Q: I am a retired executive currently working as a re-employed annuitant during parts of the year. I always look forward to reading your Federal Times column. I have a question regarding some advice you provided in the Dec. 13th edition.
You indicate that it’s best to use the Thrift Savings Plan’s L Funds as planning guides. You recommend choosing the L Fund that corresponds to your life expectancy and apply its beginning asset allocation to your account, then periodically adjusting the mix. I had always heard that you should choose the L Fund that most corresponds to the date you anticipate needing the funds. In my case, I’m fully invested in the L 2020 and it almost sounds like I’m being too conservative. Did I misunderstand your advice? I don’t plan on needing the funds in my TSP for some time.
A: What I’ve provided in my articles is not the optimal solution, but what I recommend to folks who don’t have the skill or time to prudently manage their TSP account themselves and are not willing to find someone to do it for them. In my experience with clients, the allocations that result from the TSP’s method of selecting L Funds are significantly more conservative than the ones they choose for themselves with the benefit of a clear understanding of the retirement income that can be safely supported by those allocations.
It is important to note that my recommendation assumes that the investor is seeking to maximize the after-tax, inflation-adjusted income that can be safely supported by the allocation over a lifetime. An investor with lower expectations will be free to choose a more conservative and, hence, lower-returning, lower-risk allocation. Ultimately, the best way to choose an allocation is to match its risk and return characteristics with your future cash flow needs, but this exercise requires resources outside those possessed by most individual investors — and many professionals!