The G Fund is by far the safest fund offered by the Thrift Savings Plan, hands down, it is truly a remarkable security. It’s one of the very few instances in the investment world where you literally cannot go wrong. This fund allows investors to earn interest rates similar to those of long-term U.S. Treasury Bonds, but without any risk or loss of their capital. The TSP G Fund is managed by the Federal Retirement Thrift Investment Board. The G Fund buys non marketable U.S. Treasury securities that are guaranteed by the U.S. Government. If you don’t remember anything else about the G Fund please remember that you cannot lose the money you invest with this fund and the interest is guaranteed by the U.S. Government.
What Are U.S. Treasuries?
In short U.S. Treasuries are the debt financing instruments of the United States federal government, and they are often referred to simply as Treasuries.
The main objective of the G Fund is to produce a rate of return that exceeds inflation. As of this post the current inflation rate is 1.3% – This means that for every $100 you have in savings at the end of the year it will now only have the purchasing power of $98.70 because the average amount of goods you purchase will have increased 1.3%
The interest paid by the G Fund is calculated on a monthly basis at the average rate of return of U.S. Treasury securities with 4 or more years to maturity. As of today (12/23/2014) the current interest rate is 2.125%.
While this fund is the safest because you will never lose money in nominal turns, you run the risk of losing money through the erosion of purchasing power. Let me give you a quick example – If you are earning approximately 2% a year in the G Fund but the inflation rate is at 3% you are essentially losing 1% a year because the money you are earning in your account at 2% is being outpaced through inflation in the goods you buy throughout the year.
Let’s take a look at a couple charts to visualize this concept… Update this chart
Here is a chart representing the interest rate on the 10 Year U.S. Treasury. At this time there is no chart available that strictly mimics the G Fund, however this is the closest thing available. In order to get the exact TSP G Fund interest rate you must to the Thrift Savings Plan site for that information. As you can see the current 10 Year U.S. Treasury interest rate is at 2.18% which is fairly close to 2.125% which is the official G Fund interest rate at the moment – Now let’s take a look at the current rate of inflation in the U.S.
As of right now the current inflation rate is 1.3% – Which means in theory, your effective rate of return in the TSP G Fund is .825% (2.125% G Fund interest rate minus 1.3% inflation rate).
In regards to investing it is imperative that you try and understand the full scope of your investment. Most people simply believe when they invest in the G Fund they are in fact receiving the current interest rate but by conducting due dilligence and factoring in inflation it becomes quite clear you are earning far less.
How Do I Use The G Fund In My TSP Account?
Almost every single investor I know holds some portion of their retirement portfolio in cash in order to be completely protected from loss, however as TSP members we simply do not have that option, therefore the G Fund is an ideal investment option for this purpose. But please keep in mind as investors geared for the long haul, your primary goal is likely growth in your retirement portfolio not capital preservation. Most investors have a long time horizon before they retire, so generally speaking if they can control their investment emotions and navigate volatility responsibily, then in the long run, one of the TSP stock funds such as the C, S, or I Fund have the potential to compound your investment at a higher annual rate.
In our TSP Newsletter, we use the TSP G Fund as the risk-free investment vehicle, allocating all of the portfolio to it when stock market conditions start to deteriorate and point towards a long term bear market. Taking such actions allows us to lock in our substantial investment returns while the investment model waits for bullish market conditions to return. Our newsletter utilizes a proven strategy for identifying bullish and bearish markets. We have tailored this strategy towards the Thrift Savings Plan in order to help you increase your TSP portfolio returns significantly over time.
My personal opinion of the G Fund is it is a very great alternative during bear markets and for retirees approaching retirement within 1-3 years. Outside of those two scenarios I would highly discourage anyone from allocating their contributions to the G Fund at best perhaps 5-10% of their portfolio but even then inflation will cripple the growth of returns over time.