The Disadvantage of Contributing to the Thrift Savings Plan Lifecycle Funds, by Dennis Snoozy

dennis snoozy
January 11, 2021

The Thrift Savings Plan Lifecycle funds are designed to minimize the risk of investors as they get older. But what serves as a great investment option for workers in their earlier days in the workforce becomes less suitable as they near retirement. Employee’s individual goals and need should influence their investment choices, but many people misuse the Lifecycle funds. If you want to know whether this fund will meet your requirements, you must first see the funds’ value.

The Lifecycle funds have two main characteristics:

1. Simplicity: Investing appears complicated most times. The Lifecycle funds are designed to simplify the Thrift Savings Plan investment process. It allows participants to have their money in a particular fund. This fund will automatically change as they are close to retirement.

2. Better default option: The G fund is the default for federal employees before the L fund was designed. Since many people on the TSP don’t change their allocation, they lose years of potential investment growth because they are not aggressive with the plan. Currently, the Lifecycle fund, which is the closest to workers’ expected retirement data, is the default fund for new employees. This implies that if new workers don’t alter their allocation, their investment can grow as they start their careers.

The disadvantages of the Lifecycle funds

You don’t need to aggressively invest if you are still a young federal employee because you still have more time to fund your TSP. But when you are approaching retirement, your situation will determine the best investment strategy suitable for you. Based on individual circumstances, two people may need different investment strategies even if they will retire at the same time. Personal retirement elements, such as retirement savings and geographical location, will affect your choice of investment strategy. For example, some employees have retirement savings that exceed their retirement needs. In contrast, some have retirement savings below their retirement needs. The TSP Lifecycle funds are a one-size-fits-all solution because it works in all situations.

Over time, the Lifecycle funds get more conservative, and all your savings eventually become income funds. The Lifecycle income fund has allocations in the G fund, F fund, C fund, S fund, and I fund. The G and F funds contain 80% of the allocations because they are very conservative. Despite the safety of the Lifecycle fund, it grows slowly over time. The growth rate of Lifecycle income funds is merely above inflation, but it is more conservative for many retirees.

The majority of federal employees understand the need to invest conservatively as they approach retirement. Still, too much conservative investment may be dangerous if you want to have enough money during your retirement period. Due to the lasting lifespan and retirement period, many people depend on their investments to maintain their living costs while tackling increased prices due to inflation.

The Lifecycle fund is good, but you might be disappointed if you blindly assume that the Lifecycle fund fits your situation. The essential thing is that you understand the purpose of the fund and if it suits your situation.