TSP Asset Allocation

[behindthedimes]

I am 32 years old with about $105K in my TSP plus paying back a loan I took out toward my home purchase two years ago. I currently contribute 8% of my salary (GS 13-05 in North Jersey).

Right now I am running the following allocation:
5% G
5% F
40% C
40% S
10% I

I do pretty well per my performance percentage they give you. Just looking for any other suggestions. I am not entirely committed to staying with the Government long term but I want to maximize my growth as much as possible. I actually have taken portfolio engineering classes and the models i learned skew way too heavily to G because of the low return variance.

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[rgarling]

5%F - 5%G: Might as well be 10%G

When the bad times hit, consider a (temporary) tactical re-balancing down to 0%. i.e. use your cash equivalent to buy oversold equities when the time comes.

[samclem]

Your allocation strikes me as appropriate for a person of your age. Compared to market values, you are "overweighted" in small US stocks, so you should expect higher volatility and slightly higher returns (over a long period) than the market as a whole. A minor note: If it were my money and I were your age, I'd probably increase my allocation to the G fund--your 10% total allocation to bonds is tiny, and going to 30% (or even more) has a small negative impact on total portfolio return but offers a fairly significant reduction in volatility. When the stock market goes down, you'll rebalance and buy more shares cheaply. Yes, over the likely 30 year horizon before retirement your 10% bond portfolio will likely have a total end value higher than a 30% bond portfolio, but by the same token a 0% bond portfolio would likely beat them both. For the same reasons you now have 10% bonds, I'd consider increasing their %age to 25-30%. Other observations:
1) I would not engage in tactical reallocation into/out of equities and try to guess when stocks are sufficiently beat-down to buy more. Just rebalance to your target allocation periodically and know you'll be buying shares more cheaply during downturns, and selling off appreciated shares as their prices rise. If you feel like you are talented enough to pick stocks and time the market, then throw away that government job and get to a trading floor immediately--your fortune awaits (not!)
2) Consider just dumping the whole thing in a L-series fund if you can find one that has an allocation close to what you'd like. Or pick an L-series fund that is close, and tailor the total allocation by adding S or C as needed. This way others will do the rebalancing for you automatically and take the emotion out of it.
3) If you leave govt service, keep some money in the TSP anyway just so you have access to the G fund. It's unique, and you can continue to use it as you bond/fixed income component while you invest your other money in equities in your IRA, new 401K, etc.

Good luck.

[behindthedimes]

Quote:

Originally Posted by rgarling 5%F - 5%G: Might as well be 10%G When the bad times hit, consider a (temporary) tactical re-balancing down to 0%. i.e. use your cash equivalent to buy oversold equities when the time comes.

Thanks for the tip. I actually had more in G and I but in 2009 I upped my C and S by 5 and 10% respectively.

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[behindthedimes]

Quote:

Originally Posted by samclem Your allocation strikes me as appropriate for a person of your age. Compared to market values, you are "overweighted" in small US stocks, so you should expect higher volatility and slightly higher returns (over a long period) than the market as a whole. If it were my money and I were your age, I'd probably increase my allocation to the G fund--your 10% total allocation to bonds is tiny, and going to 30% (or even more) has a small negative impact on total portfolio return but offers a fairly significant reduction in volatility. When the stock market goes down, you'll rebalance and buy more shares cheaply. Other observations: 1) I would not engage in tactical realocation of funds and try to guess when stocks are sufficiently beat-down to buy more. Just rebalance to your target allocation periodically and know you'll be buying shares more cheaply during downturns. If you feel like you are talented enough to pick stocks and time the market, then throw away that government job and get to a trading floor immediately--your fortune awaits (not!) 2) Consider just dumping the whole thing in a L-series fund if you can find one that has an allocation close to what you'd like. Or pick an L-series fund that is close, and tailor the total allocation by adding S or C as needed. This way others will do the rebalancing for you automatically and take the emotion out of it. 3) If you leave govt service, keep some money in the TSP anyway just so you have access to the G fund. It's unique, and you can continue to use it as you bond/fixed income component while you invest your other money in equities in your IRA, new 401K, etc. Good luck.

Ironically enough I am getting my Masters in Financial Engineering so I can possibly get in the quant/trading field.

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[donheff]

When/if you get married and have substantial investments in other vehicles consider putting more equities elsewhere and heavily weighting the TSP to G. I have my entire TSP in G. Equities are in a taxable account and DW's 401Ks. The TSP serves as a bond fund and cash equivalent. In a bad downturn I could sell equities in other accounts to fund current expenses and simultaneously by equities in G to balance the "bad" transactions.

[behindthedimes]

I am married. My wife is a teacher with investments of her own and happens to be Series 7/9/10 registered when she was a broker.

Am I allowed to buy into TSP if I leave the Government or only move what is in there?

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[ExFlyBoy5]

Out of curiosity, have you considered the lifecycle funds? I have mine in the L2030 (has been there for YEARS) and although I am technically retired (but can't touch it for many more years), I have been pretty happy with the returns so far. Of course 2008 would have sucked if I was drawing on it then, but all in all I have been happy. BUT...I don't have a MS degree in Financial Engineering either (I had NO idea there was such a thing).

[ExFlyBoy5]

Quote:

Originally Posted by behindthedimes I am married. My wife is a teacher with investments of her own and happens to be Series 7/9/10 registered when she was a broker. Am I allowed to buy into TSP if I leave the Government or only move what is in there? Sent from my SM-N910V using Early Retirement Forum mobile app

Once you leave the government, you can no longer contribute. You can move all the funds around all you like, but can't add anymore. Which I hate because it's a really good deal.

