The TSP Loan program lets you borrow money from your own TSP account while you are either in the armed forces or employed by the federal government.
HOW IT WORKS
When you borrow the money, it comes out of your actual TSP
account. It can be any amount between
$1,000 and $50,000, not to exceed your contributions and earnings from those
contributions. It does not include any
agency contributions (blended retirement system or BRS) or earnings from agency
contributions.
As you are repaying this loan, it is repaid with interest
through payroll deductions back into your own TSP account. This means that this large amount of money
will not be growing tax advantaged in your TSP account during the time period
you have borrowed it. You lose the
opportunity for that growth. More on
this later.
Keep in mind, even though you are paying interest, it’s a
low, low rate and you pay it back to yourself, so it’s not really a cost to
you. The interest, however, is not
tax-deductible.
LOAN ELIGIBILITY
To be eligible for a TSP loan, the following must apply:
Employed by uniformed services or federal government
In pay status
Only have one outstanding general purpose loan and one outstanding residential loan from any one TSP account at a time
Have at least $1,000 in your TSP account not counting agency contributions and earnings
Have not repaid a TSP loan of the same type within the past 60 days
Not had a taxable distribution of a loan within the past 12 months unless it was the result of your separation from Federal service
Charles Schwab index funds fees are certainly among the lowest.
There is a fierce battle waging between the big firms for
the lowest index fund management fees.
We can thank Vanguard for low fees overall. I think they started kicking too much ass and taking too much market share, so Fidelity and Charles Schwab index funds took notice and started slashing their fees.
This has been nothing but good for investors. I’ll have to keep this and other similar posts constantly updated, as prices are slashed among the big three often. I’ll summarize the recent changes later.
INTRODUCTION OF INVESTING AT SCHWAB
When you buy Charles Schwab index funds, here’s some of what
you get:
Mutual Fund OneSource service funds and other No
Transaction Fee funds are $0 for online trades
All other mutual funds cost up to $76 to buy and
$0 to sell
Online stock trades are $4.95 per trade
Online Schwab ETF OneSource trade are free
Other ETFs can be purchased for $4.95 per trade
If you are going to buy Schwab index funds outside of the Schwab mutual fund family, definitely invest somewhere else. Their fee for other mutual funds really makes it cost prohibitive (that means way too damn expensive!)
WHAT’S AWESOME ABOUT CHARLES SCHWAB INDEX FUNDS?
$167 billion under management in mutual funds
and ETFs
3rd largest provider of index funds
(behind Vanguard and Fidelity)
No minimums to invest (This is an issue at
Vanguard)
CHARLES SCHWAB INDEX FUNDS
I’m going to talk about the features and fees of the three most popular and competitive mutual fund categories. Here we go!
S&P 500 INDEX FUND
Aaa yes, the benchmark of all index funds in my
opinion. It has a dear place in my heart
as my main investment during most of my military career.
Just that.
Nothing else.
It is Warren Buffett index fund recommendation of choice.
Maybe you’ve made some of these mistakes military members make.
I made a few of these mistakes myself, but I’m still here today doing relatively well.
Let’s see how you measure up.
1. GOING INTO DEBT
I want to use a few other phrases to signify what kind of mistakes get military members or families in trouble.
It’s living large when you haven’t made that money yet.
Spending money you haven’t earned. Otherwise known as… Keeping up with the Jones’s.
The funny thing is, the Jones’s are going into debt to keep
up with you too!
Here are some things that will really put you into debt:
Buying or renting much
more house than you need…
I see it time and time again in the military. A married couple with one newborn buying a 4000 sq ft property. Not sure what they will do with 6 bedrooms and 4 baths!
You want to be well off? Get the smallest property that will fit your needs. (Awww, that’s no fun!)
Having a new house custom built…
But it’s so nice to have a big house built to your specifications. You deserve it!
Big houses need lots of things to fill them up. They just don’t look right without expensive
furniture and nice cars. They are also
expensive to heat and cool. Good luck!
