The ABCs of the TSP (Thrift Savings Plan)

on April 15, 2016 Comments Off on The ABCs of the TSP (Thrift Savings Plan)

          Living in the Hampton Roads area, there are many military families and individuals serving our country who participate in the government equivalent of a 401(k) plan called the Thrift Savings Plan (TSP).  In addition, there are many government services civilians locally in Hampton Roads and across the states who are saving for retirement in the same TSP.  So as a general thought, we’re going to cover the ABCs of TSP investment choices using broad brush strokes as we will cover it over weeks to come.  

 

         As a contributor to your TSP you have a couple options of how to invest your retirement savings contributed from your earned income. First, let’s start with the L Funds-  “Lifecycle” funds that focus on your investment time horizon and diversification (we’ll talk about the use of the G, F, C, S, and I funds in a moment).  Investments in the L Funds can range from very conservative to very aggressive using broad asset allocation in your retirement plan portfolio.   The Lifecycle Funds are more hands off, and you’re letting your TSP portfolio coast as you contribute each month (aka dollar cost averaging).  These funds have a low expense (.29%) on the management of the underlying funds in it. Each L fund has a level of risk and rates of return based on the asset allocation of each portfolio.  Because the L Funds sound simple and straight forward, you shouldn’t assume the set and forget mentality-  you may be using a cookie cutter approach that may benefit from a layer of customizing.  The glide-path on these L Funds doesn’t keep in mind the balance of the human element like the low interest rate environment we are currently in with bonds as an example.  Or, how would you feel if your $60k invested in 2008 in the L Fund 2050 set you back $24k (40% loss) due to its more aggressive nature?  

TSP- L Fund 2050–  A very high growth and very low asset preservation portfolio for those not drawing income until 2045 or later.
TSP- L Fund 2040– A high growth and low asset preservation portfolio for those not drawing income until 2035 through 2044.
TSP- L Fund 2030– A moderate growth and asset preservation portfolio for those beginning to draw income from 2025 through 2034.
TSP- L Fund 2020– A low growth and high asset preservation portfolio for those drawing income from 2017 through 2024.
TSP- L Income– Very low growth and very high asset preservation portfolio for those drawing income now or beginning to before 2017.

Sources: Thrift Savings Plan- https://www.tsp.gov/InvestmentFunds/FundOptions/index.html

 

        Second, as an investor you have individual investment funds in your TSP with a broad range of assets like those in the L funds.  You create the asset allocation yourself, having a little more customized interest and involvement in the selection of the funds.   TSP funds are very low cost index funds that don’t have ticker symbols (see image below).  You make the decisions, and you contribute each month to an allocation you prefer.  Based on the savings plan summary document of the TSP,  there are no options to invest solely in either commodities, gold and precious metals, natural resources, or currencies.  The portfolio makeup is traditional in nature using stocks, bonds, and cash.  Due to this fact, we have portfolios that can complement and round out some of the asset allocation needs outside of the Thrift Savings Plans.  Additionally, we are able to track client TSP portfolios and your performance on an individual basis for retirement planning. 

Comparison of TSP Funds

Source: TSP summary plan document located at https://www.tsp.gov/PDF/formspubs/tspbk08.pdf

 

        To some, the idea of having to figure out your TSP asset allocation strategy can be puzzling based on the level of knowledge and interest you have in investing.  Foundational to investing is understanding your goals, time horizon, and risk tolerance by way of doing a survey.  We would encourage you to use a general survey sample like Fidelity or Charles Schwab to review risk tolerance as an investor.  You should review this, and also make notes as to why you invest those dollars over the years in that risk category.  The markets fluctuate and today’s news can sometimes be too persuasive on how you invest.   Get professional guidance or people you can trust who won’t push a biased product and can serve as a soundboard. Knowing how to allocate and service your portfolio based on your needs, motivations, life events, time horizon, and current markets is important.  As registered investment advisors (RIA), we run across these retirement plans with clients from time to time.   Since we are a fee only RIA, we focus on non-transaction or non-commission based investment advice.   This benefit gives us the ability to give customized guidance to a client’s plan at an affordable cost with no bias or conflict of interest to those who contribute to the TSP.  Working with professionals in this matter may be well worth your time and money.   If you have any questions in regards to your TSP or company retirement plan, please ask questions, or comment and follow us via our blog or www.couragemiller.com.  

 

 

 

 

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Jeffrey MillerThe ABCs of the TSP (Thrift Savings Plan)