By Hank Coleman
As far as investing goes, the general rule is that you put money into less aggressive, less risky funds as you age. The same can be said for both civilian and military investors who choose to invest in the federal government’s version of the civilian 401k retirement plan, the Thrift Savings Plan, or TSP for short. And, like their civilian counterparts, members of the military should consider changing their TSP allocations throughout their careers in order to ensure that they are not too heavily invested in risky investments than needed to as their retirement age nears.
For Soldiers, Sailors, Airmen, and Marines who are just starting their careers, they have the luxury of time on their side. These investors can afford to accept more risk than others in their investment portfolio. They can take more chances than other members of the military who may be closer to retirement and the time when they will need their investments to supplement their living expenses.
Without considering TSP Lifecycle Funds, the Thrift Savings Plan has five different index funds for investors to choose between for their investment options. Investors can have their TSP allocations spread across the G, F, S, I, or C Funds. The C Fund mirrors the S&P 500 index, the I Fund is an international index fund, the S Fund tracks stocks from the Russell 2000 index that are not included in the large cap S&P 500 which makes it essentially a mid to small cap index fund, the F Fund invests in government, corporate, and mortgage-backed bonds, and the G Fund invests in government bonds such as T-Bills with a risk free rate of return. For most young investors, many financial planners make TSP recommendations of dividing investments in the C, S, and I Funds.
Members of the military who are in the middle stages of their careers often have a different risk appetite for their investments than younger investors. These members of the military can start to see the light at the end of the tunnel so to speak and begin to understand the realization of all of their hard work investing. Many financial experts use a rule of thumb such as 120 minus your age to determine the amount of your investment portfolio that should be allocated to stocks (which are the C, S, and I Funds).
The remainder of that equation could be used to invest in safer bonds (such as the G and F Funds) which have a lower risk profile and will help preserve investments throughout rough stock market swings. So, for example, a 35 year-old investor would subtract his age from 120 (120-35=85) and determine that he might want to consider having 85% of his total investment portfolio dedicated to stock index funds such as the C, S, and I funds, and 15% of his TSP allocations geared towards bond funds such as the G and F Funds.
Members of the military who are about to retire should have even more money invested in bonds and less invested in stocks. This is a critical step of their TSP allocations if they plan on using their retirement money in the near term. Stock investing should be viewed as investments with a time horizon of five years or more. Because of this, many financial planners recommend shifting an investor’s TSP allocation from heavily-weighted in the stock funds to a portfolio more predominantly bond fund based in order to preserve capital.
Hank Coleman is a Captain in the U.S. Army, freelance writer, and the founder of personal finance sites such as Military Money Might and Money Q&A. His writing has been featured on The Motley Fool, Military.com, and many others. You can follow him on Twitter at @HankColeman.