The TSP Lifecycle funds are portfolio investments that consist of all five TSP funds. They automatically stay balanced and shift to a more conservative asset allocation as you approach retirement.
Here’s what the five currently look like:
Source: L Funds Information Sheet
Overall, the pros of the lifecycle funds far outweigh the cons.
Most investors are not very successful because they buy stocks when the market is high and sell stocks after the market has already fallen, resulting in low average returns:
Source: JP Morgan Guide to the Markets, 3Q 2017
The main benefit of the lifecycle funds is that it does the work for you, and is a “set it and forget it” investment. They protect investors from making poor rebalancing decisions. Over the course of several decades, an automatically rebalanced portfolio of stocks and bonds has historically performed better than the average investor and almost as well as a pure stock portfolio, with less volatility.
The reason this works so well is that it automatically does a “buy low, sell high” strategy. If the C Fund goes down, the L Funds will sell some assets to buy more of the C Fund. If the I Fund goes down, the L Funds will sell some assets to buy more of the I Fund. Pretty simple.
The biggest con of the lifecycle funds are that they are a “one size fits all” strategy. Two people that plan to retire in 2040 might share little more than a retirement date in common. One of them could have more assets, or a more conservative investment mindset, or a larger family, different pension benefits, other investments, a different retirement age, or other retirement working plans. The lifecycle funds, however, treat them both the same.
Some financial planners argue that lifecycle funds are too conservative. The “L Income” fund is supposed to be what you hold post retirement, and it invests about 80% in bonds that barely return more than inflation. Its primary goal is capital preservation. However, the average 65 year old retiree statistically can expect to live to 85, and there’s a decent chance of living to 90 or later. Although the average life expectancy is only about 80 at birth in this country, it’s 85 once you hit 65, because you’ve already gotten past many of the risks that face younger people.
That means, you probably need to rely on the L Income fund for 20-30 years or more. Retirement in that case is nowhere near the end. Running out of money is as big a risk as volatility for many retirees.
Fortunately, it’s not set in stone that you must invest in the lifecycle fund that matches your retirement date. For example, if you plan to retire in 2020, but want more stocks in your portfolio, you can invest in the 2030 or 2040 fund instead, if you’re willing to accept that volatility and don’t need the money right away. It’s not a bad idea to re-evaluate every 5 years or so to see if the lifecycle fund you are holding still makes sense for your unique situation, by talking to a financial professional or by thinking through what your goals and plans are.