TSP Funds: A Comprehensive Guide
It can be difficult to determine which TSP investment fund is appropriate for you. You have to think about what you want and what you’re willing to risk. Most TSP funds are safe, but the market can sometimes be unpredictable.
We can give you some of the information you need to help make your decision. But it is up to you to select what is best for you.
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6 Major Funds TSP Participants Can Invest In:
The “C” Fund
The C Fund is designed to match the performance of the Standard and Poor’s 500 Index. This Fund gets most of its earnings from dividends and stock price gains (or losses). It is exposed to market risk, which can go up or down depending on the economy and the stock market, and inflation risk, which means that prices could go up over time if inflation increases.
The “F” Fund
The F Fund tries to match the performance of the Barclays Capital U.S. Aggregate Bond Index. This Index comprises different types of government, mortgage-backed, and corporate bonds. When you earn money from this Fund, it comes from interest income on the securities in the Fund and any gains (or losses) that occur when you sell the securities. But there’s a risk associated with investing in this Fund: if interest rates go up, bond prices go down.
The “G” Fund
The G Fund is a short-term U.S. Treasury security designed to earn a higher rate of return than inflation. The Fund’s earnings come from the interest income on this security. However, the G Fund is also exposed to inflation risk, which means that it may not be able to keep up with rising prices in the future.
The “S” Fund
The S Fund invests in a stock index fund that tracks the Dow Jones U.S. Completion Total Stock Market Index. It means that when the stock market goes up, the S Fund goes up, and when the stock market goes down, so does the S Fund. Nevertheless, there is a chance that the value of your investment could decrease if inflation or the stock market deteriorates.
The “I” Fund
The I Fund is trying to match the Morgan Stanley Capital International EAFE Index. That means it buys stocks in the same companies in the Index. The money to invest comes from people buying shares of the Fund, and then the Fund invests in those stocks. When someone sells their shares of the Fund, the money goes back into buying more shares of stock. Any profits (or losses) come from how well those stocks do, dividends (money paid out to shareholders), and changes in currency values.
The “L” Fund
The L Fund invests in a mix of C, F, G, S, and I funds. Its investment strategy is based on how many years you have until retirement and how much risk you will take to get a higher return potential. The risk comes from how the different funds perform. But remember that your account is not guaranteed against loss.
What Is the Thrift Savings Plan (TSP), and How Does It Work?
The Thrift Savings Scheme (TSP) is retirement savings and investment plan for government workers and military personnel. This plan includes the same tax benefits as a 401(k), and many agencies offer matching contributions. Employees can contribute to this plan through payroll deductions, making it easy to save for retirement.
The largest employer in the nation is the government, so it’s not surprising that the TSP is the most extensive retirement plan in the world. It has over $800 billion in assets, and more than 6.4 million people have an account with it.
The secret to generating wealth with a TSP account is to select the correct funds and invest in them consistently over time, just like saving for retirement with a 401(k) or an IRA. Especially if you’re new to investing, it may be pretty nerve-wracking. But don’t worry; you can make it work for you with some information about the TSP and the funds it offers. Let’s get started.
What Is the Thrift Savings Plan?
In 1986, the Thrift Savings Plan (TSP) was established to assist federal employees in retirement savings. A 401(k) plan and the TSP are comparable, but the TSP includes tax benefits that make it more cost-effective to save for retirement.
TSP contributions can be deducted directly from your paycheck, and you can invest the money in various funds. A match of up to 5% is also available for contributions. Later, we’ll detail those fund possibilities and the ones we suggest.
Who Can Participate in a Thrift Savings Plan?
You must work for the federal government or be a military member to contribute to a TSP account. The TSP is generally available to anyone working for the federal government, but if you’re unsure, Consult the benefits office.
What Sets Traditional TSP Contributions Apart from Roth TSP Contributions?
Both TSP plans (traditional and Roth) have the same purpose–to grow your retirement savings–but they differ in how contributions and investments are taxed. With a traditional TSP, you pay taxes upon withdrawal; with a Roth TSP, you pay taxes upfront when contributing money to your account.
You contribute with pre-tax dollars when you contribute to a traditional TSP. The government takes the money out of your paycheck before taxes. However, when you retire and start withdrawing money from your TSP account, you will have to pay taxes on the money that you withdraw. Your tax bracket at the time will determine how much tax you must pay.
