Getting to Know Your TSP Funds

by John Cooney on Apr 6, 2017

retirement, military retirement, Thrift Savings Plan

Getting to Know Your TSP Fund Options


        Hopefully, as a member of the military or an employee of the Federal government you are electing to contribute a percentage of your salary into a 401K plan.  If you aren’t, now is a great time to start.  The TSP’s low fees make it an attractive investment option, and as a bonus, if you are a FERS employee, the government also contributes a matching percentage to your account.  For members of the military, matching contributions are a component of the new Blended Retirement System going into effect in 2018.  More on the BRS is available here,

        So, now that you are initiating or continuing good retirement savings habits and contributing to a TSP, where is your money going?  The TSP is made up of five individual funds, and a lifecycle fund, which is a professionally designed mix of the five individual funds.  In this article, we will take a closer look at all six of your options and help you make a smart allocation choice when investing for retirement.

The “G” Fund – The G in “G” Fund stands for government.  The “G” Fund is invested in short-term US Treasury securities and as such the interest rates will be similar to long-term government securities but with little risk of the investor losing their principal investment.  The interest rate in the “G” Fund is calculated monthly based on the market yields of all U.S. Treasury securities with more than 4 years to maturity.  For those invested in the “G” Fund, they risk that the rate of return will not keep up with the rate of inflation.  It appeals to conservative investors who are willing to trade the potential of long-term growth for confidence in the security of their investment.  Over the last 10 years, the “G” Fund has had an average annual rate of return of 2.63%.

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The “F” Fund – The F in “F” Fund stands for Fixed-Income.  The “F” Fund in invested in a seperate account that mirrors the Bloomberg Barclays Capital U.S. Aggregate Bond Index.  This index includes US Government, mortgage-backed, corporate, and foreign government (issued in the US) sectors of the US bond market.  Investors in the “F” Fund are similar to those who would invest in the “G” Fund in that they value security of principal over the chance for higher long-term rates of return.  Fixed income investments will typically earn more than money market investments, particularly in an environment where interest rates are falling, but are exposed to more risk as well.  The four main risks facing “F” Fund holders are market risk, credit risk, inflation risk, and pre-payment risk.  Market risk is the risk of bond prices falling.  Credit risk is the risk of the issuer of the bond defaulting on their debt obligations.  Inflation risk is the risk that the rates of return will not keep up with the rate of inflation.  Finally, pre-payment risk is the risk that the issuers of the debt will pay back the debt early.  They would do this in times where interest rates are falling, leaving investors with only lower-paying interest rate options available to invest in.  Over the last 10 years, the “F” Fund has had an average annual rate of return of 4.59%.


The “C” Fund – The C in “C” Fund stands for common stock.  The “C” Fund invests in a separate account managed to mirror the Standard & Poor’s 500 Index.  The S&P 500 is a market index composed of stocks of 500 medium to large-sized US Companies.  The “C” Fund appeals to investors who are looking for the opportunity to participate in the potential higher returns associated with equities as opposed to the fixed-income and money market sectors.  With the potential for higher rewards, there is also the exposure to risks as well.  The leading risk for the “C” Fund is market risk.  The value of the “C” Fund can be volatile as prices of common stocks fluctuate.  In addition to market risk, “C” Fund investors are also subject to inflation risk, meaning the rate of return on their investment may not exceed the rate of inflation.   Over the last 10 years, the “C” Fund has had an average annual rate of return of 7%.


The “S” Fund – The S in “S” Fund stands for Small Cap.  The “S” Fund is invested in a stock index fund that tracks the Dow Jones US Completion Stock Market Index.  This index is made up of small and medium sized companies that are not included in the S&P 500.  Investing in the “S” Fund gives investors the potential for higher returns associated with Small Cap stocks but also exposes them to a higher level of volatility.  The major risks associated with the “S“ Fund are market risk and inflation risk.  Over the last 10 years, the “S” Fund has had an average annual rate of return of 8.82%.


The “I” Fund – The I in “I” Fund stands for International.  The “I” Fund invests in an account that tracks the MSCI EAFE Index.  This Index Fund invests primarily in large companies from more than 20 non-US countries.   Investing in this fund gives investors exposure to the international equities market.  Due to this, in addition to market risk and inflation risk, the “I” Fund also contains currency risk.  Over the last 10 years, the “I” Fund has had an average annual rate of return of 1.02%.


The “L” Fund – The L in “L” Fund stands for Lifecycle.  The “L” Fund is a professionally designed mix of stocks, bonds, and government securities.  The makeup of the asset classes within the fund are designed based on when the fund participant expects to begin withdrawing the money.   It is a combination of the “G”, “F”, “C”, “S”, and “I” funds and therefore will have all of the same risks we discussed with the individual funds.  The percentage of each of the individual funds in the “L” Fund will vary dependent on your retirement time horizon.  The “L” Funds with a long time horizon will be weighted towards “C”, “S”, and “I” Funds.  For investors with a short time horizon will be weighted heavily towards the “G” Fund.  With the “L” funds, the market risks are designed to be minimized as you approach retirement.  The “L” Fund is also the default fund, if you do not specify a fund to invest in when you open your TSP account, then your contributions will automatically be invested in the appropriate “L” Fund based on your age.


        There are several factors we would look at to determine what fund or mix of funds you should be investing your TSP account into.  The first is what we call your risk tolerance, that is, how well are you able to handle volatility in your account.  The second factor we would want to look at is your time horizon for retirement and the assets you have available for retirement.  This will help us determine your risk capacity.  You may be willing to take on a high amount of risk, but if the TSP is your sole retirement account and you cannot afford any volatility in your account, you may be better off with an approach that’s more conservative than your risk tolerance allows.  Another important factor is determining what your other retirement accounts are or even if there are any other accounts.  You are probably familiar with the term diversification, making sure your investments are diversified help lower the overall risk in your portfolio.  In addition, to your TSP account, you may have an IRA, or if you are a Reservist or National Guardsman, you may have a 401k.  By looking at all of your retirement accounts, we can make sure that you are not overly reliant on one segment of the market, but instead have a broad exposure to limit the impact of downturns in your account.  If the TSP is your only retirement account you can still achieve this diversification through investing in the “L” Fund or by directing a percentage of your contributions to each of the individual funds.  You can change your contribution percentage at any time by logging into your account on

        So what should your next steps be?  Well, if you are TSP eligible and currently not contributing, you should open an account.  If you are contributing, look at the percentage you are deferring, and if possible, try to increase that percentage.  Make sure you do your research, go to and look at all the funds available.  Read through the risks and understand the potential returns associated with each fund.  If you have questions, talk to a military financial counselor or a financial planner.  These professionals can help you determine which funds are right for you and your situation.  Once you have decided on which fund or mix of funds to contribute to, it is important to have a plan in place to regularly monitor your TSP account.  This can be done quarterly, annually, or at whatever time interval you want, the important thing is to make it a scheduled event.  Re-examine your contribution levels and allocation choices to make sure they still align with your retirement plan objectives.  Most importantly, get started, the best time to begin saving for retirement is yesterday, but if it’s too late for that, then do the second best thing and start today, good luck!

Got questions about the TSP?  Want to know how the TSP fits in to your overall retirement income plan?  Contact us today at for a no-obligation introductory call so that we can help you feel confident in your financial future.

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