Throwback Thursday Classic Post – Step 3 to Crush the Thrift Savings Plan – Asset Allocation

Posted on August 13, 2020 Updated on August 9, 2020

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.

Throwback Thursday Classic Post – Step 2 to Crush the TSP – Decide

Posted on July 30, 2020 Updated on July 26, 2020

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.