TSP allocation question

[JoeNDC]

Does anyone have any recommendations for TSP fund allocation. I'm currently 42 years old, married with one child, and don't plan on using the money for at least 20 years. I am currently in the 2055 Lifecycle Fund, but worried that it might be too heavily weighted in the I Fund given the TSP restrictions on international investments. I have been reading that maybe it makes sense to do the following allocation given my long-term timeframe: 60% C, 20% I, 20% S. Does anyone have thoughts or recommendations?

[JJ-]

What kind of restrictions are you taking about on international investments? It looks like that fund is ~35% I fund. Or are you talking about the securities in the I fund itself? It does not have emerging markets but you can buy that separately and IMO should not prevent you from buying I fund.

You should manage your TSP in line with your whole portfolio, meaning that you should choose a meaningful asset allocation and put the pieces together with the various investment accounts.

For example, I use a 60/40 domestic / international allocation and do not use bonds as part of my portfolio at this moment. My TSP is ~70% I fund. This is because I have a lot of domestic stock in my taxable accounts with significant capital gains and don't want to liquidate yet, otherwise I'd marginally prefer to have the international holdings in the taxable account.

The S fund is a bit interesting. It calls itself a small cap but it holds both small and mid caps. It is a decent slice away from large caps, but I think at your point picking a good asset allocation is most important.

If TSP is your only investment account there is nothing wrong with holding L2055 until you do some homework, and even after homework it's still can be a good choice because of its simplicity and the limited fund options in TSP.

 Both bogleheads and portfolio charts have good resources on picking asset allocations and portfolio design.

[Michael in ABQ]

I'm in my 30s so don't plan to touch my TSP for 20+ years. I've gone with 75% C, 15% S, and 10% I. I used to be 60/20/20 but as I dug a bit deeper I saw that International - at least the I fund, just has not been performing well. With so many US-based companies operating internationally I think the need to have a substantial I holdings is reduced. I went a little higher with the S fund as it's got higher potential, but more volatility. 

I didn't want to touch any of the lifecycle funds because they all include the G and F funds and those just seem like a complete drag on any investment portfolio - at least when your investment horizon is decades. The 2055 fund is only 1% G and F, but within 5 years it will be close to 20%. With inflation and interest rates where they are, that's a hard pass for me.

[JJ-]

I'm in my 30s so don't plan to touch my TSP for 20+ years. I've gone with 75% C, 15% S, and 10% I. I used to be 60/20/20 but as I dug a bit deeper I saw that International - at least the I fund, just has not been performing well. With so many US-based companies operating internationally I think the need to have a substantial I holdings is reduced. I went a lit higher with the S fund as it's got higher potential, but more volatility. 

I didn't want to touch any of the lifecycle funds because they all include the G and F funds and those just seem like a complete drag on any investment portfolio - at least when your investment horizon is decades. The 2055 fund is only 1% G and F, but within 5 years it will be close to 20%. With inflation and interest rates where they are, that's a hard pass for me.

You make a good point about the need to keep your allocations appropriate for your age and consider how the lifecycle funds change.

Domestic large caps have been on a tear lately and contribute to the difference in returns. However the I fund like other international indexes is for portfolio diversification. Too low of a percent and you lose the value of diversifying. Take a look at many sites and you'll see recommendations to have probably at least 30% in international.

[JoeNDC]

It seems like the C and S have consistently performed better than the I over time as well as recently. Am I missing something, do you expect the I to catch up at some point?

[JJ-]

It seems like the C and S have consistently performed better than the I over time as well as recently. Am I missing something, do you expect the I to catch up at some point?

What do you mean by consistently? There are periods where the I fund/international stocks  had better 1, 3, and 5 year returns than the c or s (early 2000s come to mind). But lately yes C and S funds have outperformed.

However I'd say the role of diversifying internationally primarily is to protect against a domestic stock bubble. Read up on the 1980s Japan stock bubble and collapse that has taken decades to recover.  This is the primary argument for including international holdings in a portfolio i think.

Whether international indexes "catch up" is anybody's guess. There are plenty of folks that say you don't need them and others say you do. Just do your homework into portfolios and asset allocation and rest easy in your choice.

[sabanist]

Im 43 and been 100pct in the c fund for over a decade.  Its worked pretty well

[Villanelle]

Do you have any other investments, and if so, how are they allocated?

Your best bet is to decide on an overall allocation that makes sense to you, then align your TSP with that and your other allocation. 

There are also other factors at play.  Are you planning to have a pension?  is it inflation-adjusted?  If so, then you likely need less bonds than many people.  But C/S/I has NO bonds. That may be the right choice for you, but you'll want to give some thought to that before deciding. 

[JoeNDC]

Thanks very much for the questions. Yes, I have a Roth IRA that is 65% Total Stock Market Index (Vanguard) and 35% Total International Stock Market Index (Vanguard). I started federal employment at a young age, so I will have a pension about 40% of my final pay (indeed for inflation), but that won't be for a while.

[Villanelle]

If you don't like TSP's International fund, then get all your international in your Roth.  Decide on an overall % of your portfolio that you want to be specifically international (and each other segment), and then do 100% of that in your Roth.  Twice a year, check to make sure that across all your accounts, you are close to your targets.  So if your target for international is 20% total and your Roth value is 40% of the total invested across all accounts and funds, then 50% of your Roth would be international.

You have no bond exposure at all.  Is that intentional? 

Again, just decide on what overall AA you want, and then work out where you want to house each part of if.  Fund availability and withdraw dates are two major factors to consider when spreading out your allocation to TSP and your Roth, and whatever else you may eventually have.

[simonsez]

You have no bond exposure at all.  Is that intentional? 

Feds that aren't interested in retiring that early (like the OP) will have a sizable pension.  This can act as the bond allocation.