You pay taxes on your money with a Roth TSP before it enters your account. As a result, your taxes will be slightly higher when you make your donations. The good news is that because Roth contributions grow tax-free, you won’t have to pay taxes on the money you withdraw when you retire. That means the money in your Roth TSP account will be yours to keep, and you won’t have to give any of it to the government!
When you have the option, we always advise choosing a Roth option. The tax benefit is the key justification. There is no assurance that tax rates will remain the same if you have decades before retiring. However, you need not be concerned if you have already paid taxes on your contributions.
Another benefit of saving for retirement is that you will not have to pay as much in taxes. You will save money on your taxes today, and you will also save money when you retire because you will not have to pay as many taxes.
If you start making Roth IRA contributions as soon as feasible, you won’t notice the money that goes toward taxes. You’re already used to paying it. Plus, the nest egg you worked so hard to build (contributions and growth) will be all yours when you retire.
A Mix of Roth and Traditional
You will likely benefit from making Roth contributions to your TSP. Still, you can also do a mixture of Roth and traditional contributions (though this is not what we recommend in most cases). Remember that any matching contributions you receive from your agency or service are automatically put in your traditional TSP and can’t be converted to Roth.
What Are the TSP Contribution Limits?
The maximum contribution limit for your TSP account for the year 2022 is $20,500. If you’re 50 years or older, you can contribute an extra $6,500 as a “catch-up” contribution.
Do Your TSP Contributions Receive a Matching Grant?
If you’re a FERS or Blended Retirement System member, your agency or service will match your TSP contributions (BRS).
If you are on FERS or BRS, your employer or service will automatically contribute 1% of your earnings to your TSP account, whether or not you make any contributions. This 1% contribution grows over time, meaning you must complete two to three years of service (depending on the agency) before you can keep the money.
If you contribute 1% of your pay to your 401k plan, then your company will match that contribution. They will give you a dollar-for-dollar match on the first 3% you contribute and 50 cents on the dollar for the next 2%. If you contribute 5% of your pay, you can get the full 4% match! Another plus is that your match is immediately vested, which means it’s yours to take with you if you find a new job.
When you invest in your TSP account, your employer will match your contributions. That’s free money! Most people invest 5% of their pay to get the entire match.
Remember that the money your agency or service puts in your account is considered a traditional contribution. It means the money will be taxed when you retire.
What Amount Should You Put Into A TSP Account?
Millions of people have followed the 7 Baby Steps plan to get rid of their debt and save for retirement. Once you are debt-free (except for your house) and have a 3-6 month emergency fund saved, you start Baby Step 4, which is investing 15% of your income for retirement.
If you contribute 15% of your income to your retirement account, you will have a lot of options when you retire. You will also have enough money to save for your children’s college and pay off your house.
You should invest enough money to get the full match if you have a TSP. That’s 5% for most government employees. That means you can invest an additional 10%.
Next, open a Roth IRA in cooperation with your financial counselor. A Roth IRA allows for tax-free withdrawals and has many more mutual fund alternatives than the TSP. In 2022, you can contribute up to $6,000 (or $7,000 if you’re 50 or older) to a Roth IRA.
If you want to invest in a Roth IRA, you can choose to invest in a mix of mutual funds. These funds will have returns of at least 10-12%. We recommend that you divide your investments equally across these four types of funds: growth, growth and income, aggressive growth, and international.
Put the rest in your TSP account if you contribute the most you can to your Roth IRA and still don’t have 15%. If you don’t get a match on your TSP contributions, start with a Roth IRA. You can talk to an investment professional to determine what’s best for you. They can assist you in selecting the best funds and opening a Roth IRA.
What Types of Funds Does a TSP Offer?
The TSP offers five individual fund options, each of which is invested in US Treasury securities, bonds, or the US or international stocks.
- The Government Securities Investment (G) Fund is a mutual fund that invests in government securities.
- Fixed Income Index Investment Fund (F)
- The Common Stock Index Investment (C) Fund is a mutual fund that invests in common stocks.
- A mutual fund that invests in small-capitalization equities is known as the Small Capitalization Stock Index Investment (S) Fund.
- Fund for International Stock Index Investment (I)
There are two ways to manage your money in these funds. You can invest in one of the five individual investment funds. Alternatively, you can invest in a Lifecycle fund. The Lifecycle fund is a fund that has a preselected ratio of these five personal funds.
