Step 3 to Crush the Thrift Savings Plan – AssetAllocation
Posted on September 7, 2019 Updated on September 15, 2019
The Thrift Savings Plan (TSP) is the military’s retirement account. Learning how to maximize its utility should be high on your financial priority list. At MCCareer.org, I’m going to create a guide that will show you how to crush it with the TSP. We already showed youstep 1andstep 2in that guide. Here’s step 3…
The 3rd Step to Crush the TSP – Asset Allocation
You’ve probably heard that you shouldn’t put all of your eggs in one basket. That is what asset allocation is all about…making sure your eggs are in multiple baskets.
Asset allocation can be complex. There are entire books written about nothing but asset allocation, likeThe Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk
. That’s a good book if you want to nerd out, but I’m going to try and simplify asset allocation for you.
What Assets are Available in the TSP?
There are only five assets available:
- G Fund –US government bonds specially issued to the TSP
- F Fund – US government, corporate, and mortgage-backed bonds
- C Fund – stocks of large and medium-sized US companies
- S Fund – stocks of small to medium-sized US companies (not included in the C Fund)
- I Fund – international stocks of more than 20 developed countries (soon to include emerging markets)
What is not available? There are a few major asset classes unavailable. You cannot invest in real estate or international bonds. International emerging markets will be added to the I Fund soon but are not currently available. If you want exposure to any of these asset classes right now, you’ll have to get them in your other investment accounts, like your IRA or taxable account.
How Do I Pick My Asset Allocation?
If in step 2 you decided to use L Funds, you don’t need to pick an asset allocation for your TSP. The L Fund takes care of it for you.
If you are not going to use L Funds, one way to decide on an asset allocation is to takethis Vanguard survey. At the top of the page it will give you a suggested allocation, such as 80% stocks and 20% bonds.
Another way is to borrow from trusted investment experts. Here are a few opinions.
InThe Elements of Investing: Easy Lessons for Every Investor, Burton Malkiel recommends these age-based asset allocations:
- 20-30s – bonds 10-25%, stocks 75-90%
- 40-50s – bonds 25-35%, stocks 65-75%
- 60s – bonds 35-55%, stocks 45-65%
- 70s – bonds 50-65%, stocks 35-50%
- 80s+ – bonds 60-80%, stocks 20-40%
In the same book, Charlie Ellis recommends these asset allocations:
- 20-30s – bonds 0%, stocks 100%
- 40s – bonds 0-10%, stocks 90-100%
- 50s – bonds 15-25%, stocks 75-85%
- 60s – bonds 20-30%, stocks 70-80%
- 70s – bonds 40-60%, stocks 40-60%
- 80s+ – bonds 50-70%, stocks 30-50%
Mr. Ellis is a little more aggressive than Mr. Malkiel because he recommends a higher allocation of stocks.
There are other ways to come up with a reasonable asset allocation, such as financial “rules of thumb.” The founder of Vanguard, John Bogle, is famous for creating the “age in bonds” rule of thumb. It says that whatever your age is, that is the percentage of your investments that should be in bonds. The rest should be in stocks.
For example, I’m 43 years old, so his rule would say I should have 43% in bonds and 57% in stocks.
This rule has been criticized as being too conservative, so some have changed it to 110 or 120 minus your age as the percentage you should have in stocks. For example, for me this would mean:
- 110 minus age 43 = 67% in stocks, the rest (33%) in bonds
- 120 minus age 43 = 77% in stocks, the rest (23%) in bonds
There are certainly other ways to come up with your asset allocation. You could ask a financial advisor. You could readother books. You could read other blog posts, likethis one on the Bogleheads Wiki.
What About Other Assets Like Your Pension and Social Security?
This is a tough issue. Some would argue that pensions and social security are income streams and that they should not play into your asset allocation decision. This is what Vanguard argues. Others would argue that they are “bond-like” and should be factored into your asset allocation and counted as a large pile of bonds. Here are a few thoughts on the subject from blogs I follow and trust:
The Bottom Line – Asset Allocation
Somehow you have to figure out your desired asset allocation. The info above will hopefully facilitate that. Once you have a target asset allocation, now you have to apply it to the investments available in the TSP. Takethe 4th Step…invest.
