Now in its 35th year, the Thrift Savings Plan offers a lot of investment lessons

If you have been investing in the Thrift Savings Plan (TSP) for its entire 35 years, you have likely got a pretty good nest egg. Consistency and patience is part of what we have learned from the TSP over the decades. For more, the Federal Drive with Tom Temin talked with certified financial planner Art Stein.

Interview transcript:

Tom Temin
Is it possible 35 years of the TSP?

Art Stein
Yeah, and it’s great to have that long-term record, because we can really learn a lot from it. Investing is really a long-term proposition, people should look at it that way. And what we see when we look at the three TSP funds that have 35 year records. So that’s the G fund, which is short term bonds, the F Fund, which is longer term U.S. bonds, government and corporate, and then the C Fund, which is a S&P 500 index fund, it invest in the stocks of large U.S .companies, 500 of the largest. What we see is that the C fund, more than doubled the return of the bond funds. And that’s hugely significant. Now, the C fund was, of course, much more volatile, had more years where there were negative returns for the calendar years. Of course, the G fund really doesn’t have volatility, and the F Fund is volatile, but by a fraction of what you see in the C fund.

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Tom Temin
In many ways, the G fund is just a little bit better than a mattress.

Art Stein
Well, it’s a lot better than a mattress, because one, it has a rate of return and the money in your mattress does not. So the average annual return for the G fund, over 35 years, was 4.6% a year. The F Fund was 5.5%. But the C fund was 11.9%, almost 12% a year, which is, a great rate of return. Now 2022 was extremely unusual in a couple of different ways. One, it was the first time both, the F Fund, which is the bond market, and the C Fund, which is representing the stock market, both declined in the same calendar year. And the declines were pretty major in 2022. Even the bond fund was down 12.8%. And the stock funds were down even more, but that was a first time they were both down in the same calendar year.

Tom Temin
So is it fair to say that, if the C fund was down whatever, 13, 14%.

Art Stein
Eighteen.

Tom Temin
Eighteen. that still would not have wiped out, even two of the years, of the 35 or of the prior several?

Art Stein
No, because, good years for the TSP are like 2020 and 2021. The C fund was up 18% in 2020 and 28% in 2021. Those were great years, and actually, 2019 was up 31%. So huge increases. And yeah, it was down 18%. But if you held on and you had started, say, even in just in 2019, you were still came out way ahead.

Tom Temin
In other words, on the long term, they go up significantly, but it’s more of a ratchet effect, than it is a straight curve.

Art Stein
Yes. And the way I describe it is, it’s like a person with a yo-yo walking up a hill, and the yo-yo is going up and down and up and down. But because the person is walking up a hill, at some point, even when the yo-yo is at its lowest point, it’s still higher than it was at its highest point further down the hill. And that’s what we’ve seen with the U.S. stock market.

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Tom Temin
So if you don’t invest, that makes you the yo-yo.

Art Stein
Yes. Don’t be the yo-yo.

Tom Temin
And just a point of historical question. What did people invest in before the TSP? Because the TSP is not quite as old as the 401K plan that it’s part of.

Art Stein
Yeah, well, the TSP really started with the G fund, which I think started in 1987.

Tom Temin
What did Federal employees have before any of that?

Art Stein
They didn’t have a 401K. It was [Civil Service Retirement System (CSRS)], and they had this great annuity, and the government didn’t feel the need, or should they have felt the need to offer them a 401K, In addition. But then, they wanted to switch to a less rich retirement package, and give more responsibility to employees to plan for their own retirement security. So then they started a 401K plan. And that mirrored what was happening in the private sector, where there were a lot of companies that had great retirement packages, great pensions. Of course, the government calls the pension the annuity. But they got away from that, because they could not afford, it’s a very expensive thing to do.

Tom Temin
We’re speaking with certified financial planner Art Stein. And getting back to 35 years of TSP. What about some of the other funds? There have been foreign stock fund and some of the others, how have they done? Again, over the long haul?

