Here are two tips for investing in the Thrift Savings Plan (TSP) that frequently trip up beginners and not-so-beginners:
- Strive to always base your TSP contribution off of your basic pay because it is the most stable and predictable pay you have. If you prefer to contribute from bonuses (or some other type of pay) you can, but realize that they tend to be less predictable. During my career I’ve seen the Navy’s pay structure changed and my special pays get hosed up due to the variable timing of the special pay NAVADMIN release. If I would have been contributing to the TSP from my bonuses, my TSP contributions would have been screwed up. TSP contributions from base pay, though, wouldn’t have missed a beat because my basic pay stayed the same.
- If you are in the Blended Retirement System (BRS), make sure you don’t fill your TSP early. If you fill it in September, you won’t get a match for the rest of the year. You have to contribute each month to get the monthly match.
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. First, we’ll cover the C Fund, which would probably be the fund you would pick if you were only allowed to pick one.
29 JAN 1988
The Federal Retirement Thrift Investment Board currently contracts BlackRock Institutional Trust Company, N.A. (BlackRock) to manage the C Fund assets. The C Fund remains invested regardless of the performance of the securities markets or the overall economy.
The C Fund is invested in a stock index fund that fully replicates the Standard and Poor’s 500 (S&P 500) Index, a broad market index made up of the stocks of 500 large to medium-sized U.S. companies. The C Fund’s objective is to match the performance of the S&P 500. Also, some of the money in the C Fund is temporarily invested in the G Fund and earns the G Fund return.
The C Fund is a passively managed fund that remains invested according to its indexed investment strategy regardless of stock market movements or general economic conditions.
What is the Risk?
Your investment in the C Fund is subject to market risk because the prices of the stocks in the S&P 500 Index rise and fall. You are also exposed to inflation risk, meaning your C Fund investment may not grow enough to offset inflation.
What is the Benefit?
Historically, this increased risk has been rewarded with an increased return. It offers the opportunity to experience gains from equity ownership of large and mid-sized U.S. company stocks. Here is all the performance data as of 3 OCT 2020:
Types of Earnings
The C Fund changes in value as the market price of its stocks change. In addition, the C Fund makes money for its investors when those stocks pay dividends. Unlike a traditional mutual fund, though, income from dividends is included in the share price calculation. It is not paid directly to participants’ accounts.
It also makes some money on interest on short-term investments and securities lending income.
BlackRock credits interest and dividend 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 0.042% or 4.2 basis points, which like all the TSP funds is ridiculously low and is a major benefit of the TSP. It cost $0.42 for each $1,000 invested.
How Should I Use the C Fund in my TSP Account?
The C Fund can be useful in a portfolio that also contains stock funds that track other indexes such as the S Fund (which tracks an index of small US company stocks) and the I Fund (which tracks an index of international stocks). The C, S, and I Funds track different segments of the overall stock market without overlapping. This is important because the prices of stocks in each market segment don’t always move in the same direction or by the same amount at the same time. By investing in all segments of the stock market (as opposed to just one), you reduce your exposure to market risk.
The C Fund can also be useful in a portfolio that contains bonds. Again, it is because the prices of stocks and bonds don’t always move in the same direction or by the same amount at the same time. So a retirement portfolio that contains a bond fund like the F Fund, along with other stock funds, like the S and I Funds, 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 S&P 500 index funds like the C Fund:
The best-known of the broad stock market mutual funds and Exchange Traded Funds (ETFs) in the US track the S&P 500 index of the largest stocks. We prefer using a broader index that includes more smaller-company stocks…Funds that track these broader indexes are often referred to as ‘total stock market’ index funds. More than 80 years of stock market history confirm that portfolios of smaller stocks have produced a higher rate of return than the return of the S&P 500 large-company index. While smaller companies are undoubtedly less stable and riskier that large firms, they are likely – on average – to produce somewhat higher future returns. Total stock market index funds are the better way for investors to benefit from the long-run growth of economic activity.
If you want to follow their advice, you just combine the C Fund with the S Fund in a 3:1 ratio. To see how I use the C Fund, read the Crush the TSP series.
We’ve talked about steps 1-5 to crush the Thrift Savings Plan (TSP). Now we move on to the final step (unless I think of more), step 6 – rebalance annually.
What is Rebalancing?
Let’s say that your desired TSP asset allocation is 70% stocks and 30% bonds. After the last year, though, stocks earned more than bonds and now you’re sitting at 85% stocks and 15% bonds. In order to rebalance back to your desired asset allocation, you’d sell approximately 15% of your stocks and buy bonds, restoring your desired asset allocation. It’s that simple.
Why Should You Rebalance?
