The Thirty-two Year Decline in TSP G Fund Returns

The Thirty-two Year Decline in TSP G Fund Returns

September 29, 2020

Since its introduction in April 1987, G Fund returns have declined substantially. In 1988 and 1989, the G Fund annual return was 8.8%. In 1990, it was 8.9%. In 2019, the return was 2.2%, a 75% decline from 1988 and 1989.

The decline continued this year. The August monthly return was 70% lower than the return in January.

The decline in G Fund returns is a result of the overall decline in U.S. interest rates since 1988. The G Fund interest rate is based upon the “weighted average yield of all outstanding treasury notes and bonds with 4 or more years to maturity.” When interest rates and yields for those treasury notes and bonds decline, the G Fund monthly return declines.

Because U.S. interest rates are currently the lowest in history, G Fund returns are also the lowest in history.

While G Fund returns declined, the cost of living increased. The cost of living is measured by the Consumer Price Index. The cost of living is more than double what it was in 1988. G Fund returns are down more than 70%. That is a bad combination for G Fund investors.

G (and even F) fund investors need to be aware that the purchasing power of G Fund interest rates has declined over time. Especially after subtracting out the effects of taxes and inflation.

The result: Over-investing in the G fund puts retirees at greater risk of exhausting investments during a long retirement.