March 2013

Contribution Allocations

People have different thoughts on this, but here's what I think.  Let's say someone has been working 5 to 10 years with the federal government and has over $50,000 in their Thrift Savings Plan.  Obviously, which TSP Funds their existing money is invested in makes a big difference in what their annual return on that money will be.  As for their current contributions, if they max out the amount they put in their TSP, which now is at $18,000 per year, the most they will put into their TSP on a bi-weekly basis is about $692, plus a little more with the matching 5%.  So let's say an even $800.  Now let's say the market is doing well and they make 2% in two weeks.  They would add $1,000 (2% x $50,000 currently in TSP) to their existing balance, and would add $16 (2% x $800 of new contributions) to the money they just put in.  All together, they would have

   $50,000        +        $1,000            +          $800            +             $16             =       $51,816.
(old money)      (return on old money)      (new money)      (return on new money)
So, their balance increased by $1,816, or 3.63%.  Now let's say they had their new money allocated only to the G Fund, and in the same two weeks, it only went up 0.1% (which is fairly typical).  0.1% of $800 is $0.80.  So after the two weeks, they would have $51,800.80.  So their balance increased by $1,800.80, or 3.60%.  
So there is not much difference between investing new contributions in exactly the same way as investing existing funds as opposed to investing new contributions into a single fund like the G Fund.  Obviously, you won't make much more if you invest this way and the market goes up, and you won't lose much if you invest this way and the market goes down.  However, this analysis is only applicable when someone's entire TSP balance is regularly adjusted with interfund transfers so that the new allocations are incorporated into the Funds where the existing balance is being invested.  With the TSPM System, interfund transfers usually happen at least once a month or more.  Other strategies recommend rebalancing monies in TSP Funds quarterly.
Personally, I change my allocation to match which Funds I am investing my total balance in.  But if I were to just leave the allocation of new money alone and only change which Funds my existing money is invested in by making interfund transfers, the result would be about the same.  Because they are so similar, TSPM does not suggest that one way is really any better than another.