Delivered on: Thursday, February 10, 2022

TSP Lifecycle Funds

Why, when, and how to use this investment strategy

• DESIGN: review the intended purpose of the lifecycle funds
• FUNDS: explore the make-up of the various lifecycle funds
• STRATEGY: identify who the ideal candidates are for this method

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Prefer to read instead? Below is a transcript from the video:

Hello! Welcome to today’s webinar on the Lifecycle Funds in the TSP. This has proven to be one of our most popular topics. We have many registered for today. And I know that all of you want to make sure that you’re doing the right things in the TSP. That’s what today’s session is all about.

For a few housekeeping items about today’s topic, we knew that this was going to be a popular topic because we get so many questions about the lifecycle funds in our workshops; employees email them in, asking for advice. So, we knew that we needed to cover some of the real gems about the lifecycle funds, good and bad, that each of you need to know. Of course, in our audience today we’ve got lots of different types of federal employees on the line.

The good news is that the TSP with respect to the lifecycle funds operates the same regardless if you’re under the CSRS or FERS retirement program, or any of the other ancillary programs like the Foreign Service Pension Program. So that’s great news.

Q&A. We have our support team standing by to answer any of your questions. If you’ve been on our webinars before, you know you can simply go to the Q&A area in the chat box, and type in your questions. We’ll respond by text as well. I’m going to stay focused on delivering today’s material. The team is going to stand by to answer those questions.

Like we always do, of course, handouts are available right now. You can either go to the handout section right by the Q&A, or you can look to the bottom of your screen for a link to the handouts. And, of course, this session is being recorded. If you have to step away, if you’re not able to listen to the whole thing, there will be the replay that will be sent to each of you who already registered. For anyone who didn’t register for the session but wants to listen in, they’ll be able to get that as well.

Now stay to the end. I have really racked my brain on everything lifecycle fund related. I’ve got some great FAQs and I’ve got 10 observations that I’m making about the lifecycle funds that I think you need to be aware of if you’re seriously considering using one of these funds.

My name is Chris Kowalik. I’m the founder of ProFeds. We’ve got our workshop, our podcast. You’ve probably seen us in articles all over the place. Happy to be here with you today and bring this candid insight to a topic that I think is so popular because there’s some ease associated with the lifecycle funds that tend to mask some of the challenges of the lifecycle funds. So, we’re going to really focus on that today.

Today’s session is about the lifecycle funds, why, when, and how to use this investment strategy. What’s the difference between the lifecycle funds versus all the other funds that are available? And who’s the right person to be using the lifecycle funds? What’s the right scenario? Today’s agenda, at the high level, we’re going to talk about the design of the lifecycle funds and really talk about why they were created. What’s their intended purpose for the TSP to create them? Next up, funds. We want to see what the makeup of the lifecycle funds are over a long period of time.

And then strategy; this is really where I put a lot of focus because the strategy in any investment product is important. So, we want to see who really is the ideal candidate for this method. And through a series of questions and observations, I think you’ll be able to tell who the right candidate is.

Let me first start by saying what this webinar will not cover. We are not going to give investment advice here. It is not our place. In fact, you’ll see in some of my observations, I think it’s really misleading for people who don’t know your situation to give advice to you on how you should invest. I simply want to show you how the lifecycle funds work and some observations that we make about the lifecycle funds that may persuade you to invest in them or may persuade you to do something different, but that’s your call. We just want to show you how they work.

Let’s start by talking about the regular fund choices. Because if we’re going to talk about lifecycle funds that are made up of these regular funds, we need to first know what we’re starting with. There are five of them. We have the G, F, C, S, and I Funds. You’ve probably heard a lot about these funds over your career. But I want to take just a moment to walk through each one of them as a baseline for anyone that maybe hasn’t really taken the time to dive into each of these funds.

The G Fund is your government securities fund. There is no index per se. The word “index” refers to the market. This is simply an interest-rate-based account. That interest rate changes every quarter. So, the G Fund is your safe fund, your one and only safe fund in the TSP. And we always like to tell folks that there are two guarantees with the G Fund. You’re guaranteed never to lose your principal or your earnings. And you’re also guaranteed not to make a lot of money. That’s just the nature of a fund, like the G Fund, that simply has a low interest rate that is accumulating over time, but no spectacular results like you would have in the stock market funds.

Next up, we have the F fund, which is a mix of government and corporate bonds. Bonds are not technically safe, but they are relatively safe. You’ll see that the F fund does have the capacity to lose money, but it doesn’t have those big gains available in the market funds either. And it’s indexed against this fund called Barclays Capital US Aggregate Fund Bond. So, however that bond fund is performing, the F fund will perform very, very close to that.

Then we have the three market-based funds, the C, S, and I. So, the C Fund invests in large US companies. It’s indexed against the S&P 500, which is the 500 largest publicly traded companies in the United States. The S Fund is a mix of small and medium sized US companies. And it’s indexed against what’s called the Dow Jones, the total stock market completion index. It essentially takes the entire US stock market and subtracts out the 500 largest publicly traded companies that are represented in the C Fund. The S Fund is everything else that’s left. So, that’s where we get the total stock market completion, the rest of the market.

The I Fund invests in mostly large foreign companies and it’s indexed against Morgan Stanley Capital International EAFE index or the Europe, Australasia, and the Far East. Lots has been going on with the I Fund lately as far as what types of countries it’s investing in, but certainly there’s another webinar for that. We’re not going to get into the politics of that today.

