Asset Allocation Tips for Thrift Savings Plans

by Samuel Taube, Managing Editor, Investment U

If there’s one thing that Americans of all creeds can agree on, it’s reverence for our civil servants and veterans. When the people who serve our country reach the end of their careers, we want them to retire comfortably. That’s why the government created Thrift Savings Plans (TSPs).

These tax-advantaged retirement plans have some advantages over civilian IRAs and 401(k)s. But they also offer less of a selection than most retirement plans. TSP investors must choose from a list of government-managed funds that aren’t available to the public.

As a result, it can be hard to find asset allocation tips and other information about TSPs. Below, we’re walking you through some common decisions faced by TSP investors.

Asset Allocation or a Lifecycle Fund?

The first decision in setting up a Thrift Savings Plan is between managing your own allocation and investing in a lifecycle fund.

A lifecycle fund is exactly like a civilian target date fund. You just select one that is designed for your intended retirement year. Then the fund managers do all of your allocation and rebalancing for you. For novice investors, lifecycle funds can be good options. They take the hassle out of managing your TSP, and they provide reasonable returns.

But ultimately, they tend to underperform a skilled investor who can manage their own asset allocation. That’s because they follow a generic age-based formula: equities early in life, bonds later in life. This isn’t a bad strategy, but it can be slow to adapt to the changing conditions of the market.

If you don’t feel confident enough about investing to allocate your own assets, then a lifecycle fund may be the right choice for your TSP. But if you’ve got some investing chops, then you can likely do better on your own. Keep reading for tips on how to allocate between the various individual funds.

The F Fund and the G Fund

The F fund and G fund are your conservative asset choices. The F fund is made up of fixed income securities. It tracks the BlackRock U.S. Total Bond Index Fund (MUTF: BMOIX).

The G fund, on the other hand, is composed of a portfolio of unique government securities that aren’t available to the general public. It’s the oldest and safest fund of any TSP investment. But it also offers the lowest returns. The G fund is fairly similar to the Vanguard Short-Term Government Bond Index Fund (Nasdaq: VGSH).

As you can see, both funds are extremely low risk and low return. Both closed out 2016 within 1% of where they started.

thrift savings plan tsp asset allocation

The funds aren’t terribly different from each other. But as you can see above, the F fund is a bit higher risk (and higher yielding) than the G fund. Unless you think that the U.S. might default on its Treasury bonds for the first time ever, the F fund is the way to go.

As with any retirement portfolio, your allocation of conservative investments like the G and F funds should be small when you’re young. As you approach retirement age, it becomes more important to protect your money from market risk. So you should gradually shift your allocation toward G or F funds as you reach middle age.

The C, I and S Funds

If you have many years of saving ahead of you, then you should embrace risk and grow your money as much as possible. That’s what the C, I and S equity funds are for.

The C fund is a common stock index that tracks the S&P 500. The I fund is made up of international stocks and follows the MSCI EAFE benchmark. And the S fund, the youngest of the bunch, is a small cap index that tracks the Dow Jones U.S. Completion TSM Index.

The S fund is the riskiest (and potentially highest-returning) investment available to TSP investors. Small cap stocks are volatile - many don’t survive to become midcap or large cap stocks. But those that make it deliver unbeatable returns to investors.

The C and I funds, on the other hand, are ultra-diversified indexes of domestic and international blue chips, respectively. They’re safer than the S fund, but concurrently, they tend to grow more slowly.

Your portfolio should definitely contain a mix of C and I funds. Consider adding some S if you’re young and willing to gamble on a higher return.

If you’ve helped to defend or expand our freedom, then you deserve to retire with dignity and grace. The U.S. government is contributing to this goal by maintaining the Thrift Savings Plan system. But your TSP isn’t of much value if you don’t know how to use it.

Remember - go heavy on the S fund when you’re young, ease into a mostly C and I allocation in the prime of your career, and then move most of your money into G and F as you get older.

Or, if that’s too much to keep track of, just pick an appropriate lifecycle fund. Either way, you’re entitled to a wealthy retirement for serving our country.

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