Does it make sense to rebalance your Thrift Savings Plan investments on a regular basis? Most financial advisors say yes and will go further and suggest rebalancing other investment vehicles (IRAs, taxable accounts, etc.).
You should come up with an asset allocation that suits your needs based on when you anticipate needing to invest. You should consider both your estimate of future financial needs and your risk tolerance. A level of risk that is acceptable for one investor may not be suitable for another. JP Morgan once asked the following question about risk tolerance: “Do you want to eat better or sleep better?” You’ll be choosing your asset allocation based on your own personal sleep index.
Financial planners recommend rebalancing your portfolio annually to ensure your portfolio maintains the desired balance. For example, if your desired allocation is 50% C and 50% G and you have $100,000 in TSP, you will start the year with $50,000 in each fund. Let’s say the C fund grows by 15% and the G fund grows by 4% in one year. At the end of the day, the C-Fund will have 52.5% ($57,500) and the G-Fund will have 47.5% ($52,000). To maintain the 50/50 balance, we need to redistribute our investments so that both the C and G funds are at $54,750.
But wait. Want to do the work of rebalancing your TSP every year? Back in 2005, Thrift Savings Plan made it easy when they introduced L Funds. L-Funds are similar to what the private sector calls “target-date” funds. Those who choose the L Fund will allow the TSP to allocate investments to them. The Thrift Board follows conventional investment wisdom and allocates funds so that the farther away you are from retirement, the more aggressively you invest, and the closer you get to retirement, the more conservatively you invest.
The L Fund is rebalanced daily and all funds except the L Income Fund are rebalanced (towards a more conservative allocation) on a quarterly basis. The allocations in the table below are from October 2022.
The average annual change in allocation is relatively small until the last five years of the fund’s life (eg, to 2025 for the 2030 fund), after which the change to the G fund accelerates. Unlike many private sector 401(k) plans, TSP does not charge an additional fee for his participation in the L Fund. The TSP periodically adjusts the fund’s investment mix. Information about individuals and the L Fund can be found on the TSP website (https://www.tsp.gov/publications/tsplf14.pdf).
When TSP introduced the L fund, it didn’t complicate matters. What they did was take 5 base funds (C, S, I, F, G) and combine them in different proportions within each of his 5 L funds. Conceptually, individuals approaching retirement would choose the L Income or L 2025 Fund, while the child they hired last Monday would choose to invest in the L 2065 Fund. In fact, new recruits are automatically enrolled in her age-appropriate L Fund at her 5% contribution rate.
Do it yourself or use the L funds, the choice is yours.
Federal Career Expert President John Grove is an expert in the field of retirement and benefits for federal employees. This expertise stems from his 26-year federal career managing retirement programs at a large federal agency office of 3,500 employees.
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