One of the tenets of Portfolio Risk Management is “Don’t put all your eggs in one basket”. This is known in the financial management industry as “Unsystematic” or Company-Specific risk. It’s the risk you are assuming when you hold a concentrated position in a single company, and that company faces financial troubles due to a change in consumer taste, leadership changes, scandals, or lawsuit. So, what’s a concentrated position? Conventional wisdom advises that you have a ‘yellow light’ once a single company makes up 5 percent of your investments, and you have a ‘red light’ at 10 percent.

Just know that right now…

The ‘C’ in C Fund stands for ‘Concentration Risk’

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Make sure you read the ABOUT and DISCLAIMER pages before taking action.

For Feds who are Veterans, make sure you read all the stuff about Military Service Credit Deposits so you can make the most of your FERS Annuity.

Note that I use the terms TSP and 401k interchangeably, as they are treated the same under IRS rules for a ‘Qualified Retirement Plan’.

Early Career Savings and Short-Term Savings

Save at least 10 percent of your gross salary per year.

When you get promoted, try and put as much of the ‘new’ money into savings as well.  Use this money as ‘dry powder’ for retirement, furthering your education, a down payment on a house, or money you may need to hold you over if you decide to switch careers later.

Save as much as you can in tax-deferred retirement accounts (401k/TSP) and never leave ‘free money’ (employer matching contributions) on the table.  You cannot earn a better rate of return than money handed to you for free.

Where to park short term money (0-3 years)

Note that an average ‘bear market’ is a drop of 30% in the S&P 500’s value/index price for 30 months.

If you’re looking for short-term places to stash monies, Buy a short term TIPS fund, individual bank CD’s (preferrably brokered CDs through Schwab/Vanguard/Fidelity), or individual short-term Treasury bonds/notes (via TreasuryDirect or also for free through Schwab/Vanguard/Fidelity).

If the series I savings bond is offering a ‘fixed’ rate of 1.0 percent or better (and you can handle deciphering the byzantine rules around purchasing and redeeming Series I Savings Bonds), consider using Series I savings bonds (via exclusively through TreasuryDirect.gov) for rainy day money.

Medium Term Savings (3-5 yrs.)

This nut is harder to crack.  It’s easy to say that 3 years is too short a time horizon for stock market investing, and that you should be in short-term bonds or CD’s.

Some say you should have some stock market exposure for a 5 year savings horizon but I disagree.   Go look at Dow or S&P 500 returns for 2000 – 2010.

Medium-Term money is best kept in either medium-term treasuries or CD’s with maturities between 3-5 years.   The TSP ‘F’ Fund or the AGG ETF are ok, but I prefer fixed investments with maturity dates that match your ‘need date’.  That is, if you need the money in exactly 5 years, buy a 5-year CD or a Treasury that matures in exactly 5 years.     In this scenario you are guaranteed the money you put in- plus the promised interest rate- in 5 years.

If your only purchasing choice (ie within TSP or 401k) is a bond fund, make sure the ‘Duration’ of the fund does not go beyond the time horizon when you will need the money.    You may have to do some research to find the ‘Duration’ of the bond fund in the Fund Prospectus pages or on its Fund Summary Page.   Don’t buy a fund with a 10-year Duration if you need the money in 5 years.    This is just like buying a 10-year CD for money that you need in 5 years.  This is known as a ‘Duration-Liability mismatch’, and can get you in to huge trouble if rates drop.

Duration-liability mismatch is what torpedo’ed Silicon Valley Bank in 2023.  You don’t want to end up like Silicon Valley Bank.

Saving for Retirement/Long-Term Savings

As far as retirement fund choices go- You’re not going to beat the TSP, so just stop it.

You cannot beat the low expenses of TSP  and the stable-value fund (G Fund) product offering in the TSP.

Think about it.  Congress writes the rules for their own Defined-Contribution retirement plan (the TSP), so it behooves them to create plan rules to their own benefit.  Re-read this last sentence and Think about It again.

Don’t stare at your retirement account balances daily.

I’m paraphrasing former Barron’s editor Alan Abelson who said ‘Investing is like hiking up a mountain with a yo-yo.  The yo-yo represents the daily moves in the stock market.  If you stare at the motion of the yo-yo, you’ll never recognize the fact that you’re steadily climbing up the Mountain.’

