Show Notes – Episode 6 TSP L Fund Changes
This July, the Thrift Savings Plan (TSP) has made some changes to its L Lifecycle Funds. These funds get their name from year you plan to retire and begin withdrawing your money, called the target date. You choose one appropriate target date fund. Then that fund invests your money based on how much longer you have to retirement. They manage a shift in risk by following a set plan, called the glide path. They invest in higher risk investments while your young and gradually shift your portfolio to less risky investments as you get close to retirement. Target date funds are typically available in retirement savings accounts like TSP or a 401(k) where you can invest by payroll deduction. You can also open an IRA and invest in a target date fund.
Target date funds continuously re-balance the fund as needed when the value of stocks values change and throw the fund out of balance, off the glide path. The fund managers are constantly “buying low and selling high" to keep the balance and stay on the path.
In choosing a target date consider when you will start withdrawing your retirement savings. You normally can't draw from these retirement plans until you're at least 59 1/2 years old, or you pay a 10% early withdrawal tax penalty. For military, its very unlikely you will be that old when you leave the service, even if you retire. So pick a date where you’re at least age 60. There is an exception for FERS employees. Your TSP will be exempt from the penalty if you separate from federal service in the year you turn 55 or later. For Special Category Employees (SCE), it's 50 or later. For everyone, the penalty will apply for most withdrawals from an IRA before age of 59 ½.
Also consider what kind of “retirement” you envision. Many peoples’ views are changing and they’re not just planning to hit 65, collect social security, and sit in a rocking chair. You may be thinking of a second career or doing something part time when you separate from government service. In that case, your target date might be even later. It’s up to you.
TSP calls its target funds Lifecycle (L) Funds. TSP has five core mutual funds C, S, and I are stock funds, G and F are bond funds. The L Funds invest in the 5 core TSP mutual funds in different percentages depending on where your target date year is along the glidepath. For example, L 2060 will invest almost entirely in the C, S, and I stock funds and a very small amount in G and F bond funds. That will shift gradually over time, so you are invested mostly in conservative F and G bond funds and much less in the stock funds at the target date. Once a target year arrives, that fund is retired and your savings are put in the L Income fund. This is the fund designed for TSP participants who are withdrawing their funds in retirement.
This July, there was some changes to the L funds. First off, there are more of them. They used to have an L fund for 10-year intervals. So if you were planning on retiring in 2025, you had to choose between L 2020 fund or L 2030 fund. TSP has now added more funds farther out, and at 5 year intervals. That’s an L Fund every 5 years from 2025 to 2065. This gives more options to our younger employees and servicemembers and makes it a little easier to pick an appropriate target if you were between the 10 year marks.
If you would like more detailed information, you can check out a blog I wrote for the Military Financial Advisors Association at their website: http://militaryfinancialadvisors.org/blog/You can find more information at: https://www.tsp.gov/funds-lifecycle/If you have any questions about today’s show, or would like to learn more, reach out and let’s do this, together. https://www.moneypilotadvisor.com
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