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By Barbara O’Neill, Ph.D., CFP®, AFC® [email protected]

One of the best ways to save for retirement is in a tax-deferred employer savings plan. Like 401(k) plans in the private sector, the Thrift Savings Plan (TSP) is a defined contribution plan that allows service members (and federal government workers) to voluntarily set aside a percentage of their pay for financial security in later life.

For 2020, the maximum annual savings limit was $19,500 and $26,000 for older workers aged 50 and over.


The amount that accumulates depends on how much money is saved, how long the money has to grow, and the performance of selected TSP investments. There are two savings methods: traditional TSP (contributions of pre-tax dollars not yet taxed) and Roth TSP (contributions made after a worker’s pay is taxed). With the traditional TSP, taxes are owed when funds are withdrawn, while qualified Roth TSP withdrawals are tax-free.

Service members can contribute to one or both types of TSP plans up to the maximum annual limit. A benefit of TSP investing is low average expenses of about 0.040% (i.e., 40 cents per $1,000 invested). One reason that TSP expenses are low, compared to actively managed mutual funds, is the use of money left “on the table” by participants who leave federal service early (before employer contributions are vested) to offset fund expenses.

There are ten TSP investment funds to choose from. A key factor in service members’ fund selection is their investment risk tolerance. The University of Missouri has an empirically-tested Investment Risk Tolerance Assessment tool that can be used to determine service members’ comfort level with different plan options.

Below is a brief description of each type of TSP account and the type of investor that it is most suitable for:

  • G Fund (Government Securities)- The G Fund invests in nonmarketable U.S. Treasury securities that are only issued for the TSP. Its major risk is inflation (purchasing power) risk when investment returns are less than the inflation rate. The G Fund is the most conservative TSP plan option and is typically selected by very conservative investors who are willing to forgo growth potential to avoid exposure to the stock market.
  • F Fund (Fixed Income Index)- The F Fund is an index fund that aims to match the performance of the Bloomberg Barclays U.S. Aggregate Bond Index. It includes primarily U.S. government bonds, mortgage-backed bonds, and corporate bonds and it is subject to credit risk, call risk, and inflation risk. The F Fund is the second most conservative TSP investment option, has no stock exposure, and has the potential to out-earn the G Fund due to the diversity of fixed-income investments in its portfolio.
  • C Fund (Large Company Stock Index)- The C Fund is an index fund that aims to match the performance of the Standard and Poor’s (S&P) 500 index that tracks the performance of the 500 largest publicly traded U.S. companies. It is subject to market risk and inflation risk and is appropriate for moderate-risk tolerance investors who seek the potential to earn high returns from profitable companies within the fund index.
  • S Fund (Small Company Stock Index)- The S Fund is an index fund that aims to match the performance of the Dow Jones U.S. Completion TSM index that tracks companies that are not included in the C Fund. It, too, is subject to market and inflation risk and is appropriate for moderately aggressive investors who seek the higher returns that stocks in riskier small-to-medium-sized companies can potentially provide.
  • I Fund (International Stock Index)- The I Fund invests in international stocks of more than 20 countries and aims to match the performance of the MSCI EAFE index. It has three primary sources of risk- market, inflation, and currency risk-and is appropriate for moderately aggressive investors who seek the additional portfolio diversification that investing in stocks issued by companies in other countries offers.
  • L Fund (Lifecycle Funds)- Each of the 10 L Funds is a diversified mix of the five core funds (G, F, C, S, and I). They were designed to let investors hold an entire portfolio in a single L Fund and get the best-expected return for the amount of expected risk that is appropriate. Every quarter, the target allocations of all the L Funds except L Income are automatically adjusted, gradually shifting them from higher risk and reward to lower risk and reward as they get closer to their target dates. When an L Fund reaches its target date, any money in it becomes part of the L Income Fund, which generally keeps the same target allocation. For example, in 2025, the L 2025 Fund will be rolled into the L Income Fund.

For additional information about TSP investment selections, visit the TSP Investment Funds website.

Retirement ceremony for Air Force Maj. Gen. Donald Fick on June 21, 2012. Photo by Jim Greenhill