I would be remiss if I didn’t share with you how the different funds have behaved over the last 10 years. To make this simple, for each year, we’ve identified the best performing fund in green and the worst performing fund in red. Anytime you see parentheses, that is a negative. So, to give you an idea, most of these funds have been winners and losers in various years. The two exceptions, of course, are the F fund. It’s never been the top performing fund, but it has been the loser for two of the last 10 years. The C Fund has never been the worst performing fund. But of the last 10 years, it’s been the top performing fund for three of those years.

Just to give you an idea of how this all works, this is really for your reference. I’m not going to spend a lot of time here, but it is worth recognizing what the capacity of each of these funds really is as far as how much it can make. It would be ridiculous to believe that you could make a 20 or 30% rate of return over in the G Fund in any given year. That will never ever happen. It’s also not fair to believe that in the C, S and I Funds and frankly the F fund as well, that you’ll never lose money. That’s certainly possible as well.

When we think about the lifecycle funds, it kind of goes to the question of, “Well, when you have the five funds, how do you decide where to put your money?” That’s where the lifecycle funds really came to be. The lifecycle funds become a mixture of the five regular funds, the G, F, C, S, and I that we just covered. So, the funds themselves are a mixture, maybe a little bit more organized in this bowl of M&Ms that we see here. But it is an ever-changing mixture over a long period of time. I want to go into just a little bit of the history of the lifecycle funds, so that we’re all really clear of what they were designed for.

In 2005, the TSP lifecycle funds were created. They were created because there were so many employees that were just unsure how to invest. We’ve got these five funds, so how do I know what percentage I’m supposed to be in each one of them? They were designed to give employees a little bit of direction based on some timeframe in the future. And the timeframe that the lifecycle funds tell employees to look for is the time in which you plan to start needing the money out of the account. It’s not necessarily the timeframe in which you retire.

You may retire from federal service, go on and work another job. You may have other assets that you plan to use before you start needing money out of TSP, whatever that might look like. And then many of you will retire and start to need that money out of TSP right away. So those dates would be the same for you.

The lifecycle funds is not some magical thing that the TSP created. This was really modeled after the strategies in the private sector called, and they go by a couple of different names, horizon-based portfolios, or target date funds. So, lots of different names like that. But essentially, it is picking a date on the horizon out into the future or a target date in time. And that’s when we need the money. So, we need the account to behave properly between now and that point, so that we have the money that we need at the time that we need it. That’s the basic structure of the lifecycle funds, whether they’re in TSP or out in the private sector.

So, the objective of the lifecycle fund is to strike an optimal balance between the expected risk and return of each of the underlying funds. Each of these lifecycle funds is a mixture of the five regular funds that we just talked about, the G, F, C, S, and I. Every lifecycle fund has every underlying fund in it. It’s just a matter of what percentage.

Now, what’s unique about the lifecycle funds, as opposed to just spreading your money out by yourself, is that for these funds, the mixture adjusts over time. And it’s over really a long period of time from when the fund was first created to the time that it expires. There is a preset change that happens every quarter to each of the individual lifecycle funds. And as you get closer to needing the money from the TSP, that account gets more and more and more conservative.

Here’s the real objective: The objective up top is what the TSP says that it’s doing. But I think the real objective of the lifecycle funds is to keep federal employees from making a total SWAG with their TSP investment choices. And if you don’t know what a SWAG is, that’s a scientific wild ass guess. And that’s how most people, not just feds, but anybody faced with big investment decisions typically handle it, because they don’t know any better.

So, the lifecycle fund give some direction to the general mixture that should be in place given your timeline before you need the money. We don’t love SWAGs. We would prefer there be some intentional guidance on how to invest.

Let’s talk about the design of the lifecycle funds. These were designed so that you could put 100% of your TSP balance into one lifecycle fund. One of them. All of your money in one lifecycle fund. Because there are preset mixtures for each of these funds that change over time. And they’re specifically designed to work with you along your journey, your investment journey, so that you have the money when you need it. That’s the general premise. So, about those preset mixtures, let’s talk about these a little bit.

All of the changes that are going to happen to the lifecycle fund over that long period of time are predetermined when the fund is created. It is not based on what’s happening in the market. If the market’s up, or if the market’s down. We’re not wheeling and dealing out there trying to figure out how can we hedge our bets in the lifecycle funds. That’s not how they are designed. They are designed with a predetermined mixture that we already know when this lifecycle fund is created, what it’s going to look like each quarter until it expires.

Each quarter, the fund rebalances. Because some of the stocks or some of the funds within the lifecycle funds will perform really well. Some will perform poorly. And each quarter, it’s going to reset and get back to that preset mixture that it needs to be at. So, they’re going to sell or buy to even out the percentages that should be in each of the lifecycle funds.

Because there are lifecycle funds every five years as far as the timeline goes, that means that every five years, one of those lifecycle funds will retire and a new one will be created. It used to be that there were only five funds but here in the last couple of years, instead of every 10 years, it’s now every five years. And so, we’re going to naturally see an ever-changing evolution of the lifecycle funds that are available to choose from.

Let’s take a quick peek at the 10 lifecycle funds that are available in the TSP right now. We’re going to start over on the left-hand side. I want to remind you that we have the G, F, C, S, and I in every single one of these lifecycle funds. You’ll simply see that the percentages look different. So, the 2065 fund, you can see is primarily made up of the market-based part of the TSP, so the C, S, and I. So, these are the more volatile types of funds. And the 2065 fund is designed for people needing the money around the year 2065.

