TSP’s G-fund: winner of the Nag or the derby?

With inflation at 8.3% year over year, many federal and military investors in Thrift savings plans are looking for a safer haven for both their current account balance and future purchases.

After a long record period, the stock market has acted strangely. A European war, a global pandemic and a broken supply chain will do that. Both for the stock markets and for our mental well-being.

The price at the pump, which the media and politicians love to follow, has never been higher. And a late starter with odds of 80 to 1 won the Kentucky Derby. Go figure!

Whenever there is an economic bump in the road, and this one looks more like a sinkhole, some people panic. And feel they have to do something. Anything, but something. And sometimes they are right. This is where the ultra-safe G fund comes in, which never has a bad day. Of all the TSP options, this is the only one that doesn’t have a government guarantee that it won’t lose money. Although stock index funds like C, S, and I options have by far the best track record, they can and do tank — and currently do. So in that sense Fund G looks good to many with its recently increased 3% guaranteed return. Highest in decades. It corresponds to the definition of a haven of peace. But…

Many financial planners say it depends on the definition of safe. If it’s not losing money, bingo! But if it also doesn’t keep pace with inflation, it also means that over time your nest egg will decrease in value. A 3% return, over time, is not very comforting if the value of your available funds goes down. CSRS federal retirees get full inflation adjustments every January, like Social Security. But for FERS retirees, which includes most current workers, there is a diet COLA feature. In times of high inflation (3% or more), this plan can significantly reduce the purchasing power of retirees. So I asked Arthur Stein, a well-known Washington-area financial planner, what he thought of the G-fund. Most of his clients are active or retired federals. Several are TSP millionaires. And he’s a frequent guest on FNN’s Your Turn radio show on Wednesdays. Here is what he said:

The G fund has two advantages: zero volatility and all holdings are guaranteed by the government.

However, investors in G (and F) funds should recognize that, historically, long-term investments in G and F funds have lost purchasing power. The annual returns of Fund G have gradually declined since its introduction in April 1987. In 2021, the return was 1.4%, 84% less than in 1988. The cost of living (inflation) has more than doubled during this period.

This leaves TSP participants with a dilemma. Should he invest for:

  • The lower volatility and lower chance of losing principal (“safety”) offered by G and F funds (bonds) and accepting the greater probability of declining purchasing power; or
  • The higher potential growth historically offered by equity funds, accepting higher volatility and market declines for the opportunity to increase purchasing power.

Almost useless factoid

By David Thorton

Surgeons perform better when listening to music; in one study, AC/DC led to better performances than the Beatles.

Source: National Library of Medicine