If this is what your retirement savings looked like, I bet you’d be feeling pretty good about yourself.
But what if I told you that this was actually Enron’s stock chart. And in less than a year, the entire value of the stock would be wiped out.
If you were in your 50’s or 60’s and had your life’s savings in Enron in the early 2000’s you were screwed.
While capital appreciation is great in your 20’s and 30’s, once you approach retirement, you want to have a smooth glide path into retirement.
That’s where the TSP Lifecycle Funds, like the TSP L 2025 Fund can come in handy. They automatically help your portfolio reduce risk as you approach retirement age.
The TSP L 2025 Fund is the most conservative lifecycle fund outside of the TSP L Income Fund. In the remainder of this post, we’ll walk through the TSP L 2025 Fund so you can understand how it works and what it invests in to see if it is a good fit for you.
Get Gov Worker’s top 4 tips for federal employees!Table of Contents
- What is the Thrift Savings Plan (TSP)?
- How do the TSP Lifecycle Funds work?
- What is in the TSP L 2025 Fund?
- Who should invest in the TSP L 2025 Fund?
- How does the TSP L 2025 Fund compare to private sector alternatives?
- Is the TSP L 2025 Fund right for me?
Please do not confuse my personal blog for financial advice, tax advice or an official position of the U.S. Government. This post may contain affiliate links. If you make a purchase after clicking on a link, I get a small percentage of the sale at no additional cost to you.
What is the Thrift Savings Plan (TSP)?
The TSP is a qualified retirement plan for federal employees and members of the Uniformed Services who have taken the oath of office. Founded in 1986 through the Federal Employees’ Retirement System Act (FERS), the TSP operates in a similar manner to a 401(k) for government employees.
Federal employees can contribute up to the 401(k) maximum ($22,500 in 2023, not including catchup contributions). They even receive matching contributions up to 5% of their salary; most of it with no vesting period (free money).
Currently, employees can choose between one of 5 index funds with no added fees:
- G Fund– (short term government bonds, guaranteed to increase in value)
- F Fund– (medium term government and corporate bonds, similar to BND)
- C Fund– (“common stocks” i.e. S&P 500)
- S Fund– (small and medium cap stocks)
- I Fund– (international stocks, limited to certain countries that excludes emerging markets)
How do the TSP Lifecycle Funds work?
If you looked at the above list, you may be asking what the “L Funds” are all about.
The Thrift Savings Board came up with the “L Funds” or Lifecycle Funds in 2005. Each L fund is composed of the 5 core funds. The TSP board adjusts the mix of these 5 funds along a “glide path” so that you automatically have a portfolio that balances risk and expected returns in a way that makes sense for your age.
This means that you do not have to invest in these funds separately. One contribution to any Lifecycle Funds gets distributed into all five funds based on your preference for risk.
The only decision you need to make with the L fund is choosing which one you want to invest in. Each L fund has a number with it- these numbers are your corresponding retirement dates.
Let’s dive into details about the TSP L 2025 Fund.
What is in the TSP L 2025 Fund?
First, let’s cover the most obvious fact about the the TSP L 2025 Fund. The fund is targeted for investors who hope to retire between 2023 and 2027.
The Federal Retirement Thrift Investment Board has developed a glide path that specifies the mix of stocks and bonds that a federal employee with a FERS pension should hold at a given age. They then built L Funds in 5 year increments to help employees’ portfolios follow those paths.
People in the L 2025 Fund are less than 5 years away from retirement. The current asset allocation (May 2022) contains:
- 20.57%: C Fund
- 54.27%: G Fund
- 13.87%: I Fund
- 5.17%: S Fund
- 6.12%: F Fund
This mix has a low level of risk with over half of the money in the G Fund. However, the TSP L 2025 Fund still contains about 40% stocks to help you beat inflation.
Who should invest in the TSP L 2025 Fund?
Any federal employee can invest in the TSP L 2025, but it is specifically designed as a contributory retirement plan for anyone who plans to start withdrawals from 2023-2027.
As I said before when talking about the “best TSP allocation“, your life may be totally different from what the TSP thinks your life is like. Therefore, even if you don’t plan to retire in 2025, you may find that the L 2025 find might be right for you.
For instance, if you think your pension will cover most of your expenses, you can be more aggressive with your money. If you wanted to be more aggressive than the L 2025 Fund, you could choose a Lifecycle Fund with a later date (like the L 2035 Fund or the L 2040 Fund) or build your own portfolio from the 5 core funds.
On the other hand, if you have a lot of debt or need to support aging parents or children with extra financial needs, you may wish to be more conservative with your TSP, having your money in the TSP L Income Fund or a portfolio of all bonds.
No matter which L Fund you select, try to avoid holding more than one L Fund in your portfolio. There is no advantage to mixing these funds. And if you do decide to use the Lifecycle Funds, know that they are designed for a “buy and hold” TSP strategy rather than active trading.
How does the TSP L 2025 Fund compare to private sector alternatives?
You can find similar funds like the TSP L 2025 Fund with some private equity investment companies.
Here’s what several private sector funds hold in their similar lifecycle portfolios.
I was really shocked when I created these graphs. There are huge differences between the asset allocations of these three target date funds for people very close to retirement. Only one of the funds holds more than 50% of the assets in bonds (the TSP L 2025 Fund). Additionally, there are large differences in the amount of foreign assets these funds hold.
My takeaway from this is that it’s important for investors to do research before investing… even in target date funds. While target date funds (like the TSP Lifecycle Funds) are supposed to be easy default investments for people who don’t want to deal with investment details, you should always look into a few details before jumping in with both feet.
Is the TSP L 2025 Fund right for me?
Your TSP Portfolio is like a Smokey Bear saying… “Only you can know if the L 2025 Fund is right for you.”
However, as a run of thumb, if you’re planning on retiring around 2025, the TSP L 2025 Fund should have everything you need for a safe retirement. It’s an easy, no-stress solution for those people that don’t want to think about finances or investing. With a total expense ratio of 0.047%, it’s not only easy but cheap as well.
If you’re someone like me who eats, sleeps, and breathes finance, then you’re probably going to want to build your own portfolio. That’s okay too. The most important part of investing for retirement is that you are comfortable with your retirement plan.
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