I get a lot of questions about the different funds in the TSP so let’s take a quick look at what the each fun actually represents. Most of the information I’m going to share comes straight from the TSP website, but hopefully I can make it easier to find and understand.
L Fund (Lifecycle fund comprised of G, F, C, S, and I Funds)
To put it simply, the L Fund is a combination of all the other fund (G, F, C, S, and I) in certain ratios that change year to year. The L 2050 is meant to mature in the year 2050, meaning starting in the year 2050 it will no longer change its ratio of holdings between the G,F, S, C and I funds and changes into the L Income fund. Currently the L 2050 fund is heavily weighted in the C, S, and I funds because anyone investing in the L 2050 fund is not planning on retirement for another 30 years and has time to correct any market crashes. As the L 2050 fund approaches 2050 it will decrease the ratio of C, S, and I holdings in favor of the less volatile G fund. Said another way, when you are young the L fund is invested in stocks and when you are old it is mostly invested in bonds.
Here is a great visual of what will happen in the L fund from the TSP website.
Below is what the L 2050 Fund’s ratios were in 2010 and every 10 years after.
As you can see, the fund starts heavily invested in the C, S, and I funds (primarily stocks) and by the time you are 10 years out from retirement more than 1/3 of your savings is invested in bonds. Finally, in 2050 your portfolio will rest at 74% invested in bonds. This is all done to reduce the volatility in your portfolio as you get closer to retirement. Average L Fund returns are from 4.14% – 6.27%.
G Fund (Government securities)
The G Fund is invested in US Treasury securities issued specially to the TSP. Investopedia has a great explanation for what a security is, “A government security is a bond issued by a government authority with a promise of repayment upon maturity. Government securities such as savings bonds, treasury bills and notes also promise periodic coupon or interest payments. These securities are considered low-risk, since they are backed by the taxing power of the government.” What that means is you have a guaranteed return on your investment as long as the Government does not collapse, only downside being that the return on investment is small.
F Fund (Government, corporate, and mortgage-backed bonds)
The F Fund is a bond index fund, which is collection of bonds meant to model the Bloomberg Barclays U.S. Aggregate Bond Index. Bonds are, at their most basic level, loans issued by governments or corporations where you are the lender.
Here are the average returns according to the TSP website. There is more risk and volatility than the G Fund, however, the returns are greater. The great risk of investing in bonds comes from interest rates, when interest rates rise, bond prices fall. However, bonds are much less volatile than stocks as you’ll see in a moment. Average F fund returns are 6.45%.
C Fund (Stocks of large and medium-sized U.S. companies)
The C Fund is an index fund comprised of the same stocks as the S&P 500 Index, made up of the 500 largest companies in the US (which actually has 505 stocks because it holds 2 share classes of stock from 5 of the 500 companies #FunFacts).
Here are the average returns according to the TSP website. There is much more risk and volatility than the G and F funds, however, the return potential is even greater. Average C fund returns are 10.09%.
S Fund (Stocks of small to medium-sized U.S. companies)
The S Fund is an index fund comprised of the Dow Jones U.S. Completion TSM Index. It is comprised of small to medium-sized US companies that are not present in the C Fund. You can think of the S fund as a fund for all the rest of the companies in the US not found in the C Fund. The S Fund is a good addition to the C Fund because you can increase your portfolio without overlapping with any of the stocks held by the C Fund.
I Fund (International stocks of more than 20 developed countries)
The I Fund is an index fund that tracks the MSCI EAFE (Europe, Australasia, Far East) Index funds. The TSPFolio Website does a great job of explaining what is in the I Fund “The EAFE index contains about 950 international large-company stocks from 21 developed markets: 16 countries in Europe and 5 in the Pacific Rim. The index is broadly diversified, and it’s designed to include at least 85% of the market value of each industry group within member countries. You can think of the EAFE index as an international version of the S&P 500 that includes all developed countries except Canada and the U.S.”