Now, it’s really hard to see at the very top of the 2065 fund, but we do have a little bit of G and a little bit of F, but it is enough to say that it exists in the 2065, but nothing of any substance that exists up there. It’s a very, very small percentage of the 2065 that’s the G and the F. Now, it looks like the 2065, the 2060 and the 2055 are identical. For all intents and purposes, the difference is very minor and so minor that it doesn’t even show up differently on these charts. They are different, but not significantly by any measure.

As we get into the 2050 fund, that’s when we start to see the market difference between how that money is invested. So, we have fewer of the market-based funds, so the C, S, and I. And we’re starting to introduce some safety. We’ve got 10% of the 2050 that is safe in the G Fund, we have 8% that’s relatively safe in the F or the bond fund, and then the rest of it is going to ride in the market. You’ll see those numbers shift slightly into the 2045.

And what I’d like you to do for a moment is just keep your eye on the orange piece of the chart. We go from 10 to 15, 21, 27, all the way to 71% of the portfolio being made up of the G Fund. So, you can see that over time, the makeup of the lifecycle funds gets more and more and more conservative. What can kind of be confusing to employees is they think that they have to go in and change these accounts.

Like, well, now I’m in the 2050, but eventually I’m going to have to change to be more conservative to change it to the 2025 or the income fund. That’s not how this works at all. The idea is that the money goes into one of these accounts these funds, the 2050, for instance, and over time, in five years, the 2050 fund is going to look like the 2045 fund does right now that you see on the screen.

These would be incremental changes every quarter. So, you’re not seeing a huge shift in your portfolio in a given year. You’re simply seeing those minor changes along the way that you probably don’t even recognize are happening. Until one day you wake up, and that 2050 fund around the year 2050 is going to roll right into the lifecycle income fund. It will look like the far-right hand side of the screen, where we have the vast majority of that portfolio as safe. But we do have some opportunity for growth or loss as it might be in that particular time in the market.

This is the overall makeup of the life cycle funds. This is certainly easier to look at than those pie charts that they used to use. We couldn’t fit 10 pie charts on the screen and make sense of any of them. So, this is certainly an easier way to look at these funds.

Let’s talk about rates of return. The lifecycle funds themselves don’t have their own inherent rate of return. It doesn’t operate independent of the other funds. Instead, the returns of the lifecycle funds are based on their performance of the funds that are underlying, the G, F, C, S, and I. So, it’s just a matter of what percentage of that portfolio for the lifecycle fund that you’re invested in is G, F, C, S, and I. And it will, in turn, get the proportional return that has happened for each of those five regular funds.

Anytime you see an article or something put out by the TSP that shows a rate of return for the lifecycle funds, this is simply a constructed rate of return. We’re piecemealing all of the different underlying funds and their performance and creating what looks to be like an actual rate of return for the lifecycle funds. But that actually doesn’t exist. It’s really just the five regular funds.

So here we’ve covered kind of a high-level overview of the lifecycle funds. But where the rubber meets the road is where we get into the real questions that employees ask us about the lifecycle funds, so that we can start to dig into some of the details. We’re going to cover some of the frequently asked questions that we hear in our workshops and in all of our feedback from feds who are really wondering about these lifecycle funds, and if they’re right for them.

The first question is, can the lifecycle funds lose money? The answer hands down is yes. Each of these lifecycle funds have different levels of risk. But they all have the potential to lose money. Every one of them. Even the lifecycle income fund, I’m going to kind of go back here to this chart. You’ll see the lifecycle income fund still has 12, three and 8% in the market. So, if the market tanks like in 08, for instance, the lifecycle income fund will lose money. That’s just the nature of how that works. So, absolutely, every one of the lifecycle funds has the potential to lose money.

What I always want to remind people of is that when it comes to the lifecycle funds, please don’t confuse simplicity with safety. The lifecycle funds aren’t these perfect creations that make your money work perfectly for you over a long period of time. That’s not the way any investment works. It’s simply getting you in that ballpark. But it doesn’t mean that that money is safe.

Next question. Are the lifecycle funds set it and forget it funds? I’m going to say yes and no to this question. I’ll say yes first with the way that they’re designed. They’re intended to make the changes along the way for you without you need to intervene or take action. That’s how they’re designed to work. But I’m going to follow that up with a no in that we don’t want you to set it, forget it, ignore this account, and pretend that everything’s just going to work out for you in retirement without doing any kind of fine tuning that’s unique to you.

This is not the Ron Popeil rotisserie chicken commercial, where you set it and forget it. That’s not the way the lifecycle funds work, especially if you want to get them dialed in for your situation to make sure it coincides with everything else in your financial life. More on that here in just a bit. But we definitely don’t want to confuse set it and forget it with just set it and ignore it, because that will not serve you well.

Next question. This is by far one of the biggest questions and misunderstandings that we have with federal employees. And that is, am I allowed to have more than one lifecycle fund and the regular funds too? The answer is yes. You are allowed to do it. But it’s not how the lifecycle funds were intended to be used. Remember, they were designed for you to put 100% of your TSP assets into one single lifecycle fund. So, when you have money in more than one lifecycle fund, or maybe you’ve carved out some in the G Fund or some extra in the C, whatever that might look like, you throw off the optimal balance that this very strategy was designed to create for you.

