New Graduate w/Full-Time Job: Federal TSP Advice

[jdmorton]

OK, here's the deal - the last of our 4 children graduated from college in May (yea!) and got a full-time job on Capitol Hill last month (double yea!!); now all 4 have full-time jobs (triple yea!!!).

Child 4 now participates in the federal thrift savings plan (TSP) - came to me for advice, and I thought a good starting point is to put 3% of the starting salary into the TSP to begin with (already being taken out). Then, with each of the next couple of raises, to increase the individual contribution until it reaches the maximum match percentage - which I believe is a total of 10% of salary (individual contribution + the federal match).


Anyway, here is what I am thinking:

1. Currently, all contributions are being put into the G Fund - which is the default fund. This will change once we figure out where we want future contributions to go.
2. Since Child 4 is young and right out of college, I think a reasonable beginning overall asset allocation would be 80% stock and 20% all other (bonds and money).
3. In reviewing the TSP fund choices, all have low expenses (the info off of the TSP website is showing 0.025% for each fund as of 2010 - might be slightly different today, but still low).
4. Do not plan on utilizing the L Fund, as I am not a fan of the lifestyle time horizon fund approach.
5. Looking first at the non-stock 20% allocation, my first thought is to recommend equal amounts into the G Fund and F Fund - 10% each.
6. For the stock 80% allocation, I am thinking to recommend 40% in the C Fund, 15% in the S Fund, and 25% in the I Fund.

For those of you not familiar with the TSP funds, here is a very brief description of each (except the L Find):

• G Fund - Government securities specifically issued to the TSP
• F Fund - Government bonds and mortgage-back bonds (matches performance of Barclays Capital U.S. Aggregate Bond Index)
• C Fund - Large and medium-sized U.S. companies (matches performance of S&P 500 Index)
• S Fund - Small and medium-sized U.S. companies not in the C Fund (matches the performance of the Dow Jones U.S. Completion TSM Index)
• I Fund - International stocks of 21 developed countries (matches the performance of the Morgan Stanley Capital International EAFE Index - Europe, Australia/Asia, and Far East)

Any thoughts?

 

[pb4uski]

At that age, I would have gone all stock (40/40/20 to each of C,S and I) and increase my 3% for 50% of any raises I received until I was at the max.

What is the AA of the L fund? As a point of reference, the Vanguard Target Retirement 2045 is 63% Total Stock, 27% Total International Stock and 10% Total Bond.

 

[HawkeyeNFO]

I have gotten out of the I-fund, now doing just the S and C. Glad I did, too. Because the I-fund only takes into account developed countries, my opinion is that it is missing out on the capability for true growth. I like Nords's theories on this, and being military with a COLA'd pension awaiting, I do take more risks with my other money.

With Europe's troubles over the past 3-4 years, I don't want to invest there, generally.

Only advice I have is to see if they can put in up to the maximum, and ensure they get as much matching funds as possible.

 

[W2R]

Why not send the child a link to the Bogleheads book list, and suggest that he/she can leave the money in the G Fund while reading them, and until ready to make investing decisions independently.

This is a great opportunity for your child to learn to invest at a young age! If you do it, the learning opportunity is lost. Better to make mistakes (if any) while the account balance is small as it is now.

 

[MichaelB]

One default option is good, but in case it remains the only choice for an extended period, it should probably be equities.

+1@ Hawkeye's suggestion to up the contribution to the max, +1@ W2R to send a suggested reading list. Maybe even reach deep into your pocket and buy it yourself.

 

[lrak]

I'd say contribute the percentage necessary to get the maximum possible match now. Its easy to live like a college student when you're used to living like a college student. I think it is harder if you get used to living a better lifestyle and then have to cut back.

I'd go easy on the bonds at the moment because interest rates are going to have to rise a whole lot sometime before your kids are ready to retire.

 

[donheff]

I also vote for the stock fund as the default and maxing the contributions. But the G Fund is an excellent cash substitute and can have a place in any asset allocation. Even for young people some "cash" in the G fund could be handy if they also have equities in taxable accounts they could sell in an emergency. If the equities were liquidated at a bad time they could simultaneously exchange some G Fund "cash" for purchase equities in the TSP to balance things out.

 

[ejw93]

JD -

Younger typically means be more aggressive with AA (mostly stock, not mostly G-fund)...

...but the most important issue is that junior is leaving FREE MONEY on the table if he is not contributing 5% salary deferrals to his TSP.

Also, no one has mentioned it yet, but as an entry level employee, junior is probably in a low salary/tax bracket and would be better off placing the 5% in the Roth TSP option. Note that the 5% employer match will still go towards the 'traditional' TSP in this case.

 

[painterbill]

+1 leaving FREE MONEY on the table if he is not contributing 5% salary deferrals to his TSP.

From TSP Booklet: Summary of the Thrift Savings Plan (5/2012) WWW.TSP.GOV

Agency Matching Contributions — If you’re a FERS participant, you receive Agency Matching Contributions on the first 5% of pay you contribute every pay period.
The first 3% is matched dollar-for-dollar by your agency; the next 2% is matched at 50 cents on the dollar. This means that when you contribute 5% of your basic pay,
your agency contributes another 4% of your basic pay to your TSP account. Together with the Agency Automatic (1%) Contribution you get, your agency puts in a total of
5%. Keep in mind, though, that if you stop your employee contributions, your Agency Matching Contributions will also stop, but Agency Automatic (1%) Contributions
will continue to go into your account. You can contribute more than 5% (see “How Much You Can Contribute” on the next page), but your agency only matches the first
5% you contribute.

 

[RAE]

I agree that he should contribute a minimum of 5% to his TSP to get the govt. match.........that's a no-brainer. Then increase the % over time as he advances and his salary increases.

