How to maximize your TSP

This content was written by Justin T. Pierce and James M. Campbell, both fiduciaries and Federal Retirement Consultants℠ at Federal Employee Benefit Advisors.

We’re not going to bore you with the nuts & bolts of how your Thrift Savings Plan works.  We do things a little differently here at Federal Employee Benefit Advisors (FEBA).  We’re going to show you how you can maximize every bit of the TSP as possible.  There are several strategies you can employ, some immediately, to put yourself into a better investment position; ultimately leaving you more confidently prepared & ready for your retirement.  Here is what you will learn as you read through this article:

• TSP basic overview (Very brief, not too wordy, we promise)
• Unmasking the C, S, I, F, G Funds
• Enhancing the Lifecycle Funds
• Maximizing TSP with withdrawal/transfer options

TSP basic overview

TSP came into being in 1986 with the G Fund added on April 1^st 1987…no foolin’!  The C & F funds were added shortly thereafter in January 1988.  To round out the fund portfolio the I & S funds were added in May of 2001.  There are also Lifecycle Funds which are a blend of all 5 funds designed to strategically reallocate to target your desired retirement year.  Currently, there is a traditional pre-tax withholding account and a Roth after tax withholding account which was added in 2012.  A 5% matching contribution is available to all FERS employees.  The matching portion is added into the traditional pre-tax withholding account even if all contributions are directed to the Roth account.  There is also a mutual fund window available.  It is expensive and limiting; only about 1% of all TSP monies exist within this window.  TSP is managed by Blackrock Capital Advisers and is facilitated by the Federal Retirement Thrift Investment Board.

Unmasking the C, S, I, F, G Funds

C, S, I Funds

Although you have 5 fund options to pick from, in reality you only have 3 choices to invest in.  Here’s why we say that.  The C, S, & I Funds are your stock index funds.  The C common stock index fund, S small capitalization stock index fund, I international stock index fund are all one asset class: Stocks/Equities.  They are the same thing.  Even though there are 3 different indexes they are correlated assets.  Correlation means that they are moving in the same direction almost all the time.  So, when the stock market is up, the C, S, I Funds are up.  And when the stock market is down, the C, S, I Funds are down.  They almost always move in the same direction together.  Unlike individual stocks, which can move in opposite directions, indexes generally do not as they are a large group of individual stocks.  They might earn a little more or less than the other, but they are moving in the same direction.

If we know that we have 3 options/funds to invest in within the same asset class, then we want to find the BEST-in-class fund.  There is a clear winner amongst the C, S & I Funds.  Only one of these funds we advise our clients to invest in.  One of these funds has greatly out-performed the other two, and has done so with considerably less risk.  In our professional opinion, the only stock fund worth putting your hard-earned money into is the C Fund.  Here is why.  The data never lies:

• In 2008 the I Fund lost -42%…the C Fund only lost -36%
• In March of 2020 (due to Covid) the S Fund lost -21%…the C Fund only lost -12%
• In 2022 the S Fund lost -26%…the C Fund only lost -18%

These are but just a few examples of the C Fund not losing nearly as much as the two riskier funds.  Yes, the S & I have the potential to have a higher single rate of return then the C; and in fact, this has happened in the past, but what we are trying to help you understand is that not having as big of losses as the other two allows the C Fund to outperform the I & S Funds over time. This is because the C Fund is a more conservative stock index Fund; it comprises around 500 big US companies.   Let’s look at the historical return data to help cement this concept:

• Since inception (1988), the C Fund has averaged 10.88% as of 4/30/24
• Since inception (2001), the S Fund has averaged 8.87% as of 4/30/24
• Since inception (2001), the I Fund has averaged 5.09% as of 4/30/24

Something we always ask our federal employee clients is this: “Would you rather average 10.88%, 8.87%, or 5.09% taking roughly the same amount of risk?”  So, we will ask you the same question.  We now have decades of data on the C, S, I.  We know they are the same asset class, so why not invest in the BEST-in-class?

F Fund

The F Fund is the fixed income index fund.  It is a blend of over 11,000 bonds and notes.  In our professional opinion, the F fund is not a great option. Even the Lifecycle funds agree, there is no significant allocation to the F fund in any of the 10 current L funds.  Before we show you why the F Fund is not an ideal investment, let us first explain why it was originally added.  For the longest time, bonds tended to be considered the “gold standard of conservative investing.”  This is because bonds tend to be non-correlated with the stock market.  In other words, when the stocks go down, bonds are supposed to rise slightly; maybe 2%-5% on average.  This is a great hedge on the more aggressive stock market.  The problem with the F Fund is that is a huge basket of many different types of bonds.  Therefore, it behaves differently than owning a bond outright.

The F Fund has not been performing well over the last 10-15 years.  Here is what we mean:

• Over the last 10 years the F Fund has averaged 1.39% as of April 30, 2024.

Even worse, the F Fund was heavily correlated with the stocks in 2022.

• The F Fund was down -12.83%. Comparatively speaking, the C Fund was down -18.13%

Here is what we ask all of our federal employee clients: “Do you really want to risk experiencing double digit loss to potentially gain 1.39%?”

G Fund

The G Fund is the government securities investment fund.  The G Fund earns interest set by law at the weighted average yield on outstanding US Treasury securities with four or more years to maturity.  In other words, it doesn’t make much money: the 10-year return to-date is 2.36%.  This creates a very big problem for federal employees who are in the retirement horizon of their career.  The G Fund is truly the only safe investment fund the TSP main core funds have to offer.  It guarantees no losses, which is very important, but it does not keep up with inflation most years historically.  This creates an investment dichotomy, as one hand, the G fund protects the investor from dangerous market downturns, but on the other hand the value of their G Fund balance reduces as they suffer from inflationary loss each year.  Ex: Inflation = 5% & G Fund return is 2.36% means that the balance of the G fund suffers –2.64% inflationary loss.

