Tsp question

[zakariyya]

I recently sold my house at a huge profit in conjunction with a PCS. At my new assignment I will not be buying a house. So, I have $100K I’d like to invest. In 5 years I will retire from the military and I’d like to use the money as a down payment on a home at that time. In the meantime I’d like to invest my money myself in a manner that mimics the L2030 fund (hopefully more earnings than savings but not very risky since I want to use the money in 5 years). Is there any stocks or bonds on index funds that mimic the G, F, C, S, and I funds where I can invest my money? Every year I will move the money around so that the percentages in each investment closely follows the percentage investments in the L2030 fund.

 

[savedmother]

@zakariyya To answer your question directly, this website shows you exactly what each fund tracks. You can easily recreate the portfolio (besides G funds, since they don't track an index).

https://www.tspfolio.com/tspfunds

However, if your plan for the money is to use it within 5 years to purchase a house, I would not recommend investing it. A good idea would be to purchase I bonds from treasurydirect.gov. You can buy $10,000 a year. So if you are married, you can buy $20k right now, and another $20k in January. I bonds keep up with inflation, I would recommend reading more about them.

It is tempting to invest, since you don't want your money sitting around losing value to inflation. However, for money with such a specific goal, it is too much risk. What if in 3 years, the market drops nearly 50% like it did around 2000 and again in 2008, and takes nearly 5 years to reach previous levels? Would you be okay only having $50-60k as a downpayment? Or would you at that point not use the money at all and instead wait until it returned to it's previous value?

Edit: Forgot to actually place the link for the first paragraph.

 

[zakariyya]

@savedmother Thanks for the info. I will definitely read up on I bonds. Check my reply to Richie below and let me know if u have any comments or suggestions. I definitely like safer so maybe I’ll take the I bond route. I’m still undecided.

 

[savedmother]

@zakariyya My suggestion would still be to not invest this money. I am not any kind of expert, so do not rely on my advice, it is entirely up to you. I know it's tough having money just sitting there and not doing anything. It sucks that interest rates on bank accounts and CDs right now are so low, they don't even keep up with inflation. That's why I suggested maxing out on I bonds.

If it were me, I simply wouldn't be comfortable with the risk of something happening in the market like it did in 2000 and 2008. I try to separate my different accounts. My long term retirement accounts, sure, I can handle that risk, since long term the market seems to continue to grow. However, for my short term goals (saving for a house, my emergency fund, saving for vacation, etc), it's just not worth the risk. I'd rather buy I bonds every year, to ensure that money is at least protected from inflation, and keep the rest in the highest yield bank account I can find.

The only other suggestion I would make is to consider if you actually want to use that money for a down payment, or if you would rather invest it in a retirement account. If you max your TSP and IRA contributions, you would be able to put $26,500 a year into retirement accounts (or $53,000 a year if you are married and contribute to your spouses). You could get that $100k into retirement accounts by the time you are out of the military, and use a no down-payment VA loan. Or you could keep enough for a 20% down-payment, and put the rest into a retirement account like I described. Lot's of options to consider, but it's ultimately up to you.

 

[soteriologist]

@savedmother My dad and I were just discussing I bonds while I was home on leave. Rates in the current period are over 7% thanks to the huge inflation numbers recently. I second this suggestion

 

[zakariyya]

@savedmother I’m seriously considering your advice. I’m considering of the 100K putting 60K in l bonds and dividing the other 40K up into extremely safe funds. Every year buying more L funds. The website says you can actually get 15K l bonds annually (30K since I’m married). You have to do 10K online and 5K through paper deposits.

 

[resjudicata]

@zakariyya Are you sure you want to invest money that might lose 30-50% of its value in the next 5 years?

5 years is a very short time frame to invest money especially when its going to be used for a down payment.

 

[zakariyya]

@resjudicata I’m trying to mimic the L2030 fund so I’m not investing 100%. I’ve done some research in the last few hours and here’s the plan. I’ve come up with. Keep in mind this is still just in preliminary phase and can change. Any suggestions I would gladly take.

33% G,
7% F,
31% C,
8% S,
21% I

$33,000 savings (G Fund)
$7,000 AGG (F fund)
$31,000 SPY (C fund)
$8,000 DWCFT (S fund)
$21,000 EFA (I fund)

Each January I will review the L2030 fund and move the money around to mimic the percentages so my money will become safer over time.

 

[resjudicata]

@zakariyya If you are dead set on investing I would simplify this and just invest whatever portion you want in VT/VTWAX.

And like the other person said, I Bonds are a very solid choice to tuck some money away to keep up with inflation.

 

[tn8710]

@resjudicata No index fund lost 50 percent of it's value even during the pandemic. 30-50% loss is not a realistic concern if properly invested in a tsp type fund.

 

[resjudicata]

@tn8710 We cant predict what will happen. Losing 30% is completely reasonable if there was a big market downturn.

 

[tn8710]

@resjudicata You would only lose if you sold. If you invest on index funds over 5 years you will come out with a profit.

If you keep your money in the bank you will lose spending power.

 

[resjudicata]

@tn8710 This is just wildly incorrect.

Over 5 years you generally should come out positive if without a market crash.

If the market crashes in the next 5 years OP is screwed for a down payment depending on how long it takes for the market to recover which could take years.

Index Funds do not guarantee anything. They fall to market downturns like anything else.

 

[tn8710]

@resjudicata So find me an index fund that is down 50%. Look at 2008. If you invested the day before the crash you would be positive after 5 years.

Every investment has a risk but an index fund over 5 years is a very small risk. He would lose money in the bank or the bond market with current rate of inflation.

But if you don't want the risk don't invest. But saying 30-50% over 5 years is just crazy.

 

[resjudicata]

@tn8710 We aren't talking about over a 5 year investing period though.

OP is buying a house in 5 years and needs the money then.

The bottom line is that its too risky to invest for that short of a term.

ALSO, previous performance does not guarantee future returns. who is to say that the next 10 years is sideways or downwards trading. I don't know. Nobody does.

 

[tn8710]

@resjudicata Depends on your level of risk. I would say the s&p going up is a very safe bet.

 

[zakariyya]

@tn8710 I think Richie is warning though that what if the market crashes in 5 years, the week before I was gonna withdraw it? Then I would possibly need to wait years just to break even or I withdraw at a loss. Of course if every year I change the percentages to match 2030 fund then in 5 years I should have 70% to 80% in savings (g fund).

 

[tn8710]

@zakariyya Depends on your level of risk. I wouldn't worry but that's me. Do what you think is best.

 

[savedmother]

@tn8710 A short term loss of 30-50% is absolutely a concern in a fund. Yes, long term the market has always returned to levels before a large drop, but there are several examples of it taking a few years to regain value. That is not a good place to keep money you plan on using in 5 years for a large purchase.

 

[tn8710]

@savedmother Show me an index fund that matches the tsp funds that is down 30% over 5 years.