Posted: 1/17/2009 7:37:45 PM EDT
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Hi there. I'm looking for some input into my TSP (government version of 401k) allocation.
I'm 25, married, and have no children (and no immediate plans for children). My income is approximately $60,000 per year, and my wife makes about $35,000 per year. I recently accepted a government job that I'd ideally like to retire from. If that scenario occurs, I will have a pension of approximately 40% of my final take-home pay. Since this isn't guaranteed, however, I'll be depending on my TSP for my primary retirement funding. I'm currently contributing 5% of my gross salary and will have a 5% match starting in a couple of months. I would like to boost my contribution to 10% within the next 12-18 months, and will add another 5% several years down the road once I transition into a higher paying position. I am not risk adverse, but I'm also not a huge gambler. I currently have my allocations set up as follows, but this allocation is an "educated guess" based on the information in the TSP guide book. I've put the majority of my allocation into a targeted retirement fund for 2040. I have a solid 40 years before I plan on retiring, so I'll likely be closer to 2050, but that option won't be available until 2010. For diversification, I put 15% into common stocks, 10% into riskier small caps, and 5% into international stocks. Is this an appropriate amount of diversification? Too much diversity? Even though I'm not risk adverse, should I throw a bit of money toward government securities or fixed income indices? Thanks for your advice! If I can provide additional information, please let me know! -James Edit: I only have approximately $5,000 in retirement savings thus far. I have $4,000 in a 401K that I'll be rolling into my TSP next week, and about $1,000 in the TSP so far. |
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I'm a Govie as well. Currently have ALL of my funds in the L2040.
The Life funds are designed to provide you with diversity and fund management. Each L fund (2010, 2020, 2030 and 2040) is adjusted every year to accommodate your retirement target closing in. Having money in additional funds puts you heavy in those funds (as the Lifecycle fund already has money in each for you). But ultimately, your distribution is your personal preference. As the stock market is down now, and people talk about a recession and possibly a depression, maybe it is time to throw money into some of the higher risk and get the benefit of dollar cost averaging? With a retirement target of 2050, you are correct, you have DECADES for the money to grow and can afford losses more easily now. (NOTE: I'm not a financial advisor, I'm an Engineer) I would HIGHLY recommend pushing your TSP contribution to the maximum. I adjusted mine the other week to the newly raised Federal limit ($16.5k). An easy way to get to this is to increase your contribution percentage every January with the increase in the COLA. Every time you get a raise, bump it up by 1-2% as well. Essentially taking money that you won't miss and just holding your budget the same. But the power of compounding interest is HUGE given 40 years to accrue, so the more you put in now the better. |
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For diversification, I put 15% into common stocks, 10% into riskier small caps, and 5% into international stocks. Is this an appropriate amount of diversification? Too much diversity? Even though I'm not risk adverse, should I throw a bit of money toward government securities or fixed income indices?
You basically have no diversification at all. Under stress, most equities tend to act alike - just look at a chart of your holdings (or close facsimiles of your holdings): 
So, yes you should have exposure to bonds and other things that offer something different than stocks, and it should be more than a bit or a meaningless token. Don't confuse high risk with high reward. High risk offers the potential for high reward, but also offers the potential for significant loss. Remember, your match gives you an automatic 100% return, you probably shouldn't be as aggressive as you think you need to be. |
| If you like the idea of the lifecycle funds in that someone is helping you to decide what percentage and where to put your money why not just check the tsp website as to what the L2040 fund is made up of? Then go into your tsp account and allocate those percentages to the available funds. You will then have the same make up as the L2040 fund and your expenses will be much less because you're the one doing the work. The whole process might take you 10 minutes once a year. |