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Survivor’s Beware – The TSP Trap

Posted By Dennis Damp On In ANNUITIES / ELIGIBILITY,BENEFITS / INSURANCE,ESTATE PLANNING,FINANCE / TIP,RETIREMENT CONCERNS,SURVIVOR INFORMATION | Comments Disabled
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(Updated 2/26/2023) I received a call from the wife of a friend who passed away. She was concerned about her options after being notified by the TSP that her husband’s account was converted to the G Fund [2] upon his death. She was approached by a financial planner that suggested she transfer her husband’s TSP account to them, and they would manage it for her. Her husband was an astute investor and knew the ins and outs of the stock market and personally managed all of their investments.

 

Don’t Break the Bank.

Before Making a Change

Before considering moving your TSP to a financial planner read Have You Considered Hiring A Financial Planner [3] that discusses the pros and cons that are involved with such a move. A financial planning firm will often charge 1.65% a year of your total account value or more to actively manage your funds. For example, if you have $300,000 in your TSP G Fund, and transferred it to a financial planning firm, they can charge you up to $4,950 a year, with a 1.65% annual fee, for their services plus individual fund management fees and in some cases transaction fees.

The TSP G-Fund charged $177 in 2023, .057% for that same amount, 57 cents per thousand dollars in your account in 2023, and there aren’t any transaction fees! The financial planning firm would have to achieve much higher gains to offset their fees. Typically, higher gains often come from higher risk investments.

Often when a spouse who managed the finances for the family dies, the surviving spouse is caught unawares and doesn’t know how to proceed. This is why a financial plan [4] and estate plan [5] are so important. Not just for annuitants but for all federal employees as well. How would your family cope and survive if something tragic happens to you! I have always been a planner and enjoy the process because it creates order out of potential chaos.




A survivor is vulnerable at the time of loss and for many months thereafter. It’s best to not make any major financial decisions for at least 6 months or more to give you time to grieve and deal with all of the issues at hand. The G-Fund is a safe haven that gives you time to evaluate your options and plan you next step.

TSP Advantages

The TSP is one of the lowest cost plans available anywhere and it can be easy to manage especially for retirees where they, for the most part, want to conserve and not risk their life savings. The G-Fund has NO MARKET RISK and Uncle Sam guarantees that the G-Fund will never decrease in value unlike all other funds. An article that I wrote titled The TSP Advantage (Should I Stay or Go) [6] outlines the advantages of the THRIFT Plan. They charge extremely low management fees that average 69 cents per thousand dollars invested for the traditional G, C, I, F & S funds and 64.8 cents for the Life Cycle funds.

Bond Fund Facts

The disadvantage of bond funds in general right now is that the Federal Reserve is aggressively increasing interest rates, bond funds typically decrease in value because the bonds they hold in their account have a lower yield than the newer issued bonds. That won’t happen with the G-Fund since it is guaranteed not to decrease in value as noted above. When you compare the G-Fund to any Certificate of Deposit (CD) or most other bond funds it’s rate of return is higher than most would expect.

In 2022 the G-Fund rate of return was 2.9%, the same year it was difficult finding a CD paying close to that rate until recently as the short-Term Treasury Bill’s rate skyrocketed to 5%. If the current rate of return stays on track, the G-Fund return in 2023 will exceed 4% and higher if the Federal Reserve continues to raise rates to fight inflation.  Your account will never decrease in value if you retain 100% of your account in the G-Fund.

The L-Income Fund

The problem with keeping everything in the G-Fund is that, for the most part, it won’t keep up with inflation long term. There is another option for annuitants that many select, the L-Income fund [7]. This fund is designed to achieve a low level of growth with a high emphasis on preservation of assets. Unlike the other L Funds, the L Income Fund’s asset allocation does not change quarterly. However, like the other funds, it is rebalanced daily to maintain the following target investment mix:

The L Income fund averaged -2.77% in 2022 compared to +2.98% for the G Fund. There is market risk to 26% of your total investment and the tradeoff for that risk is a higher yield overall as long as the market doesn’t tank again like it did in 2008 and 2009. The ten-year rate of return for the L-Income fund was 3.93 to 2.11% for the G-Fund. The key to determining if you can tolerate the risk is whether or not you need the funds now to live on and when you anticipate taking withdrawals to maintain your lifestyle in retirement.

There are TSP options to consider [8] with your THRIFT plan and the more you know about it the better prepared you will be when the funds are needed. Explore your options carefully and take time to understand exactly what impact your decisions will have on your account balance, the bottom line.

Helpful Retirement Planning Tools 

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, medical procedures, and financial information are subject to change. To ensure the accuracy of this information, contact relevant parties and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended, nor should it be considered investment advice and our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.

The advice and strategies contained herein may not be suitable for your situation and this service is not affiliated with OPM or any federal entity. You should consult with a financial, medical or human resource professional where appropriate. Neither the publisher or author shall be liable for any loss or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

 

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