Q. I am a FERS employee with 28 years in government service and about five years away from retirement. I evaluate my TSP portfolio allocation based on risk comfort, life expectancy, etc. in isolation from what I expect to receive from Social Security and my FERS pension. My allocation is roughly 60 percent stocks, 40 percent bonds (mostly G Fund). Recently, I have been told that because I will have a guaranteed income stream from my FERS pension, I can afford to take more risk in my TSP and I should move money from the G Fund to the stock side of the portfolio. What are your thoughts on what role a FERS pension should play in one’s TSP portfolio allocation decision?
A. First, you should not consider the G Fund to be a bond holding. It is comparable to cash. The F Fund is a bond fund.
Your TSP account is essentially a pension fund, and like any pension fund, it should be managed to support the benefits it will be expected to reduce. In order to do this, you must identify the size and timing of the benefits (distributions) your account will need to produce over its lifetime — at least, year by year. Knowing how much you’ll have coming in each year from sources like pensions and Social Security, or like earned or rental income, is essential to figuring this out. For example, if you plan to spend $50,000 in 2025 and will receive $15,000 from your FERS annuity and $20,000 from Social Security, you’ll need to obtain the remaining $15,000 from your TSP account that year.
Once you know what benefits your account will need to pay over your lifetime, you’re in a position to begin the analysis needed to determine your TSP allocation. Any other approach is nothing more than a guess, including that “risk comfort” approach you’ve been using.