The stock market (like the S&P 500 or the TSP ‘C’ Fund) is a solid long term bet for holding periods greater than 5 years.

If you need some facts to back this up, the companies that compose the S&P 500 have never encountered a negative year of earnings since the creation of the index.  The growth RATE of  S&P earnings has occasionally gone negative, and there have been negative individual QUARTERS of S&P earnings, and the perceived VALUE (ie the market index price) has dropped in a year (and sometimes longer), but there has not been a YEAR of negative earnings for the S&P 500 since its creation.

Stated another way, if the S&P 500 were one single giant company called ‘USA, Inc.’, ‘USA Inc’ would have made a profit EVERY YEAR since its creation:

S&P 500 Earnings – 90 Year Historical Chart | MacroTrends

Earnings per Share (Orange Line) and the Value of S&P 500 (Blue) over 90 years.  Note the Orange Line (Earnings) has never been negative.

Think about this before you send your hard-earned money towards actively-managed investment products, derivatives, options, market-timing strategies, Alternative Investments, Private Placements, Master Limited Partnerships, Non-Traded REITs, etc.

If you’ve done all the above for your Savings and still have cash left over at the end of the year (congratulations!), put the maximum amount you are allowed per the annual IRS limits in a Roth IRA.

Real Estate

The Real Estate Game can be hard to win because you typically pay an extra 10 percent in fees and expenses when you buy, then you pay 10 percent in fees and expenses when you sell.

That being said, Real Estate is typically a winner over the long term, as Housing Prices tend to follow local WAGE INFLATION (Not Consumer Price Inflation) over the long run.   This makes sense, as people can’t/won’t pay more than they can afford for rents or mortgages.  In the long run this is not sustainable.

If you’re going to be in a location more than 3 years and you like the schools and your neighbors, go ahead and buy a house you like in that neighborhood if you can afford it.

Over the long term, inflation drives the ‘real’ cost of your monthly interest payment to the bank to near zero.   Buying a house on a fixed-rate mortgate and holding it long-term is one of the only ways you will ever ‘win’ against inflation.

Use a VA loan (if you are eligible) to take advantage of the free refinance benefit if/when interest rates drop.

Another added benefit of the VA loan is that the loan is ‘assumable’ if the homebuyer is also a veteran.  DO NOT UNDERESTIMATE THIS BENEFIT. ‘Assumable’ means the house buyer can take over your mortgage under your original mortgage rate and remaining mortgage term.

This can make your house more attractive to a buyer if today’s mortgage rates are much higher than your existing VA loan rate.

If you have to move out of the above house for PCS/career move and you can rent out the home at a monthly rent  better than 1 percent of the TOTAL value of the house when you bought it, consider renting the house out to somebody rather than selling it.  Example, if you bought the house you live in for $350,000 4 years ago, you still have the original mortgage against the $350,000 value, and can rent it out for $3500 per month today, then consider renting it out rather than selling it when you move.  Research and find a good professional property manager and gladly pay them 10 percent of the monthly rents to take care of everything for you.

If this discussion about rental properties makes your head hurt then just sell the house and move on- You won’t like the drama of being a landlord.

Note that equity in your home or investment property is NOT LIQUID. DO NOT assume you can get your hands on this equity tomorrow (or even 1 year from now) if you need it. I learned this the hard way and had to stay in the workforce for an additional 2 years.

Said another way, if you cannot click a mouse button and convert an asset to cash, it’s not liquid.

Traditional vs Roth IRA/401k.

This has been a hotly debated topic ever since the creation of the Roth accounts in the late 1990’s.  In general, Roth accounts work best if you are in a low tax bracket when you make your contributions (ie your early working years) and make your withdrawals when you are in a high tax bracket.

However, to know the right answer you need a crystal ball that predicts not only your tax rates for every year in the workforce, but also every year of your retirement.  Since I don’t pretend to know this answer for myself (or you) I try to keep about HALF of my tax-deferred retirement investments in Roth accounts and half in Traditional accounts.

That way I can make tactical decisions in each year of retirement based on my annual tax situation to pull what I need from Traditional, Roth, a combination of both, or neither.

