery is for Millionaires
Here are the rest of this week’s articles:
Be Proactive, Not Reactive When It Comes To Creating Passive Income
Don’t Compare Your Finances/Investing to Others
How Much Money Does a Doctor Need to Retire?
Maintaining a Small RV for Retirement Travel
Should You Turn Your Starter-Home into a Rental?
The Value Proposition of a Real Estate Access Fund
Updated Trinity Study Results for 2019 – More Withdrawal Rates!
2 Important TSP Changes and Finance Friday Articles
This week I’d like to highlight the 2020 TSP contribution limits, which will be $19,500 for most of us, as well as the instructions for enabling 2-factor login, which will be required as of 1 DEC:
TSP Contribution Limits for 2020
TSP 2-Factor Login Instructions
Here are the rest of the articles:
2020 Tax Brackets, Standard Deduction, and Other Changes
6 Bare Minimum Tasks to Fix Your Finances
Are Real Estate Investments Resistant to Inflation?
Bernstein Says Stop When You Win The Game
Financial Burdens and Physician Burnout
How to manage money for financial success in the U.S. military
How to Think About Money: A Physician on Fire Review
Into a Cloud – Letters from a Downed World War II Pilot
Lessons Driving an $800 Car Can Teach Your Kid
Non-Intuitive Lessons From the Man Who Solved the Market
Student Loan Planner Reviews: Honest Opinions from Three Former Clients
The 3 benefits of charitable giving
The Price of US Stocks and Signal Failure
Trends That Matter in Asset Management
TURNKEY RENTALS DON’T HELP YOU ACHIEVE FAST FIRE
Using Your Estate Plan to Have a Graceful Exit
What does buying a new car really cost over the years?
Why are Doctors Burning Out? Three Ways FIRE Can Save Us
Why Timing the Market is a Fool’s Errand
My Investment Portfolio
I write a lot about personal finance. If you are wondering what I’m doing for my own finances, here’s a detailed look at my own portfolio. I’m not going to give you dollar amounts, but percentages. If you want to know the dollar amounts, they can be expressed in one word. I have…enough:
At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds,“Yes, but I have something he will never have . . . enough.”
Assets
My financial assets from largest to smallest include: (all percentages are rounded to the nearest whole percentage)
- 24% – My taxable mutual funds, which is where I put our retirement savings when I fill our retirement accounts. It is currently invested in:
- 56% – Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
- 37% – Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
- 7% – Vanguard Prime Money Market Fund Investor Shares (VMMXX)
- 21% – My Thrift Savings Plan (TSP) – Currently invested in this proportion:
- 91% – US stocks
- 75% – C Fund
- 25% – S Fund
- 1% – International stocks (I Fund)
- 9% – US bonds split evenly between the G Fund and F Fund
- 91% – US stocks
- 15% – My paid off house.
- 12% – My wife’s TSP, which is invested 100% in US bonds with a 50/50 split of the G and F Funds.
- 12% – My wife’s Roth IRA, which is invested in:
- 53% – Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
- 47% – Vanguard Total International Bond Index Fund Admiral Shares (VTABX)
- 9% – We have two 529 plans with Vanguard invested in their aggressive age-based portfolio.
- 6% – My Roth IRA, which is 100% invested in the Vanguard Total International Stock Index Fund Admiral Shares (VTIAX).
- 1% – My wife’s individual 401k, which is 100% invested in the Vanguard Total International Stock Index Fund Admiral Shares (VTIAX).
- 1% – My wife has a 401k that is invested in the Fidelity® 500 Index Fund (FXAIX).
Liabilities
None. Aside from credit cards we pay off every month, we’re debt free.
Overall Asset Allocation
Excluding the pension and my house, here’s my overall asset allocation courtesy of our favorite tool that made all of this easy, Personal Capital:
Finance Friday Articles
Here are my favorite articles from this week:
Financial Planning for Early Career Attending Physicians
Following The Stock Market Is Bad For Your Returns
I followed the path to FIRE — and learned that early retirement is the wrong goal
Here are the rest of this week’s articles:
10 Benefits of Keeping Your Credit Score in Good Health
Achieving Work-Life Balance Through Part-Time Work
A Step by Step Guide to Tax Loss Harvesting
Cap Weighted Versus Fundamental Index Funds
How are the 2000 and 2008 retirees doing?
