July 30

Coffee With Mike- FERS Breakdown Series Pt. 5

FERS, Investments, TSP

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How do we invest in TSP? We're continuing the series and I encourage you to use the Federal Employee Ballpark Estimator. Assuming you've already done that, then you know what rate of return you're actually shooting for. Now, this is a little bit tricky if you're going to do this on your own, but part of my hope is is that I'm teaching how to do it on your own. That's why we have our allaboutfers.com school, there's always some lessons in there that you can take on learning how to choose report filter, there's also availability of us helping you out if you need our help, want to talk to us. 

But, let's just talk about, 'Well, what about me? How do I decide it on my own?' You need to look at the tsp.gov website, go to the information that they provide about their funds, and also look not only about what the performance has been, but look at what the intention of each fund is.

So in TSP, we have five individual funds: 
  • The G Fund, which is basically treasury bonds, and it equates to a 12 year treasury rate;
  • The F Fund, which is basically corporate bonds;
  • The C Fund, which is the S&P 500; 
  • The S Fund, which is the rest of the investment index in the US;
  •  and then the I Fund, which currently is the largest companies in a few countries that emphasizes stable companies that are going to generate a typical revenue that enables them to generate profit. It's called the EAFE index.

When we take a look at those five funds- G, F, C, S, and I- we get to choose among them if we want to. If you want to, you can pick one fund. If you want to, you can pick all five funds. What percentage of your money should go at each of those funds. That's really the trick, is to understand what to put where. So, instead of trying to understand that, guess that, what TSP has done is they've given you some fund managers. Those fund managers is called the L fund. Each L Fund, some have dates and one of them has a title, the L Income Fund. Each of these L Funds are managers of the five individual funds. Each one of these L Funds has G, F, C, S, and I. If it's an L Income Fund, that's designed for people who are actually retired and actually pulling out income every month, but it can be used by anyone.  

The dates run all the way to 2065, and currently, this is 2021, so that's 44 years from now. We've got funds that run out 44 years from now, so we should have a range of funds that meet our needs. They have their fund dates at the zeros of a decade and the fives of a decade, so 2025, 2030, 2035 and so forth. These fund managers are determining for you how much of your money goes into each one of the five individual funds. Then they're shooting for a certain rate return. 

Here's the simple idea I'm trying to give you: the L Income Fund is the most conservative. Think of that fund as providing 4%. The L2065 is the most aggressive, not that it's truly aggressive as the private sector might use that term, but it's aggressive for TSP. So that fund, the L2065, I'm going to say 8% could be its target rate of return. In TSP L Funds, we have a range of returns that we can breakdown, that shoot somewhere between and including 4% to 8%. If we need 9% or 10%, we're probably not going to use an L Fund, we're probably going to have to use S Fund or C Fund to get that 8, 9, 10% opportunity. There's no guarantee but that's probably going to be your best opportunity. 

"If you want to, you can pick one fund. If you want to, you can pick all five funds. What percentage of your money should go at each of those funds. That's really the trick, is to understand what to put where."

Other than that, if you're looking to get a return that is 8% or less with a floor of 4% average return over, let's say a 20 year period, then we are in a good shape when we consider the L Funds. Again, we don't have to make the decision of what goes where, they're making that decision for us. If you want to manager, think about the L Funds. If you think about rate of return, L2065 is 8% and L income fund this 4%, then every five years difference it gets a little bit lower. 

That's something that you can use to just say, 'OK, so how many different breaks are there between L Income Fund and L 2065? Well, there are about 9 different breaks there, so if we divide the difference between 4% and 8%, it's 4. We divide that by 9, it's about 0.5%. You can think about every fund from 2065 down, 8%, 7.5%, 7%, 6.5%, 6%... and so forth. That's just a simple way, it's not technically accurate, but you know what? It's simple enough and probably in the ballpark enough that we can begin to do some planning. Hope this is helpful to you and visit our school if you want more information about how to build your own. 

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