Thrift Savings Plan (TSP)........I need help

Factual Questions
1

Can anyone explain it to me.

Right now I have 14% of my pay going into it. 90% in the G fund, 5% in the F fund and 5% in the C fund.

I never much paid attention to it until recent, due to a lady who retired here at work with nothing to her name. She has no home, no money in savings, no money in TSP, and she took an early buy out which she’s run thru already. I hear she’s doing miserable and instead of enjoying her retirement she’s looking for a job.

I dont want to end up like her when it comes to retiring and this has become a wakeup call for me.

A co-worker has 70% of his contribution going to the S fund, 15% to the I fund and another 15% to the C fund.

Can someone explain this all to me in a language that isn’t confusing!!!

2

This is no different from investing for your retirement on your own by buying index funds. Where you should put your money depends upon your tolerance for risk, and how long it will be before you retire.

The G Fund, which consists entirely of government-backed securities, is absolutely safe. The value can never go down. On the other hand, it’s like putting all your money into savings bonds. The returns it produces are very small. So, money you put in there is safe, but it’s not going to grow very fast. Over the last 12 months, the G fund has returned just over 4%. If all your money is in the G Fund, you’re going to be fairly poor in retirement.

The C Fund is more like a large-cap stock index fund. It’s invested in the 500 largest stocks in the market. Unlike the G Fund, the value might go up, or it might go down. If you see the S&P average on the stock market go up, your C Fund holdings will be going up a similar percentage, and vice-versa. So, there’s more risk, but there’s the possibility of higher returns. Over the last 12 months, the C Fund has returned over 34%.

The S and I Funds invest in broad groups of small-cap stocks and international stocks, respectively. Like the C Fund, they might go up, or they might go down, depending upon how the markets are doing. They tend to be more volatile than the large-cap stocks, going up and down more quickly. So, there’s more risk, but the possibility of greater rewards. Over the last 12 months, the S and I Funds have returned over 51% and 45%, respectively.

The F Fund invests in a broad collection of bonds. These aren’t as safe as government-backed securities (the G Fund), but are generally less volatile than the stock funds (C, S, and I). Over the last 12 months, the F Fund has returned just under 5%.

If you’re getting close to retirement, you don’t want to have much risk, because you’re going to need to start drawing that money fairly soon. So, if the markets take a dive, you won’t be able to wait it out. But if you’re still more than, say, 10 years away from retirement, you should be heavily invested in stocks. Historically, in the long run, they have always out-performed safer investments, like government securities or bonds.

If you’re in your 20s, I’d tell you to put 35% in C, 25% in S, 25% in I, 10% in F, and 5% in G. If you’re in your 40s, maybe 40% in C, 20% in S, 20% in I, 10% in F, and 10% in G. In other words, the older you get, and the closer to retirement, the more you want to start shifting from the riskiest (but potentially best-performing) funds to the safer but duller ones.

The TSP website has a lot of this information, and your personnel office can surely give you some of the pamphlets the TSP folks turn out that explain the pros and cons of different TSP allocations.

3

By the way, for those of you who are now confused as can be, the TSP is for U.S. Federal Government employees. It’s somewhat like a corporation’s 401(k) plan. The employee contributes a percentage of his or her salary, and the government matches part of it. The investment choices are limited, as is the percentage of salary that one can contribute.

4

Whew!!!

Thanks EARLY OUT.

I did a change last night and was not quite sure if I made the right decision. I’m 29 right now and made changes so that the S fund got 70%, the I 15%, and the C fund 15%.

I didn’t put anything in the G or the F fund.

but seeing as what you recommended for a 20 and 40 year old, how about someone who will be 30 soon, should i put something in the G and the F fund?

5

At your age, you have the advantage of having many, many years before you need to use that TSP money to live on, so you can afford to take higher risks, but potentially get a much higher rate of return. You’ve chosen a fairly risky mix of funds. While the S Fund has done very well over the last 12 months, it could also drop by a lot if the economy goes into the dumper again (it’s growing right now, but there are no guarantees).

Remember how tech stocks soared in the late 1990s? Some people put all their money into them, and laughed at everyone else, because they were getting much better returns. Of course, when the bubble burst, and the NASDAQ lost over 60% of its value, those tech stocks were suddenly worth a whole lot less (a lot of the so-called “dot-coms” went out of business entirely, meaning that their stocks were then worth zip, zero, nada). People who had all their money in tech stocks took a bath. Those whose money was spread around a bit more also lost money, but not as much.

Spreading your money around into different kinds of investments tends to give you very good returns, though never the highest possible, while spreading the risk, so that if one kind of investment goes sour for a while, it doesn’t wipe you out, because you’ve got the other kinds of investments in the mix.

