The Thrift Saving Plan (TSP) is meant for government employees, inclucing civil service employees and those serving in the uniformed services, to have a retirement saving plan set into motion. A TSP account acts much like a 401(k) does in the private sector. It offers tax deferment as well as a chance to have your employer match your contributions for many federal employees.
There are different TSP investment strategies that you could consider, but before you decide exactly what you want to do with the contributions you make, you should know about the available options that you have for investing. TSP offers five different types of funds that you can invest in and each is signified with a different letter. Here is what the letters are and what they mean:
- G Fund: This fund is a government securities fund and it is comprised of securities that are not available to the general public. Considered the least risky of all the available TSP funds, the G Fund is also the default fund that your money will be invested into if you make no election at all.
- F Fund: This fund is a fixed income fund. It is also considered to be one of the less risky funds available and it invested in BlackRock’s US Debt Index Fund, which tracks the Barclays Capital Aggregate Bond Index.
- C Fund: This fund is the common stock fund. This fund invests in BlackRock’s Equity Index Fund, which tracks the S&P 500 Index Fund.
- S Fund: This fund is the small capitalization stock fund. This fund invests in BlackRock’s Extended Market Index Fund, which tracks the Dow Jones US Completion TSP Index.
- I Fund: This fund is the international stock fund. This fund invests in BlackRock’s EAFE index fund, which tracks the MSCI EAFE Index.
Obviously, the three stock funds will have more risk than the other two will, but where there is more potential for risk, there is also more potential for reward. So, you have to decide what is best for your particular circumstances.
Again, if you do not elect to do anything specific with your TSP contributions, then they will automatically be placed in the G-Fund and all your contributions will go in. So, you do need to have some sort of investment strategy if you wish to make the most of your savings.
The first thing to consider when coming up with your TSP investment strategy is how tolerable are you to risk? If you are on the younger side, then you have more time in which you can take more of a risk. However, if you are closer to retirement age, then you may not wish to take a tremendous amount of risk. So, it has to be a good blend.
What you can always do is lend a little more of your contributions to the risk side or safe side depending on what you want to accomplish and how close to retirement you are. If you are looking for large returns, then you have to be willing to take on some risk. If you have a lot of time before retirement and you don’t mind a little risk then go 60 percent in one or more of the stock funds and then put the other 40 percent in tone of the two ‘safe’ funds. If you want more safety and you are close to retirement, then reverse the percentages.
Keep in mind that you can adjust your percentages whenever you want to so if you feel that the stock market will do better in the near term, you can shift more of your savings into the funds that will be stock heavy. If you feel the stock market will suffer in the short term then you may want to shift to the funds that do not include stocks.
Another strategy you can employ is the equal contribution strategy. This will be where you take your total contribution and chop it up into five equal parts and then invest equally in each available fund. This will give you the most amount of asset allocation possible and give you a level of safety as well as a level of potential risk/reward. It is important to note, that with this strategy you will be invested slightly more towards the side of risk as 60 percent of your money will be going into the stock funds as opposed to only 40 percent going into the non-stock funds.
If all of this sounds like it may be too much for you to handle, then you can always elect to participate in the Lifecycle Fund series. This was introduced in 2005 to aid those who simply didn’t have the time or the interest to keep up with their TSP.
Basically, the Lifecycle Fund is where your money gets invested for you by a professional according to how close you are to retirement. The further away from retirement you are, the more your money is put in funds that will have a better chance of great appreciation, but will also carry a greater risk. As you get closer to your retirement age, your money will then be shifted and invested into the funds that offer far less of a return, but also, far less of a risk. So, the idea is, you retire with the most amount of money possible, all without having to watch your TSP day in and day out.
Of course the worst possible TSP investment strategy that you can have is none at all.
This is your money and you have to make it work hard for you. Your nest egg will not grow itself, but rather needs to be built up by you over a long period of time.
If you are not willing to take the time to come up with your own TSP investment strategy then take advantage of the fact that you have a system in place that will do the hard work for you. Whatever you do, take action now.