If you don’t, you may be assuming more or less risk than you desire.
Also, by rebalancing you force yourself to sell what has overperformed and buy what has underperformed. Although this seems counter-intuitive because you are selling what has given you the largest return, by doing this you are systematically selling high and buying low. When left to themselves, investors typically buy high and sell low, the opposite of what you want to do. Rebalancing forces you to do it right.
How Often Should You Rebalance?
Vanguard has researched this, and you can read their full report here:
Their conclusion is:
We conclude that for most broadly diversified stock and bond fund portfolios (assuming reasonable expectations regarding return patterns, average returns, and risk), annual or semiannual monitoring, with rebalancing at 5% thresholds, is likely to produce a reasonable balance between risk control and cost minimization for most investors.
In other words, you rebalance annually or semiannually (twice per year) whenever your current asset allocations are off by 5% or more from your desired allocations. If the current and desired allocations are within 5% of each other, you do nothing.
How Do You Rebalance in the TSP?
You just log on and do what they call an “interfund transfer” or IFT. You can read all about it on this page from the TSP website.
Because you are doing it in a tax-advantaged retirement account, there are no expenses, fees, or taxes associated with rebalancing (unlike if you were rebalancing a taxable account).
You can only do it twice per month without restrictions, but since you are smart you are only doing it once per year anyway.
Do You Need to Rebalance With Lifecycle Funds?
No, you don’t. This is one of the major advantages of the L funds. If you are hitting the easy button on your TSP and just using a Lifecycle fund, you don’t need to rebalance…EVER!
That’s It. Crush the TSP!
That’s the final step to crush it in your TSP account. Read the whole series, maximize your TSP contributions, and get rich in the military.
We’ve talked about steps 1-4 to crush the Thrift Savings Plan (TSP). Now we’re on to step 5, deciding between the Roth vs traditional TSP. Let’s take a look at the difference between the two and help you to decide which is the right choice for you.
The Traditional TSP
The traditional TSP is the first of two potential tax treatments for your TSP contributions. If you elect it, you defer paying taxes on your contributions and their earnings until you withdraw them. This is the only option for any money you get as a result of the 5% government match in the new Blended Retirement System (BRS).
If you are in a combat zone making tax-free contributions, your contributions will be tax-free at withdrawal but your earnings will be subject to tax.
The Roth TSP
The Roth TSP is the second of two potential tax treatments for your TSP contributions. If you contribute to it, you pay taxes on your contributions now and your earnings are tax-free at withdrawal.
The Roth TSP is similar to a Roth 401(k) that a civilian would have, not a Roth IRA. There are no income limits for Roth TSP contributions. You can contribute to both your Roth TSP and a Roth IRA without contributions to one affecting how much you can contribute to the other. For example, in 2019 you can contribute the full $19,000 to your Roth TSP and $6,000 to your Roth IRA.
Which One is Best for You?
Here’s a table that compares the two options from the TSP website:
|The Treatment of…||Traditional TSP||Roth TSP|
|Your Paycheck||Taxes are deferred*, so less money is taken out of your paycheck.||Taxes are paid up front*, so more money comes out of your paycheck.|
|Transfers In||Transfers allowed from eligible employer plans and traditional IRAs||Transfers allowed from Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s|
|Transfers Out||Transfers allowed to eligible employer plans, traditional IRAs, and Roth IRAs2||Transfers allowed to Roth 401(k)s, Roth 403(b)s, Roth 457(b)s, and Roth IRAs3|
|Withdrawals||Taxable when withdrawn||Tax-free earnings if five years have passed since January 1 of the year you made your first Roth contribution, AND you are age 59½ or older, permanently disabled, or deceased|
* If you are a member of the uniformed services receiving tax-exempt pay (i.e., pay that is subject to the combat zone tax exclusion), your contributions from that pay will also be tax-exempt.
1. Roth contributions are subject to Federal (and, where applicable, state and local) income taxes, while traditional contributions are not taxed until withdrawn. However, both Roth contributions and traditional contributions are included in the amount of wages used to calculate payroll taxes (e.g., Social Security taxes).
2. You would have to pay taxes on any pre-tax amount transferred to a Roth IRA.
3. Transfers to a Roth IRA from a Roth TSP are not subject to the income restrictions that apply to Roth IRA contributions.
The issue of whether Roth is a good option for you was discussed in this TSP Highlights called Is Roth For You?
If you like interactive calculators, this one from Betterment is pretty good.
If you don’t trust anything I say and want to read what someone else thinks, I don’t blame you. Here’s a good article from Money.
