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The Consequences of Being too Conservative with a Federal TSP

ThA conservative investment approach puts investors at risk. Not only will there be lost market growth, but by not keeping up with inflation, the account owner may find themselves without enough funds for retirement.

Sometimes playing it safe can be too safe. The most popular fund in federal employees’ Thrift Savings Plans (TSP) is the conservative G Fund, which invests in short-term U.S. Treasury securities that are specially issued to the TSP. The U.S. government guarantees both the principal and interest payments.

Yes, it’s a safe and secure investment choice. Until 2015, this was the default when employees signed up for the TSP and did not make an asset allocation decision. However, there are risks.

Kiplinger’s recent article asks “Federal Workers: Are You Playing It Too Safe with Your TSP?” The article says that the urge to use only the G Fund is a very common misconception that many federal employees make. Some also merely modify the entire balance and contributions to the G Fund, when market volatility hits.

While it can be smart to secure your retirement savings from loss when close to retirement, it also can be a great time to use your future contributions to buy in a downward-moving market. However, federal employees aren’t given much guidance about asset allocation, risk and reward and how their choices will impact their retirement income.

It is not usually wise to place your entire balance into one fund and forgo potential gains in others.

This same advice can be used with any of the plan’s other four funds, including the C Fund: 100% exposure to one fund is rarely a good move.

The TSP now offers plan participants target-date Lifecycle Funds (L Funds), the default choice since 2015.

This might have been okay when federal workers received a pension program that provided a sizable portion of their retirement income. However, because of changes in the federal system, any pensions today are far more modest. There is a place for the G Fund, but it shouldn’t be the only fund. Many workers simply ask their co-workers what they’ve done for their fund choices and go with that.

Your work friends may be great friends, but unless they are investment professionals, they won’t really know what your best investment plan should be. Speak with a professional who is knowledgeable and experienced in helping federal employees about retirement savings. After all, it’s your retirement.

Reference: Kiplinger (May 21, 2019) “Federal Workers: Are You Playing It Too Safe with Your TSP?”