How to Invest in the TSP in 2023

There are two key things federal employees need to understand to invest successfully in the TSP.

To do well in your Thrift Savings Plan (TSP) you have to be an expert, right? You have to study the markets for hours every day to know exactly when to buy and when to sell.

Fortunately, neither of those statements are true. Anyone can do exceptionally well in their TSP just by understanding the basics. 

Only 2 Important Things

The only 2 things that you need to know to do well in the TSP are:

  1. Which funds are safer and which are more aggressive
  2. When you need the money

Safe Vs. Aggressive

There are 5 core funds in the TSP: G, F, C, S, and I. The safer funds are the G and F funds and the more aggressive funds are the C, S, and I funds. The safer funds aren’t as volatile in the short term but won’t grow as much as the other funds over time.

This is a brief explanation of each of the TSP funds and the investment objective of each fund:

  • G Fund: Ensure preservation of capital and generate returns above those of short-term U.S. Treasury securities
  • F Fund: Invests in various types of U.S.-based bonds in the Bloomberg U.S. Aggregate Bond Index
  • C Fund: Invests in 500 of some of the largest U.S. companies (Tracks the S&P 500)
  • S Fund: Invests in smaller U.S. companies by tracking the Dow Jones U.S. Completion Total Stock Market Index
  • I Fund: Invests in the major companies in Europe, Australasia, and the Far East

The “Safe” TSP Funds

The G and F funds are the more conservative of the 5 funds because they don’t have the tendency to be as volatile as the others, but as a price for being more stable, they don’t have the potential to grow as much as the other funds.

The G Fund actually guarantees that any money invested in it won’t lose value, but it has only averaged about a 2% annual return over the last 10 years. 

The F Fund can drop in value but is still very stable compared to the other funds. However, it has only averaged an annual return of 1.7% over the last 10 years.

The Problem With The G and F Funds

As many people approach retirement, they often will put the majority of their TSP accounts into a combination of the G and F funds. While putting a portion of your money in conservative funds can be a very strategic thing, many people take this way too far. 

The G and F funds probably won’t lose value, but they probably won’t grow much either. Over time, this lack of major growth as well as inflation can take a huge toll on your money. 

For instance, if the prices of things go up every year (inflation) and your investments aren’t growing enough to more than make up for it, then you may deplete your TSP much faster than you had planned. 

Now, I am not saying that the G and F Funds aren’t good funds. They are great funds and they do exactly what they are designed to do. But with that being said, you will want to make sure you also have investments that will help you maintain your standard of living over the course of your entire retirement.

The Aggressive TSP Funds

The C, S, and I Funds are the more aggressive of the funds in the TSP. 

The reason they are called “aggressive” is because they have a much higher chance of sustaining major growth over time. However, because of this, they can also be much more volatile than the G and F Funds.

For example, the C Fund lost more than 35% in 2008 but regained it all and more in the next couple of years.

TSP L Funds

The most important thing to understand about the L Funds is that they are not independent funds. They are simply different combinations of the core 5 funds that we have been talking about. 

What makes them different, however, is that each L Fund is designed to automatically become more conservative over time. In theory, a federal employee could invest in a single L fund and never have to change the investment allocation for the rest of his or her career.

The TSP created the L funds in an effort to simplify investment decisions for federal employees. Many federal employees who were unfamiliar with the 5 core funds struggled to know which mix they should use. 

The idea is that a federal employee can simply put his or her entire TSP balance into the L Fund that is closest to his or her projected retirement date and then leave it for the entirety of a federal career. As time goes on, the L Funds automatically invest themselves more conservatively as people approach retirement.

As the target date for each fund is passed, it becomes the L Income Fund. This happened for instance to the L 2020 Fund during 2020.

If someone is looking for the L Fund that has the potential to earn the most over time, it will always be the one with the furthest target date. Right now, that would be the L 2065 Fund. But this will also be the L Fund that has the most volatility.

As of July 2023, the L 2065 was split up like this: 

  • G Fund: 0.39%
  • F Fund: 0.61%
  • C Fund: 50.54%
  • S Fund: 13.81%
  • I Fund: 34.65%

As you can see, this fund has very little G and F in it. It is meant for those federal employees who have a long-term time horizon.

The L Income Fund is on the other side of the spectrum and is very conservative. This is the allocation of the L Income Fund as of July 2023:

  • G Fund: 69.38%
  • F Fund: 5.63%
  • C Fund: 13.06%
  • S Fund: 3.18%
  • I Fund: 8.75%

Since most of the L Income Fund is in the G Fund, this fund is very unlikely to lose money. That being said, this fund is also very unlikely to earn much over time. 

In my opinion, the TSP L Funds are too conservative for the average person. Investing too conservatively can be a problem if you don’t want to run out of money in retirement. With lifespans and retirements lasting longer, retirees will want to find a balance between being too conservative or too risky so that they don’t outlive their money but they also can make it through the next market downturn.

When Do You Need The Money?

Generally speaking, any money you need soon from your TSP should be in the safer funds whereas money you don’t need for a while should be in the more aggressive funds. 

For example, it makes sense for a 20-year-old to invest almost entirely in aggressive funds because he probably doesn’t need money from the TSP for 30+ years. 

Conversely, if someone is retiring tomorrow, then he is probably planning to withdraw/spend from the TSP soon so he will want more conservative investments to make sure that the money needed for that dream retirement vacation isn’t bouncing around in the market the week before he needs the money. 

As a rule of thumb, any money you need in the next 8ish years should be in conservative investments. 

For example, if you are retiring tomorrow and are planning to withdraw $20k/year from your TSP, then you would need about $160k ($20k x 8 years) in conservative investments to get you through the first 8 years. 

If you had a total of $400k in the TSP, then $160k of it would be in conservative investments and the other $240k would be in more aggressive investments. 

While Working

Most federal employees that still have 10+ years before retirement probably should have the majority of their money in things that are going to grow, but as people get within 10 years of retirement it becomes more important to introduce conservative investments. 

As someone approaches retirement (and in retirement) it is important to set up the bucket system which this article shows you how to do.

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 Haws Federal Advisors.