As you may (or may not) heard from your team members or leadership, the TSP (Thrift Savings Plan) has finally released their three new lifecycle (L) funds – L2055, L2060, and L2065. I just wanted to take a second to chat on these options.

First things first – What ARE lifecycle funds?

Lifecycle funds are funds that automatically rebalance (in TSPs case) quarterly to lower your risk of loss as you get closer to the year chosen.

As an example, let’s use these made up numbers to better explain how they work:

As you start investing in a farther date target fund (such as picking the L2065 vs 2055), you want to be higher in stocks than in bonds or cash because you have a higher tolerance for risk as you are planning on pulling that money out 10 years later. Let’s say you will start with an 80-20 split between stocks and various bonds/money markets. As you get closer and closer to retirement, you might find your fund has changed to a 60-40 split, and later, maybe even 50-50. This is done in case an event such as COVID happens on your retirement year, so your portfolio does not shrink by 50%, but rather only 25% (as you only have a 50-50 split, instead of 100-0). On the flip side, if the stock market is doing extremely well, and goes up 30% in one year (such as 2019 was for many people 100% in the C fund), you will only see half of those gains.

While this sounds like a lot, and can be worth hundreds of thousands if your portfolio is large enough, keep in mind that this is for your safety. If you have a comfortable $1 million in the TSP and are ready to full retire with those numbers, it is more important to keep that $1 million rather than risking it going to $800K over a potential gain of $1.2MM.

Back to the new funds though…

After years of arguing AGAINST L funds due to having a far higher allocation that necessary in the bond/money market funds even at the farthest out L fund allocation, the TSP is finally taking stock of industry practices and, this time, even the most conservative fun (L 2055) is starting off with a 99-1 equities split and will remain so until 2027! The other funds, such as the L2060 and 2065 all lag behind 5 years, so you’ll see them picking up past the 1% mark in 2032 and 2037 respectively. You can see their exact breakdowns and re-balances on the TSPs own website if you’d like.

Finally, the vindication that I have been waiting on that L funds WERE TOO SAFE for our younger service members! Now I have no problem advocating for L funds for those that want a complete “set it and forget it” option and will say that it is appropriate for the majority (90%+) of members out there.

As for me, I’m sticking with my own portfolio that will remain 100% equities for the foreseeable future, but more on that later.

– Art