New or expensive cars…
Whatever you do, don’t buy a new car. On top of that, don’t ever fall for that crap where you think you are getting some special benefit through military car sales. You are still overpaying and getting KILLED on depreciation the day you put the first mile on it.
I like buying used cars with one previous owner and low mileage. Ideally, you pay cash for it.
Vacationing while overseas…
You are stationed in Germany, and there are LOTS of 4 days
weekends, so you are hitting a different country on each one. You are in Japan, and it’s the perfect
gateway to Southeast Asia. Everybody will
be filling their Facebook and Instagram feeds with travel while stationed overseas.
Don’t overdo it. Take
advantage of existing geography and vacation in areas around you that you. Try to drive there instead of flying, and try
to Airbnb instead of hotels.
DISCLOSURE: THIS POST MAY CONTAIN AFFILIATE LINKS, WHICH MEANS I GET A COMMISSION IF YOU DECIDE TO TAKE ADVANTAGE OF A SERVICE THROUGH MY LINKS, AT NO COST TO YOU. PLEASE READ MY DISCLOSURE FOR MORE INFO.
Do you know how to invest in the TSP in 2023?
You want to invest in your TSP, but you’re worried about inflation, COVID and the markets crashing.
I’ll show you exactly how to invest in the TSP in 2023 including:
What changes to make to your portfolio in 2023
Fatal TSP Mistakes to Avoid
Nine TSP allocation strategies for 2023
How to Protect your TSP balance with bonds
This shows how to invest your TSPin a way that will lead to financial independence at or before retirement.
Through using these types of investment strategies (I’ll tell you exactly which one I used), I became a military millionaire well before retirement.
Anyone can duplicate this.
The allocation strategies I talk about in this article are:
S&P 500 Index Allocation
Total Stock Market Index Allocation
Warren Buffett TSP Allocation
Dave Ramsey TSP Allocation
Paul Merriman TSP Allocation
Total World Stock Market TSP Allocation
Balanced Index Fund Allocation
Three-fund Allocation
My Rich on Money Personal Portfolio Allocation
Changes for 2023
My investment recommendations did not change in 2023.
Why?
The biggest mistake people make with retirement investing is tailoring their strategy year-to-year depending on what’s going on in the world.
This causes you to make far less money than you would if you stuck with the same strategy through thick and thin.
Global Pandemic? Inflation? Overheated stock and real estate market?
So what.
This tried and true method of how to invest in the TSP will make you rich in retirement if you stay the course.
Don’t bounce around with useless TSP investment strategies like timing the market, playing with TSP charts, selling before or after elections, buying on dips, selling on bad news, etc.
Instead, use these tools to make an informed decision about the best long-term TSP strategy for you.
Several of these TSP investment strategies are recommended by well-known money gurus such as Warren Buffett and Dave Ramsey.
I’ve also added every TSP investment option I could find that will work with the available funds.
TSP ALLOCATION 2023
Below is a list of different potential TSP allocation strategies to show you how to invest in the TSP in 2023.
I’ve pulled these from various sources and as I discover new ones, I will update this. Please send me your recommendations with supported documentation.
The S&P 500 Index
This is the asset allocation I used most of my working life.
When I opened a Roth IRA in 1999, I called my bank and asked to put it in the S&P 500. At the urging of an investment advisor (I’m not a fan of most), I put it in an aggressive growth fund instead. In 2000, it lost half its value.
From that day forward, I decided S&P 500 would be the way I invest. I had read before that Warren Buffett said something to the effect of, if you don’t have time to look at stock charts and read finance news all day long, you are better off investing in the S&P 500 index and never touching it.
Actually, here’s exactly what he said in 2013 in his letter to shareholders:
“In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners…but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
Additionally, instead of investing his wife’s inheritance in Berkshire Hathaway stock, he plans to invest it in the S&P 500 index.
That should tell you something.
If it’s good enough for Warren, it’s good enough for me.
To mimic a full investment in the S&P 500 index, just invest 100% in the C fund.