FAQs
Your best bet is to stick with the C, S and I Funds. Here's the ratio we recommend for your portfolio: 80% in the C Fund, which is tied to the performance of the S&P 500. 10% in the S Fund, which includes stocks from small- to mid-sized companies that offer high risk and high return.
What is the best asset allocation for TSP? ›
Your best bet is to stick with the C, S and I Funds. Here's the ratio we recommend for your portfolio: 80% in the C Fund, which is tied to the performance of the S&P 500. 10% in the S Fund, which includes stocks from small- to mid-sized companies that offer high risk and high return.
How should I allocate my TSP 2024? ›
To make equal contributions over the course of the 2024 calendar year (for 26 pay periods), you should contribute $885 each pay period.
How should I allocate my TSP funds? ›
How you distribute your money among the TSP funds should reflect your time horizon, or when in the future you'll need retirement income, and your risk tolerance. If you want to choose an investment option that will adjust automatically to manage risk over time, consider the Lifecycle Funds (L Funds).
How do I change my TSP allocation? ›
Once you have logged into your TSP account, select “Contribution Allocations” on the left side under “Online Transactions.” From the “Contribution Allocations” page, click on the “Request Contribution Allocation” button at the bottom of the page.
What is the best TSP allocation Dave Ramsey? ›
Dave Ramsey's advice is to save 5% into the TSP to get the full match, then max out a Roth IRA, and then put more into the TSP if you are able to save more after that.
How much should I have in my TSP at 62 years old? ›
There is no such thing as too much money in the Thrift Savings Plan. If you want your TSP balance to be able to generate an inflation-indexed annual income of $10,000, most financial planners will suggest that you have a $250,000 balance at the time you retire.
What is the 5 year rule for TSP? ›
Earnings are considered qualified after both of these Internal Revenue Code (IRC) requirements are met: 5 years have passed since January 1 of the calendar year when you made your first Roth TSP contribution and you are at least age 59½, permanently disabled, or deceased.
What is the rule of 55 for TSP? ›
The Rule of 55 allows workers who leave their job during or after the year they turn 55 to avoid paying the 10% early withdrawal penalty on their retirement account distributions. It doesn't matter why you are leaving, but you must be at least 55 years old in the calendar year you are leaving your job.
How to maximize your TSP? ›
By starting early, contributing regularly, investing in a diversified portfolio, taking advantage of catch-up contributions, and considering the impact of taxes, you can maximize your retirement savings and enjoy a comfortable retirement.
TSP Allocation
Deciding on the asset allocation of your TSP means you pick how much of your money you want to invest in each of those three. For example, you can put 70% of your money in stock and 30% in bonds or 60% in stock and 30% in bonds, and 10% in cash equivalents.
What is the most aggressive fund in the TSP? ›
The conservative funds are the G and F funds and the aggressive funds are the C, S, and I funds.
What is the best way to use TSP in retirement? ›
Where should I put my TSP when I retire? In most instances, the best options are to transfer your TSP assets to your new 401(k) plan, your IRA, or leave the assets in your TSP account. It's best to consult with your financial advisor to make sure that you make the right choice for your situation.
Can you change your asset allocation? ›
Rebalancing refers to making adjustments to your portfolio when your preferred asset allocation has shifted and is an important tool to keep you from straying too far from that asset mix. There are many reasons to make changes to your original investment plan.
Should I move my TSP to G fund? ›
If you choose to invest in the G Fund, you are placing a higher priority on the stability and preservation of your money than on the opportunity to potentially achieve greater long-term growth in your account through investment in the other TSP funds.
Does TSP automatically rebalance? ›
To maintain each L Fund's target allocation, we rebalance it at the end of every trading day. We do this by buying and selling the individual funds that make up the L Fund so that the percentages go back to what they were at the beginning of the day.
What is the most successful asset allocation? ›
100% Asset Allocation
Another option for the best asset allocation is to use the 100% rule and build a portfolio that's either all stocks or all bonds. This rule gives you two extremes to choose from: High risk/high returns or low risk/low returns.
What should be ideal asset allocation? ›
If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
What percentage should I put in my TSP? ›
To receive the maximum Agency or Service Matching Contributions, you must contribute 5% of your basic pay each pay period.
What is the recommended asset allocation for retirees? ›
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
. That’s a good book if you want to nerd out, but I’m going to try and simplify asset allocation for you.
InThe Elements of Investing: Easy Lessons for Every Investor