TSP L 2065 Fund: A Retirement Plan for New Employees

By Sam •  Updated: 04/28/22 

Recently, I read a book about a public school teacher who had a dream of traveling around Europe. Not like Phileas Fogg obviously, just a little sightseeing. But he didn’t have the time, and money.

Know what he did?

He started a retirement savings plan. This way, he could afford to fulfill a lifelong dream when he had the time to make it happen.

As a public servant, have you ever thought about having a retirement plan? Some sort of investment portfolio that you can keep and benefit from when you retire?

That is why you need the Thrift Savings Plan (TSP)

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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)?

I can hear you asking, “what exactly is the Thrift Savings Plan?”

Well, the TSP is an employer-sponsored retirement plan for federal employees, including government agencies and military organizations. You have heard of the 401(k) from your private sector friends, the TSP is the alternative for those in civilian service or federal service.

If you work for the government, the federal government creates a TSP account for you when you start. You’re automatically enrolled with a 5% contribution you receive agency contributions and automatic contributions equal to a 5% match on your money. If you’re a recent federal employee, your automatic enrollment contributions are placed into the appropriate Lifecycle fund (keep reading to find out more). The vesting period ranges from 0-3 years depending on the contribution type.

When you choose to make a contribution, there are two types of TSP to choose from. There is the traditional TSP and a Roth TSP. The difference is based on paying federal and state taxes. If you choose the traditional TSP, it does not count as taxable income till you begin withdrawals after retirement (tax-deferred contributions). The Roth TSP lets you pay taxes on the contributions you make in the same tax year (but you can withdraw money tax free in retirement).

How do the TSP Lifecycle Funds work?

For some time the government has had five core TSP funds:

Not until 2005 did the Thrift Savings Board come up with the Lifecycle Funds (L Funds) as a form of target-date funds which blend all the previous five core funds.

If you’ve read my previous post about the best TSP allocation, you know that balancing these investment funds to come up with the perfect portfolio. Not only that but your individual target allocation depends upon many factors, such as whether or not you have dependents or money outside of the TSP.

The Lifecycle Funds are an “easy button” to retirement planning in the TSP. These “fund of funds” follow a glide path set by professional investment advisors that automatically balance risk and reward for you as you approach retirement.

What is in the TSP L 2065 Fund?

The TSP L 2065 Fund, started 7/1/2020, is the current L funds and is designed for employees that hope to retire after the year 2062. This is the latest target date fund that you can invest in. (There’s no L 2070 Fund… yet.)

The funds are spread throughout the five core funds and the allocation of funds will also change continually as the time horizon on the fund approaches. The L 2065 puts a lot of its assets in stocks.

To illustrate, as at 12/31/2021, the Fund has its asset allocation in the following funds:

TSP L 2065 Fund composition

The good thing about this fund is that it simplifies investing for you. It uses an automatic asset allocation every quarter regardless of how volatile the markets might be. Each L Fund is rebalanced at the end of every trading day to ensure your investment is at its optimum level.

Who should invest in the TSP L 2065 Fund?

The fund is open to members of the uniformed services and other public workers. Participants in the fund will generally be anyone who has plans to begin withdrawals from 2062 or later. Consequently, if you plan to retire or leave your job around 2062 this is a good fit. The Fund is also open to workers who retire before 2062 but who would like a more aggressive portfolio.

You might want to be more aggressive and chase higher investment returns if you think your FERS annuity will cover a large portion of your needs in retirement or do not need to worry about providing for other people.

The L 2065 Fund is for long-term investors. You can protect yourself against inflation or a volatile market by saving long term. In fact, the TSP board expects that the L 2065 Fund gives you the best expected return for the expected risk that applies to 2062 or later.

How does the TSP L 2065 Fund compare to private sector alternatives?

At ~40 years away from “retirement” age, all target date funds look the same. At that stage in your career, your main investment objective should be growth above all else. That’s why the L 2065 Fund and private sector alternatives are almost 100% invested in stocks.

This graph compares the L 2065 Fund to the LifePath Index 2065 Fund offered by BlackRock. They both are invested nearly entirely in stocks. However, the BlackRock fund includes a very small percentage of real estate in the portfolio.

TSP L2065 fund compared to private sector counterparts.

As you approach retirement, the TSP lifecycle funds become much more conservative than their private sector counterparts. (Check out the TSP L Income Fund)

Since TSP Lifecycle Funds are designed as a “set it and forget it” investment, TSP participants should know that while these funds start out more aggressive than private sector funds, they become more conservative as you age.

Is the TSP L 2065 Fund right for me?

The TSP L 2065 fund has advantages and disadvantages. The government designed the TSP L 2065 so that your retirement investment dollars are optimally balanced between risk and reward over your entire career. Another advantage of the L 2065 is your total expense ratio is very low at just 0.049% compared to private alternatives.

As a part of the public service, I know you are probably a bit risk-averse. So you may appreciate the fact that the L 2065’s glide path becomes more conservative than many private sector funds. You are pretty insulated from risk as a federal retiree anyway. Your social security benefits and FERS pension will last a lifetime. And the L 2065 will help even more.

Therefore, with the L 2065 fund you can just “forget” about it until you’re close to retirement. Your savings will always be safe. Furthermore, they are also less volatile because of their high stock portfolio.

On the other hand, the investment objectives of the L 2065 fund may not match your personal investment objectives. The L 2065 fund has a heavy dose of the I Fund, which is concentrated in just a few foreign markets.

Hopefully, you now better understand the TSP L 2065 Fund and whether or not it matches your investment objectives.

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Sam

Sam i.e. "Gov Worker" started working for the government at age 18 and loved it so much that he never left. He started GovernmentWorkerFI in 2019 to help fellow federal employees understand their benefits, take control of their finances, and live their best lives.

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