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The Main Risks of the TSP G Fund

If we were to compare all the US Treasury investment opportunities, it would not take long to point towards the TSP G Fund as one of the best risk/reward ratios. This being said, every single investment in the world will have its risks, and this is what we are going to explore today. What are the main risks? Is the TSP G Fund the best fund within the TSP?

To start, we should say that the G Fund is perhaps the least volatile of all investment opportunities available in the Thrift Savings Plan, but there are still negatives all investors should keep in mind. Of them all, low returns and the lack of inflationary protection, seem to be the main worry. If you are considering putting 100% of your TSP into the G Fund, as so many have before you, we urge you to reconsider because this may mean that your investment earns less than the increase of your grocery bill.

Let us explain – The TSP G Fund creates a risk-free return derived from short-term Treasuries. That means that if short-term Treasuries do not have a very high yield (which could easily be considered the case from 2009 through the writing of this article, late 2017) then the yield of the G Fund will correspondingly be – very low. If inflation (the increase in your grocery bill amongst other things) outpaces the yield of the G Fund – you would be LOSING PURCHASING POWER by investing in the G Fund.

Low Returns from the TSP G Fund

– So, with little doubt, we can confidently say that low returns are the biggest downfall of the G Fund. At first, this does not seem like much because something is better than nothing but the real risk here comes from not having enough money when you retire, and this is the aim for most.

Example – If we say you have a 40-year career in federal service and you choose to invest a steady rate of $1,000 each month to the TSP (after being matched by the government, of course), a rate of 3% per year will see you end up with just over $1 million in your TSP. Although that amount sounds like a lot, in terms of purchasing power (what you can buy with that money in the future), the value of these savings could be substantially less than half that figure after 40 years, and this is before you consider tax upon all withdrawals.

On the other hand, a more diverse portfolio could earn you a return percentage of 5-7% – possibly even more. After 40 years of investments, this could leave you with between $2-$3 million which is much stronger once you adjust for inflation and tax. Risks exist in every investment – but you should consider this point – do you, the investor, have a greater risk investing in something that gives you the opportunity to achieve your future income goals – or is it safer to buy a guaranteed* product that assures you that DO NOT have enough to live on in retirement?

Interest Rate – Ultimately, the rate of return given by the G Fund is dependent on the US Federal Reserve and the corresponding Treasuries that determine this yield. Since its first year towards the end of the 1990s, it has averaged over 5% in returns, but this is a stark difference to the last five years where the return has been lower than 2%.

Currently, federal interest rates are the lowest we have seen for a generation, and this drought could continue for many years to come. Compared to the highs of the 80s and 90s, returns over the next decade or so could remain very weak indeed for the G Fund.

Risk of Default – As another risk, the G Fund relies upon the credit of the United States. Although they may say they have never defaulted on a payment for any debt, this is a slight alteration of the truth because the US Treasury failed to pay T-Bills back in 1979. At the time, the country was experiencing a political debt ceiling crisis. This, coupled with unusually high demand and a problem with IT in critical areas, meant that important payments were missed. Considering interest rates and inflation were both high at this point, this simple error had a huge impact.

Eventually, the holders of T-Bills were paid, but they were refused interest for the delay at first before the US Treasury admitted to their mistake and paid up to all investors. Back to the current day, the US credit rating continues to decline as we see an increase in the national debt to GDP ratio. Although we have our currency which provides a little flexibility, it is still a major concern and one that will only get worse if not addressed.

The risk of defaulting on G Funds and other treasuries is certainly low, but it can never be said that the risk is actually zero.

TSP G Fund and the Problem with Inflation

– Whenever you invest in Treasuries or bonds, the money will be susceptible to inflationary risk. With the G Fund, there’s a huge advantage that it will never lose its paper value but that doesn’t mean you won’t lose purchasing power. With history to look back on, it suggests the G Fund will continue rising faster than inflation as it has done for many years but this isn’t guaranteed. As soon as we hit a period of high inflation, this could change very quickly. In truth, inflationary environments may be more suited to equities and real estate investments because historically these types of investments tend to retain their tangible value and cash flow in a rising interest rate environment.

Summary – With the TSP G Fund, it’s a superb investment tool because of the low volatility, but you need to spread your risk and create a portfolio if you want to see maximum growth (and therefore a healthy retirement)!

*Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

About June Kirby

June Kirby has almost two decades of experience serving as a federal employee retirement trainer, strategy specialist, and advocate. Based on her extensive knowledge, she offers consultation on a host of federal retirement benefits and TSP maximization strategies. Ms. Kirby tirelessly travels the country to make herself available to hundreds of deserving, yet under-served federal and postal employees, federal agencies, unions, and organizations.

Simply Secure Financial and June Kirby are not affiliated with or endorsed by the U.S. Government, any governmental agency, or any federal benefits programs discussed herein. Your personal specialist at Simply Secure Financial may offer insurance services, and as such, is a licensed insurance professional with training and experience in federal employee benefits.

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