By John M. Gannon
The federal government-sponsored Thrift Savings Plan (TSP) began offering “lifecycle” funds in 2005 as a choice for those interested in saving for retirement. Some 75,000 members of the uniformed services (and 300,000 total federal government employees) now invest in the TSP’s lifecycle or “L” Funds. These funds offer a number of benefits, but it’s important to know what you’re getting into before you invest.
Lifecycle funds typically make investment mixes, or allocations, based on a target retirement date – such as 2020, 2030, etc. – when you will need to use the money in your TSP account. If that date is a long time from now, the lifecycle fund will be more heavily weighted toward stocks or stock mutual funds. But as the date approaches when you will need your money, the investment mix will become weighted more heavily toward fixed-income or stable value investments, including bonds or bond funds and Treasury securities.
This gradual shift to more conservative investments is designed to reduce your risk as you approach retirement.
Stocks stand to provide the best return over the long-term, but their year-to-year fluctuations make them riskier than long- and short-term bonds. According to data maintained by Ibbotson Associates from 1926-2005, common stocks recorded a 10.4 percent annualized return during the 80-year period, while long-term government bonds returned an average of 5.4 percent and 30-day Treasuries averaged 3.7 percent.
If you won’t retire for many years, you stand a good chance of riding out the market’s short-term fluctuations and reaping the higher returns that stocks offer. In that case, stocks or stock mutual funds can comprise a larger portion of your retirement portfolio. On the other hand, if you are very close to retirement age, you can’t afford to have your retirement portfolio take a nosedive and may be better suited to hold a portfolio consisting of less risky investments.
The objective of L Funds, then, is to provide the highest possible rate of return for the amount of risk taken. And you don’t have to worry about making these allocation decisions yourself; they are made automatically, based on your age and planned date of retirement.
The TSP has established five L Funds based on different time horizons. Each of these funds invests in five individual TSP funds using professionally determined investment allocations tailored to different time horizons.
When you invest in L Funds, you select the most appropriate L Fund based on when you expect to begin withdrawing money from your TSP account. But note that the date you expect to need the money from your account may not be the same as your retirement date from the military – if you plan to continue to work, for example. For many TSP participants, the most appropriate choice may be the L Fund with a time horizon closest to their 65th birthday.
Each quarter, the investment mix in the fund you selected automatically will adjust to a slightly more conservative position, gradually approaching the investment mix of the L Income Fund. Professional managers also will periodically review the mix to ensure that it remains appropriate. When an L Fund reaches its target horizon date, it will roll into the L Income Fund.
Although you can allocate as little or as much of your TSP account to an L Fund as you want, TSP administrators recommend allocating your entire retirement TSP account to a given L Fund to achieve the optimal investment mix. If you invest in an L Fund and continue to invest in one or more of the other TSP funds, you risk throwing your total investment mix out of whack, which may increase your risk.
Be aware that the L Funds can have periods of gain and loss. Investing in the L Funds is not a guarantee against loss and does not eliminate risk.
To direct new money to an L Fund or any TSP fund, you need to specify a percentage of your payroll contribution that will go to the L Fund – this is called a contribution allocation. To move money from one TSP Fund to an L Fund or any other TSP fund, you must make an interfund transfer.
These actions may be completed on the TSP website (www.tsp.gov) or through the Thriftline at 1-877-968-3778. You also can submit the TSP Investment Allocation Form (TSP-50), obtainable from your service or directly from the TSP.
If you like the idea of putting your retirement savings on autopilot, then an L Fund may be the best TSP route for you. L Funds: Time Horizons
Choose this fund: If you will need the money in:
L 2040 2035 and later
L 2030 2025 through 2034
L 2020 2015 through 2024
L 2010 2008 through 2014
L Income sooner than 2008