I’m a huge fam of Jim Lange. He’s a noted expert in financial management, saving for retirement, and estate planning. He’s written a number of books, some of which you can get for free on this page. If I ever move back to Pennsylvania, I’ll probably have him do my estate planning so that I don’t have to worry about anything in retirement.
He sends out a monthly newsletter that I get via snail mail, and it usually has a useful article in it. If you want it, you can get it here.
A previous edition had a section called “Jim’s Point-by-Point Summary of the Whole Retirement & Estate Planning Process.” It was simple but extremely useful. Below in bold are each of the points he lists for people who are still working, which is most of my readership. Let’s take each bolded point and militarize it for you so it is specific to those of us in the military.
Contribute at least the amount to your retirement plan that your employer is willing to match or partially match.
For those under the legacy retirement plan, this is not an option. For those under the new Blended Retirement System (BRS), you need to contribute 5% of your basic pay to the Thrift Savings Plan (TSP) to get the pull 5% DoD match:
You also need to make sure you contribute 5% every month and don’t fill the TSP too early. If you max it out in October, you won’t get a match in November or December.
If you can afford to, contribute the maximum allowed to your retirement plan even if your employer does not match.
This is $19,500 in 2020. You can do an extra $6,500 if you are 50 or over. You can even do more if you are in a combat zone.
Once you have maximized contributions to your plan at work, contribute the maximum you can to an IRA, even if you cannot take a tax deduction on it.
If you are able to fill your TSP account, next you’ll need to open an IRA at an investment firm. Vanguard is the obvious choice due to their across the board low investment fees and unique non-profit structure, but you can do this anywhere (Schwab, Fidelity, etc.).
If you make too much to contribute to a Roth IRA, you just use the back door Roth IRA option.
Consider your personal tax bracket when trying to decide if you should contribute to a Roth or a traditional IRA/retirement plan.
With a traditional plan, you take a tax deduction now and pay taxes later when you take the money out. With a Roth plan you pay the taxes now and the withdrawals are completely tax free.
The general principle is that if you are in a lower tax bracket now than when you are retired, you do the Roth. If you are in a higher tax bracket now, you use the traditional.
No one really knows what the future holds, though, making this decision tough. Here are some resources for you to check out when making this decision:
Do not take loans against your retirement plan. Allow the tax-deferred or tax-free status of the account to maximize the growth of your money.
While the TSP allows loans, I refuse to link to any information about it. Once you put money away for retirement, you don’t borrow from it unless it is an ABSOLUTE EMERGENCY.
The Bottom Line
Here are the point-by-point summary of steps Jim Lange suggests you take if you are saving for retirement:
- Contribute at least the amount to your retirement plan that your employer is willing to match or partially match, which is 5% of basic pay in the BRS.
- If you can afford to, contribute the maximum allowed to your retirement plan even if your employer does not match, which is $19,500 in the TSP ($26,000 if you’re 50+).
- Once you have maximized contributions to your plan at work, contribute the maximum you can to an IRA, even if you cannot take a tax deduction on it. Use a back door Roth IRA if you need to.
- Consider your personal tax bracket when trying to decide if you should contribute to a Roth or a traditional IRA/retirement plan.
- Do not take loans against your retirement plan. Allow the tax-deferred or tax-free status of the account to maximize the growth of your money.
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.
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.
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:
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.
Target date funds are popular. You just pick the approximate year you want to retire, and you invest in the fund that has a year close to that in its name. Nothing could be easier!
Let’s take a look at the Thrift Savings Plan’s (TSP) target date funds – the Lifecycle Funds or L Funds.
1 AUG 2005
The L Funds are invested in the five individual TSP funds based on professionally determined asset allocations.
To provide professionally diversified portfolios based on various time horizons, using the G, F, C, S, and I Funds. The objective is to strike an optimal balance between the expected risk and return associated with each fund.
The L Funds’ strategy is to invest in an appropriate mix of the G, F, C, S, and I Funds for a particular time horizon, or target retirement date. The investment mix of each L Fund becomes more conservative as its target date approaches.
The strategy assumes that:
- The greater the number of years you have until retirement, the more willing and able you are to tolerate risk (fluctuation) in your TSP account value to pursue higher rates of return.
- For a given risk level and time horizon, there is an optimal mix of the G, F, C, S, and I Funds that provides the highest expected return.
Each quarter, the L Funds’ target asset allocations change, moving towards a less risky mix of investments as the target date approaches. So if you are invested in one of the L Funds, you will notice that as you get closer to your target date, your allocation to the riskier TSP funds will get smaller while your allocation to the more conservative G Fund gets larger.
The rate of change in the target asset allocation is small when the L Fund target dates are in the distant future. The rate increases as the funds approach their target dates.
When an L Fund has reached its target date, it will be rolled into the L Income Fund. The L Income Fund:
- Is the most conservative of the L Funds.
- Focuses on capital preservation while providing a small exposure to the TSP’s riskier assets (C, S, and I Funds) in order to reduce inflation’s effect on your purchasing power.
