Updated March 2023.
For those eligible to participate in the government’s Thrift Savings Plan (TSP), the TSP could be a first step toward planning for your retirement. The next step is to pick the funds you’ll invest in. Different fund options are available. Each has unique investment objectives and levels of risk and reward. Determining which are appropriate for you depends on your specific retirement goals. That’s why understanding the various funds is necessary before deploying any of your allotment to them. Here is a close up of the TSP and its funds.
Purpose of the TSP
The Thrift Savings Plan is intended to give those serving in the military as well as most employees of the U.S. government the opportunity to set money aside for retirement. The TSP is a defined contribution retirement plan, like a civilian 401(k). It’s administered by the Federal Retirement Thrift Investment Board.
To encourage you to contribute to your retirement, TSP offers a tax incentive on the money you save. Income and growth in the account are not taxed until withdrawn. To learn more about the TSP, visit https://tsp.gov or contact your service payroll office.
If you’re in the Blended Retirement System (BRS), your service makes automatic and matching contributions to your TSP account.
Funds in the Plan
There are five core funds in the TSP. They are:
- G Fund – made up of short-term U.S. Treasury securities (Treasury bonds).
- F Fund – a fund intended to perform like the Bloomberg Barclays U.S. Aggregate Bond Index.
- C Fund – a common stock fund that matches the Standard and Poor's 500 (S&P 500) Index.
- S Fund – a small cap fund that tracks the Dow Jones U.S. Completion Total Stock Market Index.
- I Fund – an international fund intended to match the MSCI EAFE Index.
The G Fund is considered to be the least risky of the core funds. Its returns are likely to be lower, but more stable. Its price should also be more stable than the other funds. The other funds have more price volatility than the G Fund. Each fund has its own types of risks that are unique to the securities in which it invests. You can learn more about each option at the TSP website, https://www.tsp.gov.
Ways to Invest
There are two ways to invest in the TSP. You can manage your own account or you can choose from a pre-selected blending of the core funds.
If you manage your own account, you simply buy one or more of the individual core funds. If you decide to use the pre-selected blending of the core funds, you will choose from one of 10 Lifecycle, or L Funds.
What are the Lifecycle Funds?
The L Funds are a mix of the five core funds blended together to create separate funds based on expected retirement dates.
The Lifecycle funds provide a professional allocation of your assets. As you get closer to your target retirement date, the L Funds reduce your exposure to riskier funds and increase your exposure to the G Fund.
The percentage invested in each of the individual core funds is selected based on future target retirement dates. After that allocations are adjusted every quarter. For example, a recent allocation (March 2023) in the L 2040 fund was as follows:
G Fund – 20.93%
F Fund – 7.32%
C Fund – 36.84%
S Fund – 9.80%
I Fund – 25.11%
The L Funds in the TSP have recently undergone some changes. Six new Lifecycle Funds have been added. Previously, the funds were spaced out every ten years. Now they're in five-year increments. When your TSP account is started, it defaults to the Lifecycle Fund closest to your 62nd birthday.
While the funds are named in five-year increments for the target retirement years, they are geared to investors planning to retire within a few years of the stated target date. For example:
|Withdrawals Starting||Appropriate L Fund|
|2063 and beyond||L 2065|
As you get closer to your target retirement date, the mix of assets in your L Funds becomes increasingly more conservative until ultimately they all roll into the L Income Fund.
It is important to note that throughout each of the quarterly changes in fund allocations, the core funds maintain their unique risk/return profiles and the L Funds contain the same underlying risks as each of the component funds in which it allocates resources.
There is no such thing as a free lunch. Investing in the TSP does come with a cost. There are investment fees and expenses. And they are not uniform across all of the different core funds. Some funds have higher fees than others.
The good news is that none of the TSP funds have fees reaching one percent annually. In most cases, they are right around half (0.5) percent per year.
Optimizing Your Retirement Plan Using the TSP
The TSP offers many benefits to those in uniform. They are a low-cost way to invest for retirement. Their tax deferral means you pay no taxes on your income and growth until you start taking distributions.
Starting your retirement savings plan as early as possible is one key to being successful. Selecting an allocation of TSP funds is also very important. Matching their investment objectives to your financial goals is critical to helping you achieve them. An informed decision increases the likelihood the two will be aligned.