Previous posts have looked at the I fund of the TSP and why people may shy away from investing in it, and at the other funds—G, C, S, F. Now, we will focus on the L funds in the TSP, or Lifecycle funds.
Lifecycle funds use determined investment mixes that are tailored to meet investment objectives based on various timelines (when withdrawals are expected to begin). The objective is to strike the optimal balance between the expected risk and return associated with each fund.
The strategy is to invest in an appropriate mix of G, F, C, S, and I funds for a specific timeline, or target retirement date. The investment mix of each L fund becomes more conservative as the target date approaches. This strategy assumes that:
- The greater number of years you have until retirement, the more willing and able you are to tolerate fluctuation in your TSP account.
- For any given risk level and time horizon, there is an optimal mix of G, F, C, S and I funds that provide the highest rate of return.
Each quarter, L funds’ target asset allocation change, moving towards a less risky mix of investments as the target date approaches. When an L fund has reached its target date, it will be rolled into the L Income fund. This fund is the most conservative of the L funds and does the following:
- Focuses on capital preservation while providing small exposure to TSP’s riskier assets (C, S, and I funds) to reduce inflation effect on your purchasing power.
- It is also designed to produce current income for participants who plan to start withdrawing from their TSP accounts soon and for those who are already receiving monthly payments from their accounts.
- Has a set allocation that doesn’t change over time.
Like the other TSP funds, you are subject to investment risks because this fund is associated with the individual funds.
The account isn’t guaranteed against loss, therefore, L funds can have periods of gain and losses just like the individual TSP funds do.
L funds simplify fund selection; you choose the fund closest to your target date.
When you invest in L funds:
- You can be sure your TSP account is broadly diversified.
- You don’t have to remember to adjust your investment mix as your target date approaches, it’s done for you.
Here is a look at the different L funds.
This fund is for those currently withdrawing from their TSP accounts in monthly payments or who plan to begin withdrawing before 2018. The objective is to achieve a low level of growth with a higher emphasis on preservation of assets. Unlike the other four L funds (see below), the L Income fund asset allocation doesn’t change quarterly. However, it is rebalanced daily to maintain the target investment mix.
This is for those who withdraw their money beginning 2018-2024. The objective here is to achieve a moderate level of growth with a moderate emphasis on preservation of assets. The allocation is adjusted quarterly.
This fund is for those who withdraw their beginning 2025-2034. Its objective is to achieve a moderate to high level of growth with a low emphasis on preservation of assets.
For those who will withdraw between 2035-2044. The objective here is to achieve a high level of growth with a low emphasis on preservation of assets.
This is for those who will begin to withdraw money in 2045 or later. The objective is to achieve a high level of growth with a very low emphasis on the preservation of assets.