TSP G Fund: ‘Safe’ Is Not ‘Without Risk’

The G Fund is considered the safest of the TSP funds, but being “safe” does not mean there are no risks of losing money.

The G Fund, has long been the low-stress haven of TSP participants looking to shelter their nest egg from market volatility thanks to its combination of safety and liquidity. It is the most popular of the TSP funds, holding nearly 36% of all TSP assets because of its ‘safe returns’. But in today’s interest rate environment, the G Fund’s ‘safety’ comes at a cost.

It is critical to understand that being ‘safe’ is not the same as being ‘risk-free’. There are a number of different types of investment risk that need to be taken into consideration, a few of which we will expand on in this article. But first…

What is the G Fund & how does it work?

The G Fund is a special short-term US Treasury security only marketed to TSP participants. Its returns generally reflect the rate of the 10-yr US Treasury but do not require the participant to make a 10-yr commitment with their investment.

The G Fund also makes up the vast majority (nearly 75%) of the L Income fund, and acts as the low-volatility anchor that all of the Lifecycle funds rely on more and more as their target dates approach. This is because of the relationship between Acceptable Risk and Investment Timeline. From a timeline standpoint, the L-Income fund actually helps provide some context as to the most common investment horizon for monies invested in the G Fund.

Acceptable Risk & Investment Timeline

When and how we intend to use an asset in retirement is a big consideration in determining how much risk is appropriate for that particular asset. In the long run, history has shown us that accepting more risk by participating in the market generally equates to a higher long-term reward.

So why don’t retirees commonly have 100% of their money in the market? Because one bad year can wipe out a lifetime of good decisions! 

As Will Rogers put it, “At a certain age we are more worried about a return OF our money than we are with a return ON our money.”

If a particular asset were earmarked to pay your bills next month, should we gamble with it? No! That asset should emphasize safety and liquidity to ensure its available and accessible on your next due date – regardless of whether the market is up, down, or sideways.

But if that asset is not intended to pay your bills for another 10 years, then more risk could be acceptable because there is sufficient time to recover should the market drop tomorrow. If earmarked for use in 20 years, even more risk could be tolerated by that asset because that asset would need to capture enough growth to outpace inflation for two whole decades.

Which leads us to our first concern about the G Fund…


“Inflation’s the reason why a dime ain’t worth a nickel these days!”

Like water moving through the layers of the Grand Canyon, inflation constantly erodes the spending power of our money by increasing the cost of goods and services. It is working relentlessly against the returns we earn with our nest egg and increasing the likelihood that we eventually cannot afford our lifestyle.

Inflation has averaged 1.9% since January 2009. But the G Fund has only averaged 2.3% over that same time period.

So, if you had $100,000 that earned $2,300 in a year, we have to then consider that the purchasing power of that $100,000 went down by $1,900 during that same period. This leaves us with only a $400 net gain – and, unless it’s in the Roth TSP, that gain is subject to income tax before it actually reaches our wallet for us to spend.

Now, tax brackets move, but if we assumed 5% state & 22% federal income tax, that 2.3% G Fund average would have an after-tax equivalent yield of only 1.68% (now not even keeping up with inflation). 

Is this a problem for money intended to pay bills later this year? Of course not! But, the longer we defer use of monies parked in the G Fund, the more erosive the impact of inflation – especially for those trying to generate retirement income.

When on our fixed income, the coupling of today’s suppressed interest rates with the relentless march of inflating expenses often requires us to withdraw a larger amount of principal (as opposed to earnings) from our TSP in order to meet our budgetary needs. This can create a dangerous distribution cycle where less principal is left to earn towards next year’s income – which further perpetuates the need to withdraw more principal to pay the following years bills and so forth – accelerating the depletion of our account.

The irony of retirement is that the longer we spend enjoying our golden years, the more ‘gold’ we must generate each year to live the same lifestyle as inflation works against us! That is why having a Thrift SPENDING Plan is so critical to your long term success!

Public Policy Risk

Although popular, the G Fund average rates of return have left much to be desired over the last decade… Even so, some politicians feel that the G Fund is ‘too sweet’ of a deal.

There have been multiple proposals, from both sides of the political aisle, looking to reduce the interest credited to participants of the G Fund as a means of balancing the budget (or at least partially curbing our ballooning national debt). The details differ with each rendition of the proposal but the question the politicians are asking boils down to, “Why should the TSP offer a 10-year treasury’s rate of return without a 10-year commitment?”

Under these proposals, the G Fund would potentially decrease the returns even further. If the rates are further suppressed through these proposals and the G Fund remains the only option in the TSP that protects your principal, those on fixed incomes will face a tough decision. Thus, many Feds look beyond the limited options of the TSP when designing their retirement income plan. 

Debt Ceiling

Now another unique condition of the G Fund is that you must allow the government to use that money, without asking your permission, should we reach the dreaded Debt Ceiling. The repayment of those funds (and interest) is backed by the claims paying ability of the US Government… but is it fair to point out that there are now $22,000,000,000 worth of other claims that Uncle Sam has to worry about as well? 

Has Uncle Sam defaulted on those claims before? Never. But keep in mind it took 200 years, two world wars, and the building of America as we know it to rack up the $7,000,000,000 in national debt that we had in 2007. That has more than tripled since! Thus, there is also the concern of the government relying on the G Fund to keep its lights on each time we reach the Debt Ceiling. Who wants to be the last resort for anyone who’s shown the fiscal (ir)responsibility that our government has? Not I! 

When was the last time the Treasury Department had to take ‘extraordinary measures’ to keep the government’s lights on you ask? 

Try right now…

For this combination of reasons, it is important to consider where the G Fund is ideally positioned in your retirement timeline.

For different people the G Fund will play different roles – largely based on when and how the funds in question are meant to be utilized. It’s great for funds that need to be safe because they have a shorter investment time horizon before their intended use but monies in the G Fund with a longer timeline may struggle to outpace inflation with the paltry long-term growth averages. In the TSP’s limited options, you either sacrifice earnings by settling for the G Fund or sacrifice safety by looking at the other 4 TSP funds. So, for those of you not willing to settle, there are a number of alternative strategies that can offer similar safety but with much higher potential growth outside of the TSP.

If you would like to review the G Fund’s utilization in your own retirement plan be sure to contact a Federally Focused Retirement Planner. 

About the Author

Tom Walker is the founder of Walker Capital Preservation Group, Inc. He believes strongly in empowering today’s federal employees through benefits education at retirement workshops and through featured publications. He has compiled many greatly informative resources on his website, WalkerCPG.com and WalkerCPG Facebook page.