Here are the average returns according to the TSP website. The I Fund will closely follow the C&S funds with a bit more volatility and, generally, lower returns. The reason the I fund tracks the C and S funds is simple “No financial market exists in a vacuum. As recent events have shown, what happens on the world stage greatly impacts the state of the U.S. stock market.” (The Global Influence on the U.S. Stock Market – Ohio University). Average I fund returns are 4.23%.
What I do
If you got all the information you need and don’t care about my opinion feel free to stop reading, however, if you are curious about what I do with my TSP savings feel free to keep reading. First I’m going to clear up some confusion you may have about the Roth vs Traditional TSP.
TSP vs. Roth TSP
The only difference between a Roth TSP and Traditional TSP is when you are taxed. The Traditional TSP taxes you when you take money out and the Roth TSP taxes you when you put money in. So, if you are in a 25% tax bracket now and you retire in a 25% tax bracket there is literally no difference between Roth and Traditional TSPs. Don’t take my word for it, let’s do the math.
In the scenario below I assume you have $2 that you want to contribute to a Roth and Traditional TSP. You put $0.75 into your Roth TSP (because you have to pay the 25% tax upfront) and $1 into your Traditional TSP (taxed later when the money is withdrawn). Let’s assume you are 30 and both funds grow at 7% interest yearly until you withdraw the money at the age of 60 while still in the 25% tax bracket. Both traditional and roth give you the exact same return on your investment.
So, what is the big deal, both accounts ended with the same amount after taxes? Well, with a Roth account you are assuming that you will be in a higher tax bracket when you pull the money out. If you spend your whole life investing wisely you will hopefully end up in a higher tax bracket than today. Additionally, if the government raises or changes the tax brackets I would rather have my retirement fund protected. I am not going to tell you whether you should use Roth or Traditional because that is a personal decision; I personally put my money into a Roth TSP. You can always contribute to both a Traditional and Roth TSP if you want to hedge your bets. (the limit to TSP contributions, between traditional and roth is $19,000 per year under the age of 50)
Choosing your Funds
Now that you have figured out which account you are going to use let’s take a quick minute to talk about how you want to allocate the funds. I am an advocate of the total market index fund. The way to achieve this using the TSP funds is to do an 80/20 split of the C & S funds, 80% in C and 20% in the S fund. I do this for a few reasons, the biggest being the fact that I am an idiot. The second reason is because it is impossible to time the market. You do not know when the market is going to be up, when it is down, when the market is at its peak or valley. Every study I’ve read shows that most people will not beat the market in the long run. So few will beat the market over a 30 year period that it is better to take the average and be happy you are beating just about anyone who is trying to time the market. I have no international exposure with the I Fund but that is because the TSP’s international exposure does not include, in my opinion, some of the stronger international markets. I get my international exposure using alternate retirement accounts. If I were to incorporate it into my TSP I would do a 70/15/15 C/S/I split.
One of the last HUGE advantages of the TSP is the maintenance fee, which is currently 0.038%. When you are looking at mutual funds or managed funds you will often see fees around 1% or near that. That fee is taking huge chunks of your money over time, 1% doesn’t sound like much but that 1% compounds each year, and over the course of 30 years it eats away at your profits. The TSP’s management fee is 0.038% … that is one of the lowest management fees you will ever find. Even Vanguard’s (a company that is touted to have the lowest fees out there) total market index fund has a management fee of 0.05%.
I’ll caveat this by saying that the 80/20 split is great today while I am young but as I approach retirement I may move to a more conservative 50/15/35 split between the C/S/F funds to take away some of the volatility. That is essentially a 65/35 split between stocks and bonds. That will give the benefit of the gains from the stock fund and the security of the bond funds. It is like I am doing my own lifecycle fund…with a better return.
I hope that this was informative. If you see anything here that doesn’t sound right or have any questions feel free to leave a comment or email me directly at firstname.lastname@example.org.