Thrift Savings Plan: TSP Funds Explained

Thrift Savings Plan logo.

Investing with the Thrift Savings Plan, or TSP, is a great benefit offered to members of the Armed Services to build a nest egg for their future.  Those who know me know that I encourage everyone to participate in this program.

There are two great benefits the TSP offers that should make it your first choice in retirement investing.  The first is that service members who are part of the Blended Retirement System, or BRS, receive an instant 4% pay raise.  That’s right, you get free money for doing nothing else than planning for your future.

The second benefit is the ease at which you can invest into TSP due to the system’s automation.  Once you have set up your account and your allocations, TSP is a fire and forget retirement system.

Other than not knowing how to set up your TSP account (which is explained here), the most common objection I have received to why Soldiers don’t invest with TSP is that they do not understand the funds.

Related Article:
Contribution Calculator: What will Your Account be Worth at Retirement? 

G Fund:

G is for Government Securities.

All to often Soldiers have told me they are investing heavily in the G fund.  “Why,” I ask them and the response is always that the G Fund does not lose value.  That is right, if you want a 100% safe investment that will not lose face value then this is the fund for you.

But that is the only benefit the fund will offer.  The G Fund grows at a rate of the 10-year US Treasury Bonds.  I know that means nothing to you, so let me explain it this way, it grows about 2.5% a year.  That is about $.01 a week for every $15 you have invested.  

Ironically though, the predicted inflation rate is also 2.5%.  What does that mean in regards to your investment?  Well, inflation reduces the buying power of the US Dollar and as such means you need more money to buy the same things.  

What it means to the G Fund is that if the interest you earn on this investment is equal to the inflation, then you aren’t really making any money.  If inflation outpaces the G Fund, then even though you have earned money it actually is worth less than you started.

I hope that I have explained this well.  If not, here is another way to look at it; by going heavy in the G Fund, you will never become rich from the opportunity created by compounding interest.

F Fund:

F is for Fixed Income.

Like the G Fund, the F Fund is based on bonds and as such the revenue it earns is rather fixed.  The F fund is more diversified than the G Fund as it invests in not only Government Bonds, but Corporate Bonds, and Real Estate Bonds.  Due to the nature of bonds, the risk for this investment is low.

These types of bonds typically earn a better interest rate than that of the treasury bonds.  But not but much.  Additionally, unlike the treasury bonds which compile the G Fund, these bonds can lose value.  In fact, at the time of writing, the F fund is the only TSP fund which has a negative return for the last 12 month period.

There is no stock symbol for any TSP funds.  But, the Vanguard’s Total Bond Market Index Fund attempts to follow a similar investment strategy.  As such, you can look up their ticker symbol of VBMFX to see how a similar fund is performing.

C Fund:

C is for Common Stock.

Common stock is what you have when you buy shares of a publicly traded company.  Which companies does the C Fund hold?  This fund owns shares in the companies which make up the Standard and Poor’s 500 Index, commonly known as the S&P 500.

Why 500 you ask?  The index tracks the progress of 500 different large and medium-sized companies in the United States.  Instead of putting all your eggs into one basket, you are diversifying across 500 baskets.  As a result, the risk of your investment is mitigated.

But, you might say, “the stock market goes down and as such I will lose my money.”  This is very true, unlike the G Fund, you can lose money here, and lose it fast.  For example, in 2008 this fund lost nearly 37% in value.  

Although this was particularly bad, it was also an anomaly. In 2009, the fund returned grew 27% in value and in 2010 it rose again another 15%.  Therefore, had you not changed anything about your investment strategy from 2008 to 2010, you would have fared far better than someone who panicked in 2008 and switched to the G fund and missed out on the recovery.

This brings up a great point about investing for your retirement.  If your planned retirement date is decades away, you have time to recover from any losses like those of 2008.  Don’t panic, stay the course of your investment strategy.  From 1923, when the S&P 500 Index was created through 2016, the index has returned an average of 12.25%.  

If you would like to see how this fund is performing, look no further than your favorite news source.  The S&P 500 is typically listed alongside all financial news.

S Fund:

S is for Small Capitalization Stock Index.

Small Capitalization Stocks, or Small Cap, are the smaller companies that are publically traded similar to those in the C Fund.  The biggest difference between these companies over the companies in the S&P 500 is the volatility.

Volatility, in simple terms, is how fast a stock or fund moves up and down.  Small Cap companies tend to have higher volatility than Large Cap companies.  This can be great in beating the S&P 500 Index, or it could be devastating on a negative year.    

An example of this would be the 38% drop in value in 2008.  But, in 2009 the S Fund rallied and returned nearly 35% and continued its growth in 2010 for 29%.  When you compare this to the numbers provided for the C Fund, you would have lost more value in 2008, but had more value by 2010.

I Fund:

I is for International Stock Index.

The I Fund is very similar to the C Fund in that it owns stocks in companies.  The biggest difference is that it owns stocks in companies from over 20 developed countries.  As such, this fund could have a great day when American stocks are down or vice versa. 

Any stock can be influenced by new laws, elections, wars, trade agreements, and so many other things which are totally out of our control.  By investing with foreign companies, you are diversifying any single risk factor which may plague one country.

As this fund does carry stock, it does have the risks associated with stocks.  The biggest of all being the loss of value.  Including the 40% loss in 2008, this fund has returned positive growth over the last 10 years. 

Table of Growth:

The table below reflects the gains and loses for each of the five TSP funds.  Even with the crushing loss of 2008, all of the TSP funds have positive growth over the last 10 years.  

What about the L Funds?

L is for Lifecycle.

The explanation of TSP funds would not be complete without mentioning the Lifecycle Funds.  L Funds were created in 2005 with one intent in mind, making TSP even easier.  You might be scratching your head right now after reading about each fund and have no clue where to go next.

That is where the L Funds kicks in and TSP gets Soldier proofed.  The L Fund is a hybrid of all five of the TSP Funds.

As I mentioned earlier, you can afford some extra risk if your retirement is decades away.  But as you arrive at your retirement, you might not want to have that much risk exposure.  The L Funds have the additional advantage of automatically reducing the risk by changing out of the stock funds to more of the bond funds as you near retirement.

Like I said, TSP is fully automated to make investing easy for everyone.  I say again, Soldier proofed.

If you decide to invest in the Lifecycle Funds, you will then have the decision of which of the five L Funds you want.  TSP has conveniently named the L Funds with a year in which you anticipate drawing your TSP contributions.  I know you would like to draw the money now but look for the year that is closest to when you turn 59.5 years old.

One final note on Lifecycle funds, when the date of the fund is reached they are absorbed into the L Income fund.  For example, in the year 2020, the L 2020 will no longer exist and all of your funds invested in there will become L Income.  But, at the same time, L 2060 will be added for everyone to invest in.

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