Should I roll my 401k in to an IRA when I leave an employer?

While most pundits (and brokerage houses) advise you to do this so that you can have ‘more control’, keep in mind that most 401k plans have a provision that permits you to start making withdrawals without penalty if you leave your employer at age 55 (web search ‘401k Rule of 55’).

Unless you meet one of the rare conditions that allow early IRA withdrawals, IRA’s force you to wait to age 59.5 to make penalty-free withdrawals.

Is forcing you to wait an additional 4.5 years to withdraw retirement savings the definition of  ‘more control’?

Also, if you live in a sue-happy state (like the Democratic People’s Republic of California), a judge chooses how much of your IRA you get to keep if you get sued.

Don’t like that level of uncertainty in your retirement plan?  Then know that Pensions (like FERS and your retired Military Pension) and Qualified Retirement Plans (like the 401k, 457b, and TSP) are largely shielded from creditors and lawsuits. Example: A certain infamous retired NFL player got to keep his NFL pension payouts, even after he was found liable for two ‘wrongful deaths’.

TL;DR Version: TSP is the best version of 401k on the Planet.   If you have left an employer and their 401k provider has high expenses and fees (greater than 1 percent on the funds or account value expenses), then it might make sense to move it to an IRA with a low-cost provider.  Otherwise, keep your money in the 401k/TSP to take advantage of the Rule-of-55 and as a free ‘lawsuit insurance’ policy for your retirement savings.

If you like your new employer’s 401k, it’s ok to perform a trustee-to-trustee transfer of your old 401k in to your new employer’s 401k.  Think twice about ditching the TSP.

Cars

You can’t win the personal finance game with cars- Cars are just a necessary expense for most people and you’ll have to do your best to reduce the damage to your wallet.

Note: Temporary market anomalies or supply chain disruptions can alter the new-vs-used car math below.

Buy a used car that is off-lease (36 months old) that you like and drive it until the wheels fall off.

Avoid new car/used car dealer lots except for Carmax.

It is usually best to avoid leasing a car since the dealer/manufacturer is holding all the ‘cards’ and the transaction financials are not transparent to the buyer (you).  At the end of the lease, you own NOTHING and may actually owe MORE money if you are returning the car with mileage or damage that do not meet the terms of the lease contract. If you have a business that lets you write-off a car lease then the lease MAY work in your favor.

If you keep cars 10-12 years you can consider buying new via a new car buying service (ie Costco).

Again, avoid walking on to a new car lot ‘off the street’.   I’ve not once had a positive (or even neutral) experience purchasing a car by walking on to a new- or used-car lot ‘off the street’.

As for the make and model of car, research reliability on Consumer Reports, AND find a car that is manufactured at least 75,000 times per year.  Anything less than this annual volume means the manufacturer does not have sufficient data to determine the reliability of its components and manufacturing processes.  As an added bonus, this volume is also a sweet spot for finding reasonably-priced repair parts down the road.

Avoid buying a car model made in the introductory year of its life cycle/generation/body style.   Let other buyers be the guinea pigs and find all the faults in year 1 of a new body style.

Don’t forget to research the cost of insurance ahead of the purchase.  There can be a huge difference in insurance costs between different engine options and 2-door vs 4-door choices.

For service, create a relationship with a local independent mechanic who regularly repairs your make of car.  Dealers typically charge more for repairs and place a middleman called a ‘service writer’ between you and the mechanic who repairs your car.

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Every year I get the statement from TSP providing an update on my Portfolio’s performance for the last year.

2022 was not a good year… to put it mildly.

But I’m not feeling too bad or pessimistic, as a simultaneous dip in both the stock and bond markets has not happened in over 50 years (the last time both the AGG Bond index and S&P 500 were down in the same year was 1969).    There’s plenty of articles on how and why this happened, and what a rare occurrence this SHOULD be.

Fortunately, the TSP and FRTIB saw this coming.  TSP divested its Lifecycle Funds away from the Aggregate Bond Index (you know it as the TSP F Fund) back in 2015.