Lifecycle funds are similar to target date funds. They are based on the year you plan to retire. The Lifecycle fund automatically changes the direction of your investments from high-risk, high-reward options to low-risk, low-reward opportunities as you approach retirement. Lifecycle funds comprise all five individual TSP funds. Still, their ratios change quarterly, so your L Fund gets more conservative as you approach retirement.
A 2040 Lifecycle fund, for example, is designed for individuals who plan to retire between 2038 and 2042. The L 2040 Fund is riskier but will become more conservative as participants approach retirement. Meanwhile, the L 2025 Fund is more conservative since participants in this Fund are closer to retirement. Their nest egg is being protected from losses and growth.
Because they adjust automatically, lifecycle funds may appear tempting. But we’re talking about your future here! A computer does not know who you are, your financial condition, or your retirement plans. As a result, we are not fans of Lifecycle funds and do not suggest them to anyone.
Individual Investment Funds
The TSP’s investment funds are a great investment alternative since you may control how the five different fund types are balanced. You can even exclude those you do not want in your portfolio. It gives you complete control over your investments.
Even though these funds make up Lifecycle funds, you are still in control if you invest in them the way you want. The TSP doesn’t have as many investment options as other 401(k) plans, but you can still choose what is best to grow your money.
What Funds Should You Choose?
There are five different types of individual investment funds you can choose for your portfolio:
- The G-Fund for Government Securities Investment
- Investment in Fixed Income Index (F) Fund
- The C Fund for Common Stock Index Investment
- Investment in Small Capitalization Stocks (S) Fund
- Investment (I) Fund for International Stock Indexes
So, which TSP funds should you invest in? To begin with, steer clear of the G and F Funds. These two accounts are linked to treasury and corporate bonds. They have a low risk but limited growth potential. The C, S, and I Funds are your best option. We recommend an equal allocation of these three funds:
- 80 percent in the C Fund, whose performance is determined by the S&P 500
- 10% of your portfolio should be in the S Fund, which holds securities from high-risk, high-return small- to medium-sized businesses.
- 10% in the I Fund, a global fund that invests in shares of foreign corporations
The best way to invest in the stock market is to put most of your money in the C Fund and then invest a little bit in the S and I Funds. Another option is 60% in the C Fund, 20% in the S Fund, and 20% in the I Fund.
Other TSP Investment Options
The TSP will have a new investment option in June next year. That allows participants to invest in thousands of mutual funds outside the typical G, F, C, S, and I Fund umbrella. However, this option is not as clear-cut as it seems on paper.
If you choose to invest in a mutual fund through the TSP, the annual costs are $150 + $29 for each trade. Your initial investment must be at least $10,000 and come from money already in the TSP. Additionally, you are prohibited from making automatic contributions to mutual funds or investing more than 25% of your account in the mutual fund window.
Listen, moving funds through the mutual fund window takes a lot of work, but if you want to do it once a year or every other year, it can be a geeky activity you enjoy. Look for individual funds that have outperformed the S and I indices for more than ten years in small or international categories. If you don’t want to move your money from C, that’s okay because it has performed well over the years.
Talk to a professional if you want to know more about the money in the TSP. They can assist you in making the best fund selections while keeping your entire retirement strategy in mind.
Work With an Investment Pro
You don’t want to be broke when you retire, so you must partner with an investment professional or financial advisor. They can help you understand the different investment options and make intelligent choices for your TSP account. You’ll feel more assured about your retirement as a result of this.
If you need help finding an investment professional, try SmartVestor. It is a free way to find someone qualified and can help create a plan that will allow you to build wealth based on your specific situation and goals for the future.
TSP Investment Strategy: Optimization
Many people invest when everyone else is doing it. It usually means they will lose money because they are investing when the stock prices have already gone up. However, when there is an inevitable recession. And their stocks lose value; these same people become frightened and sell their stocks after they have already fallen in price. As a result, they miss out on the recovery when stock prices eventually go back up.
When stocks have already gone back up, some people buy them. But this can be a bad idea because it means they’re buying high and selling low, which will kill their TSP growth.
Some people give up and invest their whole portfolio in the G Fund, which hardly keeps up with inflation. However, if you take that strategy, you might not have enough money to support yourself in retirement. The G Fund is not a risk-free investment because there is a danger of not having enough money in retirement that must be considered.
