personal finance

Step 4 to Crush the TSP – Invest

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You’ve read steps 1, 2, and 3 to crush the Thrift Savings Plan (TSP), and now you’re ready for step 4 and to start investing. In step 3 you came up with your desired asset allocation, so make sure you have that. You’re going to need it for the rest of the post. Just to make life a little easier, we’re going to use an example asset allocation of 80% stocks and 20% bonds.

Bond…James Bond

For the bond portion of your asset allocation, you only have two investment choices:

  • G Fund – US government bonds (specially issued to the TSP)
  • F Fund – US government, corporate, and mortgage-backed bonds

Both of these are US bond options, which is just fine. There are no international bonds available in the TSP.

We could have an intellectual discussion about the subtle differences between these two bond funds, but we’re not going to. It isn’t necessary. They’re both fine bond funds, so just split the difference, diversify, and put half of your bond allocation in the G fund and half in the F fund.

To illustrate, in the example allocation of 80% stocks and 20% bonds, we’d put 10% in the G fund and 10% in the F fund.

That’s it. The bonds are done.

The Stock Allocation

This is a little more complicated. The largest decision you have to make is how you’re going to divide your stocks between the three options. Here are your choices:

  • 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

The first question is what percentage of your stock allocation should go to the I fund. There are a few schools of thought on this.

John Bogle, the founder of Vanguard, is famous for believing that you don’t need to invest any of your stocks in international stocks. His long held belief was that the US companies are doing business globally, so they are already worldwide diversified. For example, Coca-Cola is clearly selling Coke products all over the globe. He would say you should put 0% of your stocks in the I fund.

At the other end of the spectrum are people who believe that you should invest proportionally. If you look at the worldwide value of stocks, it is about a 50/50 split between the US and the rest of the world. These people would say you should put 50% of your allocation in international stocks.

Both of these opinions are reasonable, so anything between 0% and 50% allocated to the I fund is fine. What do I do?

I rely on the research done by Vanguard, an institution managing over $5 trillion. I figure they have more money and resources to research this stuff than I do. What does Vanguard do?

If you look at their Target Retirement Funds, which are meant to be a “one stop shop” kind of investment fund, you’ll notice that they split their stock allocation so that 60% is US and 40% is international. They used to do it 70% US and 30% international, but their research showed 60/40 to be a better split so they moved to it a few years ago.

You’ll notice that a 40% international allocation is between the 0% Bogle viewpoint and the 50% global weighting viewpoint, so it seems fine to me and that is what I do.

If you want another opinion, you can look at the TSP Lifecycle funds. You’ll notice that they do about a 70% US and 30% international split, like Vanguard used to do. Again, that seems reasonable.

Ultimately, you can pick anywhere from 0% to 50% and find someone really smart who agrees with you. I’d encourage you to have some exposure to international, so I’d say you should pick at least 20%, but it really is up to you.

Not sure what to do? Go with 30% (the TSP Lifecycle approach) or 40% (the Vanguard approach) for the I fund and call it a day.

How to Split the C and S Funds

This is easier, or at least I think it is. The C fund is basically an S&P 500 index fund of large companies, with the S fund having the rest of the small and medium sized companies. If you want to mirror the US stock market, you want to put about 75% of your US stock allocation in the C fund and the other 25% in the S fund. You’ll notice that this is what the TSP Lifecycle funds do, further backing up my assertion.

So, I recommend that you split your C and S fund allocation 75/25, respectively.

Putting the Stock Portion All Together

For the stocks, here’s the math:

  • (Your desired international stock %) X (your total stock allocation %) = % that goes in the I fund
  • (Your total stock allocation %) – (% you are putting in the I fund) = % you must divide into the C and S funds
  • (Your % you must divide into the C and S funds) X 0.75 = % that goes in the C fund
  • (Your % you must divide into the C and S funds) X 0.25 = % that goes in the S fund

Let’s use the 80% stock and 20% bond example we started with to illustrate. Let’s assume we’re going with a 40% desired allocation to international (like I personally use):

  • (Desired international stock = 40%) X (total stock allocation = 80%) = 32% goes in the I fund
  • (Total stock allocation = 80%) – (32% that is going in the I fund) = 48% we must divide into the C and S funds
  • (48% we must divide into the C and S funds) X 0.75 = 36% that goes in the C fund
  • (48% we must divide into the C and S funds) X 0.25 = 12% that goes in the S fund

That gives us a stock allocation of 32% I fund, 36% C fund, and 12% S fund.

The Bottom Line

We split our bond allocation 50/50 between the G and F funds. We put the desired percentage for international stocks in the I fund. We split the remaining stock allocation 75/25 between the C and S funds, respectively.

For the 80% stock and 20% bond portfolio we are using as an example, this plays out:

  • 10% in the G fund
  • 10% in the F fund
  • 32% in the I fund (based on a hypothetical 60/40 US/international stock split, which can vary as discussed above)
  • 36% in the C fund
  • 12% in the S fund

This can be tough to grasp in a blog post, so if there are questions or points that need clarification just put them in the comments section and we’ll straighten them out.

The next step you need to crush the TSP is to decide if you’re going to go Roth or traditional, coming soon…

Step 3 to Crush the Thrift Savings Plan – Asset Allocation

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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 (soon to include emerging markets)

What is not available? There are a few major asset classes unavailable. You cannot invest in real estate or international bonds. International emerging markets will be added to the I Fund soon but are not currently available. 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 43 years old, so his rule would say I should have 43% in bonds and 57% 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 43 = 67% in stocks, the rest (33%) in bonds
  • 120 minus age 43 = 77% in stocks, the rest (23%) in 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 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.

Step 2 to Crush the TSP – Decide

Posted on Updated on

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 $19,000 in 2019.
  • If you are 50 or older, you can contribute an additional $6,000.
  • 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 2030.

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 are listed in this table from the TSP website. Or you can read this booklet that discusses your investment options.

That is really it. You can either use a Lifecycle fund, or one of the five other funds listed in the table or booklet.

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.