Lifecycle Funds: Making A “Model Retirement Program” Even Better

Are lifecycle funds a way to time the stock and bond markets? What is the philosophy behind lifecycle funds. Here is a quick summary

Are the new lifecycle funds now offered by the TSP an investment a federal employee should consider? No suspense here: Any TSP investor should, at a minimum, seriously consider what these funds have to offer.

Here is a very quick summary of the considerations you should think about in deciding whether to put at least some of your investment money into these funds.

Market Timing?

These funds are not an attempt to time the market–at least not in the traditional sense. Market timers try to anticipate the next move of the stock or bond markets and invest in those markets based on that anticipated move. In other words, if a market timer thinks that small company stocks are about to take off, he will put money into the S fund to take advantage of the anticipated price increase of this fund.

Or, to use another example, if a market timer thinks interest rates are going to move up quickly, he may take money out of the F fund and put it into another fund to avoid losing money if bond prices are about to head south as a result of rising rates.

The problem is this: Even professional investors are unable to reliably predict the future of the stock or bond markets. No doubt, market timers will make some correct moves and make money in some instances. But, unless they are exceptionally good or lucky, they will lose more than they make. Most federal employees don’t want to take that chance with their future retirement.

Market timing can be a way to gamble with your future retirement funds. Most of us are looking forward to a financially secure retirement and gambling with that future is not an attractive proposition.

Lifecycle advantage: Diversity of Investments

But if lifecycle funds are not market timing funds, what are they?

Lifecycle funds are a way to diversify your TSP retirement investments. Most federal employees are not natural gamblers. In fact, many federal employees put all or most of their TSP money into the G fund.

There is nothing wrong with the G fund. It is a great investment tool for TSP investors and it is very safe. The problem is this: It is so safe that it doesn’t pay you much money because you are not taking any risk. In other words, the G fund is unlikely to bring you a financially secure retirement if you put all of your money into it throughout your federal career. Historically, you will get a better return on your investment with more of your money in stocks. The G fund does not go down during stock market dips. But it doesn’t go up much either–even if the stock market goes up 20% or more during a year. So the probable result is that you will have less money if you do not participate in the big runs the stock market is likely to have at some point during your long career while working for Uncle Sam.

Many financial experts tell their clients to invest more aggressively in their younger years. This gives them an opportunity to use their big advantage in investing: they have more time until they retire. Over time, stocks generally give a much better return than very safe bond investments.

In other words, if you put too much money into the G fund, you may not be able to retire with anywhere near as much money as if you put more money into stock funds.

Protecting Your Retirement Investment

Having said that, stocks can (and often do) go down. And as many investors know, they can go down fast and may not recover for years. So, if you are getting close to retirement, you will not want to put much of your retirement money into stocks. If you do, you may find much of your retirement nest egg has disappeared just as you and your spouses are about to enjoy the lifetime cruise you have been dreaming about to celebrate your new status as a federal retiree.

Lifecycle funds spread your money throughout the different TSP funds.You can do that on your own as well but many people don’t like to make financial decisions or never get around to it. A lifecycle fund makes the decisions for you and automatically adjusts your investments in the different funds as you get closer to retirement.

But the way your money is invested is not static. For the reasons mentioned above, a young investor just starting a federal career has more time to recover from any stock market losses and will not be retiring for decades. So more of that investor’s money will be put into stock funds and much less will be put into the G fund.

Conversely, an older TSP investor who is getting close to retirement does not have enough time before retirement to recover from potential losses in the stock market. As a result, more of this investor’s money will be put into the TSP’s G fund to protect him from potential losses and to preserve the investments he has made throughout a long, prosperous federal career.

Model Retirement System

The TSP program is sometimes referred to as a model retirement plan that should be emulated by private companies. The lifecycle funds are likely to enhance that reputation.

Lifecycle funds do not time the market. As you get closer to retirement, more of your money will go into the G fund–regardless of what the folks running the TSP may think about the short term future of stock or bond markets. The philosophy underlying these funds is to automatically diversify your investments in a wide variety of stocks and bonds without trying to predict the unpredictable. There are still no guarantees. You may find yourself a multi-millionaire as a result of maximizing your TSP investments throughout your career or you may find you don’t have enough to enjoy the lifestyle you have dreamed about. But the lifecycle funds improve your chances of success. Putting your retirement money into the new TSP fund options will be a safer way for many TSP investors to take the major step of deciding to put their money into a variety of stock funds.

You can get detailed information on the lifecycle funds right here. You can see more about the returns of private sector lifecycle funds in this article on lifecycle funds.

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