The decision really boils down to whether you’d like to pay taxes now (Roth) or later (traditional) and how your current tax rate compares to your likely future tax rate during retirement. While predicting the future is not easy, if you are young or early in your career, your earnings and tax rate are likely to rise in the future, so you should probably lean toward the Roth option. If you are in your peak earning years and you expect your tax rate to fall in retirement, you should probably lean toward the traditional and defer taxes to a future date.
If you are not sure which option to choose, many people recommend you diversify your retirement accounts and simply split the Roth and traditional 50/50. That way in the future you’ll have options depending on how future tax rates and your financial situation changes.
What do I do? I can afford the taxes now and want as much tax-free money available to me as I can get, so I put all the money in the Roth TSP that I can. That said, the first part of my career I didn’t have a Roth option, so a large percentage of my TSP balance is in the traditional TSP as well, so I’m about 50/50 split between the two options.
Some Rules to Be Aware Of
The TSP keeps your traditional and Roth money in separate “buckets” in your TSP account.
You cannot convert any portion of your existing traditional TSP balance to a Roth balance.
You can make both traditional and Roth contributions if you want. You can contribute in any percentages or amounts you choose and can change your election at any time.
If you are getting government contributions (perhaps because you are in the Blended Retirement System), they are deposited into your traditional TSP. You can put your portion in the Roth, but the government’s portion must go in the traditional.
The Bottom Line
Use the resources above to decide if you want to invest in the traditional TSP, the Roth TSP, or some combination of the two. If you’re not sure what to do, I’d just split it 50/50 so you have options in the future.
Keep your eye out for the last step to crush the TSP, rebalancing.
The Thrift Savings Plan (TSP) is the military’s retirement account. Learning how to maximize its utility should be high on your financial priority list. At MCCareer.org, I’m going to create a guide that will show you how to crush it with the TSP. We already showed you step 1 and step 2 in that guide. Here’s step 3…
The 3rd Step to Crush the TSP – Asset Allocation
You’ve probably heard that you shouldn’t put all of your eggs in one basket. That is what asset allocation is all about…making sure your eggs are in multiple baskets.
Asset allocation can be complex. There are entire books written about nothing but asset allocation, like The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk. That’s a good book if you want to nerd out, but I’m going to try and simplify asset allocation for you.
What Assets are Available in the TSP?
There are only five assets available:
- G Fund – US government bonds specially issued to the TSP
- F Fund – US government, corporate, and mortgage-backed bonds
- C Fund – stocks of large and medium-sized US companies
- S Fund – stocks of small to medium-sized US companies (not included in the C Fund)
- I Fund – international stocks of more than 20 developed countries
What is not available? There are a few major asset classes unavailable. You cannot invest in real estate or international bonds. International emerging markets may be added to the I Fund is the TSP board can ever sort out the politics. If you want exposure to any of these asset classes right now, you’ll have to get them in your other investment accounts, like your IRA or taxable account.
How Do I Pick My Asset Allocation?
If in step 2 you decided to use L Funds, you don’t need to pick an asset allocation for your TSP. The L Fund takes care of it for you.
If you are not going to use L Funds, one way to decide on an asset allocation is to take this Vanguard survey. At the top of the page it will give you a suggested allocation, such as 80% stocks and 20% bonds.
Another way is to borrow from trusted investment experts. Here are a few opinions.
In The Elements of Investing: Easy Lessons for Every Investor, Burton Malkiel recommends these age-based asset allocations:
- 20-30s – bonds 10-25%, stocks 75-90%
- 40-50s – bonds 25-35%, stocks 65-75%
- 60s – bonds 35-55%, stocks 45-65%
- 70s – bonds 50-65%, stocks 35-50%
- 80s+ – bonds 60-80%, stocks 20-40%
In the same book, Charlie Ellis recommends these asset allocations:
- 20-30s – bonds 0%, stocks 100%
- 40s – bonds 0-10%, stocks 90-100%
- 50s – bonds 15-25%, stocks 75-85%
- 60s – bonds 20-30%, stocks 70-80%
- 70s – bonds 40-60%, stocks 40-60%
- 80s+ – bonds 50-70%, stocks 30-50%
Mr. Ellis is a little more aggressive than Mr. Malkiel because he recommends a higher allocation of stocks.
There are other ways to come up with a reasonable asset allocation, such as financial “rules of thumb.” The founder of Vanguard, John Bogle, is famous for creating the “age in bonds” rule of thumb. It says that whatever your age is, that is the percentage of your investments that should be in bonds. The rest should be in stocks.
For example, I’m 44 years old, so his rule would say I should have 44% in bonds and 56% in stocks.
