TSP Loan? Yes! And Here Is Why…

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Should you borrow from your TSP? Yes! If you’re going to pay off other debt.

In this episode I walk you through how you calculate a TSP loan and when and why you should do it.

I’m working with a woman now, we’ll call her Sara, who has $30k outstanding on a Home Equity Loan and $20k outstanding on a car loan.

The monthly payments total around $850 or so.

Borrowing $50k from her TSP will pay both loans off AND the interest she was before paying to the bank will go to her. Her interest is based on the yield of the G Fund at the time she took the loan. Currently, that yield was 2.857% (7/20/2018). Weird because when I look at the yield of the 10 year Treasury Bond it’s almost identical! Crazy that. (No really, just go back to my G Fund video where I discuss the correlation between the G Fund and the 10 Year Treasury).

Even better for Sara though is that in 5 years her TSP loan will be completely paid off, yet she would still have had her Home Equity Loan balance.

In this case, she’ll free up nearly $900 a month. And have no debt. And that couple thousand of interest will have gone to her account, not the banks.

“But Josh, she can deduct the interest on her home equity loan!”
“Really…what if she doesn’t itemize. Oh by the way, even if she were deducting it that interest is costing her real money. Interest on her TSP loan is going to her.”

“But Josh, the markets do better than the loan she is paying herself. So, to take the money out of her TSP will hurt her return!”

“With that logic, you should have never have any equity in your home. You should be fully leveraged at all times.”

TSP Lifecycle Funds – What You Need To Know

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TSP Lifecycle funds are a mix of the 5 TSP funds. They are allocated in a way to be more aggressive the further from retirement you are.

The Lifecycle Inocme fund is 74% G Fund and 6% Fund. So, it’s 80% bonds. With a bit in C, S and I.

The Lifecycle 2050 fund on the other hand is mostly in stocks, about 80% with the bulk of the stocks being in the C Fund.

Now, each quarter the Lifecycle Funds get a bit more conservative. ANd that is my only real problem with them.

If you just retired, say are 60 years old and are in the Income Fund, you are simply not going to get any growth on that portfolio and yet you have probably 30 more years to live.

Can’t have that.

In fact after taxes and inflation, the Income fund loses money…

Now it won’t kill you in any given year but each year, year after year, you’re losing purchasing power. And it’s purchasing power that you need in order to grow to deal with rising costs.

TSP C Fund – What You Need To Know

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The TSP C Fund is a very low cost S&P 500 index fund.

The S&P 500 index is essentially the largest 500 publicly traded companies in the United States.

Largest means market capitalization. Does not mean revenue, sales, number of employees or anything like that. Simply means you take the number of shares outstanding times that by the current share price and VOILA, that is your market capitalization.

The 500 largest market capitalization stocks in the US are in the SP 500.

So, now that you know what the C Fund is how do you incorporate it into YOUR portfolio?

Well, in my opinion, the C Fund should be the foundation of ALL portfolios where the investor won’t need the money for 5 years or more.

If you can withstand some serious market chaos, and by serious I mean a 50% decline like we saw from Oct 2007 to Mar 2009, a 25% decline every 4 years or so and on average a 14% decline EACH YEAR, you could make a lot of money in the C Fund.

In fact, since inception the C Fund has averaged 10.53% a year. That means you’ve doubled your money every 7 years. Put $100k in there in 1988 and that is worth $2 million now.

Put $100k in there in 1988 and have added $5k a year and you’re worth $3 million today!

That’s a lot of money. But how many people actually did that? Not many. Why? Because the markets go up….and then they go down.

WHen they go down people get real nervous and bail. Can’t do that.

So before you buy into the C Fund you’ve got to make a deal with yourself that you will not touch the money for 5 years. If you can convince yourself to stay pat for 5 years running. You’re probably going to do okay.

No guarantees of course. But what are the alternatives? A Bond Fund paying 2.85% and that’s BEFORE taxes and inflation… YIKES!

Episode # 57 – TSP F Fund – What You Need To Know

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The TSP F Fund is the Thrift Savings Plan version of a corporate bond fund. However, if you dig a little bit you’ll quickly see why this fund is NOT a corporate bond fund in the least.

Why do I say this? Look what happened in 2008. In 2008 everything, and I mean EVERYTHING got hammered. That is, everything for government bond funds. Government bonds did swimmingly in that year as everyone was fleeing from risk into assurance.