As a result, the ‘bad’ year I saw in my TSP Lifecycle (target date) fund could have been much worse if I had my money in an equivalent target date fund with Schwab, Vanguard, or Fidelity.  Here’s a look:

The TSP L2030 Fund has a 60/40 Stock/Bond mix, so I compared to the Fidelity and Schwab target date funds with similar allocation percentages.   L2030 dropped by -10.32 percent in 2022, but Fidelity and Schwab funds with similar stock/bond mixes lost MORE…. as much as almost -17 percent.

The ‘Secret Sauce’ for TSP is the fact that TSP uses G Fund for most of its Bond allocation, where private-sector target date funds use the AGG Bond Index (which is called F Fund in TSP).  The F Fund/AGG lost -12.83 percent in 2022, so the bond allocation that Schwab, Fidelity, and others use as a ‘shock absorber’ in target date funds to compensate for stock market corrections did not do the job in 2022.

On the other hand, TSP Lifecycle Funds largely use the G Fund as the ‘shock absorber’, and as we know the G Fund has “Never Had a Bad Day” (quoted from former TSP Director Greg Long, which is still the truth).   The allocation to G Fund is why TSP Lifecycle Funds did not crash as hard as their private sector target date fund peers in 2022.

Will TSP Lifecycle Funds miss out on an AGG/Bond market rally in 2023?  Only time will tell.  But I’m keeping my defined-contribution retirement assets with TSP, for lots of reasons mentioned on this website.

For those of you who want a TSP refresher/further reading:

4 Reasons TSP Has the Best Target Date Funds

G Fund is the Unicorn of Investing

$231 for the Mutual Fund Window may be Worth It

46,000 reasons TSP is better than your 401k

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Because I like the TSP G Fund and I desire to simplify the number of retirement accounts I need to track, I chose to roll my private sector employer Roth 401k and Traditional 401k balances in to TSP.

Sounds pretty simple, right?

Well, not so for TSP. TSP had so many account glitches involved with the 2022 cutover to their new plan administrator and website that I suspect they took the eye off of the ball regarding bread-and-butter TSP transactions (like rollovers). TSP were too busy scaling up customer call center staff to take care or urgent issues (like unlocking account access for their customers).

Long story short, it took me 88 days to get TSP to acknowledge and document completion of processing the Roth and Traditional IRA rollover checks. Both checks were issued as ‘Trustee-to-Trustee Transfer’ checks from my former private sector employer plan- Empower Retirement (Btw, kudos to Empower for cutting and mailing me the checks within 3 business days). TSP took more than 2 weeks to acknowledge receipt of the checks from the USPS-confirmed delivery date, but then appeared to dump both rollover checks (Roth and Traditional) in my ‘Traditional’ TSP account. OOPS!

TSP took so long to acknowledge and process both rollover checks that I began to panic at the 60-day point (60 days is the typical time interval the IRS allows you to perform a 401k or IRA rollover to a new custodian). I was worried that TSP had made a ‘re-characterization’ of the Roth rollover check in to the Traditional TSP and that I would have a food fight between TSP and IRS to look forward to.

Over the course of 2 months I spent more than 5 hours on hold trying to get a human being at TSP to answer my question, “What did you do with the Roth rollover check”? I could not get a human to provide me with an answer so I decided to use the Nuclear Option – I filed a complaint at my congressman’s Constituent Service Office (CSO).

This got the attention of TSP and I received a callback from the Federal Retirement Thrift Investment Board (the oversight board of TSP) FORTY FOUR DAYS after submitting the CSO complaint. I finally received a call back from a human from FRTIB/TSP and the issue was resolved…. EIGHTY EIGHT DAYS after TSP confirmed receipt/custody of the 401k rollover checks. TSP confirmed that there was no ‘operator error’ on my part and that this was simply a delay on their end.

Bottom Line: Based on my personal experience (and the GAO inquiry driven by the experience of thousands of other TSP participants), TSP severely underestimated the complexity of migrating TSP Participant accounts to a new plan administrator and new website. At the time of this writing, TSP is struggling to complete the most basic of tasks- like a 401k Rollover- in a timely fashion.

Shameful. Schwab, Fidelity, and Vanguard can execute the same 401k rollover in less than 3 business days. Unfortunately, Feds and Veterans should expect similar delays and poor customer service from TSP until the dust settles on the TSP administrator cutover.

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Risk Management is rarely provided for free

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The TSP Mutual Fund Window is going to cost you if you choose to participate.

