What is the Perfect TSP Allocation for Federal Employees?

November 2, 2020 10:44 AM
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I talk with a lot of federal employees all over the world, and most feds are wondering the same thing. They ask, “What is the best TSP allocation”?

Because it would be impossible to talk to everyone personally, I thought I’d share the perfect allocation here. It is 30% in the I Fund, 40% in the C fund, and…

I am sorry if I got your hopes up but I just couldn’t help myself. Unfortunately, even as a financial planner who helps feds invest and plan for retirement for a living, I don’t have a perfect allocation. I really wish I did though. It sure would make my life and yours easier.

One of the biggest reasons that there is no cookie cutter allocation is that investing is not about making as much money as possible, and while that may sound strange, let me explain why.

If we were all trying to just make as much as possible, we’d put 100% of our money in the C fund because it has the highest average return over its lifetime, or even better, we’d invest 100% in emerging economies where the room for growth is huge.

And for those that are still not convinced, think about why you took a job with the federal government. Did it have the highest salary? Did it have huge upside potential with plenty of opportunity for stock options? Or were there other factors involved? Oftentimes, the best part of working for the government is not the salary. It is the job security, retirement benefits, and other perks. 

When searching for a job, we all tend to understand that it involves more than just money, but when it comes to investing, sometimes we lose that connection. Don’t get me wrong; your investments should make you plenty of money over time, but that is not the only thing they should do. They should also allow you to live an incredible life; a life that you are passionate about and excited to live every day! However, because your version of an incredible life is different from mine, our investments should look different as well.

Now, I am sure someone is asking, “Well, if everyone still just focused on making as much as possible with their investments, wouldn’t that allow them to do whatever they wanted in retirement?” The answer is sometimes.

The issue is that all investments have risk, and generally, the more an investment can earn, the more risk you are taking by investing in it. As we all know, the C fund can grow much faster than the G fund, but the G fund won’t drop by 40% like the C fund did in 2008. Over time, the C fund will earn much more than the G fund, but it may take some years to recover from large drops.

Think about it this way: If your goal was to have the largest TSP balance possible in 100 years, I would probably recommend a large helping of the C, S, and I funds. They will be more volatile but will have high growth over time. However, if your goal is to retire in 2 years and provide consistent retirement income for the next 30 years, my recommendation might be very different depending on how much risk you are able to take. To make things even more complicated, your tax bracket, pension, social security benefit, and family situation also play a huge role in determining the best TSP allocation.

I am sure it can be frustrating as a federal employee trying to figure out how to invest your TSP, especially when you read articles like this and the answer is “well, it depends,” but I hope that this article does not scare anyone into thinking that investing is too difficult to do on your own.

Many people spend the time to make educated investment decisions based on their situation and end up with great results. My goal with this article is to remind all of us that there is no one-size-fits-all approach to retirement and that proper planning makes all the difference. 

When it comes down to it, I don’t care whether someone hires someone to help or they put the time in to make great decisions on their own. My goal is to help as many feds as possible feel prepared and confident about their future whether we decide to work together or not. That is one thing that makes these articles so powerful; people from all around the world can read and learn something that will improve their lives without ever meeting me or other authors.

The water cooler guy at work may know a lot about the TSP and may actually give some good advice, but in the end, he is not responsible for your decisions or retirement. We are all responsible for the decisions we make every day and then the consequences that come with them. Just like every area of our lives, we become more confident in our retirement when we invest the time and energy into making it amazing.

© 2020 Dallen Haws. All rights reserved. This article may not be reproduced without express written consent from Dallen Haws.

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About the Author

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at PlanYourFederalBenefits.com.

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