This article outlines a process to find a certified financial planner to design a TSP allocation that makes sense within the context of your overall retirement planning.
If you'd like to discuss this individually, here's a link to our page where you can request a personal consultation to speak with our experts: TSP Retirement Planning
Step 1 to Find a TSP Advisor:
Narrow your search exclusively to financial advisors who act as fiduciaries at all times.
This is a critical first step. Do not work with an advisor who is familiar with the TSP but is not a fiduciary at all times.
Familiarity with the TSP can build undeserved credibility, which is later used to sell poor investments or high-commission financial products that TSP participants do not need and do not benefit from.
A fiduciary financial advisor has a legal obligation to put your best interest first at all times. Fiduciaries generally provide higher quality advice than commission-driven financial salespeople.
Unfortunately, most financial advisors are not fiduciaries. We wrote a detailed article about why fiduciary matters, how to find a fiduciary advisor, and how to use the website investor.gov to determine whether an advisor you are thinking about hiring is a fiduciary at all times or not: Find a Fiduciary
A fiduciary financial advisor who is familiar with the TSP can:
Provide investment advice while your funds are in the TSP
Explain TSP distribution options
Help with the paperwork you’ll need to complete when it comes time to access your TSP funds
Help you coordinate your TSP with other aspects of your financial life into a well-organized, comprehensive plan.
Provide advice as a fiduciary at all times.
Step 2 to Find a TSP Advisor:
Ask the 6 questions below to assess whether the financial advisor has familiarity with TSPs:
What are your thoughts about TSP fund performance?
What would you suggest for my TSP allocation strategy?
TSP vs. 401k: What’s the difference?
TSP vs IRA: What’s the difference?
Can I rollover my TSP to an IRA while I’m still employed?
How does withdrawing from my TSP account after leaving federal service work?
Connect with our fiduciary advisors by clicking here for a detailed analysis of the TSP in addition to other aspects of your retirement planning.
Question #1: What are your thoughts about TSP fund performance?
The TSP stock funds (C Fund, S Fund, I Fund) track broad stock indexes. Rather than make investment decisions based on past performance, you’ll benefit more from learning about how each fund invests.
With the C Fund, your performance will roughly equal the performance of the S&P 500 index, which is an index of the 500 largest US companies. This fund owns companies such as Apple, Microsoft, Amazon, Google, Visa, and many other high-quality US companies.
Generally, as leading US companies grow their profits over time, this will lead to long-term growth over time for money invested in the C Fund too. Even though the C Fund invests in some of the highest-quality US companies, it is still subject to significant short-term fluctuations.
While it’s likely to produce competitive growth over the long-term, the C Fund is also very likely to experience significant down weeks, months, years, and likely consecutive down years from time to time. Because of that, the C Fund is most suitable when used as a long-term growth investment.
It’s important to also make sure there’s enough money in cash and high-quality bonds (such as the G Fund) so that you aren’t forced to sell the C Fund at bad times. Our article here discusses investment allocation in more detail: What Are The Best Investments For Retirement?
With the S Fund, your performance will roughly equal the performance of an index of small companies that are not big enough to qualify for inclusion in the S&P 500 Index discussed above. In general, the average company in the S Fund may not be as financially strong as some of the leading US companies mentioned above. However, it’s also possible the average company in the S Fund will experience a faster rate of growth because they’re starting from a smaller base.
As companies become larger, it generally becomes more challenging to maintain the same rate of growth. While it’s possible that companies in the S Fund will, on average, produce more growth than companies in the C Fund, that’s not necessarily going to be the case. Some of the largest US companies mentioned above have done a great job at maintaining growth even as they have become very large, at least for now.
With the I Fund, your performance will roughly equal the performance of the MSCI EAFE index, which tracks the performance of international companies primarily in Europe, Australia, and Asia. As of 2020, this index is weighted towards companies headquartered in “developed” non-US countries such as Japan and the UK. Companies in some of the fastest growing countries, such as India for example, are not included in this index as of 2020.
For TSP participants, it’s not necessarily essential to invest in the I Fund to have a “globally diversified” portfolio. The leading US companies mentioned above, found in the C Fund, are very global already. For the stock portion of your TSP investment allocation, you do not necessarily need to invest in anything other than the C Fund to be globally diversified.
