Introduction to the Thrift Savings Plan Allocation Guide

I started this blog after having the same frustrating conversation about Thrift Savings Plan (TSP) allocation which I have had with co-workers dozens of times over the past few years. So many of my colleagues are incredibly smart, hard working people who are great at what they do, but they don’t have a basic knowledge of investing. Without a well founded Thrift Savings Plan strategy, their retirement accounts are hinging on blind luck and bad advice, and I genuinely fear for their financial security down the road. I started typing up a quick email for one of them to explain how I invest in the Thrift Savings Plan, and a few thousand words later I had written most of what is on this site today. I am sure that a great many Feds and military service members out there are in the same position, so I stuck it online to try to help some others who want to make the most of the opportunities provided by the Thrift Savings Plan, and avoid catastrophic mistakes.

I became a Fed about 20 years ago with no savings and almost $100,000 in law school debt. With no income other than my GS salary, I now have $2,000,000 invested in the stock market – about half of that because I have made good decisions with my Thrift Savings Plan allocation. As a result, I have hundreds of thousands of dollars more in my Thrift Savings Plan than most of my peers do. I’m not telling you this to brag – I just want you to think for a minute about what is at stake for you.

My Thrift Savings Plan strategy isn’t a secret, it isn’t particularly technical, and it isn’t hard to do once you develop a basic understanding of what is commonly referred to as the business cycle. This isn’t another attempt to time the stock market – we look at broad economic trends rather than easily manipulated stock market patterns. And it doesn’t require a lot of machinations and decisions – on average I change my Thrift Savings Plan allocation about once a year (and sometimes go years without touching it). You just have to be willing to devote a few minutes a month to figuring out where in the business cycle we are at any given point (and there are plenty of experts out there whose advice you can follow who do nothing but figure that out) and invest in the TSP funds which do well during that phase of the cycle.

Feds and service members allocate their Thrift Savings Plan badly for a lot of reasons. Most TSP talk revolves around simplistic, outdated and flat-out wrong axioms like: “buy and hold” is the key to successful wealth building, being diversified results in better returns, and an investor’s career stage largely determines what they should be invested in. If followed, all of those half truths and fictions will lead to huge losses when the economy contracts, and tremendous missed opportunities as it expands.

rolling dice tsp allocation strategy guideBut maybe the worst reason that I have heard over and over again when we have the TSP talk is they don’t want to be bothered with it – they want to set it and forget it. The problem with doing that is that none of the options offered in the Thrift Savings Plan is the right choice 75% of time. My colleagues work hard for 50 to 60 hours a week, but they don’t want to spend twenty minutes a month to make investment decisions which can often make the difference of thousands of dollars in a single day. I don’t want to spend my days worrying about it or doing research either, but I am willing to do a little bit of reading occasionally and to adjust my Thrift Savings Plan allocation on rare occasion. The difference between “set it and forget it” and “set it and adjust it once every year or two” could be hundreds of thousands of dollars as they approach retirement.

Here is the nutshell of my TSP strategy in its very simplest form: the business cycle is a long-term pattern of changes in the economy which follows four stages: expansion, prosperity, contraction, and recession. Each of the basic Thrift Savings Plan funds (the S, C, G and F funds) do very well in one of those phases, but are either flat or do terribly in others. The cycle is not exact and the phases last different amounts of time and result in different fluctuations each time, but it provides the basic framework for selecting the best TSP allocation.

A host of other factors impact the stock market and your Thrift Savings Plan balance on a daily and weekly basis. But external events, no matter how much importance they are given in the 24-hour news cycle, have very little impact on the business cycle. Certainly a poor jobs report, a sovereign debt default by a European country, or prospects for armed conflicts overseas may cause the markets to fluctuate, but they do not effect the long term trends which this strategy aims to capitalize on. As a result, we do not worry about weekly, or even monthly declines in the stock market and focus on the big picture.

Nobody can predict exactly when the phases of the business cycle will change. And that isn’t my goal. When you look a chart of GDP growth rates (the standard by which the economy is generally measured) and you see the broad trends of the economy going up and down, my goal is to miss most of the losses which that downward sloping line represents in my Thrift Savings Plan, and to be on board for most of the gains which the upward sloping line represents. Note that I’m not trying to do that for the minor fluctuations, I don’t believe that anyone can accurately predict those, but rather for the major cycles in the economy. In my next post I will write in much greater detail about the characteristics of the different phases and the indicators which predict roughly when one phase is going to end and the next begin.

US GDP Historical Growth Chart TSP AllocationAt any given point in the cycle, one TSP fund is typically doing very well and the others are doing poorly relative to that fund. As a result, trying to create a balanced mix of TSP funds (or investing in the LifeCycle funds) results in the gains which are made by the strongly performing funds being canceled out in at least some measure by the funds which are weak during that part of the cycle.

The TSP I Fund (International) does very well during certain phases of a business cycle too, but it is participating in a completely different cycle than the US business cycle which governs my selection of the S, C, G and F funds. To invest in the TSP I Fund, you have to understand where the economies of the countries which dominate that fund are in their business cycles. That’s a subject I cover in great detail in this post.

The TSP G and F funds are typically lumped together as “fixed income” or bond funds, but they have very different characteristics which I explain in F Fund vs. G Fund in TSP Allocation. The cliff notes version is the G Fund provides guaranteed, but very low interest, while the F Fund will do very well when interest rates are falling, but can have negative returns when rates rise.

