The TSP is a retirement saving and investment strategy for uniformed services members (included Ready Reserve) and Federal employees. Congress established the TSP in the Federal Employees' Retirement System Act in 1986. The goal was to offer the same tax and savings benefits that private corporations offer their employees under 401(k) plans.
The TSP is designed to be contribution plan-based. The retirement income you receive from your TSP account will depend on how much you and your agency or service (if eligible) contribute to your account during your working years and the earnings accumulated over that time.
How to Invest
The TSP provides a variety of different funds you can invest in. You can create diversity how you choose by investing in index funds to international stocks. In total, there are fourteen different funds you can contribute towards. The Lifecycle Fund 2025, 2030, 2035, 2040, 2045, 2050, 2055, 2060, and 2065 is available. There is also the G.F, C, S, and I fund.
The G Fund
The G Fund's investment objective is to produce a rate of return that is higher than inflation while also avoiding risk and market price fluctuations. Its inception date was April 1st, 1987. The total expense ratio is 49 cents per $1000 managed. You won't be able to find a better management expense. The G fund's performance over its lifetime has been 4.94%, and its 10-year performance has been 2.23%. If your risk tolerance is extremely low, this is your Fund to be in. The good news is with the annual inflation rate of the United States is 1.4% for the last 12 months as of September 2020. From 2000-2019 the average U.S. inflation rate has been 2.27%. This is great even for being a "safe" investor.
The F Fund
The F Fund's investment objective is to match the Barclays Capital U.S. Aggregate Bond Index's performance. This is a broad index representing the U.S. bond market and was incepted in January of 1988. The portfolio weight is distributed between Government/Government-Related (41.5%) Asset-Back Securities (29.6%) and Credit (29%). You are charged an administrative fee of 48 cents per $1000 and 12 cents per $1000 for other expenses. This is a steal and what I love about the TSP program. The Fund's lifetime has performed a 6.14% increase and over the last ten years 3.99%. The good news is not the sexiest of numbers within the last year; the F fund has increased performance up to 8.68%.
The C Fund
The main objective of the C Fund is to match the performance of the Standard and Poor's 500 (S&P 500) Index. The S&P 500 is a broad market index made up of 500 extensive to medium-sized U.S. companies. The C Fund was incepted on January 29th, 1988, and its lifetime performance is 10.66%. Its performance in the last year has been an astonishing 31.45%. The top holdings for this Fund are Apple, Inc., Microsoft Corporation, Amazon.com, Inc., Facebook, Inc., and Berkshire Hathaway, Inc. For those that have a medium risk tolerance, this is your Fund to look into. To add to this already excellent Fund, it only takes 69 cents per $1000 for TSP to manage.
The S Fund
Like any other fund, the S Fund carries risk but offers the opportunity to experience gains from equity ownership of small-to-mid-sized U.S. companies. This is the perfect opportunity to diversify your domestic equity holdings. Incepted May 1st, 2001, it has a total asset worth of 92 billion. The S fund includes companies like Square Inc., Zoom Video Communications, and Uber. At .68 cents per $1000, your S fund is managed. The information and technology businesses have the most significant chunk (25%) of the S fund pie. Over the last ten years, this Fund has averaged 13.32% returns. That's a win in my book.
The I Fund
Incepted May 1st, 2001, the I Fund lifetime performance is 5%, but its last year result has been 22.47%. With an asset value of $58.9 billion, this Fund allows you the opportunity to invest in companies that are out of the United States. The I Fund can help a portfolio that also contains stock funds that track other indexes such as the C Fund and the S Fund. The I Fund can also be helpful in a portfolio that includes bonds. This is helpful since bonds are less volatile—the less risk involved, the better it comes to investing. The I Fund contains companies like Nestle S.A., Toyota Motor Company, and Roche Holding.
The L Cycle Fund
Each of the ten L Cycle Funds is a diversified mix of the G, F, I, S, and C Fund. These are the current Lifecycles available: 2025, 2030, 2035, 2040, 2045, 2050, 2055, 2060, 2065. and the Life Income. Every quarter (three months), the target allocations of each L fund (except Life Income) automatically shift from higher risk with greater reward to lower risk as you approach your target year (2030, 2045, etc.) Once the L fund you selected reaches its target date, the money in that fund switches over to the Life Income. To give a quick example, I will be 60 years old by 2050. I selected the Lifecycle 2050 option, and currently, over its lifetime, it has provided 10.3% in returns and the past year 14.79%.
The goal is to prepare for retirement as much as possible. You owe it to yourself for the time you served to invest for the long term. I believe a book that could break down preparing for retirement whether you decide to stay in the military, retire, become a federal employee or complete your contract and separate is the Military Millionaire.
To learn more about investing from Robert Kiyosaki (Rich Dad Poor Dad) click here