[Dreamer]

Quote:

Originally Posted by donheff I have my entire TSP in G. Equities are in a taxable account and DW's 401Ks. The TSP serves as a bond fund and cash equivalent. In a bad downturn I could sell equities in other accounts to fund current expenses and simultaneously by equities in G to balance the "bad" transactions.

For some reason, I have never thought of doing this. I guess I need to see how much the G fund is paying vs how much his Stable Fund is paying and see if I would be better doing this. Thanks.

[nash031]

TSP makes up about a third of our overall portfolio. I keep my AA spread across that portfolio, and TSP holds our entire bond allocation. Most of that allocation is in G. I see little use for F, but I do have a small amount in there just for "diversification"... I haven't put any money towards F in a long time. If the purpose of your bond allocation is to preserve capital and stabilize your portfolio in a downturn, G is where it's at. It'll do that, and you won't lose to inflation. Let the growth come from your equities.

Otherwise, I balance C and S at an 80/20 ratio to mirror total stock market, and I use the I fund in conjunction with VTIAX for my total international allocation.

So, I guess it just depends on how you view it... if TSP is your whole savings vehicle and you're good with that 90/10 tilted towards small cap and US, you're good. If it's part of an overall portfolio allocation, it just depends on what role you want TSP to play. IMO, TSP is ideally suited to be your bond allocation, but in reality it can play any number of roles.

[samclem]

Quote:

Originally Posted by FlyBoy5 Once you leave the government, you can no longer contribute. You can move all the funds around all you like, but can't add anymore. Which I hate because it's a really good deal.

True, you can't contribute, but you can still rollover and transfer funds from existing IRAs and 401Ks to the TSP. But, once you've closed out your TSP account, that option closes--you can't set up a TSP account once you leave government service. That's why I always advise every military/government employee I know, even if they've never contributed to the TSP, to set up a TSP account and contribute a few dollars before they leave government service, and never close that account. It is a zero cost way to keep a very valuable option available for later.

[donheff]

Quote:

Originally Posted by samclem True, you can't contribute, but you can still rollover and transfer funds from existing IRAs and 401Ks to the TSP. But, once you've closed out your TSP account, that option closes--you can't set up a TSP account once you leave government service. That's why I always advise every military/government employee I know, even if they've never contributed to the TSP, to set up a TSP account and contribute a few dollars before they leave government service, and never close that account. It is a zero cost way to keep a very valuable option available for later.

+1 I transferred an old traditional IRA into the TSP.

[Nords]

Quote:

Originally Posted by samclem That's why I always advise every military/government employee I know, even if they've never contributed to the TSP, to set up a TSP account and contribute a few dollars before they leave government service, and never close that account. It is a zero cost way to keep a very valuable option available for later.

I'll add to the other side of that situation: Roth IRA conversions.

Eventually you'll ER and have a few years in a very low tax bracket before you'll have to make a decision about your TSP. If you don't have any other annuitized income (other than Social Security) then the TSP annuity is a great deal.

But if you already have a federal pension then TSP RMDs might push you into a higher tax bracket, subject your Social Security to taxation, and even boost your Medicare premiums (a tax known as IRMAA).

In that situation, it might make sense to transfer your TSP account to a traditional IRA and convert a little every year (in the 10%-15% income tax bracket) to a Roth IRA.

We just mailed in my spouse's TSP transfer paperwork last week, and we have six years left to convert her balance to a Roth IRA before her Reserve pension kicks in.

It was interesting to learn that because her TSP account balance exceeds $3000, I had to sign away my right to a lifetime spouse annuity... and my signature had to be notarized.

[behindthedimes]

Quote:

Originally Posted by Nords I'll add to the other side of that situation: Roth IRA conversions. Eventually you'll ER and have a few years in a very low tax bracket before you'll have to make a decision about your TSP. If you don't have any other annuitized income (other than Social Security) then the TSP annuity is a great deal. But if you already have a federal pension then TSP RMDs might push you into a higher tax bracket, subject your Social Security to taxation, and even boost your Medicare premiums (a tax known as IRMAA). In that situation, it might make sense to transfer your TSP account to a traditional IRA and convert a little every year (in the 10%-15% income tax bracket) to a Roth IRA. We just mailed in my spouse's TSP transfer paperwork last week, and we have six years left to convert her balance to a Roth IRA before her Reserve pension kicks in. It was interesting to learn that because her TSP account balance exceeds $3000, I had to sign away my right to a lifetime spouse annuity... and my signature had to be notarized.

Is there a good book somewhere that discusses all these in's and out's. I know the tsp homepage has a lot of information but I get almost information overload.

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[Nords]

Quote:

Originally Posted by behindthedimes Is there a good book somewhere that discusses all these in's and out's. I know the tsp homepage has a lot of information but I get almost information overload.

I'm not aware of a book.

However you might try this post:
https://www.kitces.com/blog/understa...d-conversions/

It's not as long as a book, but it's the best explanation I've ever read on how to do a Roth IRA conversion-- including the timing, the taxes, the tax laws, and even some examples.

Michael Kitces is probably one of the Internet's top ten bloggers for financial planners, and an interesting guy to chat with.

This post by the Mad FIentist describes the "Roth IRA conversion ladder":
Retire Even Earlier Without Earning More or Spending Less

And finally here's this forum's Jeremy describing how he and Winnie pay no taxes at all, yet still do a Roth IRA conversion:
The Go Curry Cracker 2014 Taxes - Go Curry Cracker!Go Curry Cracker!

[steelyman]

I was thinking about this recently. Illinois does not impose state tax on retirement income (including plan withdrawals). Roth conversion of tax-deferred contributions to a retirement plan seem like a "super-Roth" (as far as state tax goes).

I guess that's true for other similar states. It never occurred to me. I've never done a conversion since the first year Roths were available, so I don't know.