Will Your G Fund Investment Returns Start Heading Up?

Problems in the U.S. economy may lead to higher interest rates for government securities.

The G fund is the retirement vehicle of choice for billions of dollars invested through the Thrift Savings Plan.

The reasons for attracting so many of investors’ dollars are simple. Your retirement money is as safe in this fund as it is anywhere else–actually it’s safer than anywhere else. The fund never goes down and G fund investors can count on slow, steady returns.

Of course, the fund doesn’t go up much either. G fund returns for the past several years have been between 4% and 5% per year. So, for that reason, the fund isn’t a great way to build up a lot of money since, by comparison, stock funds can easily go up 10% or more in a year. Of course, the C fund went down 22% in 2002 so the volatility of stock funds is much greater in the short term.

The G fund invests in short-term government securities that are issued for the Thrift Savings Plan. Employees working for private companies (the ones that some readers envision as having better retirement plans, better salaries, and tons of money) don’t have access to the safe and sound securities issued specifically for the G fund.

For these reasons, many investors put larger amounts of their retirement money into the G fund as they get closer to retirement. They obviously want to avoid one of those years with a 22% drop in their retirement funds just before they were planning on boarding the cruise ship and sailing off into the sunset with an annuity from Uncle Sam.

Recent years have seen very low inflation rates. The G fund returned more than 8% per year back in the late ’80’s. Retirees living on a stable income undoubtedly liked the few thousand extra dollars coming in each year from their secure investment in the fund. So, as the fund returns went down due to low inflation, the income of retirees dropped as well.

Could those returns go back up to 8% or more again? It’s possible although the reason for the possible increase isn’t all good news.

Higher returns in the G fund also mean higher inflation. And, in a development that will surprise many people, the stability of US Treasury Securities are being questioned by some knowledgeable financial analysts.

In a recent Wall Street Journal article, some experts are questioning the current bond rating given to the US Government.

Bond yields are still low. This low return reflects the confidence of investors in the safety and security of the credit rating of the federal government.

Last week, one ratings firm sent a note to clients contending that U.S. bonds should be given a rating of AA instead of the AAA rating they currently have. A rating of AA is two levels below the current rating and would put the credit rating of the United States below countries such as England and France.

The debt rating of a country determines how much interest it pays on its bonds or other debt it may incur. The lower the rating the higher the interest rate.

Investors see several problems that lead them to reconsider the debt rating for the federal government. The value of the dollar is falling against major currencies; the baby boom generation is nearing retirement and will be collecting Social Security benefits and straining our medical system, America’s debt is skyrocketing and, so far at least, the politicians are not moving to solve some of these problems.

According to the Journal, most countries with a AAA bond rating have a 20% ratio of debt to the gross domestic product of the country. America has a 60% ratio.

On the other hand, the American economy is very large and it’s growing, in part because of low taxes that stimulate business activity. And the federal government borrows and pays back debt in dollars. A cheaper dollar means it is easier to pay back debt.

But much of our debt is financed by foreign investors. Some of those investors are nervous and a falling dollar is hurting their investment returns. This could slow demand for U.S. Treasury securities and make it necessary for the government to raise interest rates in order to attract the money necessary to pay its bills.

The bottom line: There are storm clouds approaching for the American economy that may actually lead to higher returns for TSP investors with money in the G fund.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47