What are the best Thrift Savings Plan (TSP) funds in which to invest? How should federal employees be investing in the TSP as they approach the end of their federal careers?
These are common questions that many federal employees have and ones that Dave Ramsey has addressed many times to assist federal employees who call his radio show to ask for his advice.
How Does Dave Ramsey Recommend Federal Employees Allocate Their TSP Investments?
Dave Ramsey recommends avoiding the Lifecycle Funds completely and sticking with the 3 core TSP stock funds for investing over a long federal career because they provide the most growth potential. He also suggests avoiding the G Fund and the F Fund because of their lower performance over a long period of time in comparison to the stock funds.
He suggests this allocation for regular TSP contributions, putting the vast majority into the C Fund since it has the best long-term track record of the three funds:
- 80% in the C Fund
- 10% in the S Fund
- 10% in the I Fund
Alternatively, he has also suggested that federal employees can allocate their investments with a little bit less in the C Fund:
- 60% in the C Fund
- 20% in the S Fund
- 20% in the I Fund
Aged Based Asset Allocation
When employees near the end of their careers and look ahead to their retirement years, conventional wisdom often holds that they should begin investing more conservatively as they age to reduce the 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) by moving the bulk of the investments out of the TSP stock funds and into the G and F Funds.
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? Probably not if they are following Ramsey’s advice.
He once advised a federal employee who called his show who was age 58 and wondered if he should begin investing more conservatively in his TSP account that this was not a good idea, at least not at that age.
For reference, the caller 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
However, he did tell the caller he could consider rolling his TSP over to an IRA after retirement. 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,” since everyone’s situation is unique.
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.