8.23.22: Audio automatically transcribed by Sonix

8.23.22: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Val Majeski:
Welcome, everybody, to the Federal Retirement Show. I am your host, Val Majeski, with American Benefits Exchange. Got an awesome episode today. Going to talk about a topic that I've been hearing a lot. So I've been attending a lot of federal events, talking one on one with federal employees, doing some group presentations online and been getting a lot of questions about TSP and specifically the LL funds basically because of what we're going through this year. Right. It hasn't been the greatest year when it comes to TSP and returns like you all have seen in the past couple of years. And with the WL funds, there have been some misconceptions that I want to go over today as well as dive in and break down these WL funds in further detail. So you have a good understanding of what you're actually investing in when you choose one of these WL funds. So first, let's dive into the misconceptions that I've been hearing lately when it comes to these funds and things I'm hearing from federal employees. These are not things that I'm making up. I'm just reporting the news and passing along information and hopefully you're not on the same page and thinking the same way. But misconception number one that I've been hearing is that the funds are actively managed. Now, this is not true. We're going to go into this over time. But what is managed mean? Manage means that somebody is there picking and choosing what investments you're in, altering the percentages, altering the changes to help maximize gains and minimize losses.

Val Majeski:
At least that's what I'd want my financial manager to do or my money manager to do, is maximize gains and minimize losses. Big misconception when it comes to the funds. Also, another misconception is that the funds provide safety and security that's different from the other funds, right? So if you're invested in the other funds like the GFC, S&P or the L funds are a safe way to do that. And we're going to talk about why that's not the case either. So let's dive in. L funds. What are they? Well, the L stands for life cycle. These are life cycle or target date funds. There are numerous options. As you might see. The government just came out, TSP came out with some additional options when they made some modifications recently. There is the L income, the LL 2025, the LX 20, 30, 35, all the way up to the L 2065. Now what I mean by target date funds. Well, the idea is that if you're going to retire, say, in the year 2040, that you should be in the L 2040. And the concept will be as time changes, as time goes on, as we get closer to the year 2040 that your investment breakdown should get more and more conservative, well, what is the breakdown of each LL fund? Well, if you're not aware, each life cycle fund or LL fund. Is made up of each of the other funds.

Val Majeski:
So it doesn't matter which fund you're in. You have some percentage of each of the CFC's and I funds. It's kind of interesting. So some people think they're investing in something totally different when they go into the L funds. That's not the case. You still have a predetermined breakdown of the G, F, C, s and I funds. So what is this percentage breakdown? Well, I said we're going to go over an example. I'm going to use that same example we just talked about the year 2040, but there is a percentage breakdown for each fund and these breakdowns are predetermined. What does that mean? Well, it doesn't matter what's going on in the market. It doesn't matter what's going on with the outside circumstances. These funds are broken down by a certain percentage based on the year and those breakdowns and modifications are predetermined. We'll get into that and I'll show you more about it. Well, how does it work? Each fund, again, is is meant to be either a little more conservative or a little more risky based upon the percentages in the weighting. If you're in the WL income, which is the most conservative of all the WL funds, it's not completely eliminating entire risk, right? It's not completely safe and secure like the misconception. But it's the most conservative of all the L funds where on the other side, the L 2065 is going to be the most risky, going to have most of the weighting in the stock funds.

Val Majeski:
And that's going to be the most risky, the most risk, most reward of all the L funds. Now, what are the percentages? We're going to go into the breakdown here, but you can find those percentages on TSP. Dot gov. So I'm just going to talk about one fund in particular and show you the breakdown and how those things change over time. But you can go to TSP dot gov, look up each of the WL funds and see what those percentages are and how they're going to be changing over time. I already said what the objective really is. It's a target date fund, so that means again, if you're going to retire further down the road, the idea is that you are willing to take more risk. And as you get closer and closer to that target date, let's just say you're in the L 2025, then that should be until retirement. So that's how each fund works and the general idea or concept. But number one, we talked about misconception of being actively managed. No, those percentages are all predetermined. So let's look at an example. The L 2040, as I mentioned, what are the current breakdown? What is the current breakdown of the percentages? Now as of the recording of this show in summer, this is late August of 2022. You can see what the percentages are for the L 2040. Now the G Fund is showing it at 20.84%, the F fund 7.41%.

Val Majeski:
So you've got about one quarter of the investments in this fund is going to be more towards safety and security. Now, the G is the only one that's guaranteed not to lose. So you only get 20% in a guarantee that you can't lose money. The other 80% is subject to some kind of risk. The C. S and the AI. The stock funds are comprising about 75% of this investment. So it's it's pretty interesting the way it breaks down. So as you can see, again, 72% in the C. S and the I funds, there's a large amount, right? Large amount that was in the I fund. Now, the EI fund stands for international and that means it's comprised of international stocks, international stocks. And some of the countries that you're investing in are maybe not countries that you want to dabble it. That's up to you in your decision. But the EI fund is historically the worst performing of the three stock funds, the C. S and the I. In fact, in most cases it performs at half as much as the C and the SE. And I said percentages are predetermined. So as of 2022, you just saw what the percentages are. Those are predetermined. It has no bearing on what's going on. It's not actively managed, as I said, to help maximize gains and minimize losses, those percentages predetermined. So even if the market is in fluctuation like we're seeing, they're set and the modifications that we're going to go over are set.