So, you’re kind of missing the boat when it comes to the purpose of the lifecycle funds, even though you’ll see throughout the rest of today’s webinar, I don’t think the lifecycle funds are perfect by any stretch. And there are some significant questions that we should be asking ourselves before we invest in them.

But if you buy in to this strategy of the lifecycle funds, that it’s supposed to be this optimal balance, you’re intentionally throwing off the balance, and that doesn’t serve you well. So, like I said, this is part of the biggest confusion that exists around the lifecycle funds. And so, I want to give just a quick example, so that we can kind of get our head wrapped around what happens.

Let’s say we have Teresa. So, Teresa, she’s in her 30s. She’s got $200,000 in the TSP. She feels like she’s doing all the right things and she’s got all of her money in the L 2050 fund. She’s got quite a while before she’s plans to retire. And so, that just sits well with her. So, she goes home over Christmas. She’s talking with her buddies at the water cooler in the office, and someone gives her advice to say, “Well, maybe you should have some G Fund too, I mean, just in case. You don’t want to have all your money in the market. You should have some G Fund money.”

And so, she says, “Oh, well, these people are older than me. They’ve been investing longer. They probably know what they’re talking about.” So, Teresa decides to take $50,000 of that $200,000 and put it towards the G Fund, just in case. But what happened to her mixture? So, let’s compare the 2050 fund all by itself, which is where she originally had all of her money. We know that it’s taken right from the chart that we reviewed a few minutes ago that we’ve got 18% of that account that is safe or relatively safe in the G and the F fund. And then the rest of its riding in the market.

Because Teresa has until 2050 to need this money. So, we want this account performing for her and her taking advantage of the long-term nature that she has in this particular investment. But what happens when she carved out $50,000 to put it towards the G Fund. She didn’t add $50,000 to the account, she moved money that was already there and put it in the G Fund. Let’s see what the mixture looks like now. On the far-right hand side, this is her having $150,000 in the L 2050 fund and $50,000 directly in the G Fund. So, when we add those together, this becomes the mixture.

She now has 38% that is safe, and she’s got almost 30 years to go before she needs the money. That means that all of that amount that’s no longer in the C and the S and the I portion of the lifecycle fund is not performing for her to give her an opportunity to increase the value of her account. Of course, there will be years that those markets don’t perform well. We know that that’s how these investments operate. But over a long period of time, she has quite an opportunity.

This idea that she got advice from someone, maybe a family member, maybe somebody at the office that she knows and trusts and they said, “Oh, the G Fund, I mean, that’s the safety. You should really have at least a quarter of your account over there.” But what nobody was taking into account was that there was already part of her account that was relatively safe. And now, we’ve thrown off that mixture. So, now we’re off kilter. And that doesn’t serve Teresa well in the long term. Well-intentioned advice but still wrong.

I felt like it was important to show this example because we get these questions so often. And I think that although there’s a lot of information about the lifecycle funds out there, I think feds just have a hard time maybe putting the pieces together to really make sense of what the purpose is and how it works in real life. Hopefully, Teresa does the right thing and doesn’t take advice from people who maybe don’t really understand how all this works. And if her intention is to follow the lifecycle fund strategy, then all of her money should be in the 2050 fund so it maintains that balance that she’s looking for.

Next question. Can I do both the traditional and the Roth in the lifecycle funds? And the follow-up question is, can I invest them differently? Can I invest the traditional one way in the Roth another way? The answer to the first question is yes. You are allowed to figure out how your investments are going to be taxed, regardless of which fund you invest in.

You determine whether your new contributions going into the TSP are going to be Roth, or traditional, or some of combination of each. We’ve done a webinar specifically on the Roth strategies. So, if you’re not very savvy on the Roth side, please go watch that webinar. I assure you; it will be eye opening to really understand the tax diversification and all those pieces. So, yes, you can do lifecycle funds and decide whether that’s traditional, or Roth or some sort of combination of both. That’s great.

But the second question that’s asked is, can I invest them separately? No, you cannot invest the traditional and Roth separately. For instance, you’re not allowed to invest your traditional contributions in the G Fund, but your Roth contributions in the L 2050 fund. You can’t delineate your contributions from a tax standpoint that way.

You simply determine what the dollar amount or the percentage is that is going traditional or Roth, and then it will be sent to each of these individual funds in the way in which you have determined. If it’s in the 2050 fund, we already know the makeup of that or if you have regular funds, however it is that you have decided to invest by each fund. So, it’s very, very important that you realize that you are not allowed to pick and choose which funds within the TSP get favorable or less than favorable tax treatment, and not to mix those ideas up.

Next question. This typically comes from more of our savvy investors who are looking at alternatives. The question is, are the lifecycle funds actively managed? No. No, no, no. These are not actively managed accounts. Like I said before, there’s a preset mixture of these funds that are determined when the account is created, when the fund itself is created.

There’s no active management. There’s not a fund manager that is specifically seeking out opportunities for maybe bigger gains or to move to safety in the event we’re having a market slide. That’s not how the lifecycle funds are worked at all. These are considered passively managed accounts. So, they simply ride the wave on this preset mixture.

Next question. In retirement, can I decide from which fund to pull money when I need it? And this question is really akin to both the regular funds and the lifecycle funds. But the answer is no. When you withdraw money from the TSP, you have to take money proportionally to how it’s currently invested in. To make things really simple, let’s leave the lifecycle funds out of this. If you have half your money in the G Fund and half of it in the C Fund, you cannot pick and choose which fund to pull it from. It is a huge downside of the TSP as a whole in retirement. You are not allowed to decouple or delink these funds when you want to pull the money out.