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Art Stein
Yeah, the I fund is not done as well as the U.S. stock funds, although, there were certainly years when it outperformed. The Small stock fund is the S fund. And it invests in most of the U.S. stock market that’s not in the S&P 500. It has not done as well, at this point, as the C fund. But there are, certainly, periods of time when it did better than the C fund. So I urge my clients, who are in the TSP, to invest in both the S and the C fund, and even the I fund. Because the I fund, now foreign stocks that are in the A fund, actually, are cheaper than the C and the S fund. And cheaper means that, if you look at things like price earnings ratios, it’s better for the stocks that are in the I fund. So presumably, that would make the I fund an excellent long term performer.

Tom Temin
And the S Fund then, sort of, has the flavor of maybe, a little more Silicon Valley, a little bit more startup companies that haven’t made it to the big stock exchanges, yet. Might be on the [National Association of Securities Dealers Automated Quotations (NASDAQ)] type of flavor.

Art Stein
Well, I wouldn’t say that so much, because the big companies are in the NASDAQ or in the S&P 500. You’re talking about, Amazon and Apple and things like that. It could be like a major trucking company, it could be a manufacturing company, it could be a lot of different things, it could be a drug company. So, hopefully, they’re going to do so well in the future that, and then they become large companies.

Tom Temin
And because, your advice has been frequently, don’t try to pick stocks. That’s why you’re in these funds, because you have professionals that have lots of input, in order to tailor what those funds are made of to get the best return for the investors. What should people look at economically, just to get a sense of what the funds might be doing in the future?

Art Stein
Extremely difficult to do, Tom, because, the stock market and the U.S. economy do not move because of the same stimulus. And the stock market, and this word makes it very difficult, is a leading indicator of what’s going to happen to the economy. So it tends to go down, before the economy goes down. And it tends to start going up when we’re in a recession and things still look pretty bad. So there’s no like, obvious clue, as to what the future performance is going to be. And you can see that because, there’s no one who has consistently predicted what’s going to happen in the short term to stocks. And as a result, don’t try and forecast. You can look at 35 years worth, and see that, if I’m investing in the stock funds, I’m going to have some bad years. The number of calendar years where the C Fund had a negative rate of return, over the last 35 years, there were seven years. So 20% of the time it declined, and 80% of the time and had a positive rate of return. Well, those are pretty good odds, you’d like those odds in Vegas, you like those odds at the track if you bet on horses. But people don’t see that, what they see is, hey, it could crash. And when it does, what I’m going to read in the press is, this could be permanent, this could be the end, and it’s going to go on. That’s when you need to be investing.

Tom Temin
And much is made of the number that rises and falls of people that have, at least a million dollars, in their TSP accounts. And if you look at the numbers carefully, it’s basically the longer you’re around, the more likely you will be in that millionaire so called club.

Art Stein
If you invest appropriately.

Tom Temin
Yes, that’s right. And if you look at the very small accounts, those are associated with younger people that haven’t been in the government so long. So the eternal lesson is born out. There’s no magic to becoming a 700, 800, thousand or million dollar TSP holder except, consistency, longevity and keeping the nerve not to yank it out. When things gyrate.

Art Stein
Yeah. And I have met several people who very long-term federal employees who basically, kept their money in the G fund and, of course, they basically have what they started out with some small increase over time. And all of a sudden, they’re doing their retirement planning, and they turn around to the TSP account. It’s like not sufficient. Then of course, it’s too late.

Tom Temin
But first people do have an annuity, it’s just not the same as the service people. So it’s not their only, plus they get Social Security.

Art Stein
Absolutely. And for the people can live on so Social Security and their annuity, they don’t have to worry about the TSP so much. But the problem with that, is that the annuity from the federal government, for [Federal employee retirement system (FERS)] employees has, as you know, a diet COLA, cost-of-living adjustment. So anytime inflation is over 2%, they’re not fully compensated for inflation. And inflation, the United States is normally over 2%. So they’re looking at a pension and annuity where the purchasing power is declining over time. And it means that they then have to fall back on the TSP to make up the difference.

Tom Temin
So bottom line for 35 years, then is?

Art Stein
Stocks look good.

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