On the other hand, at only 29, staying out of the G and F Funds entirely is probably a reasonable approach. Those funds are very safe, but it would be like a 29-year-old walking with a cane, just in case you might trip and fall down. More safety than you need.

Depending upon how much of a gambler you are, I’d consider dialing back on the S Fund a bit, and putting more into the slightly more stable C Fund. The reason there’s no “right” answer, of course, is that each of us has a different tolerance for risk. Some people panic when their stock funds lose value. Others say, “Eh, it’ll go back up again,” and don’t sweat it.

Disclaimer: I am not a certified financial planner, just a retired Fed, a former member of the Snivel Service (“Whaaa - We want a raise!”).

6

Thanks again EARLY OUT!

About a week ago I hadn’t put too much thought into my TSP. I just followed what everyone else was doing, like upping my contribution to the max of 14%. I didn’t really pay much attention to what the G, F, C, S, and I funds meant. And the situation with the lady who retired just brought the reality closer to home.

I went back to make sure what I did as far as the TSP is concerned and realized that what I actually did was that I made an interfund transfer NOT a change in regards to where my contributions are going. Guess I’ll leave those changes alone.

7

A rule of thumb a freind of mine picked up from her MBA Prof* that has been helpful:

According to this theory, You take your age and subtract it from 100 (in your case 100-29 = 71), that number is the approximate percentage of your retirement savings that should be in stocks of some kind - including stock index funds.

Adding 10% to that number qualifies that as an aggressive portfolio
Subtracting 10% from that number qualifies it as conservative one.

He also said that Americans tend to err on being on the side of a little over conservative early in life (if they invest toward retirement at all) and a little too aggressive later on.

  • He warned them once they had an MBA folks would treat them as certified financial planners & there to give free advice & its been true for her. This rule of thumb has been invaluable, along with **Early out’s ** (excellent) caveat that everyone’s age age/risk acceptance/ & situation is completely different… of course you don’t want to plan your future on what a jackass (me) writes on a message board – I bet the Feds offer pre-retirement workshops etc. I’d check that out – or even spend circa $100 for an hour session with a CFP with good refs. in your town, to make sure you are on the right track for you.
8

There’s a school of thought that says that your annuity takes the place of the “bonds” part of the investment, so as long as you actually plan on staying in the government until retirement, you can be a tad more aggressive in putting the money into stocks. Your retirement annuity payout is as guaranteed as bonds are.

What you need to do is be comfortable with risk levels. As Early Out mentioned already, the G fund is safe (as long as the government doesn’t collapse, in which case worrying about retirement is pretty much moot). A huge mistake people often make is that the market will take a dive, and they will shift their money out of stocks. You have to understand that this will occasionally happen, and leave it alone. If you start swapping money in and out of accounts like that you end up buying high and selling low, which is the exact opposite of what you want to do.

As was already mentioned, if your decision to put the largest fraction of money into the S fund is just because it has had a large recent return, you should understand that it’s going to be more volotile than the other stock funds, and it is possible (likely, even) that it will lag the others at some point in time. “Chasing” the hot performers is another potential mistake - extrapolation of performance rarely pans out.

9

Early Out gave a great description of the funds, I would heartily recommend that you visit a financial planner to discuss your situation and get advice on how you should be managing your money.

Depending on the particulars of your station in life, for example, contibuting 14% to TSP might not be the best use of your money. Maybe you need to build up your day-to-day savings to protect yourself from a short-term emergency, maybe you’re better off paying off your house quicker, and so on and so on.

Rather than following people’s opinions, some professional advice would probably be far more useful for you.

10

That might be true, but maximizing your contributions to the TSP is usually a good bet, for two reasons. First, your contributions come from pre-tax dollars. Second, the government matching contribution is pretty generous. So, the final return on investment ends up being very high, indeed, usually better than anything else you could put your money into.

Ravenman is right about keeping a liquid emergency fund, however. That should always be first on the list. Second, I believe, is getting rid of credit card debt, because the interest rates are usually killers. Then, start putting money into investments.

11

I knew I could depend on you STRAIGHT DOPERS for good sound advice.

I currently don’t have any Credit Card debt. I paid that all off and pay cash for everything else, the only time I will write a check is for my car note and car insurance. I hear it is good to have a least one credit card for credit reasons, but I still don’t care for them. I still have a sour taste for credit cards since my early teens and having to pay all that money back. Wasn’t fun at all.

And fter getting a DUI in 2001, I’ve had all the “partying” sucked out of me. Which leaves me alot of money to spend. Money which no doubt will be going to build up my savings account. Thanks for that great advice RAVEMAN and EARLY OUT.

Will also take JIMMMY advice about seeing a Financial Planner. I like how you all explained this stuff to me so that I can see a BIGGER picture (THANKS SWANSONT)

Wish I had thought about all this stuff when I was much younger, amazing what turning 30 will do to yah.

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