The bond fund available in the TSP is the F Fund. With the F Fund, your performance will roughly equal the performance of an index called the Bloomberg Barclays US Aggregate Bond Index. This bond index is composed of a combination of US Treasuries, Mortgage Securities, Corporate Bonds, and other forms of debt.
Compared to the stock funds mentioned above, the F Fund’s long-term growth rate is very likely to be lower, especially in today’s low interest rate environment. However, the F Fund will also provide some stability in times of uncertainty.
Compared to the G Fund (discussed below), the F Fund will likely provide a slightly higher return under most conditions, but also has more risk of losing principal due to default than the G Fund.
The G Fund invest in short-term US Treasuries. The principal is guaranteed by the US government. This fund will likely produce very little long-term growth and may not keep pace with inflation, especially healthcare cost inflation, over the long-term.
The G Fund is not a very good long-term investment, especially with interest rates as low as they are today. However, it’s a great place for money that will be needed in the short-term because the principal is protected and will remain stable.
The L Fund series creates an investment allocation based on your age. Using age as the primary factor to determine investment allocation is a reasonable default option for participants who completely neglect their investment allocation, but it’s not an ideal way to invest for proactive participants.
For example, let’s say 60-year-old Number 1 needs her TSP money now, and 60-year-old Number 2 won’t need her TSP money for another 10 years. Their investment allocations should probably look very different as a result of their very different time horizons. However, if they invest in the L Fund as a default, their investment allocation will be identical because they are the same age.
Over the average 10-year period, defaulting into the L Fund would likely cost 60-year-old Number 2 a lot of money in lost growth compared to an allocation more suitably created for her unique investment time horizon.
Request a consultation by clicking here for a detailed analysis of the TSP in addition to other aspects of your retirement planning.
Question #2: What would you suggest for my TSP allocation strategy?
The first step to determine your TSP investment allocation is to determine your income needs from your TSP account. As mentioned above, to determine an appropriate TSP allocation, your age should not be the primary factor.
We wrote a detailed article about investment planning for retirement and investment strategy here: What Are The Best Investments For Retirement? The investment allocation strategy discussed in the article linked above categorizes investments and financial accounts into three categories.
1 – The “short-term bucket” – The purpose of this bucket is principal protection and access to money to pay expenses. This bucket will provide the lowest rate of interest, but it’s also the most stable. The G Fund fits into this bucket.
2 – The “middle bucket” – The purpose of this bucket is to provide principal protection and more interest than the “short-term bucket”. The F Fund fits into this bucket.
3 – The “long-term bucket” – The purpose of this bucket is long-term growth to beat inflation over the course of a potentially long retirement. The C Fund, S fund, and I Fund fit into this bucket.
How much of your TSP account should be invested in each of the buckets? You must consider your overall financial situation to create an appropriate allocation, not look at the TSP in a silo. A fiduciary financial advisor with a retirement planning specialty can help you create an investment allocation that’s appropriate for your unique situation.
Connect with our fiduciary advisors by clicking here for a detailed analysis of the TSP in addition to other aspects of your retirement planning.
Question #3: TSP vs. 401k – What’s the difference?
TSP accounts and 401k accounts have far more in common than they have differences. Both are employer-sponsored retirement plans. The employer chooses the investment options that are allowed within the plan, and the employee gets to pick their investments from the menu provided by the employer.
Both TSP accounts and 401k accounts allow participants who have separated from service at age 55 to take withdrawals without a 10% IRS penalty. However, TSP accounts also allow certain categories of TSP participants, such as law enforcement and firefighters, to take distributions as early as age 50 without penalty.
401k accounts do not allow employees to withdrawal funds as early as age 50 based on profession, although there are certain financial hardship provisions that can allow for withdrawals prior to age 55 without penalty.
Request a consultation by clicking here for a detailed analysis of the TSP in addition to other aspects of your retirement planning.
Question #4: TSP vs IRA – What’s the difference?
With a TSP, you have a limited menu of investment choices. Thankfully, the investment options you have in the TSP are relatively good. For example, the C Fund provides a way to invest in the 500 largest US companies for a very low cost.
The G Fund is backed by the US government and, while not a good long-term investment due to low expected long-term returns, is very secure. You have some solid investments choices available in your TSP account.