This rule has been criticized as being too conservative, so some have changed it to 110 or 120 minus your age as the percentage you should have in stocks. For example, for me this would mean:
- 110 minus age 44 = 66% in stocks, the rest (34%) in bonds
- 120 minus age 44 = 76% in stocks, the rest (24%) in bonds (this is actually very close to my asset allocation as of 9 AUG 2020, 75% stocks and 25% bonds)
There are certainly other ways to come up with your asset allocation. You could ask a financial advisor. You could read other books. You could read other blog posts, like this one on the Bogleheads Wiki.
What About Other Assets Like Your Pension and Social Security?
This is a tough issue. Some would argue that pensions and social security are income streams and that they should not play into your asset allocation decision. This is what Vanguard argues. Others would argue that they are “bond-like” and should be factored into your asset allocation and counted as a large pile of bonds. Here are a few thoughts on the subject from blogs I follow and trust:
- The Oblivious Investor – How Pensions and Social Security Affect Asset Allocation
- Humble Dollar – A Price on Your Head
The Bottom Line – Asset Allocation
Somehow you have to figure out your desired asset allocation. The info above will hopefully facilitate that. Once you have a target asset allocation, now you have to apply it to the investments available in the TSP. Take the 4th Step…invest.
The Thrift Savings Plan (TSP) is the military’s retirement account. Learning how to maximize its utility should be high on your financial priority list. I’m going to create a guide that will show you how to crush it with the TSP. We already showed you step 1 in that guide. Here’s step 2…
The 2nd Step to Crush the TSP – Decide
If you want to crush it with the TSP, you’ve got some decisions you have to make. You have to decide:
- How much you’re going to invest.
- What investments you’re going to use.
Decide How Much You Are Going to Invest
If you want to crush it, you need to invest as much as you can afford. How much can you contribute? Here is the TSP page that lists the contribution limits.
That page may be confusing, so here is the bottom line:
- You can contribute $19,500 in 2020.
- If you are 50 or older, you can contribute an additional $6,500.
- If you are deployed to a combat zone, you can contribute even more.
- Any matching contributions you get from the DoD due to the Blended Retirement System or BRS (if you’re in it) does not count toward these limits.
How much should you contribute? As much as you can. Period. Even a few hundred dollars is better than nothing.
Decide Which Investments You Are Going to Use
The TSP is pretty simple in this regard. You only really have six options.
The first option is to just let someone else handle this for you by using a Lifecycle fund. According to the TSP:
The L Funds, or “Lifecycle” funds, use professionally determined investment mixes that are tailored to meet investment objectives based on various time horizons. The objective is to strike an optimal balance between the expected risk and return associated with each fund.
Using L Funds is a simple, easy, and effective strategy that is completely fine for most people. If that is how you want to do it, you can just put all your TSP money in the L Fund with the year that is closest to when you want to retire and skip the rest of this blog post. For example, if you want to retire in 2034, you’d invest in the L 2035.
If you are more of a do-it-yourselfer, then you have five other investment options besides using a Lifecycle fund. The five investment options can be compared in this table from the TSP website.
That is really it. You can either use a Lifecycle fund, or one of the five other funds listed in the table.
The Bottom Line – Decisions You Have to Make
Like we said at the beginning, you have to decide:
- How much you’re going to invest. (Hint: as much as you can afford.)
- What investments you’re going to use – Lifecycle vs do-it-yourself with the five other available funds.
If you decided against the Lifecycle funds, the next thing you have to do is determine your asset allocation, which is our next step to crushing it with the TSP.
The Thrift Savings Plan (TSP) is the military’s retirement account. Learning how to maximize its utility should be high on your financial priority list. I’m going to create a guide that will show you how to crush the TSP. Here’s Step 1 in that guide…
Step 1 to Crush the TSP – Prepare
Before you can crush the TSP, you have to do a little preparation. You don’t need to be Warren Buffet, but you need to understand the basics of investing and the TSP. Luckily, there are many ways to learn the basics. Here are a few:
- Read a book – Go to your library, search for a used book with AddAll (one of my favorite tools), or buy one new on Amazon. The easiest and quickest read to increase your basic investing knowledge is The Elements of Investing: Easy Lessons for Every Investor. Read this book. THAT’S AN ORDER! (unless you outrank me)
- Read an online introduction to investing – The one that I’d recommend is the Bogleheads Wiki. Here’s a link to their getting started page and their investing start-up kit. What’s the best part? All of this is free.
- Watch videos – The Bogleheads have a video series, which is also free.
- Read blog posts – My favorite TSP-specific blog posts are found at The White Coat Investor. You can read What You Need To Know About The TSP, The G Fund – A Free Lunch, or The Military’s New Blended Retirement System. I wrote the last one.