For example - a couple where one is a fed and the other is a stay-at-home parent, if the fed retires at MRA and expects about 40k/yr from the pension and is also at 1MM in TSP+Roth IRA+taxable, they'd already be at an allocation that resembles 50% "bond" allocation even if their TSP+Roth IRA+taxable are in 100% equities where they're trying to retire at 40k/yr/person.

[Villanelle]

You have no bond exposure at all.  Is that intentional? 

Feds that aren't interested in retiring that early (like the OP) will have a sizable pension.  This can act as the bond allocation.

For example - a couple where one is a fed and the other is a stay-at-home parent, if the fed retires at MRA and expects about 40k/yr from the pension and is also at 1MM in TSP+Roth IRA+taxable, they'd already be at an allocation that resembles 50% "bond" allocation even if their TSP+Roth IRA+taxable are in 100% equities where they're trying to retire at 40k/yr/person.

Yes, perhaps you missed my earlier post where I pointed out the bond/pension relationship.  But the OP hasn't mentioned it so I wanted to ascertain whether this was a clear, informed decision or an oversight.    It sounds like the OP is new to figuring out an investment allocation and these are things that should be considered, even if the final decision is they aren't needed.  Plenty of people with pensions, even inflation-adjusted pensions, still feel more comfortable having some bonds.  OP hasn't given us much at all in terms of specifics regarding their situation or plan so it's difficult to say what I would do as far as bonds in their situation. 

As someone whose retirement plans rely heavily on both TSP and an inflation-adjusted federal pension, I definitely understand the relationship. 

[JJ-]

There are two camps with pensions. One says it's like bonds and can take the place of bonds. The other says it's income like social security and reduces the amount you need to draw from a portfolio.

I used to fall in the first camp but I am now squarely in the second camp. If I have $20k coming from a pension/SS and need to draw $25k/yr from portfolio, I'd want that to come from a properly allocated portfolio that can survive a bad initial get go thanks to a proper bond allocation. If I am drawing from a 100% equity portfolio there's a good chance of failure in the early years and I may need to revisit plans.

That being said if $25k/yr is a 2% WR it doesn't matter.

[Fomerly known as something]

What are your plans.  How much do you need, how much do you have.  I just hit the TSP double comma club today.  I’m a mix of 70/30 equities including I to bonds.  I have been more conservative since 2019 when I hit the number I needed to retire and I’m just waiting the 3 years and 9 months until I can retire as an early special category employee. 

Ive made so many mistakes over the past 20 years in allocating to funds, I never made the mistake of not funding it.  So what I’m saying is don’t over think it.

[kendallf]

You have no bond exposure at all.  Is that intentional? 

Feds that aren't interested in retiring that early (like the OP) will have a sizable pension.  This can act as the bond allocation.

For example - a couple where one is a fed and the other is a stay-at-home parent, if the fed retires at MRA and expects about 40k/yr from the pension and is also at 1MM in TSP+Roth IRA+taxable, they'd already be at an allocation that resembles 50% "bond" allocation even if their TSP+Roth IRA+taxable are in 100% equities where they're trying to retire at 40k/yr/person.

Yes, perhaps you missed my earlier post where I pointed out the bond/pension relationship.  But the OP hasn't mentioned it so I wanted to ascertain whether this was a clear, informed decision or an oversight.    It sounds like the OP is new to figuring out an investment allocation and these are things that should be considered, even if the final decision is they aren't needed.  Plenty of people with pensions, even inflation-adjusted pensions, still feel more comfortable having some bonds.  OP hasn't given us much at all in terms of specifics regarding their situation or plan so it's difficult to say what I would do as far as bonds in their situation. 

As someone whose retirement plans rely heavily on both TSP and an inflation-adjusted federal pension, I definitely understand the relationship.

70/30 C/S here at age 55, for the reasons noted above.  I also don't have much of a sequence of returns risk, as my current spending will be totally covered by pension/supplement when I retire next year.  The TSP is for one time, optional expenditures that can be easily adjusted up or down for the near future.

[dunnoman]

Does anyone have any recommendations for TSP fund allocation. I'm currently 42 years old, married with one child, and don't plan on using the money for at least 20 years. I am currently in the 2055 Lifecycle Fund, but worried that it might be too heavily weighted in the I Fund given the TSP restrictions on international investments. I have been reading that maybe it makes sense to do the following allocation given my long-term timeframe: 60% C, 20% I, 20% S. Does anyone have thoughts or recommendations?

I'm similar age and have a TSP. It's 100% in stocks, heavily weighted to the C fund personally, but there isn't really a wrong way to do it other than put all your money in G/F for your whole career.

I do think it's good that your are in the 2055 since that will keep you in stocks longer considering you'll be in your 70s by the time it gets to it's most conservative form. If I was you, I'd take the time to look at the allocation percentages over time and make sure the allocation over time is in line with your financial plans.

Someone mentioned it in one of the responses about how different folks manage treating pensions. I think some of the popular ideas are: 1) you don't need a bond allocation, or 2) less bonds depending on pension size, 3) <insert other ideas>.  These are good things to consider as you go take a look at that allocation of your TSP over time.

One of the reasons I have mine in all stocks is when you go to withdrawal from TSP, you do not get to pick which pile it comes from from the way I understand it. So if you want 20k for the year and make that withdrawal, you just get handed the money arbitrarily from your allocation and possibly not from the pile you want. Probably nitpicky to the point that it won't matter assuming the world economy keeps ticking for the next 30-50 years, but it's something to consider. The other, bigger, reason is that TSP is not my entire nest egg, as I imagine it is likely not for you. Like another person mentioned, there is benefit to deciding how you allocate your TSP based on a holistic look at all of your assets.

Cheers