The L funds have done a lot of good but are often misused. They often start as a great solution but for most people, they get worse as they approach retirement.
But before I get started, I have to say that this article is not meant to be personalized investment advice. It is my opinion and is meant to be educational. My hope is that this helps readers better understand what might make sense for them and without taking my opinion as law.
So, as you probably could tell from the title of this article, I’m not a huge fan of the L Funds. Overall, they tend to be misused. That being said, there is a lot of good that has come from them.
What The L Funds Are Good At
Simplicity
Many times, investing gets overcomplicated. The L funds were created to help simplify TSP investing and allow federal employees to have all their money in a single fund that changes automatically as they approach retirement.
Default Fund
Before the L Funds became the default for all new employees, the default was the G fund. This meant that many people never chose to change their TSP allocation and consequently lost years of potential growth because they were not more aggressive. Now, the L fund that is closest to your retirement date is the default fund for new employees. This means that even if new employees don’t change anything, their TSP will have a much higher chance of growing during the early parts of their career.
The Ugly Side of the L Funds
When federal employees are young and have a lot of time before retirement, there are not many times that it doesn’t make sense to invest aggressively. But as people approach retirement, the best investment strategy starts to change depending on the situation. Even if you are retiring at the same time as someone else, the best solution for you will probably be different than it is for them.
Some people have very high retirement savings compared to their retirement needs and some people have smaller retirement savings. Some people retire in New York City and others in a small town in Oklahoma. Because the TSP is most often used to fund your retirement, the best TSP investment strategy will depend on the personal elements of your retirement. The L funds are the TSP’s best shot at a one-size-fits-all solution so by definition, it is generic and not tailored to your situation.
As many of you know, the L Funds get more conservative over time and all eventually become the L Income fund (the most conservative L fund). In October 2020, the L income fund has the following allocation:
https://www.tsp.gov/funds-lifecycle/l-income/
As the chart shows, almost 80% of the fund is made up of the G fund and the F fund. Because these two funds are very conservative, the L income fund is relatively “safe” but does have slow growth over time. Since 2006, the L Income fund has grown 4.26% on average per year. With inflation averaging anywhere from 1.5%-3%, the L Income fund is beating inflation but not by much. In my experience, the L income fund is too conservative for most retirees.
Many people know that they should invest more conservatively as they approach retirement but investing too conservatively can be very dangerous as well if you don’t want to run out of money in retirement. With lifespans and retirements lasting longer, many people will rely on their investment to ensure that they can maintain their standard of living their entire life all while fighting back rising prices caused by inflation.
Conclusion
When people blindly assume that the L funds are perfectly suited for their situation, they may be disappointed. But again, I want to say that the L Funds are not bad. This article is not intended to tell people that they should or shouldn’t use the L funds. The important thing is that you understand what the L funds are designed to do and if that makes sense for your situation.