Let’s add the lifecycle funds back in here for an example. Let’s say you have all of your money in the lifecycle income fund. You are not allowed to say that you just want to withdraw the G Fund portion of the money. Maybe the market just tanked, you can’t say, “Well, just give me G Fund money this month or this year.” They don’t allow you to pick and choose from which of the funds you pull the money. You need to take it proportionally across the funds in which you are invested.

Those are our big questions that we get about the lifecycle funds. I want to move into my observations. Because I think it’s important when you’re trying to decide what to do in an investment scenario like this, whether it’s the TSP or something you have in the private sector, you need to look at it from a lot of different angles. And of course, I see it from some different perspective than you do because of the work we do with feds and really helping people to understand how these things work.

My first observation is that when employees ask us, is it best to invest in one of the lifecycle funds, the answer is always compared to what? It depends. So, compared to staying in the G Fund for your whole career, yes, the lifecycle fund will serve you way better over a long-term career than having all of your money in the G Fund. Remember, you’re guaranteed not to lose your principal and earnings. You’re also guaranteed not to make any money in the G Fund. That’s just how it’s structured.

If it’s a matter of, “Do I leave all my money in the G Fund or do I move to a lifecycle fund that is appropriate for my timeline?”, then by all means, I think the lifecycle funds could be a great move for somebody. But compared to having a dialed in approach with a financial professional? No. The lifecycle funds aren’t a substitute for actual proper, holistic financial guidance that is unique to you. So, this is all a spectrum of decisions that you’re making that we have to really figure out what’s the right move.

As you become more savvy over time from an investment standpoint, and as you’re getting closer and closer to that retirement window, we’ve got to up the game with regards to how much attention we’re paying to these types of accounts and get proper guidance. Everybody wants the easy way and the lifecycle funds. And it’s okay to a point, but there comes a time when the lifecycle funds no longer are the magic button for you.

Observation number two. For these lifecycle funds, the preset mixtures in them assume that you have no other factors of your financial life. Things like you don’t have any other assets growing aggressively like market-based accounts such as IRAs, mutual funds, maybe your spouse has a 401(k) or you have an old 401(k) that’s still shaking and jiving and over there, the lifecycle fund doesn’t know that.

So, they don’t know how to adjust that balance for you, that mixture. It also doesn’t know if you have other assets out there that are relatively safe. You may have cash in the bank, maybe you have some savings bonds, or annuity products. You have a boatload of home equity. You have some inheritance coming your way that’s pretty significant. All of those things are important factors when you’re thinking of the balance of an account as big for you as TSP.

The question I would encourage you to ask yourself is, if you don’t consider these other factors like the ones I’ve mentioned above, is the “optimal” balance that the lifecycle funds are trying to strike for you really on target? Are you way too aggressive? Are you way too conservative if you’re not looking at the whole financial picture? I’m going to say no. It’s not that the optimal balance is no longer being put in place for you because just like Teresa, who moved $50,000 over to the G Fund just in case, she threw off that balance, you’re going to throw off that balance by having other parts of your financial life existing.

So, we have to figure out how do we get that balance? It’s not going to be some broad-brush fund that’s created by the TSP like the lifecycle funds are. That’s not how we get to that right balance for your whole life. I would argue that the lifecycle funds do an okay job of finding that optimal balance if you only have the TSP, but that’s not the reality for any of you. You all have pensions that are coming to you. Many of you are married. You have cash in the bank. You have all these assets that we talked about above that very well may need to influence what you’re doing in the TSP. And the lifecycle funds simply don’t allow you to do that.

Observation number three. These preset mixtures that we’ve talked about means that regardless of how the market is performing, the fund can only take certain actions. Remember, we don’t have a fund manager wheeling and dealing on this and trying to get ahead and trying to keep from the slide out when the market goes down. So, this very well could be disadvantageous to investors if the fund is required to either buy or sell in an otherwise undesirable market condition.

By undesirable market condition I don’t mean the market is bad. We know we’re supposed to buy low and sell high for our market-based accounts, but if we had the choice, we may buy or sell with the G Fund. But the funds themselves, because the mixture is already preset, there’s nobody being able to intervene and say, “Wait a minute, this doesn’t make financial sense. We shouldn’t be buying and selling in these market conditions, let’s wait. Or let’s hurry up and do it.” That’s part of an actively managed account that you could have outside of the TSP, but that is not how the TSP in and of itself or the lifecycle funds operate.

Those actively managed accounts that you might have outside of the TSP, those fund managers can be proactive in both good and bad markets, the markets up, the markets down, we have different levers to be able to pull in those types of accounts. I’m not suggesting that you abandon TSP as employee and go out to the private sector. There’s a lot of good in the TSP. And I’m not here to bash it by any stretch, but there are distinct differences between the way the TSP as a whole operates, and then as a subset of that, the lifecycle funds and how they operate versus what is possible in the private sector.

So, the question you need to ask yourself for this observation is, does this strategy serve your investments well? And if you’re okay with this kind of management and the fact that the fund is just going to take certain actions, whether it’s good or bad, and you feel like it all comes out in the wash, then that’s certainly an opinion and that’s okay. If you’re okay with that, I’m okay with that. I’m not here to tell you how to feel about these things. But I do see that there are some challenges with this strategy because it is locking in the actions that can be taken that may not serve you all that well.

