Lifecycle Funds in the Thrift Savings Plan
March 15th, 2008 by Ana
For this week’s post in my Saturday series “Investing for complete and utter idiots and dummies” (and people intimidated by investing) I’m going to revisit the federal Thrift Savings Plan (TSP) which is the US government’s version of a 401(k). In the spotlight are the “Lifecycle” funds, or the L Funds. I didn’t cover these very well back in January when I did my overview of the TSP, so I thought it might be a good idea to line these babies up and look under the hood of each one since there are actually five different L funds. I’ll list these from “most conservative allocation” to “least conservative allocation” (and yes, liz, I understand the G fund is not really conservative when you factor in inflation concerns!)
L-Income Fund: This is the only L Fund that doesn’t actually change it’s percentage allocations, and is supposed to be for people who are already withdrawing their retirement money. The allocation is broken down into:
- G Fund: 74%
- F Fund: 6%
- C Fund: 12%
- S Fund: 3%
- I Fund: 5%
L-2010 Fund: The L-2010 fund is designed for people who will start withdrawing their money between 2008 and 2014, and the allocation changes quarterly. The linked page is pretty cool, as it has a flash show that you can see exactly how the funds allocation has changed quarter by quarter since its inception, and how it will be changed in the future! Once it reaches the same allocation as the L-Income fund it is rolled into the L-Income. Here is the allocation as of January 2008 (it will change again in April 2008)
- G Fund: 58.5%
- F Fund: 6.5%
- C Fund: 19.5%
- S Fund: 5.5%
- I Fund: 10%
L-2020 Fund: This fund is listed for people who plan to withdraw their money between 2015 and 2024, and changes quarterly. January 2008 percentages are:
- G Fund: 31%
- F Fund: 7.75%
- C Fund: 32.25%
- S Fund: 11%
- I Fund: 18%
L-2030 Fund: This fund is for people who plan to withdraw money starting between 2025 and 2034, is adjusted quarterly, and is right now allocated as:
- G Fund: 18.75%
- F Fund: 8.75%
- C Fund: 37%
- S Fund: 15%
- I Fund: 20.5%
L-2040 Fund: The “furthest out” target retirement date, for people who plan to withdraw their money after 2035. This one is also adjusted quarterly … hmmm, I see a pattern here. Here’s the breakdown of allocation for January 2008:
- G Fund: 7.75%
- F Fund: 9.75%
- C Fund: 41%
- S Fund: 17.5%
- I Fund: 24%
Overall, the L Funds are designed to be the only fund in your TSP account if you do not feel comfortable allocating your own portfolio. These funds are not designed to be mixed with others, but I know some folks do. Hence, I have given these funds the nickname “Lazy” instead of Lifecycle.
These funds are a little too “conservative” in their target dates for my tastes right now, given rising gasoline and food prices. But hey, I am just learning these things myself. If I were to put hubby’s TSP into any of these funds, I would hit the L-2040 since we are both in our 30s right now.
If you are retiring before 2035, I would say to at least go one decade past what your true target retirement is (i.e. if you plan to retire in 2016 I would go with the L-2030 instead of the L-2020). My reasoning is simple: the government never plans on people living as long as they actually do, and you may need the fund much longer than the government’s statistics think you will. But, take any and all investing opinions from me with a grain of salt 
Posted in investing |
March 15th, 2008 at 2:27 pm
I definitely approve of them for people who don’t feel they have the time or education to properly balance their funds.
March 16th, 2008 at 11:46 am
I couldn’t agree more. I was with the federal government as an employee when these funds came out. Lots of people signed up for them, and I could only shake my head in amazement. I couldn’t understand how people could be so lazy or uninterested in learning how to manager their money well. I steered away from it and continued to manage my own money.
March 16th, 2008 at 5:11 pm
I am not happy with a dog of a fund I have at American Century, and was considering their LiveStrong 2045 fund (or the One Choice Very Aggressive). Both of those have done well. LiveStrong has more bond exposure than I care for. You know me! But even that would remain a tiny part of my world because I have much larger accounts in all equities.
The Week magazine had an article recently about these funds-of-funds also layering expenses–the underlying fund expenses plus the master fund expenses. So these could be more expensive than some other plain vanilla funds.
TSP has extremely low expenses, those are great funds.
Newbie investors who refuse to educate themselves usually go for fixed contracts or money markets, and they’re afraid of equities (for all the wrong reasons, ignoring the inflation beast), so if they pick lifecycle funds, they’re a lot better off than operating solely out of ignorance and fear. Another plus is automatic port rebalancing, an oft-overlooked effective investor behavior that most people don’t do…this will help their returns over the long haul and they won’t even know it.
Ana I agree with you about going long to keep a higher % in equities.
March 20th, 2008 at 6:54 am
I went ahead and put my American Century monies into the LiveStrong 2045 lifecycle fund. We’ll see how it goes!
One benefit of lifecycle (target date retirement) funds is that there’s automatic forced portfolio rebalancing–a very effective investor behavior that very few people do. Sell your high flyers, buy more dogs. It goes against our emotions to do so, but it forces buying low and selling high–which makes you rich (and the opposite makes you lose money). So I like a fiddle-free port, and thought that feature would be a good thing to have. I keep it simple.