How to Get a Better Deal From a Real Estate Agent
How to Make a Portfolio Rebalancing Spreadsheet
Refinancing Gains in Real Estate
Save first for the kids’ college or for your own retirement?
Top 5 Money Lessons for Physicians
Reader Question – Does the TSP G Fund Count as a Bond or Cash in my Asset Allocation?
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. Plus, Personal Capital agrees with me.
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.
Just to double check myself, I went to my favorite tool to automatically track my asset allocation, Personal Capital, to see what they considered my G Fund holdings. Personal Capital is also considering the G Fund a U.S. Bond holding.
Finance Friday Articles
Here are this week’s best articles:
Rules For Asset Allocation Implementation
Staying Home – A Discussion of Foreign Stock Market Allocation
Here are the rest of the articles:
5 Reasons I’m Not Joining the Drop Out of Medicine Club
Crowds are Crazy Like a Fox When it Comes to Investing
Everything You Need to Know About Recessions
Free credit monitoring now available for troops. Here’s where to get it.
Herding Isn’t Just for Lemmings
How I Built a Short-Term Rental Business with Dr. David Draghinas
Prenups, Trusts, and Beneficiary Designations – Friday Q&A Series
Principles to Consider When Doing Home Renovations
The Alphabet Soup of “Financial Advisors”
The Importance of Revocable Living Trusts
The Lucrative Side Hustles of a 7-Figure Urologist
The Pros and Cons of a Doctor Going Part-Time
Top 5 Reasons to Retire With Less Than 25 Years of Expenses
Finance Friday Articles
Here is my article of the week, which I picked because of #3 in the article, which is particularly relevant to the value of a military pension:
Here are the rest of this week’s articles:
5 Reasons to Pay Off Your Debt
5 Ways to Increase Your Investing Returns
Eight Reasons You Will Never Reach Financial Independence
Establishing Your Own Charity Via a Donor Advised Fund
Get an Alpine Start to Your Finances!
Half of Retirees Afraid to Use Savings
How Does Home Ownership Fit Into An Investment Portfolio and Financial Plan?
How do super savers know when they can quit their jobs?
How To “Lie” With Personal Finance
How To “Lie” With Personal Finance – Part 2 (Homeownership Edition)
Landing a Doctor Job: How to Compare Positions for Physicians
Planning for Retirement is a Guessing Game
Quit Buying Cars On Credit – 15 Reasons to Pay Cash
The 60/40 Strategy Has Worked Even When Bond Returns Have Disappointed
Top 5 Reasons to Exceed 25 Years of Expenses Before Retiring
Why It’s So Important to Diversify Your Real Estate Portfolio
The Easiest Way to Figure Out Your Optimal TSP Investment Plan
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 13 OCT 2019:
| FUND | STOCKS | BONDS |
| L Income | 21% | 79% |
| L 2020 | 26% | 74% |
| L 2030 | 60% | 40% |
| L 2040 | 72% | 28% |
| L 2050 | 82% | 18% |
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.
Step 3 – You’re Done
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 83% stocks and 17% bonds, which I think is more appropriate.
Finance Friday Articles
Here is the article of the week:
Improving the Odds of Your Portfolio’s Success
Here are the rest of this week’s articles:
5 Money Myths that Explain Why Doctors are Bad With Money
Active vs Passive Real Estate Investing
A man who retired at 43 says he made 2 important money decisions before leaving work
Balanced Funds – The Mild Salsa of Personal Finance
Bond Investors Should Not Fear Rising Interest Rates
BRS Basics: It’s Never Too Late to Be Smart About Retirement
Disney Renews Armed Forces Salute for Another Year
Physicians Are Turning to Side Hustles Now More Than Ever. Why?
Spend Money On What Makes You Happy
Top 5 Reasons to Exceed 25 Years of Expenses Before Retiring
Top 5 Ways a Virtual Assistant Improves My Life
Vanguard’s Impersonal Advisor Service
Vanguard’s Upcoming “Digital Advisor” Program
Yet Another Reason to Use Index Funds
Joel Schofer's Career Planning Blog 