The other problem the G Fund presents the federal retiree is that it oftentimes creates income loss.  As a federal retiree begins to withdrawal money from their G Fund in retirement, we often see folks suffering from income loss.  The national average retirement income withdrawal rate out of 401k/IRA type retirement accounts is about 5%.  Therefore, as the federal retiree withdraws 5% out of a G Fund balance only earning 2.36% then that person suffers -2.64% in income loss.  The balance reduces because the interest rate is less than the withdrawal rate.  So, in the end, both income loss and/or inflationary loss creates a negative situation in the G Fund balance and has the potential to greatly reduce retirement income over time.

Lifecycle Funds

The Lifecycle Funds, or L Funds, are target date funds.  Their main goal of the L Funds is to allow for automatic reallocation of assets from the more-risky stock funds (C, S, I) into the more conservative funds (F, G) as an employee reaches retirement age.  They allow the federal employee to “set it & forget it,” so that each year as they near retirement, the L Fund of choice will automatically reallocate to the desired conservative to risk ratio.  Investment philosophy recommends a conservate to aggressive risk tolerance ratio of 60%-80% conservative and 20%-40% aggressive once one reaches the retirement horizon in life.  Anyone within 5 years of retirement or over the age of 59.5 is considered to be in the retirement horizon.

The idea of the L Funds is a sound one.  The problem with the L Funds is that they allocate a certain percentage to all 5 of the individual funds.  And as we’ve already explained above, we know the C Fund is substantially better than the S & I Funds.  Historically speaking, the C earns more than double the rate of the return the I, and about 2% more than the S fund.  So why then would we want exposure in two riskier stock funds that have proven over two decades to underperform the C Fund?

The other problem with the L Funds is the exposure you have in underwhelming F Fund.  TSP considers the F Fund a conservative income fund, therefore, they place some of your money in the F Fund within the chassis of your desired L Fund.  Let us remind you: the F fund is averaging only 1.39% over the last 10 years, and worse yet, the F Fund lost -12.83% in 2022; which was heavily correlated with the double-digit losses of the C, S, I Funds.  No thank you.  We believe you can make your own L Fund & potentially greatly outperform any of the L Funds available for you to choose from.

Customized and optimized L Fund

How to make a customized & optimized L Fund: First off, only use the C & G Funds.  These are the only two funds which are worth it.  Secondly, keep it simple:.  You don’t need to worry about adjusting your C/G asset allocation ratios every single year.  Follow this simple risk tolerance chart of our recommended re-allocation strategy*:

Maximizing withdrawal/transfer options

Before the TSP Modernization Act of 2019, Federal Employees were only allowed to make one In-Service Withdrawal out of their TSP during their entire career.  Wisely, the Federal Thrift Retirement Investment Board urged the members of Congress to pass the bill which now allows unlimited withdrawals from a federal employee’s TSP while they are still in service (up to 4 times per 12 months).  Anyone over the age of 59.5 has the privilege & power to take their retirement account into their own hands and transfer a portion or all of their TSP into an outside account in the private sector.  As long as the funds are being transferred into an IRA or a Roth IRA then there won’t be any taxes, penalties, or fees for the transfer.

That said, this is one of the most under-utilized opportunities federal employees miss out on.  TSP is a savings plan.  It is designed to allow younger employees to save money in inexpensive funds for the sole purpose of building a healthy balance for when they reach the retirement horizon.  The TSP is not a great place to keep all your money when you reach the retirement horizon.  The main reason is because of the simple fact that someday soon, the federal employee in the retirement horizon will need to begin taking income from their balance.  We have already explained why taking income from the G Fund is not ideal.  And it is NEVER recommended to take income out of an account/Fund which is down; especially when that fund could easily be down double digits in a single year (C, S, I, F).

TSP maximization

We highly recommend any federal employee who is of the age of 59.5+ or retired to strongly consider a savvy investment strategy we call: TSP Maximization. Which is simply: transferring some/all of their TSP balance & placing the funds into an IRA/Roth IRA in the private sector.  There are considerably better retirement account options waiting for you in the private sector.  You have the opportunity to take control of your TSP & maximize it this way.  Now, this does not affect your current TSP account and you will still be able to contribute into the TSP each paycheck and continue getting the government matching contribution.  It simply takes some/all of the balance and moves it out of TSP.

There are hundreds of options for you to consider in the private sector, so instead of overwhelming you in this article with the details on all of them, we have gone through the pain-staking measure of identifying what we believe to be the Top 2 private sector investment options to consider with TSP Maximization.  Each month we facilitate a live 1-hour nationwide webinar titled: TSP Maximization.  Not only will we break these two different IRA/Roth IRA investment options in detail, we will also go into greater detail with other ways you can maximize TSP no matter what age you are or where you are at in your career.  Additionally, we will follow the education with a 30- minute Live Q&A where we will answer your questions in real time.

Below you will find a link to our TSP Maximization webinar registration page so you can find a day & time that works for your schedule.  As a small preview, one of the IRA/Roth IRA options we will cover in detail guarantees no losses due to market volatility, has averaged over 8% over the last 10 years, offers a 10% cash match/bonus, and is low fee.* ,**  Lastly, we are not affiliated, endorsed nor hired by the federal government.

*Disclaimer: This article is not intended to be personal investment advice. These are general concepts and historical data. We cannot make any personal investment recommendations without understanding your personal financial situation, goals, and risk tolerance.

**Available in most states. Average annual return based on last 10 calendar year historical market data. Exact fees and limitations will be disclosed based on company and state availability.

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