The G Fund is incredibly unique. It is the one TSP fund that the government guarantees won’t lose money. But as many feds have found out, you are also guaranteed to not earn much either.
But interestingly enough, this hasn’t always been the case. Back in the late 80’s and early 90’s, the G Fund earned between 8%-9%. That is pretty close to the average return of the C Fund!
But as you can see from this chart, the return has steadily declined over the last 30 years.
https://www.tsp.gov/fund-performance/
But the decline in G Fund returns is not because the government has gotten stingy, it is a combination of historically lower inflation and interest rates. For example, if you were to get a mortgage back in 1990, you would have an interest rate of around 10%!
And whenever I talk about this, the first question that I get is “so should I still invest in the G Fund?” And it is a valid question. Because interest rates are so low everywhere, other investments that are considered “very low risk”, like the G Fund, are also paying close to nothing. In 99% of cases, to get a higher return these days, you are going to have to take more risk (i.e. investing in the riskier funds). And your ability to take on risk, especially with your retirement funds, is a very personal question that you’ll have to answer yourself.
But I do have to mention that paying off debt can be a great safe investment as well depending on your interest rate.
Paying Off Debt
If you are looking for a safe return on investment, paying off debt is a great way to go. Especially if your debt has high interest (ie credit cards), paying it off can save you way more than you could make on most investments.
Even with debt that has relatively low interest (like a mortgage), paying it down faster makes you an easy 3%-4%. And while interest rates are so low, for many people, it makes sense to do a refinance.
Now, I am not saying that you should always pay off your house instead of saving in your TSP because this isn’t always the best option. Sometimes still having a mortgage in retirement can be worth having more retirement savings. But if you are all set for retirement and looking for a very safe place to put extra money, paying off a mortgage early can be a great option.
Conclusion
Again, I have to repeat that I don’t think the G Fund is a bad investment. It is not. Most of the time, I recommend to my clients to have at least a portion of the TSP in the G Fund. But it is important to know what the G Fund does well and what it doesn’t. You are never going to lose money in the G Fund, but especially now, you are not going to get rich in just the G Fund. Inflation will often eat away at your TSP balance faster than the G Fund can replace it but it can play an important role in a diversified portfolio that makes sense for your situation.
