Last week, I talked with a group of military folks here at a nearby base. While talking about the Thrift Savings Plan, (TSP) one participant asked which TSP fund she should choose. I answered that there was no single answer to the question and that you had to look at TSP as just one part of the big picture. I hope that my answer didn’t seem like a cop-out, because it wasn’t meant to be.
Which fund you should use for your TSP contributions is a very individual decision. It depends on wide variety of factors, including whether you expect to earn a military retirement, what other assets you have (especially real estate, and that can go both ways), your age, your plans for employment after the military, your marital and parental status, your spouse’s employment, pension and retirement fund situation, and your general comfort with risk in your investments.
Overwhelmed? Not surprising. It is a lot to consider if you are a basic-level investor like me. There are five TSP funds, and then are a selection of Lifecycle funds that hold portions of each of the other funds. I’m not going to get in to a detailed description of the funds because there is an excellent chart available at the TSP website, and that’s not the purpose of this post.
The purpose of this post is to have you looking at TSP as just one part of your entire retirement portfolio. Don’t be scared off by the fancy word, portfolio, it just means all the different things you will be bringing together to fund your retirement. This includes TSP, Individual Retirement Accounts (IRA), 401ks from jobs before or after the military, other investments, real estate earnings, military retirement, retirement benefits from other jobs, regular savings, and Social Security. There is much discussion about using Social Security as part of your retirement planning and that decision is up to you. I don’t include it because I feel confident that there will be changes made in the decades before I retire. I figure it will be a bonus if I receive any Social Security benefits.
The other important thing to consider is how long it will be before you plan to retire. Most retirement planning experts suggest that you put your portfolio into progressively more safe investments as you get closer to retirement. Whether that is right for you depends, again, on your big picture.
Once you have an idea what things will be paying for your retirement, you need to consider your overall comfort with investment risk, and where your portfolio parts fall on the risk scale. You are aiming for a balance between risk and growth. Let’s say you expect to use TSP, an IRA, and regular savings to provide income during retirement. Your regular savings account is nearly risk-free, but there is no growth occurring there. That puts it at the low risk/low growth end of the scale. So, where might you want your TSP? I’d think somewhere in the middle, and I might even suggest a Lifecycle fund that automatically moves your TSP investments into progressively more conservative funds as you
What if, however, you’re including a military retirement pay as part of your portfolio? This is an entirely different picture because military retirement funds are very secure and they include an inflation-based Cost of Living Adjustment each year. If military retirement is part of your portfolio, it is also probably a large part, so your entire equation is automatically way more conservative. To balance out the low-risk aspect of military retirement, you want to shift the rest of your investments a little bit more aggressive.
To some extent, this is a secondary question. Don’t let indecision about which fund to use prevent you from contributing to TSP. It is a great tool for saving for retirement, regardless of which fund you choose. If you are utterly uncertain, I might recommend starting out with a L fund that reflects your anticipated final retirement date (not the date you expect to retire from the military.)
So, as usual, there’s no right answer to this question. The answer for YOU depends on a wide variety of factors and should include all the various factors discussed above. Start contributing, and then pick the fund that seems closest to right for you! Even if it isn’t perfect, it is good and it will help you achieve your long term goals.