The TSP L Funds, or Lifecycle funds, are what we consider the Thrift Savings Plans automated “Set it and forget it” funds.
These professionally determined investment allocations are tailored to meet TSP member investment objectives based on their projected retirement date. For example…
- L 2050 Fund – TSP members retiring in 2045 or later
- L 2040 Fund – TSP members retiring between 2035 – 2044
- L 2030 Fund – TSP member retiring between 2025 – 2034
- L 2020 Fund – TSP members retiring between 2015 – 2024
- L Income Fund – TSP members currently withdrawing from their TSP accounts in monthly payments or TSP members who plan to begin withdrawing before 2017.
The official objective of these funds is to strike an optimal balance between the expected risk and return associated with each fund. Simply stated, when you’re younger you can take on more risk and as you grow older your exposure to risk should be reduced.
If you are familiar with our TSP Investing Newsletter then you know we do not believe in “Setting and Forgetting” your retirement accounts. Based on this simple truth…
Nobody cares about your retirement as much as you, period!
You need to be the one who cares about your wealth and retirement, nobody else. We’re not implying you need to become a stock market expert and analyze investments all day. But you certainly need to be financially literate.
The words “diversification”, “asset allocation”, “compounding interesting”, etc should not be foreign to you. Take the time to understand the basics regarding stocks, bonds, mutual funds, and ETFs.
Some may think this is common knowledge but you would be amazed at the number of Thrift Savings Plan participants who have no clue what they mean.
Nonetheless, we have reviewed and analyzed the TSP Lifecycle Funds for you.
TSP Lifecycle Funds And Their Fatal Flaw
If you’ve had a meeting with a financial advisor or read any modern book on planning for retirement. Then chances are you’ve likely been given the narrative, “The stock market over time averages approximately 8-10%.” Unfortunately, this narrative doesn’t apply to the Thrift Savings Plan Lifecycle funds. Not in the least bit…
At face value 8-10% average gains makes sense right? How could it not when you see a graph like this?
But here’s the reality…
The S&P 500 has only returned 8-10% in a single year once in the last 88 years. Think about that for a moment.
Now think about this, in order for you to fully take advantage of the historic statistical return of 8-10% you would need to be fully invested in the stock market. But that is not the case with the TSP’s Lifecycle Funds, not in the least bit.
We’ve reviewed all the TSP L Funds and documented their TSP fund allocations on July 2009 and January 2016.
We chose both these time frames for two important reasons…
In July 2009, the U.S. stock market was coming out of one of the worst stock market crashes in history.
By January 2016, the U.S. stock market was close to an all time high.
Take a look for yourself!
Would you rather have your money fully invested while the market was severely underpriced in order to take advantage of huge gains to come? Or would you prefer to have a partial amount of your capital on the sidelines watching?
Some might think keeping a portion of your capital in reserve is prudent and they’re exactly right, if your portfolio was comprised of individual stocks. In regards to the Thrift Savings Plan or any retirement plan for that matter you simply cannot achieve the historical annual return of 9.5% if a portion of your capital is sitting in cash.
But this is the exact flaw of the TSP Lifecycle Funds. Take a look for yourself…
TSP L Income Fund
This fund was designed for TSP members who are already in retirement and withdrawing from their TSP accounts.
In theory they have a large portfolio balance and are using monthly withdrawals to supplement the pension they are receiving from the government.
But let’s take a deeper look at the allocation for this fund:
With a 74% allocation to the G Fund and a 6% allocation to the F Fund, this equates to 80% of your portfolio being allocated outside of the stock market. Which makes perfect sense, at this stage of retirement you do not want to take on a significant amount of risk with your nest egg. And if possible, it’d be great to withdrawal interest generated from your retirement portfolio without depleting the principal.
Unfortunately the reality is the L Income Fund does not do this.
Instead, this fund partially relies on market performance to generate the necessary gains it needs to maintain a decent withdrawal rate in retirement. That does not sit well with us at all. The 10yr annual return for this fund is appalling by our standards.
There are far better options outside of the Thrift Savings Plan for members who are seeking safe steady income while growing the principal of their accounts.
Municipal Bond funds are a far better option in our opinion.
What is a municipal bond?
Sometimes not all public projects can be funded by tax revenue. Therefore when a state, city, county or town wants to build public projects such as schools, bridges, highways, etc and needs to raise money, they take out a loan from the public in the form of a “Municipal Bond.” Oh and by the way you don’t pay federal taxes on the payments you receive from these bonds and in some cases no state taxes as well.
Here’s an example…
Cowboy County would like to build a new road to their 5 year old football stadium which would help alleviate traffic. The road will cost $10 million to construct and the county is willing to pay 5% interest on a 10 year loan. (Municipal Bonds typically come in increments of $1000.) Therefore Cowboy County will issue 10,000 individual shares/bonds which will pay a 5% dividend.
Here’s A Far Better Option
The Vanguard Long-Term Tax-Exempt Fund (VWLTX) currently holds 1325 bonds with an average maturity of six years and currently yields 4.8%. This fund is professionally managed and has a low expense ratio of .20% – That’s $200 on a $100,000 investment.
How does it stack up against the TSP L Income Fund? Take a look…
As you can see the dividend and annual return of the Vanguard Long-Term Tax-Exempt Fund (VWLTX) dwarfs the performance of the TSP L Income Fund. Not to mention the dividend payments are exempt from federal taxes.
The Truth About TSP Lifecycle Funds
Unfortunately, most TSP members overlook the allocation of TSP lifecycle funds before they choose to invest. In theory they sound like a great concept but put into practice we found they severely hinder your ability to generate average investment returns consistent with the market.
Each fund only invests a certain allocation of your funds into the overall markets (C,S,I Funds) while maintaining your capital in safe but low performing funds (G & F Funds):
- L 2020 – 60% stocks/40% Bonds
- L 2030 – 70% stocks/30% Bonds
- L 2040 – 80% stocks/20% Bonds
- L 2050 – 90% stocks/10% Bonds
You would be better off simply investing in the overall stock market until you approach the 5 year window until retirement.
But don’t just take our word for it…
We went back and simulated a TSP member’s portfolio from the age they were 18 – 59.5. The case study was quite simple, we wanted to see how a simple investment of $1,000 would perform over the TSP member’s investment time frame. Additionally we took the market’s average annual return from 1928-2015 of 9.5% and applied it throughout the investment time frame. Next we simply calculated how much of the “average annual return” TSP members were missing while sitting in the G & F Funds.
The results are clear as day. Staying fully invested in the stock market resulted in a 4422% gain vs a 1569% gain investing in Lifecycle Funds.
Now we know what you might be thinking…
What about actual returns?
We had the same question which led to us conducting the research and backtesting using the annual returns of the S&P 500 dating back to 1974.
The results were even more astounding than the assumed average annual return of 9.5%.
Using actual returns resulted in an investment return of 7106% if you stayed fully invested in the market instead of relying on the preallocated L Funds. In regards to the TSP Lifecycle funds you would have achieved an investment return of 2751%.
Investing in the Lifecycle Funds may seem easy and efficient but we highly disagree. As a TSP member you would be better off simply staying invested in the market. If you would returns even greater than what was presented here then our flagship proprietary method can help you do just that.