Instead of just investing in the largest companies that make up the S&P 500, you invest in those plus mid and small cap companies as well. This index encompasses the entire U.S. stock market (as the name suggests!)
Financial Independence Retire Early (FIRE) enthusiasts will swear to the superiority of this index to the S&P 500, and to suggest considering anything else is heresy!
It’s clearly more diversified than the S&P 500, and small caps have been known to outperform large caps over the long term, albeit with potentially a little more volatility.
Over long periods of time, the total stock market index fund and S&P 500 had similar performance, and it would be hard to say for sure which will outperform in the future.
In my opinion, you are doing great with either one.
80% C and 20% S will closely mimic this popular index.
While I mentioned earlier I got my idea for an all S&P 500 index allocation from something Warren Buffett said in a newsletter, he actually has more specific instructions I want to address here.
I talked earlier about how he had a plan for how the money left for his wife would be invested. I said he would invest in S&P 500 index instead of Berkshire Hathaway, but that’s only part of the story.
He also has a plan to throw bonds into the mix to smooth out the ride a little bit, which is a common investment strategy. The amount of bonds you throw into the mix will dampen the volatility, but will also limit your upside potential during booms as well.
In the same newsletter in 2013, he talked about his specific advice to his trustee on how to invest the remaining money that will be left to his family:
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund…I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
As luck would have it, this is easy to mimic with the funds offered in the thrift savings plan. 90% C fund and 10% F fund.
Thanks Warren!
Next is Dave Ramsey’s strategy.
Dave Ramsey TSP Investment Advice
I’m a huge fan of Dave’s book Total Money Makeover. His baby steps for getting out of debt are legendary!
He also has TSP investment recommendations on how to invest in the thrift savings plan. His caveats are typical of Dave’s approach to money.
In typical Dave fashion, he suggests that you first pay off all your debt besides your primary residence before you begin long term investing and have an emergency fund of three to six months of expenses as well.
He has two sets of recommendations. One slightly more aggressive than the other.
Next: Money Guru Paul Merriman’s TSP Allocation Reccomendation:
Paul Merriman TSP Allocation Recommendations
Paul Merriman is a successful advisor on mutual fund and index fund investing. He’s an accomplished author, speaker, and is well known for the ultimate buy-and-hold portfolio.
This portfolio is comprised of index funds and has an amazing track record. Unfortunately, due to the various types of funds held in this portfolio, it is impossible to mimic with the TSP funds available.
If you are curious, I wrote an article about this how to invest in this portfolio:
He explains that most notably what is missing from the TSP funds is value funds, which is a key component of his strategy to boost typical index fund returns.
He does make specific recommendations for TSP owners using what is available to us.
He has 3 separate TSP allocation recommendations based on your risk tolerance: conservative, moderate or aggressive.
With all three of these portfolios, the equity part of the portfolio is split the same way:
50% in S, 25% in C, 25% in I.
With the aggressive portfolio, the entire amount is invested this way. The conservative and moderate portfolios have a portion of the total invested in the F and G funds. This portion is not exposed to the risk of the stock market, as the C, S and I funds are.
His advice is that, generally, younger investors can afford to be more aggressive, and as you get older, you become more conservative, but this is a generalization and everybody’s situation may differ.
The conservative portfolio: 18% G and 42% F, and the rest in S, C and I at 50/25/25.
The moderate portfolio: 12% G and 28% F, and the rest in S, C and I at 50/25/25.
The aggressive portfolio: 50% S, 25% C, 25% I
Here is the link to his article on TSP recommendations:
This portfolio mix is a TSP investment strategy modeled loosely after the Vanguard Total World Stock Index Fund (VTWSX).
It will allow you to have exposure to stock markets around the globe, including the United States and developed foreign markets.
The weakness of this portfolio compared to the Vanguard one is exposure to emerging markets.
The I fund currently only has developed economies, and not emerging markets. There supposedly is a plan in place to change the I fund in the future to include emerging markets, but it hasn’t happened yet.
