The Thrift Savings Plan (TSP) is one of your most potent government benefits and can help you build a robust retirement portfolio. However, not everyone is aware of how to fully leverage the different funds available or the strategic decisions that can optimize returns. In this article, I would like to explain some of the most effective strategies federal employees use to maximize their TSPs. The information presented will help you clarify your fund options, contribution strategies, and withdrawal choices. Once you have these essentials, you can confidently craft a plan tailored to your individual retirement goals and needs.

  1. The basics of your TSP C, S, I, F, and G Funds

The Thrift Savings Plan currently offers five core funds to choose from—C, S, I, F, and G. However, many federal employees are not aware that three of these (C, S, and I) represent the same asset class/Equities.

  • C Fund (Common Stock Index): The C fund tracks the performance of the S&P 500, a well-known index representing 500 of the largest U.S. companies.
  • S Fund (Small-Cap Stock Index): The S fund, on the other hand, includes smaller U.S. companies. S Fund companies are not included in the S&P 500.
  • I Fund (International Stock Index): The TSP I Fund invests in companies from developed markets outside the U.S.

C, S, and I Funds Contain Correlated Assets

While these three funds invest in different groups of stocks, they are correlated, meaning they all tend to move in the same direction. When the stock market rises, the C, S, and I Funds typically rise together. When the market drops, all three funds are likely to fall as well.

Historically, there is one TSP fund that stands out as the best-in-class: the C Fund.

  • In 2008, the I Fund lost -42%, while the C Fund lost only -36%.
  • In March 2020, the S Fund dropped -21%, while the C Fund dropped -12%.
  • In 2022, the S Fund fell by -26%, but the C Fund only fell by -18%.

Although the S and I Funds may occasionally deliver higher short-term returns, the C Fund consistently outperforms them over time due to its lower volatility. The C Fund is more conservative and tends to invest in larger, established U.S. companies. Its design provides a balance of growth potential and reduced risk.

Historical Returns (as of April 30, 2024):

  • C Fund: 10.88% average annual return since 1988
  • S Fund: 8.87% average annual return since 2001
  • I Fund: 5.09% average annual return since 2001

The data speaks for itself: over the long run, the C Fund offers a better balance of risk and reward compared to the S and I Funds.

  1. The F Fund: A Weaker Bond Option

The TSP F Fund is a bond index fund designed to provide fixed-income returns via investments in various bonds and notes. Bonds have historically been a haven against stock market downturns. However, the F Fund’s performance in recent years has been somewhat disappointing. Over the last decade, it has averaged a return of just 1.39%, and in 2022, it experienced a significant decline, dropping 12.83%.

Given this weak performance, we recommend caution when allocating substantial portions of your TSP to the F Fund, especially when considering the better risk-adjusted returns of the C Fund.

  1. The G Fund: Safe, but Inflation Erodes Its Value

The G Fund is a unique government securities fund offering a guaranteed return with no risk of loss. However, its returns have not kept pace with inflation. Over the past decade, the G Fund has returned an average of 2.36%, which often lags behind inflation rates.

For employees nearing or in retirement, the G Fund offers protection from market downturns, but its inability to outpace inflation can erode purchasing power over time. Additionally, retirees withdrawing 5% annually from their G Fund risk depleting their accounts if returns don’t match or exceed withdrawal rates.

  1. Lifecycle (L) Funds: Pre-Made Portfolios with Limitations

The Lifecycle (L) Funds are designed to automatically shift from aggressive to conservative investments as you approach retirement. While these funds simplify investment management, they have certain drawbacks:

  • They allocate across all five core funds, including the underperforming S, I, and F Funds.
  • They offer exposure to riskier stock funds (S & I) that have underperformed the C Fund over time.
  • The inclusion of the F Fund, which has averaged only 1.39% over the past decade, drags down potential returns.

Instead of relying on the pre-set allocation of the L Funds, you can build a customized portfolio using only the C and G Funds, adjusting your allocations based on your age and risk tolerance.

 

  1. Building a Customized and Optimized L Fund

To create a more efficient portfolio, focus on the C Fund for growth and the G Fund for safety. Adjust your allocation as you age. Here are some suggested allocations based on your age.

Age Range C Fund % G Fund %

20-25               90%             10%

26-30              85%              15%

31-35              80%              20%

36-40             70%              30%

41-45             60%             40%

46-50            50%             50%

51-55            40%             60%

56-60           30%             70%

61-65+         20%            80%

This simple approach allows for personalized control, aligning your portfolio with your risk tolerance and ultimate financial goals.

  1. Maximizing Withdrawal and Transfer Options

Since the passage of the TSP Modernization Act of 2019, federal employees have greater flexibility in making withdrawals while still employed. Those over 59.5 years old can make up to four in-service withdrawals per year without penalties by transferring their funds to an IRA or Roth IRA in the private sector.

This flexibility allows you to seek better-performing investments outside the TSP while continuing to contribute to your TSP account. Diversifying your retirement savings through private-sector options can enhance growth and offer more tailored investment strategies for your retirement horizon.

 

  1. TSP Maximization: Crafting a Plan for the Future

For federal employees nearing retirement, I highly recommend a strategy known as TSP Maximization. Maximizing a TSP involves transferring some or all of your TSP balance into a more dynamic and flexible private-sector IRA or Roth IRA. By doing so, you gain access to a broader range of investment options, potentially better growth, and features such as guaranteed returns and protection from market volatility.

If you are a federal employee looking to maximize your retirement savings, one way to do so is by discovering more about TSP options. When you find out more about your TSP, you can make sounder investing decisions and create a more secure financial future.

The key to success with a TSP and other retirement accounts is to develop a long-term mindset, manage risk appropriately, and use the most efficient withdrawal options as you approach retirement.

 

Please note: This content is for informational and entertainment purposes only and is not to be construed as legal, tax, financial, or other advice. Nothing contained in this video or elsewhere on this site should be viewed as a solicitation, recommendation, endorsement, or offer by Brian Swerdlow, Anchor Financial, Safe Money Trends, or any third party to buy or sell any securities or other financial instruments.

You alone are responsible for evaluating the potential benefits and risks arising from the use of any information or other content in this video or elsewhere on this website. Before making any money decisions, you are strongly encouraged to consult with your financial advisor, tax expert, or attorney.