- Read the TSP website – The TSP website has a wealth of information.
Now you’ve got some homework. Once you’ve done as much of this as you can, move on to the 2nd step.
According to the January/February 2020 Thrift Savings Plan (TSP) Message from the Executive Director, a few important changes are coming:
- 5-year Lifecycle (L) Funds—Later this year, we’ll offer more investment options when we introduce new L Funds in 5-year increments. You’ll be able to pick an L Fund with a target date that more closely matches your intended retirement date. Each L Fund will continue to vary your investments automatically to adjust your exposure to risk as you get closer to retirement and give you the potential for long-term growth. Learn more about our Lifecycle Funds and individual fund options.
- Automatic enrollment percentage increase—Beginning October 1, 2020, new participants will be automatically enrolled in the TSP at 5% of their pay. This change also includes Blended Retirement System (BRS) participants automatically re-enrolled in the TSP on or after January 1, 2021. The increase will allow new participants to get the full matching contributions from their agency or service. If you are currently an active participant and are not contributing at least 5%, then you’re missing out on free money. Increase your percentage today by logging into your agency’s or service’s electronic payroll system and upping your contribution amount.
Here are my favorites this week:
Here are the rest:
They say there’s no free lunch, but in the Thrift Savings Plan there is a free lunch, and it’s called the G Fund. Will the government get rid of this free lunch?
The G Fund Free Lunch
What is this free lunch? You can read about it on this page in the Rewards section:
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.
The government is paying you a higher interest rate than it should. That is the G Fund free lunch.
Why is the Free Lunch at Risk?
The government periodically considers getting rid of it. For example, you can read about it in this article, which is discussing the President’s FY19 budget plan/request. Here’s the relevant portion:
The plan also proposes reducing the statutorily mandated rate of return for the government securities (G) fund to be based on either the three-month or four-week Treasury bill, at a projected savings of $8.9 billion over 10 years.
“G Fund investors benefit from receiving a medium-term Treasury Bond rate of return on what is essentially a short-term security,” the White House wrote. “The budget would instead base the G-fund yield on a short-term T-bill rate.”
TSP spokeswoman Kim Weaver said changing the G Fund’s yield, which is currently 2.75 percent annually, would have a disastrous effect on participants’ ability to save for retirement. If Congress changed the G Fund to track the three-month Treasury bill, the yield would decrease to 1.46 percent, and for the four-week bill it would drop to 1.43 percent.
“Such a change would make the G Fund inadequate and ineffective from an investment standpoint for TSP participants who are saving for retirement,” Weaver said in an email. “More than 3.6 million TSP participants (69 percent) have all or some of their account balance invested in the G Fund. Of those with money in the G Fund, 2 million (39 percent) hold the G Fund as their sole investment choice.”
For a TSP participant who has just retired and is invested entirely in the L Income Fund, which is designed for people who have begun taking annuity payments, they would run out of money at age 84 instead of the current projected age of 92, Weaver said.
Jessica Klement, staff vice president for advocacy at the National Active and Retired Federal Employees Association, said the change would make G Fund investments “useless” and likely force TSP administrators to divest from it entirely.
“[The new rate] would not even keep up with inflation,” she said. “So if you wanted to keep your money in a mostly secure fund, you would not be getting any return, and you’d actually be losing money. And if you took your money out, there would be no other safe, secure investment for those nearing or in retirement.”
What Does This Mean For You?
Right now, it means nothing. This is all just discussion about something that might happen in the future.
What you do need to understand, though, is that the G Fund serves a specific purpose in your portfolio. As the TSP site says:
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 alarming that Ms. Weaver from the TSP said, “Of those with money in the G Fund, 2 million (39 percent) hold the G Fund as their sole investment choice.” Those 2 millions people are sacrificing long-term growth for the safest and most conservative investment available in the TSP.
There’s nothing wrong with that if you’re doing it because you are very conservative, near retirement, or the G Fund serves as the bond portion of a larger, more diversified portfolio that has more risky assets like stocks or real estate.
The sad reality is that most who are solely invested in the G Fund are that way because it used to be the default option for those starting a TSP account, and they never switched it to a more aggressive investment option. Under the new Blended Retirement System, the default investment switched from the G Fund to an age-appropriate Lifecycle fund.
What’s the Bottom Line?
The G Fund gives you a free lunch, paying you a higher long-term interest rate while you are investing in short-term securities. The government periodically talks about getting rid of that free lunch.
If you are invested in the G Fund, make sure you are doing it purposely and are aware of its conservative nature. Its emphasis is on preserving wealth rather than growing wealth.