This matters, because the I fund isn’t as diverse as it could be, and that could affect returns.
The Vanguard fund I am modeling after has roughly 60% of the portfolio in U.S. stocks, and the rest are international. To model this portfolio:
Use 48% C and 12% S to make up the U.S. stock market, then use 40% I for the rest.
The 48/12 mix comes from splitting 60% into an 80/20 mix to achieve the Total Stock Market Index.
Balanced Index Fund Portfolio
This portfolio is meant to mimic the Vanguard Balanced Index Fund Admiral Shares (VBIAX).
It is a way to have access to the entire U.S. stock and bond market. It has far less volatility than the Total Stock Market Index by using bonds to smooth out the ride. The balance of this portfolio is 60% stocks, and 40% bonds.
This can be accomplished through 48% C, 12% S, and 40% F.
Obviously, you could adjust the stock/bond ratio to meet any level of risk that you would like.
Three Fund Portfolio
This is a favorite among Bogleheads (Those who love Vanguard and its founder Jack Bogle).
This fund is comprised of 1/3 each of the following:
Vanguard Total Stock Market Fund
Vanguard Total International Stock Market Fund
Vanguard Total Bond Market Fund
This fund is broadly diversified, but heavily weighted in large cap stocks. Remember, the I fund lacks the exposure to emerging markets that the Total International Stock Market Fund has, so the thrift savings plan version won’t be identical until the I includes more countries and emerging markets.
To mimic the Total Stock Market fund, I split the 33% in an 80/20 C/S split. This is where I get my weird percentages from.
A way to closely mimic this portfolio is: 27% C, 7% S, 33% I, 33% F.
Make sure you use these recommended allocations correctly!
There are literally thousands of people who google “Rich on Money TSP Allocation” every millennium. They want to learn from a true master how to invest in the TSP in 2023.
Thank you!
Until now, nobody has ever known how the brilliant mind of a master invests.
I like the idea of being a little heavier weighted on the mid-cap stocks as opposed to being just all S&P 500 index fund. Of course, I’m going against Warren Buffett’s philosophy.
Not sure how wise that is!
I used to have international sprinkled in there at 10%, but I gave up on it. There is enough international exposure between C and S IMHO.
Here it comes…
The Rich on Money world-wide dominance TSP portfolio:
50% S / 50% C
I know, I know. I should be charging for revealing my personal portfolio. I just have too much love and altruism in my heart (and no one reads this blog).
Best TSP Strategy for 2023
Now this is the important part. I reveal secrets here that nobody else knows…
How should you make changes to your portfolio based on current inflation, overheated economic markets and with the uncertainty of the pandemic?
The question of what is the best TSP strategy for 2023 gets asked all the time.
It’s a fundamentally flawed question.
If you are asking which TSP fund is best in 2023, you may think that jumping between funds at the right times depending on cycles, economic data, politics, etc. will yield you superior returns.
You may also believe that experts scouring the market for data and gifted chart readers have some way of knowing which funds will outperform in the near future.
I’m here to tell you, people with those abilities do not exist.
That’s what I gave you in this article. Options for great TSP allocation strategies that will work better than any other strategy.
Using any one of these recommendations over the long term is essentially how to invest in the TSP for 2023 or any other future year if you:
regularly contribute to your Thrift Savings Plan
ensure you are getting matching if it’s offered
stick with the same TSP investing strategy over the long term
Changing strategies or funds often is a recipe for low returns.
Want to know what to do with your IRA and real estate too?
Now for the changes you should make to your portfolio in 2023.
What you can change in your TSP portfolio year to year is your exposure to risk.
I made a separate video about this which is deep in the weeds, but I will explain it quickly right now.
Many people invest in 100% stocks. When I say stocks, that includes mutual funds and index funds.
We often don’t have any fixed income (bonds and treasury bills) in our portfolio as a hedge against market risk. Bonds and treasury bills are safe. They don’t go up and down with the stock market.
