Is the TSP G Fund Safe or Risky?

The G Fund is often described as the safest of the TSP investment funds. Sometimes it is called the “super safe” G Fund that “never has a bad day.”

As a result, TSP participants keep a higher portion of their TSP balances in the G Fund than any other Fund.

Account Allocations as of December 31, 2016

Source: Federal Retirement Thrift Investment Board.

However, there are many types of investment risk. The only guarantees provided by the G Fund are the lack of volatility (fluctuations in value) and the guarantee against loss of principal provided by the Government. None of the other TSP funds offer those guarantees. Click here for more information on volatility and TSP Fund returns.

However, historically, using the G Fund as a long-term investment exposed investors to a high risk of losing purchasing power. The rate of return for the G (and F) funds was not sufficient to increase purchasing power after subtracting out the negative effects of taxes on withdrawals and inflation.

Example

At the beginning of 1993, retirees Bill, Jack and Mary each have $10,000 in the TSP. They each invest that $10,000 in one fund:

• Bill in G (US Treasury bonds),
• Jack in F (government and corporate bonds) and
• Mary in C (stocks of large US companies).

Each of them withdraws the same dollar amount annually to buy 2000 first class stamps, after paying taxes of 30% on the withdrawals.

Why First Class stamps? First Class stamps are unique in one respect; the value (service provided) is the same year after year. Thirty years ago, one First Class stamp was sufficient to mail a letter anywhere in the US. The same is true today. That makes First Class stamps are a good proxy for inflation.

Result: Even though equal dollar amount are withdrawn from each fund each year, the G Fund is exhausted in 2009 and the F Fund in 2010. But the C Fund still had a positive balance in December 2016. In fact, the C Fund balance was 37% higher.

Yes, fluctuations in value (volatility) are much lower for the G and F Funds. Unfortunately, the low volatility occurs while the G and F Fund values decline to zero.

Few FERS retirees will be able to live on “guaranteed income” (Social Security and Federal annuity) until they die (more information here). At some point, retirement expenditures will exceed guaranteed income. Retirees then need to start withdrawing from their investments to supplement guaranteed income. Those investment withdrawals need to last as long as the retiree is alive. That will be difficult to achieve if purchasing power of the investments is declining.

Past performance is no guarantee of future performance but tell me why the G Fund is considered so “safe?

Notes:

This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.

Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.

Keep in mind that:

• Past performance is no guarantee of future performance;
• Investments involve the risk of loss of principal and earnings;
• ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
• “Average annual return” evens out variations in the actual year-to-year returns.
• ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
• None of the information provided is necessarily relevant to anyone’s personal situation. Circumstances differ among individuals and they should not assume that these generalizations or information apply to them.
• Investments mentioned may not be suitable for all investors.