Penny wise and dollar dumb in the TSP

We all have a predisposition to focus on the wrong things. Who hasn’t fallen for the misdirection of magic? We get caught looking at the magician’s right hand while the trick is happening in his left. By and large, everyone wants to save money, cut back on unwise spending and trim monthly expenses. However, sometimes there is an inclination to focus on incorrect things.

During this recent market feast, many feds have been missing the “gravy train.”

According to the Thrift Savings Fund statistics (May 2017), since 2012, feds have consistently placed between 35 percent and 42 percent of their TSP account balances into the G fund (not including G fund exposure in L fund participation).

When investment measuring tools are used, the G fund is generally assigned the same risk grade as cash (checking accounts, savings accounts and bank CDs). In this venue, I believe 35 percent to 42 percent is likely an excessive amount of exposure to a cash-like option. It is true the G fund provides a level of (comparatively) reduced risk. However, in general, investment terms, more significant risks allow for potentially greater rewards.

The G fund average annual rate of return, according to TSP – Summary of Returns, over the past 10 years is 2.63 percent.

CPI inflation rate during that same time frame according to the U.S. Inflation Calculator has been 1.84 percent. Thus, on average, money in the G fund has provided a real (after inflation) annual rate of return of only 0.79 percent over the past 10 years. Ouch!

Years ago, I had an uncle that instinctively taught me a simple lesson about avoiding the trap of being “penny wise and dollar dumb.”

I remember, as a young man, hanging out in Uncle Roy’s garage workshop. I made note of a tool he had that I knew was an expensive brand. When I showed envy at his ability to purchase such a pricey item, he smiled and said, with a bit of pride: “Yes, I always save up to buy the best tools, the first time. That way I don’t have to keep replacing them.”

He pointed out that buying the best (and potentially most expensive) tools saved him money in the long run. It was (usually) less expensive to pay top dollar for high-quality tools once than it was to buy cheaper versions over and over again.

Looking back, I think Uncle Roy’s workshop benefited greatly by his (nearly) lifelong marriage to a very “dollar smart” woman. My Aunt Lois’ frugalness was the stuff of legend and actually allowed Uncle Roy to justify his high-dollar purchases. Aunt Lois knew, his pricey acquisitions, in the long-run, allowed her to control his overall shop expenditures.

Cambridge Dictionary defines “penny smart and pound foolish (dollar dumb)” as: “to be extremely careful about small amounts of money and not careful enough about larger amounts of money.”

Small amounts = money deposited (or contributed) into a Thrift Savings Plan. Larger amounts = the total value of a feds TSP account.

Federal employees are (in general) meticulous and cautious creatures. Many have learned the long-term importance of making contributions into their TSP. They often will even make real personal sacrifices, to place a little more money into their TSP each year. This is a good representation of being “penny wise.”

In and of itself, “penny wise” is neither adverse nor harmful. Being wise with contributions and retirement savings is a good thing. “Dollar dumb” starts when a fed’s TSP focus is dominated by contributions and ignores proper allocation. This is like, stepping over a dollar to pick up a dime.

A large number of federal employees will view their TSP statements this month and be pleased when they notice the values are larger than last month. Yet, (for the dollar dumb crowd) the gains they are noticing may primarily be additional contributions made by themselves and their employer and not from significant “growth.”

A surprising number of feds place and leave their TSP contributions in the lowest performing TSP options. Their rationale is often a “fear of losing.”

Fear of losing

There are actually two types of fear when it comes to retirement savings. One is the fear of losing — when account values drop. The other is the fear of losing out — missing potential gains. Based on my experience, most feds carry the wrong fear and are in danger of losing out more than losing.

What’s being left on the table for underperforming TSP accounts?

That’s hard to say. Everyone is different and has different “risk tolerances” and needs. This means there is no one answer for all. However, we can look at an example to show how potential losses may impact a fed’s TSP gaining power.

(Note: I am in no way suggesting specific advice or providing recommendations in this column. Each fund has its pros and cons. This example is only for educational purposes).

According to for the last 10 years, the C fund has outperformed the G fund by 4.37 percent (compounded annually). Over the same period of time, the S fund has outperformed the I fund by 7.11 percent.

I am not implying that any TSP fund is unequivocally superior to another. Nor that the C fund or the S fund is the right fit for any individual. I am trying to relay, not all TSP funds are created equal, and the excessive use of a lower performing fund may provide less than desired returns.

Example: Let’s assume a wise fed re-allocated their TSP account to a more appropriate mixture for them. The new allocation increased their annual rate of return from 4 percent to 6 percent. They start this new blend with $100,000 in their TSP account. Annually, they contribute $4,000, and their employer contributes $4,000. They stay this course for 10 years.

I used’s retirement calculator to compute the following.

This (added 2 percent) example would yield an account balance of $260,878 vs. $226,994 (without the additional 2 percent). That is a $33,884 difference. Remember: our employee did nothing different besides finding a better TSP allocation, this is only a 2 percent annual difference, and this example only covers 10 years.

To clarify, not every federal employee’s TSP account requires massive allocation alterations. But, many feds are swimming in the wrong pool.

The key is to find a mix (allocation) that is appropriate for you. In this way, when the markets are going down, you will have already taken steps to mitigate your TSP losses. Losses in the markets are inevitable and unpredictable. But, by being proactive rather than reactive, those losses could reflect levels that will likely be more easily stomached. An appropriate allocation may also help you seize gains you are comfortable with when the markets are moving upward.

There are many free services on the web that may be able to assist in finding wise and smart allocations. You may also find the TSP tools helpful. Additionally, on my website, I have a risk assessment tool I offer as part of a free (no obligation) process to help feds discover if they are “penny smart and dollar dumb” with their TSPs.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risks, including the loss of principal. No strategy assures success or protects against loss. Silverlight Financial, Infinity Financial Services and its affiliates do not provide tax, legal or accounting advice. This material is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction. For a list of states in which I am registered to do business, please visit

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