It is wise to put a specific percentage of fixed income, which is bonds or treasurie bills into your portfolio of stocks to lower market risk as you near retirement.
For the thrift savings plan (TSP), stocks are the C, S, and I funds and fixed income are G fund treasuries and or F fund bond
Here’s a quick example of how to use bonds to protect your TSP.
If you have 50% or half of your portfolio in stocks and the other half in bonds, (f fund in this case), when the markets suddenly drops 30% in one day, you’ll only drop about half that, 15%, because your only half invested in stocks.
The bonds you have won’t lose value. This limits your downside.
Here’s the problem. If the market shoots up 30% in one day, you only go up half of that or 15%, because you are half invested in stocks. It’s a double edged sword, but smart to do this as you get older and have a growing need to preserve your portfolio.
Here is some simple guidance for achieving the right balance of stocks to bonds for your age and risk tolerance.
I use the law of 120.
When it comes to the percentage of your portfolio that should be in stocks, you subtract your age from 120.
A 30 year old will be 120 minus 30 equals 90% stocks. So you need 10% bonds, which means 10% F fund.
A 50 year old would be 120 minus 50, 70% invested in stocks. 30% in bonds.
Some people use the law of 100 instead of 120. You can adjust this number based on how risk averse you are.
Here’s some questions you could ask yourself and decide between 100, more conservative, or 120, less conservative.
Do I have a higher or lower risk tolerance than other investors in my age group?
Is this my only source of income in retirement, or do I have a pension, real estate, a sugar mama, or other income as a supplement?
To understand all this TSP advice, it helps to know the five core funds inside the TSP and what they consist of. This is important in understanding how they are used in building TSP investing portfolios.
TSP INVESTING GUIDE – THE FUNDS
The G fund contains short term U.S. Treasury securities with no exposure to the risk of the bond or stock market
The F fund is an index of world-wide government, corporate, and mortgage-backed bonds
The C fund is equivalent to the S&P 500 index.
The S fund is an index of mid and small-cap stocks not included in the S&P 500.
The I fund mimics the MSCI EAFE Index of international stocks in 21 developed markets excluding the United States and Canada.
The L funds are professionally managed investment funds tailored to a specific time horizon.
from opm.gov
Now we dive into each one a little more in depth before going into our TSP investment strategies:
The G Fund – The Government Security Investment Fund
Pros: No volatility and backed by full faith and credit of the U.S. government
Cons: Can barely match the inflation rate; rate based on prevailing interest rate, which is currently low
This unique investment is only available for TSP investing. It’s rate is equal to 10-year treasuries, but their liquidity and protection from interest rate fluctuations is superior to 3-month T-bills.
The interest rate resets monthly and is based on the average of U.S. treasuries with a duration of 4 year or more.
I’ll tell you how I’ve invested most of my career.
S&P 500 index fund. That’s it.
But, shouldn’t I be able to do better than that?
This post will show you a data-proven way to boost your index fund returns.
PAUL MERRIMAN
Paul Merriman is a believer in index fund investing. Additionally, he is a nationally recognized authority on mutual funds, index investing, asset allocation, and ran his own investment advisory firm since 1983. Paul has been on Wall Street since the 1960’s.
He’s been preaching something called the ultimate buy-and-hold portfolio for the past 20 years. His ideas aren’t revolutionary. It’s very similar to Larry Swedroe’s research on small value stocks and their superior performance over long periods of time. Moreover, he believes in the work of Dr. Fauna and Dr. French in regards to diversification to increase returns without adding risk.
With the ultimate buy-and-hold portfolio, we are going to keep the S&P 500 index, but only 10% of the portfolio, and then give 10% each to 9 other asset classes.
Most people say nothing outperforms the S&P 500 index over the long term. Well, that’s not exactly true.
Over the long term, 8 of the 9 asset classes we’ll be diversifying with have outperformed the S&P 500. Consequently, the risk is also roughly the same.
