Your financial support is assured when you retire from Fed employment, thanks to the Federal Employee Retirement System. FERS provides the funds through its three “pillars”: the Basic Benefit, Social Security and the Thrift Savings Plan (TSP).
The TSP builds savings from your contributions and employer matches that are allocated to individual funds (G, F, C, S, or I). You can direct your contributions to whichever fund or funds meet your financial objectives. Or, you can direct 100% of those contributions toward a TSP Lifecycle Fund, also known as an L Fund.
How L Funds Function
You can think of Life Cycle Funds as mini portfolios where slices of the other funds reside. Professional managers determine where your contributions go, with the allocations changing every three months.
L Funds are offered in five-year increments (L 2030, L 2035, L 2040, and so on) that are pegged to your stated retirement date. When the fund reaches its deadline, the proceeds are invested in the L Income Fund. The entire process is referred to as the “glide path.”
As with all investments, L Funds have their pros and cons.
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Advantage: Set and Forget
The main benefit of an L Fund involvement is that you’re NOT involved. An experienced, seasoned financial professional determines where to invest your contributions, eliminating headline tinkering and emotional decisions.
Other upsides include:
- Lower fees. The L Fund has lower expensesbecause 1) it doesn’t have management fees, and 2) you pay a single cost for the G, F, C, S, and I Funds; the expense is calculated based on allocations.
- Effective risk management.As your retirement date draws near, the “glide path” directs your contributions toward less risky individual G (government securities) and I (bonds) funds, protecting you from market volatility.
- Automatic rebalancing. The funds under the L Fund “umbrella” regularly recalibrate at the end of each trading day, ensuring that target allocations remain on track.
Disadvantage: Loss of Control
The passive investment upside of an L Fund is also a downside. Others are handling your money and making decisions on your behalf. You can’t customize allocations to meet your particular needs unless you select a different date fund or blend funds.
Other issues to consider include:
- Potentially lower returns. Near-retirement allocations to the G and I Funds can shield you from market volatility. However, those funds could also underperform relative to other higher-risk, higher-return investments.
- Retirement date timing: L Funds mature during your on-record retirement year. But if you continue your Fed employment beyond that date, your contributions will be directed into the highly conservative, low-risk, low-return L Income Fund, which might not supply enough financial support when you do retire.
TPS L Funds for Hands-Off Allocations
Consider the following if you decide to build your retirement nest egg with a TPS L Fund:
- Select the best TSP L fund for your age (versus an actual retirement date)
- Research the fund’s stock and bond mix to determine if the returns match your financial goals
- Consider mixing the fund with other assets to fine-tune investment strategies
For additional guidance with your L Fund decision-making, as well as your overall retirement approach, contact the team at Serving Those Who Serve for a complimentary benefit analysis.
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
TSP: The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you're eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.
