Ask any federal employee how to maximize their Thrift Savings Plan, and they’ll likely give you the same advice: contribute 5% of your salary to match the 5% government contribution, and start doing so as soon as possible. career as possible. And while that’s absolutely true, it’s just the beginning.

Knowing the difference between all the funds, a broad perspective of their performance over time, and some lesser-known tricks and pitfalls can help federal employees get the most out of their TSP and, ultimately, their retirement.

funds

Funds are easy, right? Everyone knows that the G bond fund never has a negative return. So isn’t it obvious the best way to go?

Not necessarily. First, while it’s true that the G fund never has a bad day, it never has a good day either: its 10-year year-to-date return is just 2.36%. That means, more often than not, they don’t even make high enough returns to keep up with inflation. Additionally, the national average retirement income withdrawal rate from 401k/IRA retirement accounts is approx. 5% So as the federal retiree retires 5% from a G fund balance while just earning 2.36%, then that person suffers -2.64% in loss of income. Inflationary loss and loss of income combine to drastically reduce a retiree’s spending power in retirement.

While it may make sense for Feds to invest most of their TSP balance in the G fund later in their careers to minimize risk and losses, if they follow that strategy throughout their careers, they will never accumulate enough to maintain a standard of living.

The F fixed income index fund isn’t a great option either. This mix of 11,000 bonds and notes has not performed well recently: as of April 30, 2024, it averaged just 1.39% over the past 10 years. In theory, its strength is that bonds are not correlated with the stock market, meaning that when the stock market goes down, bonds go up slightly. But being a mix of so many bonds, the F fund doesn’t perform the same as individual bonds. In 2022, the F fund fell right alongside the stock market by 12.83%. Such small returns simply do not justify this kind of risk. In fact, even Lifecycle funds, which invest in a variety of funds to achieve a target outcome for a specific retirement date, do not invest significantly in the F fund.

Stock index funds

The three stock index funds – C, S and I – all do significantly better than funds G and F. These are correlated assets that each invest in different types of stocks, so when the market is up, so are and these funds. When he’s down, so are they. So what’s the difference between the three?

The C Common Stock Index Fund invests in a broad group of large and mid-sized US companies and aims to match the performance of the Standard and Poor’s 500 (S&P 500) index. The S Small Cap Stock Index Fund invests in small and mid-cap companies and aims to match the performance of the Dow Jones Total Market Completion, a lesser-known version of the Dow that doesn’t match what’s in stocks – Dow Jones Industrial Average. International Stock Index Fund I invests in small to large companies in 40 developed and emerging countries outside the US

Of these three, fund C consistently outperforms the other two, with lower risk:

• Since inception (1988), Fund C has averaged 10.88% as of 04/30/24.
• Since inception (2001), the S Fund has averaged 8.87% as of 04/30/24.
• Since inception (2001), Fund I has averaged 5.09% as of 04/30/24.

Meanwhile, fund C outperformed the other two funds during periods of market losses:

• In 2008, Fund I lost 42%, while Fund C lost only 36%.
• In March 2020 (due to COVID), Fund S lost 21%, while Fund C lost only 12%.
• In 2022, the S Fund lost 26%, while the C Fund lost only 18%.

This is what has allowed the C fund to outperform the other two stock index funds over the years: while the S and I funds have the potential for higher unique rates of return, the C fund is more conservative and suffers smaller losses .

Lifecycle funds

Lifecycle (L) funds, as mentioned, invest in a variety of funds to achieve a targeted outcome for a specific retirement date. They also reallocate to become more conservative the closer federal employees get to retirement. They are the “set it and forget it” option for TSP investors. They typically start out more aggressive, then move to 60%-80% conservative and 20%-40% aggressive once the investor reaches the retirement horizon—within five years of retirement or beyond age 59.5.

While this is a good strategy on the surface, the problem with these funds is that they spread their allocations across all five TSP funds. And as we’ve discussed, some of these do significantly better than others. Why put money in the S and I funds, for example, if the C fund will consistently deliver better returns over time?

Maximizing TSP returns

There is also a mutual fund window, but it is expensive and limiting; only about 1% of all TSP money exists in this window

The federal retirement professionals at Federal Employee Benefit Advisors instead recommend following the spirit of the L fund while investing in the only two funds that make sense: C and G. Federal employees can follow this chart to reallocate their investments at certain stages. over their lifetime and maximize their returns while minimizing their risk:

Maximize withdrawals and transfers

In 2019, at the urging of the Federal Retirement Economic Council, Congress passed the TSP Modernization Act, which made a very important change to federal employees’ TSP options: instead of making a career-long TSP retirement, they now they can earn up to four a year after they turn 59.5 for the rest of their careers. As long as they roll over the funds to an IRA or Roth IRA, there are no fees, penalties or charges.

Too many feds are missing this opportunity. The TSP is a savings plan designed to help younger career employees build a healthy balance well into retirement. However, once they reach the retirement horizon, they will soon have to start withdrawing. As mentioned, this is not a good idea with the G fund; nor is it profitable to withdraw from a stock index that may be down at any given time. That’s why FEBA’s retirement consultants recommend that any federal employee nearing retirement roll over some or all of their TSP balance into a private sector IRA or Roth IRA. That way, you can still contribute and get the matching government contribution in the later years of your career, but the balance is now outside of the TSP.

The private sector has a dizzying array of options for transferring your TSP balance, but the retirement consultants at FEBA have narrowed it down to what they believe to be the top two investments for maximizing your TSP. Each month they host a one-hour live webinar titled “Maximizing TSP”. During those webinars, they discuss these two top options as well as other strategies for Feds to get the most out of their TSP throughout their careers. It also includes a 30-minute live question and answer period.

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