How should federal employees invest their Thrift Savings Plan (TSP) funds as they near the end of their federal career? This is a common question faced by many federal employees.
Asset allocation based on age
As employees approach the end of their careers and contemplate their golden years of retirement, conventional wisdom often dictates that they begin to invest more conservatively as they age in order to reduce volatility and the risks associated with presence in the stock market.
This is how, for example, the Lifecycle Funds of the TSP work; based on the fund’s target retirement year, holdings gradually change over time as the target year approaches, so investments are more conservative (ie less volatile). The TSP’s L 2065 fund has more equity funds and fewer G and F funds for this reason; the L 2025 Fund is quite the opposite.
This general concept is called age-based asset allocation.
Dave Ramsey on Age Asset Allocation and TSP
So, should federal employees approaching retirement apply this theory to their TSP accounts? Like most financial questions, it depends on who you ask.
Here is the opinion of a well-known financial advisor, Dave Ramsey.
A 58-year-old federal employee two years from retirement asked Ramsey if he should change his current investment allowance from his TSP account to something more conservative since he will be leaving federal service in the near future. to come up.
For reference, he said his TSP account is currently invested as follows:
- 40% Fund C
- 40% S Fund
- 20% I finance
In his words, “it worked very well”. That’s probably an understatement in light of the post-COVID bull market. Fund S, for example, has returned nearly 100% in the past 12 months.
Here’s what Dave Ramsey had to say about it:
I’m 60 and I haven’t changed a thing about conservative investing. What you can do when you retire [is] I would probably get out of the Thrift Savings Plan and rollover into an IRA and develop a portfolio for your mutual fund retirement.
The idea that when you reach retirement you’re supposed to move money into conservative things is called asset allocation, and it’s a widely held theory about investing within the investing community. financial planning. I personally think that is wrong. I think it’s a theory, and I think the theory breaks down. Here’s why:
At age 60, if you move things into the bond and money markets and start producing about half the rate of return you are producing now; in other words if you start doing 4, 5 or 6 [percent on average] instead of 10 or 12 [percent on average] on your money, all on the idea that now we’re heading into retirement harbor and we need to be super conservative and don’t want to put anything at risk.
The problem with this theory is that if you are 60 and healthy, statistically you will live to be 90. The average age of death for a woman in America is 76 and a man is 74, but that includes infant death, adolescent death, and so on. When you reach 60 in good health, you have a very high probability of living 30 more years. So it’s like talking to a 30-year-old and saying, “You have to invest conservatively. You have 30 years left to beat inflation.
So I think this theory is stupid, especially if you have a large sum of money. If you’re sitting there with half a million to a million dollars in those investments, and it looks like you probably are, then you’re not going to use the money anyway. You will just live off the income it creates; the money will be invested for your children. You’re not going to hit the goose; you will only live on golden eggs. This is my theory. I don’t think I will move mine [retirement investments] in conservative investments because I have millions of dollars in them.
Dave Ramsey speaking on The Ramsey Show, April 8, 2021
You can also watch the question and answer with the caller in the video below.
For more on Dave Ramsey’s recommendations on transferring a TSP account to an IRA after leaving federal service, see Do I still need to transfer my TSP to an IRA after the TSP Modernization Act is passed?.
Is Dave Ramsey right? The answer is probably: “It depends.
For someone in a strong financial position, which was the assumption made by Ramsey in his response, the advice makes sense: if a federal employee has a large nest egg in their TSP account and does not urgently need of most of the TSP money, investing with a longer-term strategy would make more sense. For someone in a different situation, maybe a different approach would be needed.
It is always a good idea to seek the advice of a financial advisor who can take the time to draw up a complete picture of your situation in order to develop a long-term plan that will meet your retirement needs.
Check out these other resources with ideas on how to prepare for retirement:
You can also use the search form on any page of the FedSmith.com website to search for other retirement articles or any other topic of interest.
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