The Thrift Savings Plan (TSP) is the contribution retirement savings and investment plan for U.S. civil service employees and retirees as well as for members of the uniformed services. As one of the most beneficial retirement plans, the TSP needs to be managed regularly if it’s the main source of retirement funding. The TSP Allocation Model can generate higher returns with less risk. It’s designed to keep your account earmarked for the best-performing funds while retaining ample diversification.
TSP Allocations Between the Funds
The TSP is comprised of five individual investment funds that offer broad market diversification. They are:
- The G Fund, or Government Securities Investment Fund, ensures safeguarding of capital and generates returns above those of short-term U.S. Treasury securities. Calculated monthly, the interest rate paid by the G Fund securities is based on the market yields of all U.S. Treasury securities with four or more years of maturity.
- The F Fund, or Fixed Income Index Investment Fund, matches the performance of the Bloomberg Barclays U.S. Aggregate Bond Index. A broad index encompassing the U.S. and foreign government, corporate, and mortgage-backed sectors of the U.S. bond market, return rates can exceed money market fund rates over the long term. This is especially important when interest rates are declining.
- The C Fund, or Common Stock Index Investment Fund, matches the performance of the Standard and Poor’s 500 (S&P 500) Index. This broad market index represents the stocks of 500 large to medium-sized American companies, offering the potential to earn a higher investment return related to equity investments.
- The S Fund, or Small Cap Stock Index Investment Fund, matches the performance of the Dow Jones U.S. Completion Total Stock Market Index, not included in the S&P 500 Index. Potential earnings include higher investment returns associated with small-cap investments; however, it has greater volatility than the C Fund.
- The I Fund, or International Stock Index Investment Fund, matches the performance of the MSCI EAFE (Europe, Australasia, Far East) Index of international stocks in 22 developed markets excluding the U.S. and Canada. This is a broad international market index that allows investing in international stock markets to gain global equity exposure in a portfolio.
TSP Modernization Act
For Federal Employees Retirement System (FERS) workers, the TSP is an excellent investment channel. The 2019 TSP Modernization Act allows for TSP plans to grow with retirees who have decades of retirement to live in. The main adjustments made to the plan include the following:
- After separation, monthly, quarterly, or annual payments can be taken.
- Payments can be stopped or started, and changes to installment payments can be made at any time.
- Multiple partial withdrawals may be made after separating from service.
- Select between a Roth balance, traditional balance, or a proportionate combination of the two for withdrawals.
- Up to four in-service withdrawals may be made each year if over the age of 59½ and still working in federal civilian or uniformed service,
- A full withdrawal election is no longer needed after age 70½ if separated from federal service. IRS Required Minimum Distributions (RMDs) will still need to be received.
- The online tools at the My Account section of tsp.gov help make withdrawals easy and seamless.
The TSP Modernization Act failed to address proportionate distributions from TSP allocations. This is where The Bucket Approach strategy is beneficial.
The Bucket Approach
This approach utilizes a multi-faceted method to manage assets to achieve investment goals while keeping up with inflation throughout retirement.
- The Cash Bucket – Funds needed within the next five years don’t belong in the stock market. Between a retirement pension and Social Security, a gap between what money is received and what money is needed to maintain a lifestyle exists. The TSP that supplements this gap amount for the next five or so years should be in The Cash Bucket.
- The Growth Bucket – The Growth Bucket is usually within the TSP’s C Fund, S Fund, and I Fund. Fluctuating often, The Growth Bucket should replenish The Cash Bucket to allow investments time to recover during recessions. How much of your portfolio should be distributed between these funds depends on your goals, your gap, and your risk tolerance level.
- The Income Bucket – This bucket should primarily be dividend-paying stocks with a strong allotment of companies providing dividends to shareholders. Dividends aren’t guaranteed and change over time. So don’t confuse the word “income” thinking it will be indefinite and steady.
At Federal Educators, we can help you better understand your federal retirement benefits. Give us a call and request your free analysis at 866-226-8160.