- Is designed to produce current income for participants who plan to start withdrawing from their TSP accounts in the near future and for those who are already receiving monthly payments from their accounts.
- Has a set asset allocation that does not change over time.
- The progression from a target date L Fund to the L Income Fund is automatic.
New Lifecycle funds will be added for distant target dates as they are needed.
What is the Risk?
Investors in the L Funds are exposed to all of the types of risk to which the individual TSP funds are exposed. Your account is not guaranteed against loss. The L Funds can have periods of gain and loss, just as the individual TSP funds do.
What is the Benefit?
The L Funds simplify fund selection, and investment risk is reduced through diversification among the five individual TSP funds. You choose the fund that is closest to your target date (or, if your target date falls between the target dates that are offered, you can split your account between the two target date funds closest to your time horizon).
When you invest in the L Funds:
- You can be sure that your TSP account is broadly diversified.
- You don’t have to remember to adjust your investment mix as your target date approaches – it’s done for you.
If you want to see the historical performance of the five L Funds or a visual representation of how the asset allocations change over time, go to this page and click on the tabs:
Types of Earnings
The L Funds earn the weighted average of the earnings of the underlying G, F, C, S, and I Funds calculated in proportion to their L Fund allocation.
The net expenses paid by investors is 0.04% or 4 basis points, which like all the TSP funds is ridiculously low and is a major benefit of the TSP. It costs $0.40 for each $1,000 invested.
How Should I Use the L Funds in my TSP Account?
Use the L Funds if you are looking for a simple, low maintenance way of investing money in your TSP account. The L Funds make the investing process easy for you because you do not have to figure out how to diversify your account or how and when to rebalance.
The L Funds are designed so that 100% of your TSP account can be invested in the single L Fund that most closely matches your time horizon (or in the two L Funds closest to your time horizon). Any other use of the L Funds may result in a greater amount of risk in your portfolio than is necessary in order to achieve the same expected rate of return.
Determine the date when, after leaving Federal service, you will need the money that is in your TSP account. Then identify the L Fund that matches your target date:
|Choose||If your target date is:|
|L 2050||2045 or later|
|L 2040||2035 through 2044|
|L 2030||2025 through 2034|
|L 2020||2019 through 2024|
|L Income||If you are already withdrawing your account in monthly payments or expect to begin withdrawing before 2019|
Advice from One of My Favorite Short Investing Books
Here is what one of my favorite investing books, The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits), says about target retirement date funds like the L Funds:
Target-date funds can be an excellent choice, not only for investors who are just getting started with their investment programs, but also for investors who decide to adopt a simple strategy for funding their retirement.
There are only five investments available in the Thrift Savings Plan (TSP), so let’s take a detailed look at them one at a time. In this post we’ll cover the G Fund.
The G Fund is proof that free lunches do actually exist because in the G Fund the government is paying you more interest than they actually should. Read on to find out how and why.
1 APR 1987
Unlike the other TSP funds that are managed by Blackrock, the G Fund is managed internally by the Federal Retirement Thrift Investment Board. The G Fund buys a non-marketable U.S. Treasury security that is guaranteed by the U.S. Government. This means that the G Fund will not lose money.
The G Fund invests exclusively in a non-marketable short-term U.S. Treasury security that is specially issued to the TSP. The earnings consist entirely of interest income on the security.
The G Fund’s investment objective is to produce a rate of return that is higher than inflation while avoiding exposure to credit (default) risk and market price fluctuations. It is designed to provide investors with interest income without risk of loss of principal.
What is the Risk?
Your investment in the G Fund is subject to inflation risk, meaning your G Fund investment may not grow enough to offset the reduction in purchasing power that results from inflation.
What is the Benefit?
The payment of G Fund principal and interest is guaranteed by the U.S. Government. This means that the U.S. Government will always make the required payments. In other words, your G Fund investment is not subject to credit (default) risk.
The G Fund interest rate calculation 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. This is the free lunch that the government periodically talks about getting rid of.
The G Fund is the lowest risk fund in the TSP and will have the lowest volatility, as you can see below. The major benefit is that you are guaranteed not to lose money. In trade for this you are receiving lower returns. Here is all the performance data as of 8 OCT 2019:
Types of Earnings
The G Fund makes money for its investors with interest paid by the U.S. Government.
The net expenses paid by investors is 0.04% or 4 basis points, which like all the TSP funds is ridiculously low and is a major benefit of the TSP. It costs $0.40 for each $1,000 invested. You won’t find a lower cost U.S. government bond fund anywhere.
How Should I Use the G Fund in my TSP Account?
Consider investing in the G Fund if you would like to have all or a portion of your TSP account completely protected from loss. If you choose to invest in the G Fund, you are placing a higher priority on the stability and preservation of your money than on the opportunity to potentially achieve greater long-term growth in your account through investment in the other TSP funds.
It is the TSP equivalent of a U.S. Treasury bond fund you’d find at Vanguard or other investing firms.