What did a typical corporate bond fund do in 2008? Well look at USAA’s Income Fund, USAIX. It was down over 5%.

What did the TSP F Fund do? It was UP over 5%! The only way to do that was to have exposure to government bonds, such as GNMAs.

Does the F Fund have some corporate bonds in ti too? Yup. That’s why I actually changed my mind mid-episode as to the fund I’d choose for my fixed income holdings, the G Fund or the F.

The F has a broader range of fixed income products in its portfolio. That will lead to a bit more risk but should provide more return too.

In fact over the last 10 years we see that precisely. The F fund doubled the rate of return of the G. In a low yielding environment every percentage point you can get helps, a lot.

So, if you can get say double the rate of return of the G Fund without doubling the risk, that’s a chance I’d take indeed.

Will it ALWAYS double the returns of the G fund? Of course not. It may in fact perform worse. I’ve no clue.

But given it’s track record and history of never having wealth destroying years, I’m pretty fond of the F fund.

Now, mind you, I’m not fond of bond funds in the whole. After taxes and inflation, it’s going to be awful to make any money in them.

But if I needed to put a bond fund into my portfolio, I won’t yell at you for choosing the TSP F Fund.

 

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Here’s the episode for the G Fund.

TSP F Fund – What You Need To Know

The TSP F Fund is the Thrift Savings Plan version of a corporate bond fund. However, if you dig a little bit you’ll quickly see why this fund is NOT a corporate bond fund in the least.

Why do I say this? Look what happened in 2008. In 2008 everything, and I mean EVERYTHING got hammered. That is, everything for government bond funds. Government bonds did swimmingly in that year as everyone was fleeing from risk into assurance.

What did a typical corporate bond fund do in 2008? Well look at USAA’s Income Fund, USAIX. It was down over 5%.

What did the TSP F Fund do? It was UP over 5%! The only way to do that was to have exposure to government bonds, such as GNMAs.

Does the F Fund have some corporate bonds in ti too? Yup. That’s why I actually changed my mind mid-episode as to the fund I’d choose for my fixed income holdings, the G Fund or the F.

The F has a broader range of fixed income products in its portfolio. That will lead to a bit more risk but should provide more return too.

In fact over the last 10 years we see that precisely. The F fund doubled the rate of return of the G. In a low yielding environment every percentage point you can get helps, a lot.

So, if you can get say double the rate of return of the G Fund without doubling the risk, that’s a chance I’d take indeed.

Will it ALWAYS double the returns of the G fund? Of course not. It may in fact perform worse. I’ve no clue.

But given it’s track record and history of never having wealth destroying years, I’m pretty fond of the F fund.

Now, mind you, I’m not fond of bond funds in the whole. After taxes and inflation, it’s going to be awful to make any money in them.

But if I needed to put a bond fund into my portfolio, I won’t yell at you for choosing the TSP F Fund.

 

TSP G FUND – What You Need To Know

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I’m a huge fan of the Thrift Savings Plan offered to Federal Government employees, including military personnel.

A cheaper investment platform I do not know. The funds in the TSP average 3.3 basis points in expenses. That means for every $1000 you have invested in the TSP your cost is 33 cents.

That’s incredible Think about it another way, if you pay 1% in investment expenses it’s going to cost you $10 per $1000 per year.

Your investment manager must have some pretty good chops to overcome that starting point. And, in fact, he/she most likely won’t.

IN this episode I analyze the G fund in the TSP. The G Fund is the Government securities fund.

I show you why you shouldn’t expect more than around 3% a year in rates of return over the next decade. Doesn’t mean I think it’s a bad fund, it just is the reality of the interest rate cycle.

Remember folks, bonds do not have capital appreciation. You get paid interest and interest only. That interest you receive is determined the day the bond was issued.

A 10 year Treasury bond issued today (July 2018) pays 2.85%. Thus if you invest in a 10 year Treasury bond you will get… 2.85% return over the next 10 years. No more, no less. It’s basic math.

Yet a lot of people want to say “Well the fund did XYZ% over the last 20 yrs so we should be able to get close to that.”

Nope Not in bond funds. The only thing that matters in bond funds and government bond funds in particularly is the coupon at issuance and thus the yield it’s paying today. Nothing else matters.