facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause

Thrift Savings Plan Life Cycle funds

As a federal employee or military member, you are generally automatically enrolled in the Thrift Savings plan.  But where do your initial investments go?  What are they invested in?  The answer is that newer employees of the federal government and military members are automatically invested into the Life Cycle funds of the Thrift Savings Plan.   Life cycle funds are target date funds meaning they automatically adjust their allocation based on a given planned year for retirement or date which you plan on withdrawing funds from the Thrift Savings plan.

The overall objective of the Lifecycle fund is to strike a fail balance between expected risk and return associated with those funds based on a future date.  The Life Cycle funds are horizon based which means that at some point we want the portfolio to look a certain way.  Generally, more conservative as you approach retirement.  The Life Cycle fund automatically adjusts to get to that future over time.  

Thrift Savings plans Life Cycle funds are made up of the five core funds which are a part of the Thrift Savings Plan.  Most people who have been investing in the Thrift Savings Plan are familiar with these funds.  The C, S, I, G, and F funds each invest and track a specific market index.  The Life Cycle fund uses a combination of these 5 funds to build a portfolio that is appropriate for your age based on the projected retirement account of the fund.  The five Thrift Savings Plan funds are:

  1. Government Securities or G Fund.   It invests in short-term US Treasury bonds.
  2. Fixed Income or F Fund.  Invests in government, corporate and Mortgage-Backed US Bonds
  3. Common stock or C Fund.  Invests in large companies traded on the US Stock exchange.
  4. Small Capitalization Stock or S Fund.  Invests in small to medium sized US Companies.
  5. International Stock or I fund.  Invests in international stocks of more than 20 developed countries.

The lifecycle fund is much more aggressive in your younger years and gradually shifts to a more conservative portfolio as you progress toward the projected retirement date.  They are organized based on 5-year increments with the idea being you pick the year closest to the year you plan on needing the funds which may or may not be your actual retirement date.  

Life cycle funds benefits

One of the greatest benefits of the Life Cycle funds is the simplicity.  In general, as you invest you should set a target allocation.  A certain percentage of each of the funds based on your individual risk acceptance level.  Then adjust those percentages back to the planned level by buying or selling individual funds at a planned interval arriving back at your acceptable level of risk tolerance.  This is called rebalancing.  The idea is that as your winners grow, they become bigger parts of your portfolio.  When you rebalance, you sell winners locking in the gain and buy the losers.  Now buying the losers might not sound great, but it provides you a way to buy an investment at a reduced amount with money made from the winners in the hopes that as the market cycles the losers eventually become winners which you have bought while at a reduced price.  As the cycle repeats itself you buy investments at a reduced price and sell them when they are increased.  By using a Life Cycle fund, you can avoid all the work and time of rebalancing.  The Life Cycle fund takes care of those actions for your portfolio to be properly balanced based on your acceptance level of risk.  Life Cycle funds rebalance daily to keep the portfolio allocation correct and they change allocation percentages on a quarterly basis.  

The simplicity makes Life Cycle funds a great option for novice investors.  The main choice is which year fund to invest into.  That is simple as it is the year closest to the one you expect to being using the funds.  Generally, that is your projected retirement for federal employees or the date you expect to begin withdrawing funds if in the military.  

It is key to understand that if you use a Life Cycle fund it is important to invest only in this option.   The Life Cycle fund is meant to be a one stop shop.  One where you set it and forget it.  Some members invest in the other 5 core funds negates the whole purpose of the Life Cycle fund.  

 In Summary.

Thrift Savings Plans Life Cycle funds are a great option.  They take all the complication out of maintaining a properly diversified portfolio.   While great for the novice investor they are also great for experienced investors who don’t have the time or desire to dedicate time to maintain a properly allocated portfolio.