Smart asset allocation in Thrift Savings Plan

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Dear Liz,
I’m 34 and married with two children. I work for the federal government and currently put 5 percent in the traditional, pretax Thrift Savings Plan and another 4 percent in the Roth TSP. My question is, what asset allocation should I use? My current breakdown is 40 percent in the C Fund (large-cap stock index fund), 40 percent in the S Fund (small-cap stock index fund) and 20 percent in the I Fund (international stocks). Thanks for the advice!
— Brian

Dear Brian,
Your all-stock asset allocation is pretty aggressive, even for someone who is decades away from retirement. That may match your risk tolerance, or you may be in for some sleepless nights the next time the stock market takes a big dive. A sprinkling of cash and bonds could provide a buffer against such a swoon.

When deciding how much to put where, you can use one of the many asset allocation calculators on the Web, or you can take a shortcut by checking out how the life-cycle or target-date options in your plan divvy up their funds.

The Thrift Savings Plan’s L2050 option, designed for those who will begin withdrawals in 2045 and later, currently puts about 10 percent into specially issued government securities (the G Fund), 5 percent into bonds (F Fund), 42 percent into larger U.S. stocks (C Fund), 18 percent into smaller U.S. stocks (S Fund) and 25 percent into international stocks (I Fund).

As with other target-date funds, this mix will be regularly rebalanced and get more conservative as your retirement date draws closer. Given how busy your life is, you might consider simply investing in this option and letting it do the heavy lifting of allocation and rebalancing for you.

The price is certainly right. All of the TSP options, including the target-date funds, are extremely low-cost, with average annual expenses of just 0.029 percent.

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