Let’s talk about observation number four. Generally, I believe that the lifecycle funds are too conservative for younger employees. Now I’m not talking about the employees who are in those first three lifecycle funds, the 2065, 60 and 55. Those are super aggressive. But most people don’t choose those because they’re not looking for a 50-year career, a 40-year career. Most people say, “Hey, I got 20 years.” So, they’re only looking out so far.

At a time when a younger fed can be taking advantage of all those long-term market gains, the lifecycle funds end up holding them back. Let’s dive into that a little bit. Let’s say we’re looking at the L 2040 fund. It would be designed for those people who plan to need their money about 20 years from now. So, you see that over on the right-hand side, the makeup. Twenty eight percent of this account is safe or relatively safe for someone that doesn’t need the money for 20 years.

I’m not suggesting that you should be all in and just ride in the market willy-nilly out there. But I am suggesting that to set aside 28% of your portfolio to not be active in the market when you have that much time ahead of you, you need to give some serious consideration to that.

So, the question is, is it sometimes risky to be too safe? I would argue every day, yes, yes. It is absolutely … There is risk in safety. And I know that seems counterintuitive. But in this case, the risk is that by being too safe, by being 28% safe in the 2040 fund for someone that has 20 years before they need the money, that means all of that money in the TSP, all those new shares you’re buying can’t work for you to their fullest potential.

Again, I’m not suggesting that every year you have these big gains. But over a long period of time, you have some significant opportunity. But if you bench 28% of your assets to not be playing for you, 20 years out from needing it, that’s risky. So, keep that in mind.

Observation number five. When it comes time in retirement to take money out of the TSP, anything you have in the lifecycle funds cannot be unlinked or what we refer to earlier as being decoupled. So, for instance, if you have all of your money in the L Income Fund, you are not allowed to just take money from the G Fund. So, I mentioned this a little bit earlier, just want to revisit this because it’s an important factor that I think employees need to recognize.

So over on the right-hand side, we have the L Income Fund makeup. And let’s say the C, S and I just took it in the shorts, huge market downturn, and the value of those shares has just plummeted to the ground. We know over time, it comes back up, long-term investor all that stuff. But in that case, if you had a choice, we would not want to take money out of the C, S, and I Fund, since the value of them is now really low. If we had a choice, we’d want to take it from the G Fund, because we know we haven’t lost any money there. We haven’t made a whole lot there, but we haven’t lost any. And so, that’s a nice, slow, and steady, and we can go pull from that account.

That would be great if the TSP allowed you to do that, but they don’t. You are not allowed to pick and choose from which fund your money comes out. It has to be taken out proportionally across all of your TSP and how you are invested. So, the question is, how’s that different in the private sector? We get this question a fair amount from people like really trying to weigh all of their choices. The reality is in the private sector, we would not have one single account that has all of these mixtures. We would have different accounts that behave differently in different market conditions and operate independently of one another.

For instance, let’s assume that we wanted the same percentages, chances are, we wouldn’t want the same percentages because we just have a savvier opportunity to dial things in for you in the private sector. But let’s say that we do for argument’s sake care. We would have 71% of our assets in an account like a savings account or a money market account that has a little bit of interest on it, maybe some bonds in there, but we’re talking nice safety.

And then we might have some bonds added on top of that to give another little layer, it’s not perfectly safe, but it’s relatively safe. And then if we still wanted some growth, which every retiree needs growth, so that their money can continue to perform for them over a long period of time, we would have a S&P 500 fund perhaps. We would have the small cap fund, the S Fund equivalent, and maybe some international stocks. We’d have the ability to have all of these different buckets that operate independently of one another.

And that way, if we go to need the money in retirement and the market just took it in the shorts, we can go take the money from our safe fund and not have to cash out shares when they just lost their value, which means we have to cash out a whole bunch of shares to get the money out that we need.

So, by virtue of these accounts being separate in the private sector, a ton of flexibility that would keep you from taking money from accounts that otherwise if you had your choice, you wouldn’t do. So, this is a big observation, one that I think is lacking for a lot of people when they’re thinking about how they’re going to take money out of the TSP. And they think like, “Oh, the TSP has been so great to me over this time that I’ve been employed.” Sure, it has, but you’ve never had to take money out of the TSP while you’ve been employed. And if you did, like a loan, that’s the opposite of what you want to do in the TSP while you’re still working.

If you haven’t experienced the TSP in retirement when you actually need the money, you don’t realize that this is a problem. It’s a big problem, and one that’s solved by going to the private sector. Now I’m not here to tell everybody, “Hey, you should go out to the private sector and invest.” I am saying that there is a level of sophistication that is available in the private sector that solves this very problem that the TSP hasn’t fixed.

Next up, observation number six. For a broad-based strategy like the lifecycle funds, for those to work, they have to make some general and pretty big assumptions. The first is that everyone retiring around the same time has the same tolerance for taking risk. I like to think of that risk tolerance as that gut feeling. If you open your TSP account statement and you see a loss percentage on there, how big does that percentage need to be before you want to throw up. That’s risk tolerance, at least at the emotional level.

Other people, when you’re thinking about retiring and risk, you think, “How much can I financially afford to lose without jeopardizing my strategy.” And that’s financial risk. So, both of those things need to be taken into account. But the lifecycle funds assume that everybody has that same tolerance level, good or bad, for the market. And that’s not a fair assumption for as many people as are invested in the lifecycle funds.