So the Federal Retirement Thrift Investment Board (FRTIB), also known as the board who runs the Thrift Savings Plan, is about to complete the implementation of the TSP Modernization Act.

The final piece of the TSP Modernization Act is to provide the much-anticipated ‘Mutual Fund Window’, which will let TSP Participants invest in funds outside of the 5-letter funds (G, F, C, S, I) and the age-based Lifecycle fund blends of these 5-letter funds.

The ‘Mutual Fund Window’ was a solution to placate congresspeople who wanted to allow TSP participants to have ESG (Environmental Special Goodness) fund options, or to choose based on their conscience if they invest in China and/or Russia.

The Grand Compromise FRTIB/TSP came up with is that TSP participants will soon (Summer 2022) be able to use the TSP Mutual Fund Window, but there will be administrative costs and certain guidelines to follow. The admin costs were put in place so that participants who choose to stay with the original low-cost vanilla 5-letter TSP fund options do not have to pay additional expenses.

In general, the Mutual Fund Window guidelines are:

• Participant must have minimum total TSP balance of $40k
• Minimum transfer to the Mutual Fund Window is $10k
• Maximum balance in MF Window cannot exceed 25% of TSP balance
• an annual maintenance fee of $95.00
• another annual fee of $55.00 to defray administrative expenses
• a cost for each trade of $28.75
• potential additional fees and expenses for some of the mutual funds

So let’s apply this to the ‘average Joe’ TSP participant. According to TSP, the average account value for a FERS participant is roughly $174k. Let’s say that Average Joe wants to fill in a TSP product offering gap by investing in a Real Estate Investment Trust (REIT) index fund.

Joe chooses the lowest cost option (which I can only assume will be available) which is the Vanguard Real Estate Index- Admiral shares (VGSLX). VGSLX Expense ratios are a low 0.12 percent per year.

Joe invests the maximum allowable 25% of his $174K, or $43,500 in VGSLX. Joe pays a total of $230.95 in fees and trading costs during his first year of using the Mutual Fund Window, or just over 0.5 percent of his MF Window balance:

At a minumum, typical TSP Participants will pay 0.5 Percent per year in Mutual Fund Window Fees (spreadsheet)

Note that Joe pays roughly $178, or 0.41 percent of Fund Window value in admin fees alone, before paying loads/expenses from the actual VGSLX fund. Note that if Joe invests the MINIMUM amount ($10,000) in the Mutual Fund Window, the admin expenses will be a HIGHER percentage of assets because the $178 fees are fixed. In this case the all-in fees to buy VGSLX will be 1.91 percent.

Are fees between 0.53 and 1.91 percent worth it for additional retirement savings diversification?

I’d say ‘no’, unless Joe has no other employer 401k plans available AND lives in the Democratic People’s Republic of California (this will be a follow-on Gubmints post).

Mutual Fund admin fees from 0.5 percent to 1.91 percent per year are not cost-effective unless there is a special provision or feature provided by the retirement account. Most retirement plan savers who want to choose options outside of G/C/F/S/I funds will be better off diversifying their retirement savings through an IRA at Schwab/Fidelity/Vanguard rather than paying TSP an additional 0.5 percent or more per year in admin fees.

ACTION PLAN for TSP Participants:

(Outside of California) If you want more Qualified Retirement Plan diversification than G/F/C/S/I funds, consider using another employer’s low-cost 401k account (if you have it) or a Schwab/Fidelity/Vanguard Rollover IRA account. You’re likely to do better without paying 0.5 percent to 1.91 percent in annual fees to the TSP Mutual Fund Window.

(California Residents) If you desire more diversification within your Retirement Savings and you do not have low-cost options in a current- or former-employer’s 401k plan, consider eating the fees within the TSP Mutual Fund Window as an exchange for the liability protection that TSP provides.

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Pay up, sucka.

I’ve yet to find a one-stop-summary of State Taxation of Veteran’s Retirement benefits, so I created one here.

There’s plenty of internet finance articles on ‘best places to retire’ based on lots of factors, including state income taxes.

Mind you that all states need to fill potholes and pay for municipal services, so you are going to get taxed SOMEHOW- whether it is from a state income tax, sales tax, or property taxes.

