The Thrift Savings Plan's (TSP) recent announcement that it would be offering five new Lifecycle Funds caught my attention. Even though the "L" funds have been available since 2005, not everyone understands them.
Beginning in July 2020, the so-called target date will be offered in five-year increments instead of 10. This type of investment may be useful for investors that are unwilling, unable or uninterested in spending a significant -- notice I did not say "no" -- amount of time managing their TSP portfolio. The appropriate Lifecycle fund is also the default -- where your money goes if you make no election when you're newly enrolled in the TSP -- option.
What is a Lifecycle Fund?
A target retirement date fund is a professionally managed mutual fund that allocates your investment among a variety of different types of assets: stocks, bonds, cash, etc. The portfolio is rebalanced periodically and becomes more conservative as the target date nears. Although this type of fund is designed to be a "one stop shop" by providing a low-maintenance diversified portfolio, it does not absolve you from planning for your goals and keeping an eye on your investments. The Lifecycle funds available within the Thrift Savings Plan (TSP) are a good example of this type of investment.
Why is a Lifecycle Fund a Good Thing?
Being a "glass half full" guy, let's first look at some of the potential benefits of target retirement funds like the L funds. They don't take a lot of effort. You invest in a single fund and get a variety of investments that are managed for you. Since the portfolio of investments is picked, rebalanced, and designed to become more conservative as you approach the target date this type of fund offers the advantage of allowing you to build and maintain a diversified portfolio while staying firmly planted on your couch.
Gone are the tough decisions to buy or sell and the headache of rebalancing your investment mix. All you must do is keep your investments going, bump them up with each pay raise or promotion, and periodically review your fund to ensure it remains an appropriate investment vehicle in the context of your plan.
The TSP Has Very Low Expenses
Since we are talking about the TSP, you can rest assured that what you're paying is nominal. In 2019, the average net expense ratio for all of the L funds was around 42 cents per $1,000 invested. That's a very low number and that's a good thing.
The Lifecycle Funds Offer no Guarantees
Target retirement funds do not offer a guarantee and are certainly not without risk. Although they are diversified across a variety of investment classes, they are not immune from market corrections or bear markets. Additionally, any fund is just an investment tool and not a cure all. You still have to figure out how much you need to save to meet your goals, monitor your overall portfolio and progress towards those goals, and set aside money for your short term needs. But if you're looking for a simple and convenient way to invest for retirement a target date retirement fund may be the right choice. You can learn more at tsp.gov.
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