As for asset allocation, I'm not a fan of the lifecycle funds either, so I'd probably avoid those.

At his age, I would probably go something like 20%S, 30%C, 10%I, 20%F, 20%G. That may seem heavy to bonds for a young person, but I am not expecting big gains in the equity markets in the coming decade, and so I think hedging your bets a bit is wise. You don't want your son to get discouraged if the equity markets perform like they did from 2000-2008, which could easily happen. Better to play it a little conservative and keep things moving in a positive direction.

 

[yakers]

I like the suggestions about maxing out the contribution to get the full match and having your child learn about investing. But some people are simply not interested in the subject so for them the L Funds are an ideal default choice. And go for the match, even if its painful.

 

[Nords]

Anyway, here is what I am thinking:

1. Since Child 4 is young and right out of college, I think a reasonable beginning overall asset allocation would be 80% stock and 20% all other (bonds and money).Any thoughts?

1. 
   I'm thinking that it shouldn't matter what you're thinking.
   
   This is a wonderful teaching moment. Send your child to the Bogleheads Wiki on asset allocation (or whatever other resource seems appropriate) and let them make up their own mind. If they have questions they'll come to you. When they own the process then they won't make bad decisions under the emotional stress of a bear market. If they want to put it all into an L fund-- or even the G fund-- and if they've thought of a good personal reason for doing so-- then that's what they should do.
   
   My daughter and I have had similar discussions about Roth IRAs and her Fidelity account, and in another year we'll be having them about the Roth TSP/TSP. These days I only get questions about Bolivian inverse leveraged beever cheeze futures and other assets that seem too good to be true...

 

[martyb]

I'm a 54 3/4 yr old fed, and my TSP is currently split 50% C & 50% S. I'm retiring pretty soon, in 2013. If I were young like your child, I'd be very agressive, with an allocation of 100% stocks, of course, keeping an eye on world issues as far as the I fund goes. At the very minimum, I'd be L 2050 or L 2040. Contrary to some folks, I do like the L funds and have done pretty well with them. Only the more agressive ones, though.

 

[floridanurse]

I'd suggest maxing out the full contribution. I think you said it was 10%. If he starts with the max out then he will never miss it.

It's much easier to save aggressively now when u young

 

[Texas Proud]

I'd say contribute the percentage necessary to get the maximum possible match now. Its easy to live like a college student when you're used to living like a college student. I think it is harder if you get used to living a better lifestyle and then have to cut back.

I'd go easy on the bonds at the moment because interest rates are going to have to rise a whole lot sometime before your kids are ready to retire.

+1 on this.... and heck, why not go 10% right off the bat

The best time to teach is at the start before bad habits form...


Edit to add... I agree with the people who say to put it in ROTH if possible...

 

[martyb]

The max is not 10%, it's whatever the current IRS maximum is. If you are less than 50 yrs old, it is $17000 this year. If this person can possibly swing it (salaries on capitol hill are likely higher than most other fed newbies) I would strongly encourage making every effort to come as close to the max contribution as possible.

 

[twigpig]

I'm with martyb. Go all stocks for the first 5 years or so. Given the amounts that will be in there and the time frames he should just check and make sure the proper amount is actually going to TSP and not worry about the balance until after the first 5 years. Martyb's situation is almost scary on how similar it is to mine. I have a bit less than 3 years before I am shown the door and told not to let it hit me on the way out (I'm more than ok with that). If I knew then what I know now my tsp would be a lot bigger. I let mine languish in default G fund for far too long and then I went 50 G and the rest in C and F for a long time after that. That's all we had back then. Back then 10% was max but now It's $17000. #4 needs to put in at LEAST 5% or when he gets to be my age he will regret it.

 

[frugalliving]

Max out the TSP contributions now and they'll be glad they did later!

 

[target2019]

By all means get every penny of matching funds. NEVER pass up free money.
Go 100% stock: C/S/I 50/25/25.
Send him a brief asset allocation article, or a short book.
If you send a young person to a retirement board they will run away.

I have my 27-year old in similar strategy, with exception of 15% in permanent portfolio fund (PRPFX). This is just in his 401(k). As the total gets larger, it helps to add some ballast. But I wouldn't be in treasuries or bond funds in early twenties.

 

[jdmorton]

Thanks Everyone, And Some Additional Thoughts

My gosh, has it been 2 weeks since I've been on this board?! Anyway, a couple of further thoughts:

• Agree that this is a great opportunity for learning about personal finance. I've given all 4 of our kids my copy of Andrew Tobias' book "The Only Investment Guide You'll Ever Need". I think that book hits most of the basics yet is an easy and fun read (for the most part).
• Agree with getting the maximum match ASAP - it might come a lot sooner than even I thought possible.
• I've been saying my recommendation for the allocation and funds to use as a starting point for discussion. What I wanted from all of you would be the pros and cons of my recommendations so that when my child and I discuss this in about a week or so, I can comment on my child's thoughts and ideas with some more insight than what is provided on the TSP webpage. Clearly, my children have to make their own decisions - I simply want to have as much accurate information to help them make as good of a decision as possible.

OK, now a couple of other questions:

1. The Roth TSP option sounds intriguing. Anyone have experience with the Roth TSP? I don't have a Roth option in my company 401(k), so I thought the conventional wisdom is to max out one's company 401(k) up to the company match and then use a Roth IRA.
2. I understand that the younger one is, the more stock (risky) investments one should make. However, I thought there is now evidence that a 80% stock/20% bond portfolio provides pretty much a similar long-term return with signinficantly less risk than a 100% stock portfolio. Am I wrong on that assumption?