financial planner Stephen Zelcer


financial advisor for federal employees

Question:  How should you invest your Thrift Savings Plan (TSP)?


Two things need to be analyzed in order to correctly answer this question:

  1. The Investor
  2. The investments

The Investor

This part of the answer has good news and bad news.

I’ll start with the bad news:  I know many people wish I could just say one fund or one portfolio that is a one-size-fits-all solution.  I can’t.  I mean, I can if every TSP investor had the same exact goals for their TSP, with the same exact time horizon, and the same exact beginning balance and the same exact ability to contribute the same exact dollar amount and assume the same exact risk.  But, we all know that each TSP investor is just different from the next.

So that’s the bad news.  Now for the good news:

You can (and should) have a TSP investment goal.

With a clear goal, you will be able to receive an answer to the above question.  Without a goal, not only will you NOT be able to answer the above question, but any investment decision you make within your TSP will by definition be arbitrary.  I am amazed at how many people ask me to recommend a TSP portfolio for them without me even knowing their goals.  I immediately turn the question back to them and ask them what their TSP goals are.  I have yet to meet the TSP investor who has a clearly defined goal.

Before you read further, grab a pen, paper and calculator.  The following pieces of information are needed to construct a TSP goal:

  • What are your TSP funds needed for? Will you need your TSP to fund your retirement?  I know the answer to this question seems obvious.  After all, the TSP is a retirement savings vehicle.  But I have plenty of clients who do not need to rely on their TSP for retirement because their Federal pension and Social Security covers their retirement expenses.  Either way, whether your TSP is for retirement or some other purpose, you will need to answer the next questions.
  • How much money will you need your TSP to produce? And will you need consistent annual income or just occasional lump sum distributions?  Whichever you choose, you will need to define the dollar amount and frequency.  This is critical because a portfolio that has a need to generate consistent annual income has additional pressures that need to be addressed.  For example:
    • Will the annual income distributions rise with inflation?
    • Will you take your annual withdrawal even in declining markets?
    • How much of your distribution will be principle vs. growth?
  • Is the above dollar amount Pre-tax or Post-tax? This is the Roth vs. Traditional consideration.  If your need post-tax dollars of, let’s say, $50k, you will need to withdraw MORE than that from your Traditional TSP, so that you net $50k after taxes.
  • When will you need these funds? In how many years from now?
  • What is your current TSP balance?
  • How much money is being contributed annually to your TSP? Include your agency contributions too.
  • How much risk can you tolerate? This, too, is critical for you to define.  Investors often pursue investments that have shown great upside potential but then they sell out of those investments when they have a steep decline in value.  As an investor you should assume that in order to reap such great upside you have to ride out the downside.  And if you are not able to ride out the downside, you will not reap the upside!  So, define for yourself, how much of a decline can you tolerate in your portfolio before you “abandon ship?”  Is it a 10% loss?  15%? 20%? Etc.

By answering all the above questions you will be able to calculate the annual rate of return you need to grow your TSP balance to yield your goal.  You will also define your risk tolerance which will inform your investment decision.  For example, if you only need a 7% return to achieve your goal, that may allow you to invest in less risky funds than your current allocation.  Yes, your current allocation may yield greater returns than 7%, but perhaps it requires you to assume more risk than you are comfortable taking.

The Investment:

This part of the answer also has good news and bad news.

The bad news:  In all likelihood you will not have the tools needed to measure the expected performance of each of the TSP funds, nor will you be able to measure how each fund correlates to the other funds.  Both of these analyses are necessary to design the best TSP portfolio that meets your goals.

What do I mean by the “best TSP portfolio?”

I mean the most efficient.  Efficient portfolios are described by Harry Markowitz (winner of the Nobel Prize for his “Modern Portfolio Theory” and designer of the “efficient frontier”) as the portfolios that provide the greatest return for a given level of risk.  Meaning, if you had two portfolios that are targeting the same rate of return, but one portfolio exposes you to less risk than the other, the less risky portfolio will be considered more efficient.

I don’t know of any free software that provides an analysis of TSP funds and portfolios.  I use more than one type of software to analyze the TSP, and I need to manually import the TSP data and run models every month in order to identify the best TSP portfolios.  After that, I can match different TSP portfolios to different TSP investors.

The good news:  In the very near future I will be rolling out my TSP Planning service.  This will be a membership service, where I will help TSP investors manage their TSP portfolio allocation.  All you’ll need to know is “the investor” (“know thyself” – isn’t that the 11thcommandment?) and your goals will point you to the best TSP portfolio for you.

Stay tuned!


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