But all things being equal, if you retire with grandkids in different states, local income taxes could sway your decision on which state to retire in (or declare your permanent residency in). Hopefully for Military and Federal retirees you are not choosing your state of residency because state income taxes end up being the difference between affording to eat human food or dog food in retirement.

Note This is not a list compiled from the Federal or State Tax codes, but combined from a few second hand sources. Do your own research to confirm your rates for your state.

So for those of you Veterans and Feds who are swayed by State Income taxation expense, here’s a comprehensive list of how your pay gets taxed, and some key takeaways.

Zero Income Tax States:
We’re already aware of who the zero-income-tax states are. You might have declared one of these as your ‘State of Permanent Residence’ if you were stationed in one during your Active Duty time.
The zero state income tax states area Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Retire here and you are free from all State Income Taxes.

TSP/401k:
12 States (inclusive of the seven zero-state-income-tax states) do not tax your TSP or 401k withdrawals (assuming the withdrawals are not ‘early withdrawals’ as defined by the IRS and subject to penalty). The additional states are Illinois, Missisippi, New Hampshire, Pennsylvania, and Tennessee.

FERS Annuity:
14 States (including the seven zero-state-income-tax states) do not tax your FERS Retirement Annuity.

Social Security:
Most states (37 States plus DC) do not tax Social Security. The 13 states who do each use a state-specific formula that I will let you research on your own.

Military Retirement:
Many states (46) also exempt (or at least provide a partial exemption) for Military Retirement Pay. But there are five states/districts who tax Military Retirement Pay at full State Income Tax rates: California, DC, Utah, Vermont, and Virginia (unless you are a Medal of Honor awardee). Boo!

Here’s the summary table:

Sources:
AARP: https://www.aarp.org/money/taxes/info-2020/states-that-tax-military-retirement-pay.html

(h/t) Tax-rates.org : http://www.tax-rates.org/taxtables/income-tax-by-state

Gov-Exec: https://www.govexec.com/pay-benefits/2021/04/states-wont-tax-your-federal-retirement-income/173194/print/

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Every year I take a look at the Allocations in my retirement plan Target Date/Lifecycle funds.  I have Qualified Plans with both my (current) private sector employer and funds I left with TSP when I resigned as a Fed a few years ago.  

If you look at the same Target Date (I’m focusing on 2030), the TSP has a much more conservative allocation than the Brokerage houses like Fidelity, Schwab, and Vanguard:

Looking at the above chart, there are 2 key takeaways:

1)  You have to go out another 5 years to 2035 to get a similar Stock allocation of ~66 percent  (That is, you have to buy TSP L 2035 to get the same Stock allocation as Fidelity/Schwab/Vanguard Target Date 2030).

2) TSP is not using much of the Aggregate Bond Index (AGG or F Fund) for its Bond Allocation – TSP uses mostly the G Fund instead (see the gold-colored bars plotted above).

Q: Why?

Potential Reason #1 : TSP followed the guidance of a 3rd party study that recommended no significant changes to Lifecycle Fund allocations. 

In 2018, FRTIB (the folks who run TSP) commissioned AON Investments to analyze and recommend any changes to the time-phased allocations of TSP Lifecycle funds.   The Bottom Line from this 26-page summary of findings and recommendations is that the L Income Fund is a bit LOW in stock allocation (TSP will gradually increase it by about 1 percent), and that the other Target Date Lifecycle Funds (L 2030, L 2040, etc) have the correct overall Stock allocation glide path, but TSP should gradually tweak the USA-versus-Overseas breakdown (‘C’ Fund versus ‘I’ Fund stock allocation).

The above slide illustrates stock alllocation (Y axis) among various Target Date retirement funds versus time (age).   TSP time-phased target stock allocations are the Gold line, while the gray lines are Schwab, Fidelity, Vanguard, and others.

The chart shows/confirms that TSP is more conservative with its stock allocations over time…. to the tune of about 10 percent stock underweighting for the same target dates/ages.  You typically have to slide the ‘age’ 10 years to the right for the Age Profile of a TSP Lifecycle Fund to match the same Target Date fund for Vanguard or Fidelity.

