Problems with TSP Investment Options and My Solutions

Chris Reddick |

As you may know, the TSP, or Thrift Savings Plan, is one of my favorite retirement plans. It offers the best in retirement plans, such as simple low-cost investing with passive indexing and easy-to-use lifecycle funds. So keeping the TSP after you separate from the service makes sense for many investors.

For most investors, Lifecycle funds are a good option. These funds target a retirement date, and you make contributions and get matches to lifecycle funds. I suggest using the lifecycle funds for your early federal government or a military career. You typically have a smaller investment amount, so it makes sense to have a simple approach to investing, and the lifecycle funds offer this.

Most lifecycle funds far from retirement have the same combination of investments, typically 90% stocks and 10% bonds. This combination of investments might be suitable for many younger investors, but not all. For example, you could be more conservative in your investments, but if you used an L 2060 or L 2065, you would get less than 1% in G or F funds! But if you moved to L 2050, you are over 17% G and F.

When you get closer to retirement, I will look into creating a more balanced portfolio. This is the portfolio for many retirees. A balanced portfolio is the most common type of investment mix that many Americans have relied on for retirement for years. Research shows that it stands the test of time. It typically contains 60% stocks and 40% bonds or fixed income. Most of the research on retirement income planning refers to the balanced portfolio. For example, the 4% safe withdrawal rate assumes a balanced portfolio. The combination of stocks and bonds that should counteract and balance each other in bull and bear markets makes intuitive sense.

The TSP does not currently offer static portfolios such as the balanced fund. This is a significant problem! Static portfolios are investment portfolios that rebalance back to the original investment allocation during a period, perhaps yearly. For example, a balanced portfolio usually has 50-60% stocks and 50-40% fixed income or bonds. A growth portfolio might have 70% stocks and 30% bonds and an aggressive portfolio of 80% stocks. But right now, to create a static portfolio, you need to do this yourself. The only investment close to the balanced portfolio is the L Income portfolio. But this is bond heavy with over 75% F and G and does not correspond to the balanced portfolio of 60/40. 

The problem with the lifecycle funds is that they get too bond-heavy as you retire. This might be suitable for some investors, but not all. A static portfolio would be a better choice. You can, of course, design a static portfolio yourself by using the five funds of the TSP. This is a lot of work for a novice investor. You can also hire a financial advisor to help you design a static portfolio. Please reach out on the contact page below.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. Individuals involved in estate planning should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

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