With an IRA account, you have more control over your investments. For example, with an IRA account you have the ability to invest a portion of the account into a specific high-quality company like Apple. Or, you could invest in a fund that primarily owns a basket of large technology companies and excludes certain lower growth sectors such as banks and utilities.
More choice isn’t always good. It’s best to seek help from an experienced fiduciary financial advisor when designing a customized investment allocation within your IRA, if you choose to go that route. There’s also nothing wrong with keeping the money in your TSP. You can keep the money in the TSP after you retire, but you’ll need to start Required Minimum Distributions at age 72 if you are separated from service by that age.
An advantage of the IRA versus the TSP is that it’s generally easier to take distributions from your account. With most IRA custodians, you have ability to customize your distribution preferences. For example, you can setup your IRA to payout dividends and interest only, or you can choose to setup a fixed monthly payout.
Further, distribution preferences are flexible and easy to change at any time within an IRA account. This assumes that, within your IRA, you invest in liquid stocks, bonds, and funds and avoid illiquid investment products. As long as what you are investing in is fully liquid, you can change distribution preferences at any time within your IRA account.
With the TSP account, you’ll need to submit a form to request a distribution of your money. It’s doable, but there’s generally more ongoing work required to access your money in the TSP versus the IRA.
A disadvantage of an IRA versus a TSP is that, with an IRA account, you generally can’t take withdrawals prior to age 59.5 without a 10% IRS penalty (there are certain exceptions). With a TSP, assuming you are separated from service, you can take withdrawals starting at age 55 for any reason, and potentially as soon as age 50 depending on your profession.
If you are retiring before age 59.5, you probably should not rollover any TSP funds into an IRA that you might need to access before reaching age 59.5.
If you’d like more investment flexibility with some of the money, but you’d also like to leave some money behind in your TSP so that it’s accessible prior to age 59.5, you can do that. It's called a "partial rollover".
A “partial rollover” allows you to move some TSP funds to an IRA to increase your investment options, while also leaving some funds behind in the TSP for access prior to age 59.5 without penalty. Once you reach age 59.5, you can later rollover any remaining TSP funds into your IRA if you chose to do so at that time.
Request a consultation by clicking here and speak with our team of experts.
Question #5: Can I rollover my TSP to an IRA while I’m still employed?
Yes, if you are beyond age 59.5. This is called an "in-service rollover". There are also financial hardship criteria that may permit you to withdraw funds before reaching age 59.5.
The primary reason a TSP participant would pursue a TSP "in-service rollover" is to move funds from their TSP account into their own IRA account to gain more choice over their investments.
As mentioned above, more choice isn’t always better. If you decide to rollover your TSP funds into an IRA, seek help from an experienced fiduciary to design an investment allocation that’s appropriate for you.
Request a consultation by clicking here for a detailed analysis of the TSP in addition to other aspects of your retirement planning.
Question #6: How does withdrawing from my TSP account after leaving federal service work?
As stated earlier, you’ll generally need to complete a form to access your money.
You can take a withdraw. A withdrawal is federally taxable, potentially state taxable depending on your state (TSP withdraws are not taxable in Pennsylvania), and potentially subject to a penalty if you are below either age 55 or 50 depending on your profession.
You can also do a “rollover”. A “rollover” allows you to move funds from your TSP into an IRA of the same type without tax. Pre-tax TSP funds should be rolled over into a Traditional IRA, unless you are intentionally performing a Roth conversion.
Roth TSP funds should be rolled over into a Roth IRA. Taxes may apply when you take withdrawals from the IRA depending on the type of IRA and the specifics of the withdraw.
To summarize, where can I find a TSP advisor?
First, restrict your search exclusively to financial advisors who are fiduciaries in all cases. Again, this article includes more detail about why fiduciary matters, as well as instructions to lookup an advisor to see if they are fiduciary at all times: How to Find a Fiduciary.
Second, at a minimum, ask the six questions from this article to gauge if the financial advisor is familiar with the TSP program.
The TSP account is usually only one part of a participant’s overall financial situation. A fiduciary financial advisor with retirement planning expertise can help you coordinate your TSP and other aspects of your financial life into a well-organized, comprehensive plan.
If you'd like to discuss this individually, here's a link to our page where you can request a personal consultation with our fiduciary advisors who are well-versed in the TSP: TSP Retirement Planning