So, by the time that you retire, because everyone has to have the same level of risk, they’re going to assume that everyone needs 71% of their money to be available for withdrawal all at once with no risk. If you tell me that when you retire or when you start to take money out of the TSP that you want to take 71% of it out right then, we need to have a serious tax conversation and a serious longevity conversation about how your money is going to perform.

So, when money is safe, when we need money safe, chances are we need it in a short period of time. If you’re saving up for a car, if you’re saving for your kids’ college, you know there is a moment in time that you need that money to be available, because it’s all going to be used at one time, or in a very short period of time like college. But we don’t need retirees to have 71% of their money available right now with zero risk. That is a huge amount. And we still want money performing for you over the long haul.

So, is being lumped in with everyone else serving your needs to their fullest capacity? There’s risk in just going along with everybody else, when there are a lot of assumptions and pretty stark assumptions that we have up here that you might find yourself not very aligned with. If you’re thinking, “Oh, well, that’s not me. I’d like to kind of ride it a little bit harder and have a little bit more of an aggressive stance in the TSP because I have all these other assets over here that I can pull from.”

Well, the lifecycle fund doesn’t know that. They can’t account for that for you. They have to have the funds work the same for everybody, which means that everybody has to kind of fall into line with what the assumptions are.

Observation number seven. The lifecycle funds end up suffering the same fate as the five regular funds when it comes time to take the money out. I’ve touched on this a couple of times. I want to stress this to its max capacity here. You must take money out of the TSP proportionally to how its invested, which means you might have to take money from poor performing funds. We don’t like that. We want you to be able to pick and choose how and when you take your money. You can’t do that in the TSP. And it doesn’t matter whether you’re in the lifecycle funds or the regular funds, the TSP simply does not allow you to pick and choose.

Next up. You aren’t allowed to invest traditional and Roth balances separately. This is the idea of tax diversification. Again, if you did not join us for the Roth webinar, we’ve got a podcast out there as well on the Roth. Please, go listen to that. Because the idea of tax diversification is you have different buckets that you can pull money from when you need the money, and it’s going to be taxed differently. The TSP simply doesn’t allow you to say, “I want my traditional money to be invested this way, but I want my Roth money to be invested that way.” You can do that out in the private sector, but you can’t do it in the TSP.

So why not have a more tailored approach to how you invest? That’s the part when you’re earning the money, but also how you take the money out. In retirement, we actually need it. Why not have a more tailored approach? I would argue most people don’t have a more tailored approach with a professional because they’re just not sure what they’re supposed to do, who they’re supposed to talk to, how do you know how to trust them, all those gut feelings that you have. But we can’t leave all this to chance.

Observation number eight. In retirement, the investing game changes, and boy, it changes big time. The strategy that you’re using while you’re working is wealth accumulation. You’re accumulating your wealth. You’re not using it yet, you’re accumulating it. But it is quite different than the strategy that needs to be in place for what we call wealth distribution, which is you using the money that you’ve saved smartly. And then we have even one more level, which is wealth preservation, if you’re wanting to pass money down to family members, your children, your grandchildren, whatever that might look like. So, there’s lots of different strategies out there. And each of them have their place in a plan.

The TSP is really great at the first one, which is the wealth accumulation. It’s cheap to invest in the TSP. It’s easy. You have your Roth and your traditional options. There’s a lot of good parts of the TSP. But the TSP is not very savvy at the second part of the strategy, which is the distribution phase for all the reasons we talked about before, that you can’t pick and choose which fund to take the money from. And so, you’re going to be forced to take money out at a time that’s undesirable.

Here’s the deal. Everybody wants this set it and forget it program. And maybe that was part of the original feeling around the lifecycle funds and why they were created. But the reality is that your future needs your input, and it needs your action. We can’t just put money into an account in the TSP or otherwise and just leave it alone and hope that one day, it turns out, and it’s okay. So why wouldn’t you play more of an active role in making sure that your TSP is on track? We want it to give you what you need in retirement, but how can you do that if you’re not in control of the very levers that you’re going to need to pull to do that efficiently? Again, you need some help to be able to do this.

Observation number nine. We’ve got two more to go here. Broad-brush advice can cause serious harm to your long-term financial well-being. I 100%, believe this. We talk about this in our workshops. You might have family or friends, you have coworkers, the ones that make me absolutely cringe are these Facebook groups and these apps and these subscription services that are like, “Hey, we’ll tell you exactly what to do with your TSP when you’re working and even in retirement.” No, no. Why would you take advice from the proverbial water cooler when these people don’t even know who you are? They don’t know your whole picture.

Friends and family, hey, those are probably the easiest ones to take advice from. And they’re probably wrong. Unless you’ve divulged your entire financial picture and all of your goals to them, and are they licensed to provide this advice? Let’s kind of start there. How on earth are they going to give you good advice? And if you’re thinking of taking advice again from these Facebook groups, or apps or whatever, you read a book, you hear something on the radio, you listen to some crazy webinar, and somebody’s talking about the lifecycle funds, whatever it might be, those people don’t know who you are.

And they have no idea what the rest of your picture looks like. So, please don’t sell yourself short on this. Get real advice, so that you have your own picture of what retirement’s going to look like and you have a plan that’s aligned with that. I can’t stress this observation enough. It is one that just makes me cringe. It is very frustrating. So please do yourself a favor and get personal help that is unique to you.

