alphaspirit/Shutterstock.com

Risk and Retirement: Managing Your TSP Investment

Understand the pros and cons of your plan.

A new law requires the Thrift Savings Plan to invest the automatic contributions of recently hired federal employees into an age-appropriate lifecycle fund.  Eric Katz outlined  this change to the TSP under the Smart Savings Act, which President Obama signed into law in December 2014. The G Fund previously was the default option for the TSP.  Besides new employees, the switch also will affect new survivor annuitants and re-hired federal employees who have a zero balance in their TSP account. 

How is a participant’s default L Fund determined?

According to TSP Bulletin 15-2, the L Fund selection for each participant will be based on a projected retirement age of 62. For example, the age-appropriate default investment fund for someone born between 1973 and 1982 would be L2040, since they would be expected to begin drawing on their TSP funds between 2035 and 2044.

In last week’s column on 12 practical tips for a successful retirement, I urged readers to consider their tolerance for risk. Participants subject to the new default investment rules will receive a letter from the TSP that includes such risk information as required by the Smart Savings Act. 

The TSP spells out the investment risks as follows:

  • Credit risk: A borrower will default on a scheduled payment of principal and/or interest—present in the F Fund.
  • Currency risk: The value of a currency will rise or fall relative to the value of other currencies—present in the I Fund.
  • Inflation risk: Your investments will not grow enough to offset the effects of inflation—present in all five funds.
  • Market risk: Your investments could decline in value with a decline in the market value of stocks or bonds—present in the F, C, S and I Funds.
  • Prepayment risk: During periods of declining interest rates, homeowners may refinance their high-rate mortgages and prepay the principal. The F Fund must reinvest the cash from these prepayments in current bonds with lower interest rates, which lowers the return of the fund.

A few years ago, when the TSP began the automatic enrollment of new hires, TSP Director Greg Long was interviewed on Federal News Radio where he made the following comment:  “I think the big takeaway of what we saw (with automatic enrollment of new hires) is that the number of people that are the youngest that are invested heavily in the G Fund—the super-safe, never-has-a-bad-day G Fund—is higher than we expected.”  Long added, “That might not be appropriate for a 28-year-old who’s got 30 or 40 years ahead to work for the federal government.” 

Considering that 35 percent of the entire Thrift Savings Plan is invested in the G Fund (as of June 30), this change to move the TSP default option from the G Fund to lifecycle funds can go a long way towards helping TSP participants become more diversified across a broad range of investments.  The G Fund has remained popular among investors because of its safety. According to the TSP, if you choose to invest in the G Fund, you are placing a higher priority on stability than long-term growth.

Risk has a bad connotation for many folks. It means there is no guarantee of safety. But investment always requires some degree of risk. To manage that risk, the Financial Industry Regulatory Authority recommends understanding and employing two basic investment strategies: asset allocation and diversification.

Diversification and Asset Allocation

By including different asset classes in your portfolio (for example stocks, bonds, real estate and cash), you increase the probability that some of your investments will provide satisfactory returns even if others are flat or losing value. How does this apply to the TSP and the Lifecycle Funds? You are using different asset classes within the lifecycle funds because you are buying stocks in the C, S, and I Funds and you are buying bonds and Government securities in the G and F Funds. The lifecycle funds’ asset allocations are described in this summary.

When you diversify, you divide the money you've allocated to a particular asset class, such as stocks, among various categories of investments that belong to that asset class. Diversification, with its emphasis on variety, allows you to spread you assets around. In short, you don’t put all your investment eggs in one basket. How does this apply to the TSP?  The five individual TSP funds offer a broad range of investment options, including Government securities, bonds, and domestic and foreign stocks. For example, the C Fund offers the opportunity to earn a potentially high investment return over the long term from a broadly diversified portfolio of stocks of large and medium-sized U.S. companies. The objective of the C Fund is to match the performance of the Standard & Poor’s 500 Index. You can learn more about the diversification of the five individual TSP Funds here.

The bottom line is all investments carry some degree of risk. By better understanding the nature of the risks and taking steps to manage them, you put yourself in a better position to meet your financial goals.  

I am happy to announce that I will be partnering with Micah Shilanski, CFP, again next month for a new webinar series, titled “Secrets to a Successful Retirement” which includes separate sessions on the topics of wealth building, insurance and estate planning. The series will air live on October 15th, 22nd and 29th. The Plan Your Federal Retirement webinar library includes:

  • Three Irreversible Mistakes (FERS)
  • Maximizing Your Social Security Benefits
  • Phased Retirement
  • Smart Choices for Open Season
  • The Missing Key to the TSP

Micah and I will discuss these topics in three one-hour segments and take audience questions. With our annual pass, you will have access to over 18 hours of training along with all new webinars over the next 12 months. You can register for our upcoming webinar series or enroll for the annual pass here

(Image via alphaspirit/Shutterstock.com)

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.