The Thrift Savings Plan, also affectionately known simply as TSP, is the government’s version of a 401k retirement plan. The TSP is a defined contribution plan. While there are several options, government employees typically contribute a set amount of money before federal and state taxes are withdrawn from their paychecks each month, effectively lowering their annual income in the eyes of the government. Later, when an employee withdrawals the principal and interest in retirement, the income earned is taxed.
Understanding TSP’s Lifecycle Funds
There are several options investors can choose to invest their retirement savings in TSP. One popular option is the TSP’s Lifecycle Funds or L Funds.
What Are Lifecycle Funds?
The L Funds use a mix of other TSP investment funds (the G, F, C, S, and I Funds) that are tailored based on when you plan to retire. The goal of the L Funds is to find a balance between your risk and the rate of return. The investment mix of each L Fund becomes more conservative as you get closer to the target date of the fund. So, for example, someone investing in the L 2030 fund would plan on retiring in 2030.
The G Fund is comprised of U.S. Treasury securities. The F is a fund with a broad range of bonds, or fixed income. The C Fund is an S&P 500 index. The S Fund is a broad market index much like the Russell 5000, and the I Fund is an international fund that mirrors the MSCI EAFE (Europe, Australasia, Far East) Index. Each L Fund has a mix or target asset allocation made up of a combination of the five TSP funds (G, F, C, S, and I).
Every three months, the Federal Retirement Thrift Investment Board changes the L Funds’ target asset allocations as their target date approaches. So, for example, each year the funds become slightly less risky and more conservative as they increase their investment in the G and F funds and lower the mix of the other three. Each quarter the move, reapportions the L Funds and changing their mix of stocks and bonds in an effort to preserve capital and reduce risk and volatility as the investor gets closer to retirement age.
Understanding Lifecycle Fund Allocation
In order to understand about TSP’s Lifecycle Funds, you have to briefly understand the five investing options that are available to investors with the TSP. The TSP has the G, F, C, I, and S funds that investors can choose from to invest. Think of these funds like typical index funds that you could purchase from an online brokerage firm or maybe even your bank.
There are currently five different Lifecycle Funds available for investors to choose. And, each one is named for the year an investor anticipates fully retiring and using the money to live. There are L Income, L 2020, L 2030, L 2040, and L 2050. Each fund has a different asset allocation based on the risk of loss and protecting the principal investment.
So, for example, someone investing in the L 2020 fund and looking to retire in 2020 would see currently their investment automatically diversified in the fund. The L 2020 fund has the following allocation of TSP funds: G Fund 55.68%, F Fund 6.32%, C Fund 21.04%, S Fund 5.56%, and I Fund 11.4%.
But, if you invested in the L 2050 fund, your asset allocation would look like: G Fund 11.68%, F Fund 5.32%, C Fund 43.68%, S Fund 14.42%, and I Fund 24.9%. The allocation is more aggressive with a lot less money in the cash equivalent and government bond funds of the G and F Funds. And, a lot more investments are in the C, S, and I Funds.
What about you? Do you invest in TSP Lifecycle Funds?