So the main ingredient in this portfolio is still the S&P 500 index. According to Merriman’s research, it has compounded at 9.3% between the years of 1970 to 2016.
Personally, that feels a bit high, but we’ll stick with his numbers today. I’m more comfortable claiming a historic 7% rate.
THE ULTIMATE BUY-AND-HOLD PORTFOLIO
Portfolio 1
For the sake of explaining this portfolio, think of the S&P 500 index as Portfolio 1. To start, we will invest $100,000 into our portfolio today between the dates of 1970-2016 to illustrate the growth that would have occurred with each step of diversification over that period.
At 9.3%, $100,000 would have grown to $6.5 million. No way I can live off that! We’ve got to do better!!
Where should you save your down payment for a house?
There are tons of articles and blogs trying to answer this question. I’m not happy with any of them.
I’ll try to answer this my way.
The Rich on Money way.
There are two main factors that will influence where you should invest your downpayment for a house.
The first is how certain you are in what timeframe you will need that money. Are you for sure using it within the next year? Not much of a reason to put it at risk.
Are you unsure if you will purchase something in the next several years, but want the option?
Maybe you should consider putting some of that money at risk instead of just letting it sit there not working for you.
The next factor is your risk tolerance.
Some people understand that by putting their down payment in the stock market or a mutual fund, they run the risk of either having it grow quickly, or the opposite, losing half or more of its value quickly.
Could you live with that tradeoff?
If not, go with the less risky options, even if you are not sure when you will purchase a house.
Also, there’s what I ended up doing in my life.
I’ll explain which one of these methods I ended up using for my money.
It’s one that could have backfired on me big-time, but luckily didn’t.
UPDATE 2: I’m updating this article to reflect new information coming from Fidelity Investments making significant reductions to the costs of their index funds on August 1, 2018 and changes to Vanguard’s fee structure on December 1, 2018.
Index Funds
Let’s have some index fund fun today.
Many in the Financial Independence Retire Early (FIRE) community recommend VTSAX (Vanguard’s Total Stock Market Index) as the investment of choice.
If you are in the Choose FI world, then you’ve heard of the Godfather of FI, Jim Collins.
You may know he is a huge fan of Vanguard as the mutual fund company of choice.
Why?
Does it have the cheapest index fund fees?
Does it have the lowest investment minimums?
It turns out…
It does not.
Then why does he recommend it?
I’ll get to that…
One thing I did the first time I read The Simple Path to Wealth (I ended up reading it about 15 times as his editor on the book) was check all my current investments to find out if I was paying too much in fees.
I’ve always followed the simple advice of Warren Buffett.
Here are the headlines that I saw when I googled “stock market” a few years ago during a downturn:
“Is a global recession led by a US Stock Market crash in the offing?”
“Dow slides as US stock market suffers worst week in two years”
“Chart analysts see bigger market pullback if interest rates continue to shoot higher”
These headlines are going to affect everyone differently. Let me share with you how it affects me. Normally, I would pay no attention to it. But now:
I laugh at it.
It’s useless information.
Let me give you a little background on me.
I worked for Fidelity Investments as a stock broker while I was in college before I joined the military. I’m an avid finance nerd and real estate investor.
I’ve studied the markets long enough to know that index funds are the smartest way to invest your money. Trying to beat the market is pointless.
I also know that a lot of what you see in the financial media space is useless information. They try to predict where the market is going. When they get it wrong, they try to explain logically why they got it wrong, which ends up being the perfect definition of hindsight bias.
Hindsight bias, also known as the knew-it-all-along effect or creeping determinism, is the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it.
Financial magazines, newsletters, cable programs, videos, it’s all meant to capitalize on either fear or greed. A few weeks ago, it was greed. The markets were kicking ass.
This week I did a guest post on one of the most popular military financial independence websites. This website was started by Doug Nordman. He retired from the Navy in 2002 and hasn’t worked since. He currently lives in Hawaii and surfs often when he’s not traveling the world. Not a bad life. What he … Read more