Advice from My Favorite Short Investing Book
Here is what my favorite investing book, The Elements of Investing: Easy Lessons for Every Investor, says about U.S. government bond index funds like the G Fund:
The U.S. Treasury issues large amounts of bonds. These issues are considered the safest of all and these bonds are the one type of security where diversification is not essential…High quality bonds can moderate the risk of a common stock portfolio by providing offsetting variations to the inevitable ups and downs or the stock market.
If you want to know how to integrate the G fund into your own TSP investments, read the Crush the TSP series. In particular, step 3 tells you how to figure out how much of your portfolio to devote toward bonds.
There are only five investments available in the Thrift Savings Plan (TSP), so let’s take a detailed look at them one at a time. In this post we’ll cover the F Fund.
29 JAN 1988
The Federal Retirement Thrift Investment Board currently contracts BlackRock Institutional Trust Company, N.A. (BlackRock) to manage the F Fund assets. The F Fund remains invested regardless of the performance of the securities markets or the overall economy.
The F Fund is invested in a bond index fund that invests in government, corporate, and mortgage-backed bonds. The F Fund’s objective is to match the performance of the Bloomberg Barclays U.S. Aggregate Bond Index.
The F Fund is a passively managed fund that remains invested according to its indexed investment strategy regardless of securities market movements or general economic conditions.
What is the Risk?
Your investment in the F Fund is subject to market risk, credit risk, prepayment risk, and inflation risk.
Because the F Fund returns move up and down with the returns in the bond market, your F Fund investment is subject to market risk. For example, when interest rates rise, bond prices (and thus, the returns of the index and the F Fund) fall. Conversely, in an environment of falling interest rates, bond prices, as well as the index and F Fund returns, rise.
As an F Fund investor, you are also exposed to credit (default) risk, or the possibility that principal and interest payments on the bonds that comprise the index will not be paid.
The F Fund is subject to inflation risk, meaning your F Fund investment may not grow enough to offset the reduction in purchasing power that results from inflation.
Your F Fund investment is also exposed to prepayment risk, which is the probability that if interest rates fall, bonds that are represented in the index will be paid back early thus forcing lenders to reinvest at lower rates.
What is the Benefit?
Although there are several types of risks associated with the F Fund, the overall risk is relatively low in comparison to certain other fixed income investments in the market because the F Fund includes only investment-grade securities. As a result, F Fund investors are rewarded with the opportunity to earn higher rates of return over the long term than they would from investments in short-term securities such as the G Fund. Here is all the performance data as of 6 OCT 2019:
Types of Earnings
The F Fund changes in value as the market price of its bond holdings change. In addition, the F Fund makes money for its investors with capital gains (net of trading costs), interest on notes and bonds, interest on short-term investments, and securities lending income.
BlackRock credits interest income each business day. This income is then reflected in the TSP share prices.
Share Price Calculations
The value of your account is determined each business day based on the daily share price and the number of shares you hold. At the end of each business day, after the stock and bond markets have closed, the total value of the funds’ holdings (net of accrued administrative expenses) is divided by the total number of shares outstanding to determine the share price for that day. The daily change in TSP share prices reflects all investment income (interest on short-term investments, dividends, capital gains or losses, and securities lending income) net of TSP administrative expenses.
The net expenses paid by investors is 0.041% or 4.1 basis points, which like all the TSP funds is ridiculously low and is a major benefit of the TSP. It cost $0.41 for each $1,000 invested.
How Should I Use the F Fund in my TSP Account?
In periods of falling interest rates, the F Fund will experience gains from the resulting rise in bond prices. So in the long run, you may expect F Fund returns to exceed those of the G Fund; however, you should also expect greater price volatility (up and down movements).
It is also important to know that higher returns are not guaranteed. This is because losses may occur when interest rates are rising, causing bond prices to fall.
The F Fund can be useful in a portfolio that also contains stocks funds. This is because the prices of bonds and stocks don’t always move in the same direction or by the same amount at the same time. So a retirement portfolio that contains stock funds, like the C, S, and I Funds, along with the F Fund, will tend to be less volatile than one that contains stock funds alone.
Advice from My Favorite Short Investing Book
Here is what my favorite investing book, The Elements of Investing: Easy Lessons for Every Investor, says about investment-grade bond index funds like the F Fund:
If indexing has advantages in the stock market, its superiority is even greater in the bond market. You would never want to hold just one bond (such as an IOU from General Motors or Chrysler) in your portfolio – any single bond issuer could get into financial deficiency and be unable to repay you in full. That’s why you need a broadly diversified portfolio of bonds – making a mutual fund essential. And it’s wise to use bond index funds: They have regularly proved superior to actively managed bond funds.
They also say, “Well-diversified portfolios should have holdings of bonds as well as stocks.”
If you want to know how to integrate the F fund into your own TSP investments, read the Crush the TSP series. In particular, step 3 tells you how to figure out how much of your portfolio to devote toward bonds.