Val Majeski:
You cannot alter these things yourself, so you can't go in to the L 2040 fund and say, You know what, I want to switch some of the weighting up and I want to put more into the S since I just heard that the I fund or I looked up and verified that the fund doesn't perform as well historically like the C and the SE do. You can't change these. They are pre determined, as I mentioned, the misconceptions that they're actively managed. There's not somebody back there tweaking the dials and turning up the percentages to maximize gains in the markets. Good. And to minimize losses when the markets bet it's set. It does not provide ultimate safety and security that management is left up to you. You need to determine how you want to break down the investments. You need to determine if you want to stay in the WL fund or move to a different fund or just go into the individual funds yourself. We've talked about this about TSP. Tsp is it administered account? It is administered. It's not actively managed. You don't have a money manager, you don't have somebody at TSP calling you to say, Hey, this fund is doing very well. You might want to think about making a move or this fund is not doing so well. You might think about making a move. It's administered. You are left to be your own money manager when it comes to TSP.

Val Majeski:
I said that the performances or the percentages are set regardless of market performance. So they're not altered based upon what's going on out there. They are pre determined not 100% safe and secure from market risk, as the misconception had said. Look at the performance history. Look at what's going on this year. That's an indication that, yeah, these things can still lose money. Do not get as conservative as you think. So we're going to go over how this changes over time. Right. These funds, as you're thinking or as I said earlier. Are supposed to get more conservative as you go through your working career and get closer and closer to that target fund. So let's look ten years into the future, right? Ten years. I already said that 72%, approximately three fourths of the investment was in the stock funds ten years ago. Well, jump ahead. Ten years. And how did things change? Approximately. Was it 34% now is in the more conservative funds, but it went from 20% into the G to 28% into the G. So it didn't get that much more conservative considering we're only eight years from retirement in this case. Right. 2032, if I'm retiring in 20, 48 years from retirement. I want to be a little more conservative. I don't want to have 60 plus percent, almost 70% in risky things at this point. I want to make sure that I'm getting more conservative.

Val Majeski:
While certainly if we fast forward a few more years, we should see this get a lot more conservative. Fast forwarding now to five years out from retirement. 35% APR is in the solid, about 65% in things that can lose money. I'm five years away from retirement. Five years now. Normally, federal employees that I'm talking to say, hey, when I'm five years, three years, two years from retirement and this might be you, it may not be you, you may still have a lot of risk in you or you may still have a lot of ability to take some risk this close to retirement. But most federal employees I talk to when they're at least five years out from retirement, want to go more conservative, say, hey, if something happened in the market, if I lost ten, 15% of my TSP, I don't have a whole lot of time. With five years left to recoup. Well, the 2040 has modified and went to 35% conservative or guaranteed, but still 65% is in some sort of risk. Okay. Well, let's go right up towards retirement. The L 2040 in 2040. Is not 100% conservative still. You've got about 65% in the G fund. So 65% is guaranteed never to lose or in something that is guaranteed, never lose. You're still have about 35% in the funds that have the ability to lose money. Now, the overall performance of the fund, the total risk should be minimized because the bulk is in the G fund.

Val Majeski:
But now we are in retirement, right? We are in a point where you are super conservative. Because you don't want to lose money, you have no time left. So just understand that the big misconception that the funds take the guesswork out of it for you, kind of because they do alter and change over time that they're managed. They're not that they take all the risk out there safe and secure, not the case. So understand what you're getting into with each alpha. Do your research, do your homework, go on TSP gov and see what the percentages are and how these things modify. You can see really only within the last three years from retirement, you'll find that there's a huge push towards the G Fund, towards the conservative side, towards safety and security. And if you're in, you know, 2065 or something, that's really far out. Check to see how much is in the eye fund. Now. I'm not giving you advice. I'm not telling you where to invest your money. I'm just looking at simple numbers on performance, which you can see also on TSP dot gov that the SSE and the C fund have far outperformed the EI fund over time, over history, now past performance, not a guarantee of what the future is going to hold. But if we look over a good period of time. Yeah, the C and the S have far outperformed in a lot of cases double what the EI fund has done.

Val Majeski:
So if you're in a fund that is is really heavily weighted on the fund, you might want to think twice about it. So just take a look at what these funds are doing for you. Now, I hope you enjoyed really this breakdown. And I know it was a brief, brief breakdown. And of the the LL funds in general, we kind of just. Brushed over the surface of what these things really are because there's a lot of other choices in there right from the low come all the way up to the 2065. But do you do your diligence, do your homework? Hopefully you did not fall trap to some of these misconceptions and those that were thinking differently. Hopefully this opens your eyes to do some more digging into what you're exactly investing in the breakdown, the percentages, how those things are changing or modifying. And if they fall in line with your overall risk tolerance and if they don't, well, it may be in your best interest to make a change, make a move so that your overall investment, your overall risk that you're taking within TSP is in line with what your your goals are and what you want to accomplish. So I really appreciate you taking the time to learn more about the funds and join me for the breakdown. Again, my name is Val Majeski with American Benefits Exchange. You've been watching the Federal Retirement Show. I look forward to seeing you on a future episode.

Sonix is the world’s most advanced automated transcription, translation, and subtitling platform. Fast, accurate, and affordable.

Automatically convert your mp3 files to text (txt file), Microsoft Word (docx file), and SubRip Subtitle (srt file) in minutes.

Sonix has many features that you'd love including automated translation, upload many different filetypes, secure transcription and file storage, share transcripts, and easily transcribe your Zoom meetings. Try Sonix for free today.