One of the more common questions you are likely to ask when you think about your Thrift Savings Plan account is, “How should I spread my investments among the TSP funds?”
Many federal employees find investing in the TSP confusing and don’t understand the principles behind each of the funds and what investing in any given fund might mean for their money. Or perhaps they left their TSP account invested in the default fund (currently the G fund) when they began their jobs and never gave it another thought.
Your situation is unique and if you have questions about how to invest your money, you would always be wise to seek counsel from a qualified financial advisor.
One such financial advisor recently offered his advice to a member of the military who has been contributing to his TSP account for the past four years. The young man is 28 years old and said that he has just been putting all of his money into the G fund. He was questioning it though because he knew that the G fund has a very low yield, so he wanted to know how to diversify his investment so that it earns a better return.
Ric Edelman is a New York Times best selling author and financial advisor who also hosts a weekly radio show where he gives financial advice to people who call his show. The young man described above had called the show and asked this question about his TSP account.
Edelman started by saying he was delighted to hear that somebody had started investing in the TSP at such a young age and was continuing to do so, and, moreover, that he was actively thinking about and taking interest in his investments.
“You need to be contributing to the Thrift Savings Plan for your own future,” said Edelman. “But, you are doing it all wrong!”
“The G fund is the worst place, or one of the worst places, that you can be choosing in the TSP. I want you to stop that and instead choose C, S and I. I want you to put 100% of your money into these funds; in fact, take the money that’s already in the G and move it over into the C, S, and I funds.”
Edelman recommended a 40/40/20 split for among these funds – 40% into the C fund, 40% into the S fund and 20% into the I fund. Why this split?
“It’s not only because you’ve noticed that the G fund doesn’t pay much in the way of interest, you are saving for your retirement which isn’t going to be for 20,30,40 years from now before you actually begin to use the money, and with such a long time horizon, you can afford to tolerate the volatility that the stock market produces, because we know two things about the stock market, both U.S. and international: it is the most profitable place to invest – historically it has always been the most profitable place to invest over long periods – and it’s also a very volatile place to invest.
“But in your case, because you are investing a little bit with every paycheck, that volatility actually works to your advantage because of something called ‘dollar cost averaging’ where you are investing a small amount of money out of every paycheck. As a result of that, it smooths out the volatility, you end up buying into it at a low prices relative to high prices, and it works to your advantage.”
If this advice sounds familiar, it is because it closely mirrors that of another financial advisor on allocating investments within the TSP whom we’ve written about before. See How Are Your TSP Funds Invested and TSP’s Roth vs. Traditional Roth IRA: Advice From an Expert.
Dave Ramsey suggests a similar allocation, although he suggests weighting more heavily in the C fund than what Ric Edelman proposed.
Ramsey suggests either 80% or 60% in the C fund and then spreading the remaining portion evenly in the S and I funds, but the three funds he recommends are the same as what Ric Edelman suggested.
How you choose to allocate your investments in the TSP is ultimately yours, but as this young man realized and Ric Edelman confirmed, keeping your investment too conservative could cost you a lot of money over the long haul.