Ask any federal employee how to maximize their Thrift Savings Plan, and they’ll probably give you the same piece of advice: Contribute 5% of your pay in order to get the matching 5% government contribution, and start doing so as early in your career as possible. And while that’s absolutely true, it’s only the start.

Knowing the difference between all the funds, a broad view of their performances over time, and a few lesser-known tricks and pitfalls can help federal employees get the most out of their TSP, and subsequently, their retirement.

The funds

The funds are easy, right? Everyone knows the government securities G fund never posts a negative return. So isn’t that obvious the best way to go?

Not necessarily. For one thing, while it’s true the G fund never has a bad day, it also never really has a good day either: The 10-year return to-date is only 2.36%. That means, more often than not, it’s not even posting returns high enough to keep up with inflation. On top of that, the national average retirement income withdrawal rate out of 401k/IRA type retirement accounts is about 5%. So as the federal retiree withdraws 5% out of a G fund balance while only earning 2.36%, then that person suffers -2.64% in income loss. Inflationary loss and income loss combine to severely reduce the retiree’s spending power in retirement.

While it may make sense for feds to invest the greater portion of their TSP balance in the G fund later in their careers, in order to minimize risk and loss, if they follow that strategy throughout their entire careers, they’ll never accumulate enough to maintain a standard of living.

The fixed income index F fund isn’t a great option either. This blend of 11,000 bonds and notes hasn’t performed well recently: As of April 30, 2024, it’s averaged only 1.39% over the past 10 years. In theory, its strength is that bonds are non-correlated with the stock market, meaning when the stock market falls, bonds rise slightly. But being a blend of so many bonds, the F fund doesn’t work the same way as individual bonds. In 2022, the F fund fell right alongside the stock market, by 12.83%. Such low returns just don’t justify that kind of risk. In fact, even the Lifecycle funds, which invest in a variety of funds in order to reach a targeted outcome for a specific retirement date, don’t invest significantly in the F fund.

Stock index funds

The three stock index funds — C, S and I — all fare significantly better than the G and F funds. These are correlated assets that each invest in different kinds of stocks, so when the market is up, so are these funds. When it’s down, so are they. So what’s the difference between the three?

The common stock index C fund invests in a broad group of large and mid-sized U.S. companies, and aims to match the performance of Standard and Poor’s 500 (S&P 500) index. The small capitalization stock index S fund invests in small to mid-sized companies, and aims to match the performance of the Dow Jones Total Market Completion, a lesser known version of the Dow which does not match up with what’s on stock shows —the Dow Jones Industrial Average. The international stock index I fund invests in small to large companies in 40 developed and emerging countries outside the U.S.

Of these three, the C fund consistently outperforms the other two, with less risk:

• 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.

Meanwhile, the C fund has fared better than the other two funds in times of market losses:

• In 2008, the I Fund lost 42%, while the C Fund only lost 36%.
• In March of 2020 (due to COVID), the S Fund lost 21%, while the C Fund only lost 12%.
• In 2022, the S Fund lost 26%, while the C Fund only lost 18%.

This is what’s allowed the C fund to outperform the other two stock index funds over the years: While the S and I funds have the potential for higher single rates of return, the C fund is more conservative, and suffers smaller losses.

Lifecycle funds

The Lifecycle (L) funds, as mentioned, invest in a variety of funds in order to reach a targeted outcome for a specific retirement date. They also reallocate to become more conservative the closer federal employees get to retirement. They are the “set-and-forget” option for TSP investors. Typically, they start out more aggressive, then shift to 60%-80% conservative and 20%-40% aggressive once the investor reaches the retirement horizon — within five years of retirement or over the age of 59.5.

While this is a good strategy on its face, the problem with these funds is that they spread their allocations across all five TSP funds. And, as discussed, some of these fare significantly better than others. Why put any money in the S and I funds, for example, if the C fund will consistently provide better returns over time?

Maximizing TSP returns

A mutual fund window also exists, but it is expensive and limiting; only about 1% of all TSP monies exist within this window

The professional federal retirement consultants at Federal Employee Benefit Advisors instead recommend following the spirit of the L fund, while investing in the only two funds that make sense: C and G. Federal employees can follow this chart to re-allocate their investments at specific milestones throughout their lives and maximize their returns while minimizing their risk:

Maximizing withdrawals and transfers

In 2019, at the urging of the Federal Thrift Retirement Board, Congress passed the TSP Modernization Act, which made a very important change to federal employees’ TSP options: Instead of making one in-service withdrawal from their TSP during their entire career, they can now make up to four per year after they’ve turned 59.5, for the rest of their careers. As long as they transfer the funds an IRA or Roth IRA, there are no taxes, penalties or fees.

Too many feds miss out on this opportunity. TSP is a savings plan, designed to help younger career employees build a healthy balance up until the retirement horizon. However, once they reach the retirement horizon, they’re going to soon need to begin withdrawing. As mentioned, that’s not a good idea with the G fund; neither is it profitable to withdraw from a stock index that may be down at any given time. That’s why the retirement consultants at FEBA recommend any federal employee within the retirement horizon transfer some or all of their TSP balance into an IRA or Roth IRA in the private sector. That way you can still contribute and get the matching government contribution throughout the final years of your career, but the balance is now out of the TSP.

The private sector has a dizzying array of options to transfer your TSP balance to, but the retirement consultants at FEBA have narrowed it down to what they believe to be the top two investments for TSP maximization. Each month they host a live hour-long webinar titled “TSP Maximization.” During those webinars, they discuss those top two options, as well as other strategies for feds to get the most out of their TSP throughout their career. This also includes a 30-minute live question and answer period.

Copyright © 2024 Federal News Network. All rights reserved. This website is not intended for users located within the European Economic Area.