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Understanding Your TSP Options

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Since April is Financial Literacy Month, I’ve decided to devote this week’s column to helping you gain a better understanding of your Thrift Savings Plan investment choices.

At the end of 2012, TSP plan assets stood at $330 billion, with 4.6 million participants. This translates to an average participant balance of $70,000. At the end of 2011, the G (government securities) fund held the largest balance of any of the funds, at nearly $148 billion.

Here’s a quick quiz: Why do you think there’s so much money in the G Fund?

  • It is viewed as safe.
  • Investors fear losing money or having a negative return.
  • The G Fund is the default choice if a participant doesn’t choose a different mix of funds.
  • Many employees still covered under the old Civil Service Retirement System who participate in the TSP view it as more of a savings account (short-term investment) rather than a retirement account (long-term investment).
  • Many people don’t understand the other investment options.
  • Many investors fear the market risk associated with stock and bond investments.

The answer is all of the above. Just because almost half of all TSP funds are invested in the G Fund doesn’t make it the best choice for everyone. Federal Employees Retirement System investors in particular should try to gain a better understanding of retirement investing versus saving money for the near term.

Words to Live By

Long-term investing requires an understanding of a few key terms:

  • Diversification:  The practice of purchasing a variety of investments in order to mitigate the risk associated with any single investment.
  • Compounding: The rate of growth of earnings. (Hint: to learn how fast your money will double, divide the rate of return into 72. For example, if you expect a 3 percent rate of return on your investment, you money will double in 24 years, but if your investment delivers a 6 percent return, then your money will double in 12 years.)
  • Market risk: The risk associated with overall financial market and economic decline (also called systematic risk). Aside from not  investing in financial markets at all, there is little an investor can do to eliminate market risk. Some investors try to escape it through market timing, but that is very difficult to do.
  • Index fund:  A compilation of investments in a particular category used as a benchmark. An example is the Standard and Poor’s index of 500 large U.S. companies.
  • Volatility:  The frequency with which investments rise and fall in value. Historical rates of return generally show that when investments fall, in most cases they eventually will rise again.

TSP Choices

Here are the investment options currently offered by the TSP:

  • Stable Value: G Fund
  • Diversified Fixed Income: F Fund
  • Lifecycle Funds (a balance of investments based on projected retirement date): L Income, L2020, L2030, L2040, L2050
  • U.S. Stocks: C Fund, S Fund
  • Non-U.S. Stocks: I Fund

The number of investment options is intentionally limited. It keeps things simple so that even novice investors can understand their options.

So which of the choices is best for you? Here are some resources to help you decide:

Here are some final numbers to consider:

  • The 2013 limit on the amount you can contribute to a retirement savings plan like the TSP is $17,500.
  • The 2013 catch-up contribution limit (a separate additional amount that can be contributed by participants age 50 and older) is $5,500.

I hope you’ll spend some time this Financial Literacy Month learning something new about retirement investing.

 

Tammy Flanagan has spent 30 years helping federal employees take charge of their retirement by understanding their benefits. She runs her own consulting business at www.tammyflanagan.com and provides individual counseling as well as online training for the National Active and Retired Federal Employees Association, Plan Your Federal Retirement as well as the Federal Long Term Care insurance Program. She also serves as the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on NITPInc.com.

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