There are two effective approaches to investing in the TSP while keeping those hazards in mind.
Smart Strategy #1: Invest in a Diverse Portfolio and Hold It
The simplest way to invest in the Thrift Savings Plan is to choose a portfolio that includes all five core funds. You could pick the funds yourself, but buying one of the lifecycle funds is easier, called “L Funds.”
The other five core funds are owned in part by the lifecycle funds. They automatically rebalance themselves, selling stocks when they go up and buying bonds and doing the opposite when stocks go down. Lifecycle funds also grow conservatively, slowly shifting from holding more stocks to holding more G Fund Treasuries.
The lifecycle fund that corresponds to your anticipated retirement does not have to be purchased.
Lifecycle funds, according to some financial advisers, are too conservative. Your life expectancy is approximately 85 years if you are 65, but you could live considerably longer.
Most people should plan to have enough money for 20-30 years after they retire. That number might be more depending on what you need. People have different needs, so lifecycle funds might not be the best choice for everyone.
However, lifecycle funds change very slowly. You can put your TSP contributions into a lifecycle fund and let it automatically balance itself over time. Every 5-10 years, you can check to see if you’re still in the right lifecycle fund for you. If not, you can always transfer your assets from one lifecycle fund to another with a later expected retirement date. It will give you more stock exposure.
Smart Strategy #2: Contrarian Investing
Almost all investors should use the first strategy because it is simple. However, you can watch out for bubbles and change your TSP allocation if you want to be more involved in your investments.
When a stock market is overvalued, it can be determined in various ways. The cyclically-adjusted price-to-earnings ratio, or “CAPE,” is one such. One hundred thirty years of data on this indicator, developed by Yale professor Robert Shiller, show stock market returns over the next 10-20 years. It will be substandard when the CAPE is high.
How to Easily Manage Your TSP
There is money in many federal employees’ TSPs, bank accounts, IRAs, and possibly taxable brokerage accounts. Personal Capital is a fantastic free resource to help manage all of that.
- A chart shows your net worth over time so you can see your position.
- A thorough accounting of each month’s total expenses.
- A fee-scanner to look for unnoticed costs that you might be paying.
- A retirement planner can help you assess your progress.
Invest each month and stay diversified across different funds. You will do well over time and be able to save up for retirement. You will get the total matching contribution from the agency if you are eligible.
Although there are some ways to optimize your TSP allocation, my standard suggestion is to invest your money in one of the relevant Lifecycle funds. The Lifecycle funds require very little hands-on management to provide strong returns because they are diversified and automatically rebalance themselves.
Frequently Asked Questions About TSP Funds
The S-fund includes smaller companies than the C-fund. The “S” in S-fund stands for “small company stocks” but includes companies with market capitalizations that are considered medium-sized and large.
The C Fund can be helpful if you have other funds in your portfolio that track different indexes, like the S Fund and I Fund. When you invest in all parts of the stock market (instead of just one), you’re less likely to lose money if the stock market goes down. The C Fund can also be helpful if you have bond funds in your portfolio.
TSP participants have one significant advantage over most 401(k) investors: lower fees. The total expense ratio, which covers investment and administrative costs, is 0.055% for individual TSP funds. It means that you will pay less in fees for your investment, which can help you grow your money over time.
Investors in the F Fund are rewarded with the opportunity to earn higher rates of return than they would from investments in short-term securities such as the G Fund.
The G Fund invests in special treasury security that is not traded on the market. This security is issued specifically for the TSP by the United States government. The G Fund is the only Fund in the TSP that guarantees the return of your principal investment.
The G Fund is more like a cash investment than a stock or bond investment. It is because it has an interest rate higher than the inflation rate. It also outperforms short-term Treasury bills.
The average yield to maturity is around 2.3%. The typical discount is 4.1 percent. The usual maturity level is reached after 7.3 years. The duration, on the other hand, is typically 5.1 years.
Most experts say you should save about 80% of your final annual pre-retirement income. It means that if you earn $100,000 a year during your working years, you’ll need at least $80,000 each during retirement to maintain your current lifestyle.
The G Fund is a type of investment that buys short-term Treasury securities. It means it has similar interest rates to long-term government securities. Still, there is no risk of losing your original investment.