How do you become a millionaire with a Thrift Savings Plan? Almost 75,500 participants did it in three steps, according to Mike Causey, senior correspondent at Federal News Network:
- Save for three decades.
- Stay in the market, even bad ones.
- Stick to the C, I and S funds.
The S Fund in particular had a banner year in 2020, gaining nearly 32% in value, including a 7.24% gain in December 2020, according to FedSmith. As of late January, it had gained another 7.11%.
Causey noted that TSP participants with $1 million or more in savings were invested for an average 29 years.
Related: TSP Core Funds Show Strong Gains in 2020, Thanks to Remarkable Year for S Fund
Causey spoke with Washington, D.C.-based advisor Arthur Stein, who said participants tend to invest too heavily in the G fund, which invests in short-term U.S. Treasury securities. The G Fund returned 0.97% in 2020, and year-to-date returns of 0.07% in January, according to tsp.gov. The S&P 500-tracking C Fund returned 18.31% in 2020, though it started 2021 slightly down at -1.01%. The I Fund, which invests in international stocks, returned 8.17% in 2020, and -1.09% YTD in January.
“Even the people who are investing in the stock funds tend to have not enough money in the S Fund,” Stein said.
“Between the C Fund and the S Fund, you’re invested in the top 3,801 stocks in the United States,” Stein said. “Many people don’t invest in the S Fund at all, and those that do tend to have a much lower allocation, so that the allocation for all TSP participants is three times as high for the C Fund as the S Fund, even though the S Fund had a higher rate of return.”
Stein noted that the S Fund is more volatile than the C Fund, adding that participants show the same preference for the less volatile of the bond funds, the G Fund.
“They’re concentrating their investments in funds that have a lower rate of return,” he said of TSP participants.
There are different kinds of investment risk, Stein said – one being market volatility, obviously. “There are other investment risks, which are not as visible. The key one for long-term investors is the loss of purchasing power as a result of taxes and inflation,” he said.
Click here to listen to the interview.
Related:
- 7 Changes to 401k Plan Design Driven by Behavioral Finance
- TSP News: 401k Millionaire Club Grows, Returns Dive in September, Default Rate Rises in October
- Fidelity: Retirement Balances (and 401k Millionaires) Hit Record Levels in 2020
Danielle Andrus works as an editor for The Financial Planning Association® (FPA®). Over the past 15 years, she has worked in various capacities, including writing and editing. Andrus has worked for several notable publications and outlets and spent more than seven years as the executive managing editor at ALM Media, publisher of Investment Advisor magazine and ThinkAdvisor.com. Before that, she was online editor for Summit Professional Networks, where she oversaw newsletter development for four magazines, including Benefits Selling, Senior Market Advisor, Boomer Market Advisor, and Bank Advisor.