Observation number 10. Listen, the lifecycle funds might be the right option for some of you, for you and your situation, not just how you feel but your actual situation. But why guess when you could know? The whole trust but verify idea. If it turns out that based on your age, your other assets, kind of the whole financial picture, your timeline for needing the money, all of that, if it turns out that the percentage of safe money versus bonds versus stocks is right aligned with the lifecycle fund that you’re choosing, well, then cool.

Put it there and you’ve done your due diligence to make sure that you’re good to go. At least until you start to need the money. And that’s a different conversation. But please don’t just take a SWAG at lifecycle funds and say, “Well, the TSP created this. This must be some perfect little program over here.” That is not the way that this works. So, I’m not suggesting that the lifecycle funds are right or wrong for any employee, but they cannot be a substitute for having a real plan for your money. I want to stress that as clearly as I possibly can because this is your future.

When you leave the federal government, your agency stops caring about you. And I say that with an immense amount of love, I want you to realize. I hope you’ve left a good legacy over at your agency and you’ve done great work and all that. But they’re not concerned about you anymore. Neither is the coworker who gave you that bad advice at TSP, the TSP themselves, they’re not concerned with your individual situation. That’s up to you. So having a real plan for your money is the only real way to serve yourself and your own future needs.

So, we’ve covered the FAQs. We covered my 10 observations. Let’s do a quick wrap-up and then I’ve got some important things to share with you. So, as a quick wrap-up, understanding that investment strategy that you have in the TSP is the first step in making sure that you’re on track. Please, don’t take a SWAG. Don’t guess, don’t wing it. You need to know what the actual strategy is that you should be following.

There is no one-size-fits-all approach. And I would encourage you, I would implore you to be weary of advice, even from well-intentioned people. If you are getting advice from someone who doesn’t know anything else about you, why on earth would you think that that is tailored to you? It’s not. So, as you accumulate more in the TSP, and frankly any other investment that you have, and as you approach that retirement window, it would be really wise to ensure that you have a tailored approach that is unique to you.

Of course, this happens out in the financial planning world. I work with a network of financial professionals that specifically work with federal employees, and they understand all the weird stuff that happens with these benefits. But the TSP is part of the strategy. It’s not the whole strategy that you have for retirement. It’s part of it. And you need somebody helping you to figure that out. So, like we always say, you got to get the rest of the story, the Paul Harvey of the matter.

I debated what to do on this webinar of whether I tried to link anybody up with a financial professional on our network who wanted that kind of direct help or if I encouraged you to go to one of our workshops. And, on one hand, I want to applaud you for taking action and wanting to get directly with one of our professionals. On the other hand, it kind of goes against what I just said, which is the TSP is part of the decisions that you’re going to need to be making.

So, I would offer to you the very best way to get that general sense of how all of your benefits are working, the TSP being part of that, but kind of that general umbrella of all of your benefits, is to go to our workshop. This is in-person training. We have these all over the country. I can’t say we have them in every city, but we’re doing our best to reach everybody. There is no cost to attend these workshops. And we are going to cover all of the topics and the decisions to be made. So, everything from your pension to survivor benefits to Social Security and all your insurance programs. And then of course, the Thrift Savings Plan.

Today we did a deeper dive on the lifecycle funds. But in the workshop, you’re going to see all the other factors within the TSP that really influence what you plan to do with this money in retirement and how to make it last as long as you do. That’s the ultimate goal, of course.

So, if you want to attend one of these workshops, you can see all the details and dates and locations at fedimpact.local/attend. I will share with you that these workshops are getting fuller as time goes on, and we’re kind of coming out of COVID and people are more comfortable being out and about. These are sessions that I love because we have your full undivided attention so that you don’t miss critical pieces of the message and you have an opportunity to have some one-on-one help following that workshop and be able to dive into your specific numbers. Again, not just on the TSP, on all of your benefits.

And if at that point, you have questions about “Hey, is the lifecycle fund what I should be doing, or should I be doing something different?” You have the opportunity to ask for that help at that time.

So, admin for today, the handout is in the replay. If you haven’t already downloaded the handouts, they will be emailed to you. Of course, the replay link will be included in that email as well.

Our next topic: I went through all my topics that I have that I’ve jotted down over time. And I happened to stumble across one of our podcasts that we did. And I looked at the numbers on the downloads of this podcast, and they were ridiculous, which tells me that you really want to know about this topic. It sounds like a boring topic, for sure, but so many of you are interested in it. And that is taxes in retirement.

So, our next webinar will be all about this topic. It is an eye-opening view to reframe your outlook on taxes after you retire. You probably have a pretty good handle of what taxes look like today. But my lord, do things change in retirement! And so, we want to give you the skinny on how all of that works. Join us on March 16th, at 1:00 Central. You can sign up for that webinar in the same place you signed up for this one at fedimpact.local/webinar.

Hopefully, we’ll see you then. I know this is probably going to be our highest registered for webinar in our history. So, get in while you can. We do have limited seats even on our virtual capacity here. But want to make sure that you get in and hear all the details on how this works.

Thank you very much. I know sometimes these webinars run a little bit long. We’ve stopped saying that they’re 30 minutes long because I always have so much to share with you to do a deeper dive and I feel like I owe it to you with what I know to be able to share that so that you get the very most out of your benefits. So hopefully you’re able to stay for the whole thing. If not, I suppose you’re not hearing this message. But thanks for joining us.

Again, to find a workshop to attend in your local area, go to fedimpact.local/attend and to sign up for that next webinar on taxes in retirement, go to fedimpact.local/webinar. We’ll see you then.

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