I am a huge fan of the G Fund in the Thrift Savings Plan (TSP). It is a great fund, but unfortunately, we see so many people approach retirement and abuse the G Fund in a way that just doesn’t make any sense. Depending on how you use it, you could end up doing much worse over time. Today, we are going to talk about the right way to use the G Fund to actually maximize your retirement and ensure you are not being too conservative or too aggressive. You need the right balance for your specific situation.
What Makes the G Fund Unique?
Let’s talk about what makes the G Fund so unique and beneficial. Without boring you with the details, the G Fund is made up of government securities—basically government bonds. The government guarantees that it will never go down in value. While it is not going to grow a whole bunch over time, it will never lose money. If you put $100 in the G Fund, it is never going to drop to $99. It will only go up, albeit slowly. This guarantee of principal preservation is something we love.
The Cash Bucket Strategy
The G Fund is incredibly effective when used as what we call the “cash bucket”—money that you need relatively soon. If you are retiring next month, the money you need in the near term of retirement (let’s call it the first one to four years) is a good amount to have in the G Fund. The exact amount depends on how much you plan to withdraw.
For example, let’s say you want four years’ worth of withdrawals in the G Fund, and you plan to take out $20,000 a year from your TSP. You would multiply $20,000 by four, meaning you would put $80,000 in the G Fund to have your first four years of retirement withdrawals set aside. Because the G Fund is not volatile and never goes down in value, its main job is to be conservative and safe.
A Buffer Against Market Downturns
Why do we want this sort of buffer? It acts as a shield during market downturns. If the stock market is going crazy and your other investments are not doing well, you have a buffer of safe money that you can withdraw and use without having to sell your aggressive investments at a loss.
Think of it like your house: if your half-a-million-dollar house drops in value to $300,000, that is a terrible time to sell. When the stock market is down, we do not want to sell. We want to give our more aggressive investments—like the C, S, and I Funds—time to recover. Having money in the G Fund allows you to do exactly that, because it will not fluctuate like the stock market. This helps protect you against sequence of returns risk, which is the danger of the market performing poorly at the very beginning of your retirement and forcing you to sell while prices are low.
The G Fund vs. The F Fund
Let’s compare the G Fund to the other bond fund in the TSP: the F Fund. We all know that stocks are generally more aggressive and bonds are more conservative. The G Fund is generally more conservative than the F Fund because it does not fluctuate; it just goes up slowly over time. The F Fund, on the other hand, can fluctuate depending on what interest rates do.
Over the long term, the F Fund is most likely going to perform a little bit better than the G Fund. However, in the short term, it can certainly fluctuate more. Generally speaking, for our clients, we recommend having some money in the G Fund and some in the F Fund to maintain a nice balance over time.
Common G Fund Mistakes
There are two common mistakes federal employees make with the G Fund that you want to avoid:
Having too much in the G Fund: We talk to many people who say they are retiring tomorrow, so they moved 100% into the G Fund because they do not want to lose any of the money they worked so hard to save. That strategy works great if your retirement is only going to last one year. However, if you want your money to last for decades and keep up with inflation to maintain your standard of living, that requires a different strategy. The G Fund is great at not losing value, but it is bad at beating inflation. Having too much in the G Fund will erode your purchasing power over time, and you will miss out on necessary growth.
Having too little in the G Fund: On the flip side, having too little is also a problem. If you are too heavily invested in the C, S, and I Funds, you have no buffer between you and a terrible down market which will almost certainly happen multiple times throughout your retirement. You have to be prepared and have enough safe money set aside.
Building Your Strategy
Ultimately, there is no perfect amount of G Fund that makes sense for everybody. If there were, I would tell you, but it doesn’t exist. As a financial planner, I see so many situations, and everyone requires a slightly different flavor. You have to find the right balance, and it has to take into account your pension and your Social Security.
For example, if someone needs all of their retirement income to come from their investments because they don’t have a pension or Social Security, we are going to invest them differently than a federal employee whose pension and Social Security cover half of their income needs. It really comes down to your specific situation and what you want.
Furthermore, this is not something you set once in your TSP and never look at again. Over time, especially in retirement as you make withdrawals and the market changes, you want to go in every single year to rebalance and make sure things are exactly how you want them to be.