How should federal employees be investing their Thrift Savings Plan (TSP) funds as they approach the end of their federal careers? This is a common question and one which many federal employees ponder.
Aged Based Asset Allocation
When employees near the end of their careers and look ahead to their golden years of retirement, conventional wisdom often holds that they should begin investing more conservatively as they age to reduce volatility and risk that comes with being in the stock market.
This is how the TSP’s Lifecycle funds work for instance; based on the target retirement year of the fund, the holdings shift gradually over time as the target year approaches so that the investments are more conservative (i.e. less volatile). The TSP’s L 2065 Fund has more of the stock funds and less of the G and F Funds for this reason; the L 2025 Fund is just the opposite.
This general concept is referred to as age based asset allocation.
Dave Ramsey on Aged Based Asset Allocation and the TSP
So should federal employees who are approaching retirement apply this theory to their TSP accounts? Like most financial matters, it depends on who you ask.
Here is the opinion of one well known financial advisor, Dave Ramsey.
A federal employee who is 58 years old and two years away from retirement asked Ramsey if he should change his current investment allocation of his TSP account to something more conservative since he was going to leave federal service in the near future.
For reference, he said he currently had his TSP account invested as follows:
- 40% C Fund
- 40% S Fund
- 20% I Fund
Here is what Dave Ramsey had to say about it:
I’m 60 and I have not moved anything to conservative investing. What you may do when you do retire [is] I would probably come out of the Thrift Savings Plan and do a rollover into an IRA and develop a portfolio for your retirement of mutual funds.
The idea that as you hit retirement that you’re supposed to move money into conservative things is called asset allocation, and it is a widely believed theory of investing among the financial planning community. I personally think it’s wrong. I think it’s a theory, and I think the theory breaks down. Here’s why:
At 60 years old, if you move stuff into bonds and money markets and you start producing about half the rate of return that you’re producing now; in other words if you start making 4, 5, or 6 [percent on average] instead of 10 or 12 [percent on average] on your money all on the idea that now we’re coasting into the harbor of retirement and we need to be super conservative and we don’t want to put anything at risk.
The problem with that theory is that if you are 60 years old and you are healthy, statistically, you are going to live into your 90s. The average death age of a female in America is 76 and a male is 74, but that includes infant mortality, teenage death and so on. When you hit 60 years old healthy, you have a very high probability of living 30 more years. So this is like talking to a 30 year old and saying, “You need to invest conservatively.” You’ve got 30 years that you still need to outpace inflation.
So I think this theory is asinine, especially if you’ve got a lump of money. If you’ve sitting there with a half million to a million dollars in these investments, and it sounds like you probably are, then you’re not going to be using the money anyway. You’re just going to be living off of the income it creates; the money is going to be invested for your kids. You’re not going to touch the goose; you’re only going to live off of the golden eggs. That’s my theory. I don’t think I’ll ever move mine [retirement investments] into conservative investments because I’ve got millions of dollars in it.Dave Ramsey speaking on the Ramsey Show, April 8, 2021
You can also watch the question and answer with the caller in the video below.
For more on Dave Ramsey’s recommendations on rolling over a TSP account to an IRA after leaving federal service, see Should I Still Roll Over My TSP to an IRA After Passage of the TSP Modernization Act?.
Is Dave Ramsey right? The answer probably is, “It depends.”
For somebody in a solid financial situation, which was the assumption that Ramsey made in his response, the advice makes sense: if a federal employee has a sizable nest egg in his TSP account and doesn’t urgently need the bulk of the money from the TSP, investing with a longer term strategy would make more sense. For somebody in a different situation, perhaps a different approach would be needed.
It’s always wise to seek the advice of a financial advisor who can take the time to get a full picture of your situation to develop a long-term plan that will meet your needs in retirement.
Check out these other resources with ideas on how to prepare for retirement:
- What Should Federal Employees Do With the TSP After Retirement?
- Why Federal Employees Need Different Financial Advice
- How to Protect Your TSP in Retirement
- What Kind of Financial Advisor is Best?
- Managing Your TSP: Asset Allocation
You can also use the search form on any page of the FedSmith.com website to search for other articles on retirement or any other topic of interest.