The lure of the G fund: Solid investment or fatal attraction?

When the Federal Employees Retirement System program was launched in the 1980s to replace the Civil Service Retirement System, some experts estimated that anywhere from a third to one-half of all the income FERS retirees would have would come from investments in their Thrift Savings Plan accounts.

That would mean the TSP is the icing on the cake for CSRS retirees, with their larger civil service annuities, but an absolute must for FERS retirees.

The reason? Since FERS retirees are under a diet-cost of living adjustment system, any increase in inflation over 2% means they get less than a full increase. For example, in January 2019, retirees under the CSRS program, military retirees and people getting Social Security got a 2.9% COLA. That was based on the rise in living costs as measured by the Consumer Price Index-W. But because of their diet COLA system, FERS retirees got only 2%. You don’t need to be a rocket scientist to do the long-term math and see what that diet-COLA formula — during an extended period of even moderate inflation — would do to the FERS retirees lifetime income. It is possible they could fall to 3% or even more each year of moderate-to-high inflation.

To protect their annuities from the ups and downs of the stock market, many active and most retired federal-postal workers have a major chunk of their TSP account in the Treasury securities G fund. Some are entirely invested in the G fund. Some have been in the G fund since it was introduced in the 1980s during a period of high and extended inflation. Many workers and retirees pulled out of the C, S and I funds during the recession of 2008-2009. Many have never returned to the stock market which has been on a roll, with ups and downs for more than a decade. They feel it is the safe thing to do. Safe in the sense that unlike the stock and bond funds — C, S, I and F funds of the TSP — the G fund never goes down. But many financial planners say putting most or all of their retirement nest egg in the G fund can be risky over the long haul because of inflation.

Financial planner Arthur Stein says the declining returns of the G fund is the result of a general decline in interest rates. He recommends to many of his clients that they consider the F fund, which he says outperformed the G fund 18 out of the last 26 years, and that there were only three calendar years in which the F fund had a negative outcome.

Meantime, checkout this chart developed last fall by Stein, which shows how the G fund returns have gradually declined along with interest rates:

(Calculations by Arthur Stein 2019)

Nearly Useless Factoid

By Amelia Brust

Despite being landlocked and an entirely different state, Utah’s official bird is the California gull. The seagull was chosen for the honor in 1955, to celebrate the fact that in 1848 the birds ate crickets which were destroying settlers’ crops — thus saving the settlers’ lives. The bird is also honored with the Seagull Monument on Temple Square in Salt Lake City.

Source: Utah State Library

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THRIFT SAVINGS PLAN TICKER

Mar 02, 2021 Close Change YTD*
L Income 22.4699 -0.0304 0.53%
L 2025 11.3615 -0.0341 1.10%
L 2030 39.6579 -0.1511 1.38%
L 2035 11.8567 -0.0498 1.50%
L 2040 44.6691 -0.2053 1.65%
L 2045 12.1936 -0.0604 1.77%
L 2050 26.6147 -0.1412 1.90%
L 2055 12.9052 -0.0841 2.48%
L 2060 12.9052 -0.0841 2.48%
L 2065 12.9051 -0.0841 2.47%
G Fund 16.5348 0.0006 0.15%
F Fund 20.7282 0.0221 -2.15%
C Fund 57.7561 -0.4702 1.72%
S Fund 81.3746 -1.41 8.21%
I Fund 36.3008 0.0128 1.15%
Closing price updated at approx 6pm ET each business day. More at tsp.gov
* YTD data is updated on the last day of the month.