When it comes to managing investments, everyone’s needs are different. Your investment needs include:
An Impersonal Touch
Lifecycle funds only focus on one aspect of your investment management: you time horizon. As we discussed a moment ago, the amount of time you have left to invest is only one piece of the investment management puzzle.
The date you retire is the only thing you have in common with the other individuals in the Lifecycle fund, so the plan administrators need to make some assumptions about your personal wants and needs. They assume that the average investor is fairly risk averse, which means that they do not wish to take on very much risk. To accommodate this average investor, they put a very conservative tilt onto the portfolio.
Check Out The Video Overview
Here’s The Original Version Of The TSP Lifecycle Fund Video
Wait, That’s How My Money is Being Invested?
The TSP.Gov website allows us to view the investment strategy of the Lifecycle Funds over the lifetime of the fund.
In this series of charts, we see the change in the 2020 Lifecycle fund between its inception in August 2005 and 2020, when the fund’s management ends. As you can see, by retirement, the fund’s assets will be 74% invested in the G Fund, which is government securities.
With the medical advances of recent years, most people should plan to have a 30 year retirement. The G Fund returned 2.45% in 2011. Inflation was 3% in 2011. Money invested in the G-Fund lost 0.55% of its purchasing power. Over the long-term, low returns from government securities will either shorten the life of your portfolio or drastically reduce the amount you can withdraw each year. To keep up purchasing power over the long-term, it’s wise to have much more exposure to equities.
What If Things Are Different When I Retire?
In the next few years, interest rates will most likely remain low. Interest rates are now at record lows and the Federal Reserve plans to keep rates low for the next several years. Low interest rates and stimulus money from the Federal Reserve will most likely keep inflation around 3% or higher.
This pressure by the Fed will help keep interest rates on government securities in the G Fund incredibly low, which will make it difficult for your portfolio to keep up with inflation. An asset allocation that is 74% government securities will most likely not even support a conservative income from your portfolio.
The TSP administrators say that Lifecycle funds are a smart and cheap way to manage your money, but this lofty goal falls short of its mark. The ultra conservative allocation that these funds will ultimately reach can hamper the survival of your portfolio throughout retirement.
To learn more about the TSP check out my post Government TSP: Overview of the Federal Thrift Savings Plan Funds.
Have Any Questions?
If you have a question about the TSP, investing or planning for retirement, please contact me.