Is the TSP Suitable For Government Retirees?

Chris Reddick |

The Thrift Savings Plan (TSP) is one of the best 401(k) plans out there. It has meager expenses and is straightforward to manage. You are only dealing with lifecycle funds or L funds targeted towards your age when you retire. Or you can pick the five underlying funds that make up the Lifecycle fund and come up with your customized portfolio.

However, one major drawback of the TSP is that the portfolio can become too conservative for many investors when you reach your retirement age, with most of the allocation in low-performing bonds. For many, this money needs to last for 30 or so years. For instance, the L 2025 Lifecycle fund has 50% in G, with a ten-year return of less than 2% or lower than historical inflation. Essentially, having the majority of your portfolio in this fund, you would be losing money over time because of the rising cost of living.

The idea of the very conservative portfolio is that you will need to start drawing the money in retirement, so you want it to be safe as possible. A more conservative portfolio is prudent for many investors who don't have a risk appetite. But for others, there might be better options.

Many former military and federal workers already have pensions and Social Security that provide monthly income in retirement. The pensions become the stable monthly income for the retiree to draw on. Therefore, the TSP might be better suited for a more balanced or growth retirement portfolio to get better returns. The problem is that the TSP does not offer a static portfolio that has an allocation perhaps more suitable for government and military retirees and their unique retirement situation.

What would a static portfolio look like in the TSP? For instance, in a balanced portfolio, the most common one for retirees would be 60% stocks and 40% bonds. A sample allocation in the TSP could have the following funds:

35% C or S&P 500, 5% S or Mid and Small Cap, 20% I or International, 30% F or U.S. broad market fixed income, and 10% G the stable fund.

Unfortunately, at this time, the TSP does not have asset allocation funds like Vanguard's strategic life portfolios or Blackrock's all-in-one portfolio that enable the investor to keep a constant portfolio allocation that matches their desired risk level. So the retiree needs to rebalance the portfolio above back to its targets perhaps once a year.

Keep in mind that each investor has a unique situation. A more conservative portfolio might make the most sense for one investor, and the Lifecycle funds would be a great option. But for others, it might make sense in retirement to either roll the TSP into another low-cost ETF provider and manage the money yourself or with the help of the financial advisor. It is best to consider investments within your entire financial plan. Schedule time with me below, and we can look at your risk level and how to match your assets with your retirement goals.


*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 for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. Individuals involved in the estate planning process 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 any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.



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