Note that in the 2018 L allocation study, AON did not recommend a net change in stock allocation in the ‘Out’ years…. they only recommended re-allocating existing stock proportions  between C (USA) and I (Foreign) funds:

In the 2018 Lifecycle Funds Study, AON recommended a tweak to the Domestic/Foreign stock split, but NOT a change to overall Stock allocation for target date funds.

Potential Reason #2:  Federal Employees have more sources of retirement  income than the TSP.

The AON Study lists out what the appropriate Risk Factors are to determine Stock Allocation within Target Date Funds. 

 Listed out as one of the top factors (I can only assume this since it is listed at the top and the factors are not ranked) in the AON Lifecycle Allocation Factors study is the availability of a Defined Benefit pension benefit to employees.  Federal employees do in fact have this Defined Benefit pension- the FERS Annuity.

As most Feds should know, the FERS retirement system is a ‘three-legged stool’  built upon FERS Annuity, Social Security, and TSP.  FERS Retirement does not rely solely on TSP like the private sector relies almost solely on the 401k. 

Therefore, in the eyes of TSP/FRTIB, the TSP does not have to do all the ‘heavy lifting’ for funding an employee’s retirement.   Based on the risk factors listed in the table above, I am assuming that FRTIB/TSP have deliberately made the Lifecycle funds more conservative than their private sector Target Date counterparts.  This is likely because TSP is not the sole source of FERS/Military retirement income and TSP does not have to ‘win the retirement game’ all by itself.

I don’t agree with this reasoning.

If you have read ‘Are you a Stock or Bond’ by Dr. Moshe Milevsky, you already know about the concept of Human Capital.  As a Federal Employee (or Military) your Human Capital is much more ‘Bond’ than ‘Stock’.  That is, you have much more potential over the years to generate a predictable, steady income stream (‘You, Inc.’ are a ‘Bond’) than a small business owner or employee of a small company (‘You, Inc.’ would be a ‘Stock’).

As a Federal Employee or Active Duty military, you will not likely receive a large payout from an Employee Stock Purchase Plan or company IPO during your income-earning years.   For this reason, I would make the argument that you should have MORE in the stock market for the same target retirement date than your private sector colleagues. 

Potential Reason #3: TSP has the G Fund as its secret weapon. 

In recent years TSP went bear-ish on the F Fund (Aggregate Bond Index) since interest rates are at historic lows.  TSP shifted its bond allocation away from the corporate bond market F Fund and over to the G Fund back in 2015.  The G Fund has never had a bad day, and TSP/FRTIB have recently chosen to use the G Fund more than the F Fund as the ‘shock absorber’ in each Lifecycle fund.  By eliminating the downside risk in the bond portion of the portfolio, TSP Lifecycle Funds have more power to purchase stocks ‘on sale’ during market dips.

Potential Reason #4:  TSP has a solid track record of providing secure retirements to its participants and does not need to be more aggressive.

In spite of providing lower stock allocations than the private sector for the same Target Dates, TSP has a solid track record of growing its own millionaires.  There are 75 thousand TSP millionaires today, including one known 2 million dollar man-   Abraham Grungold has $2M in his TSP that he earned the old fashioned way, using time and consistent participation through his working years.  

So What’s the Takeaway?

You should know what your desired stock/bond allocation is in your TSP, and why (Hint: Do you feel more like a Stock or a Bond?). 

TSP Lifecycle Funds are a great vehicle, but if you think TSP is being too conservative with your Defined Contribution Plan money, you can add a few years to your Target Date/Lifecycle Fund date to achieve your desired stock versus bond portfolio allocation.   

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“If everything I’ve done is Wrong… then the Opposite must be Right”.

This is the time of year when people make (or break) New Years’ Resolutions.   For those who follow Tim Ferriss, there is an alternate implementation of the Resolution where you instead do a year-end review, tabulate what was Positive and Negative in the past year, then resolve to avoid the biggest Negatives in the coming year.

•     Before the Roth IRA existed, and
•     Before the initiation of the Military TSP

The post Don’t Commit these 7 Deadly Financial Sins like I did appeared first on GubMints.

Happy New Year everyone! I’ve created a ‘Service Computation Date FAQ‘ page based on your comments and emails over the years.

If you would like something else to be added to the FAQ page reach out to me using the ‘contact’ tab above. Enjoy!

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