I do not have any financial motive in starting this blog, I am just trying to help a few of my colleagues with the benefit of the experience and time that I have put into this subject. Since I’m going to the trouble of writing it all down, I feel like the larger the audience I can reach, the better, so I have created this page instead of just emailing it to a few friends. I have been inspired by the example of Dan Jamison and all of the time and effort that he has put into his FERS GUIDE (which every Federal employee should read from start to finish on their first day of work and once a year after that). If I have a long-term goal with this blog, it is to eventually create something which approximates for the Thrift Savings Plan what he has created for the Federal Employee Retirement System.

Please note that I’m not telling what you should do with your Thrift Savings Plan or suggesting that you follow what I do. My goal is for this to be a transparent, straightforward, free resource for Feds and service members, and for it to be one of many viewpoints they consider when making important decisions about their financial future.

So what should you do now?

  1. Subscribe to receive email updates so that you will know when I change my allocation or post about another topic of interest (I only send one email per month with an update on where we stand in the business cycle, and promise I won’t share your email address);
  2. If you find value in what I am doing here, please share it with your friends and colleagues by clicking on the email or social media buttons below;
  3. Keep reading. In The Business Cycle Theory of Investing I will go into much greater detail on the Business Cycle and which Thrift Savings Plan fund I invest in during each phase.

Continue to The Business Cycle Theory of Investing

15 thoughts on “Introduction to the Thrift Savings Plan Allocation Guide”

  1. Hello TS Paul, Now I know your name. I just subscribed and sent you an email asking you for help w/ transferring from G to other funds, the when and how to try to gain a little more $ before retirement on Feb 2015. I want to thank you for your altruism! Before you and Dan, we were pretty much on our own and consequently lost a lot. As you can imagine ignorance multiplies our fears. I have learned a lot from Dan’s guide; sad that I just found him and you. However, Happy I did. Blessings! M Sena

    1. Dan’s FERS Guide is an amazing piece of work and really was the inspiration for creating this site (which is a very small effort compared to all the years he has devoted to mastering the huge range of issues he is an expert on). The good news is, even at retirement you still probably have decades of earning to do in your TSP account, so don’t put artificial limits on growing your retirement. Even if it was a little late, I’m glad you found us. Please try to help the other folks you know find us a little earlier in their careers. Thanks.

  2. Hi Very interesting! I am a new fed employee so I am new to TSP! A friend of mine gave me an advice in changing my TSP allocations from G to 40% on S 40% on C and 20% on I. I am still in reasearch for this! And I am reading all in your blog just so I can have some knowledge! If you think this is a good Idea please let me know. Thanks.

    1. While I tend to believe that allocation is much better than being 100% in the G Fund, it isn’t one I would choose right now for all the reasons which are scattered throughout this site. If the I Fund does well next year, you could blow us all away. My strategy is just one of many, so definitely keep reading here, but also take a look at all the other options out there too and decide what makes sense to you.

  3. Great Read. I’m relatively new to the Feds and have a laypersons understanding of finance and investing. I thought I was investing smartly by placing 15% of my salary into my TSP, only to realize that my contributions have been going into the G fund exclusively. Should I move what I have accrued in the G fund to other funds like the L funds? Shamefully Confused.

    1. I am not a fan of the Thrift Savings Plan L funds, as you will see if you read further into the website, but any of the other funds will obtain a higher rate of return over time than the G Fund. Thanks for reading and good luck with your investments.

  4. Hello TS Paul- I am a new employee to the GS system and have been doing only the 5% match into a G Fund. I feel I am exactly the type of friends you are talking about, smart Health Scientists who puts the money in TSP and does not do anything else. I look forward to your emails. My father believe that this decline we are seeing now is a good time for me to start thinking about shifting funds to earn more. I am guessing you believe this as well?

    1. I think it is always a good time to try to maximize investments in tax advantaged accounts. You can borrow for just about everything in life except retirement, so I think that has to come first.

  5. I’m about a year away from retiring, July 2017. I have my TSP in the L-2020 fund, should I move it all to the G Fund for my last year?

  6. Hello TS Paul, I’m currently getting ready to retire and I have obtain valuable from Dan on our retirement plan. Currently I have my TSP funds divided in the L2020 & L2030 funds and have close to $700k. I’m considering pulling it out and investing in another retirement fund either with USAA or Voya. I would like to get the funds up to a $1 million plus before reaching age 60, I’m currently 53. Do you have any suggestions on my proposed investment strategy. Looking at Equity UIT w/dividends, fixed income UIT’s and some Exchange Trade Funds, just to name a few. Any suggestions would be greatly appreciated.

    1. First, congratulations on that $700k in your Thrift Savings Plan – that’s awesome at your tender age.

      I can’t and wouldn’t be comfortable give individual advice, but I will talk about why I personally am in (or not in) certain funds. In my case, I wouldn’t consider the L2020 or L2030 because of the high percentage of G Fund held in each of those. In in a typical year that very low G fund return would drag down the performance of my overall portfolio substantially.

      I have to admit that I have never looked at UITs as a possible investment and don’t know much about them. I suspect that if I did dig into them, I would probably choose ETFs instead just because of the flexibility and low fees which those provide.

  7. Hi Paul,

    I wish I had seen this website years ago. I just maxed out my TSP contribution after reading your analysis. A quick question: my wife and I both have side income from rental properties. I am think where do you recommend that we invest them into outside of TSP with the flexibility to withdraw the fund to buy more rental properties but maintaining the investment? I am 49 now.


    Happy fatherhood!

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