TSP Lifecycle Funds: What are they and how do you use them?

Warning Order

Many service members today invest their savings through the Thrift Savings Plan, or TSP, which is the federal government’s version of a 401(k) for its employees.  TSP Lifecycle funds, also known as target-date funds in other retirement plans, are a useful product many retirement plans offer to simplify the process of investing by combining underlying investments in a manner that changes over time based on retirement date.  Lifecycle Funds are an excellent starting point for service members’ TSP investments, but the funds don’t always meet their needs.

Situation

Many service members today invest their savings through the Thrift Savings Plan, or TSP, which is the federal government’s version of a 401(k).  TSP offers multiple investment options and some of the lowest expenses around.  How do you know which investments to select?  How often should you change them?  Well, TSP’s Lifecycle Funds aim to make those decisions automatic.  But are they right for you?

What is a Lifecycle Fund?

Lifecycle funds, also known as target-date funds, are a useful product many retirement plans offer to simplify the process of investing.  These funds are a one-stop investment, automating asset allocation, investment selection, rebalancing, and adjustment of the risk/reward behavior of the fund over time.  TSP offers several funds based on projected retirement ages and service members should generally pick the fund whose year is closest to their projected retirement age.  For example, if one plans to retire in 2048, pick the “L 2050” fund.

What do these funds invest in?

Lifecycle Funds use a combination of the base funds offered in TSP: S, I, C, F, G.  Visit TSP.gov for more information on the investments held within each of these base funds.  For retirement dates that are farther away, Lifecycle Funds tilt toward heavier stock investments.  As time passes, they gradually shift toward bonds as a safer investment for those nearing retirement.  For example, the L 2050 fund that I mentioned earlier is currently invested in 84% stocks while the L 2030 fund is only 62% stocks.  Bonds tend to have less variation and lower total returns than stocks over time.

Coordinating Instructions

Are Lifecycle Funds right for me?

Lifecycle funds are great starting investments, but their existence is based on assumptions about your situation that may or may not be correct.  Since their asset allocations are automatic, the lifecycle funds don’t account for a service member’s other financial objectives, investments, or risk tolerance.  For some, the investments may be too aggressive given an individual’s sensitivity to changes in value, resulting in some exiting investments at the wrong time due to fear of even more losses.  For others, the investment selection may be too conservative to meet their financial goals in the face of rising expenses.  Perhaps the most substantial benefit to these funds is that they require little additional thought and analysis beyond programming automatic TSP contributions.

Do Lifecycle Funds leave money on the table?

Overcoming inflation is one of the most challenging tasks during retirement; the best way to overcome inflation is to invest in stocks and other assets that have a history of returns that exceed inflation over time.   This reality applies to the majority of other financial goals, as well, such as education or financial independence.  Bond investments generally fail to keep up over longer periods.  One possible risk in the Lifecycle Fund is that it may be too conservative near or in retirement, limiting retirees’ ability to maintain purchasing power over a long retirement.

Lifecycle Funds can be overly conservative from another perspective, too.  The military pension, both in the legacy system and the Blended Retirement System, provides military retirees a guaranteed income stream with cost of living adjustments.  In a proper financial plan, the income stream negates the need for ultra-conservative investments in retirement, allowing retirees to invest more aggressively for a better standard of living, more wealth, and even the chance to leave a substantial inheritance for their children and grandchildren, should they wish to do so.

Command and Signal

Lifecycle Funds are a great place to start with your TSP investments, but like any investment selected on an individual basis, they often miss the mark of an individual’s specific needs.  These funds could be leaving money on the table or taking too much risk depending on the situation and objectives.  Service members and retirees are best served by taking the time to understand their needs, selecting an asset allocation that best achieves their goals, and finally picking specific investments.

Other Resources

 

 

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