Thrift Savings Plan (TSP) Explainer

Posted by Cole Ferrier, July 29, 2025

If you're a federal employee or service member, you've probably stared at your Thrift Savings Plan (TSP) statement, seen the alphabet soup of funds—G, F, C, S, I—and wondered: 'Is this it? Is this simple menu enough to build a real retirement?' The good news is that the TSP's simplicity isn't a limitation; it's a powerful feature. The Thrift Savings Plan is one of the best retirement plans in the world, renowned for its incredible simplicity and rock-bottom costs. This guide is not about telling you how to invest; it's about explaining the tools at your disposal so you can confidently build a portfolio that reflects your personal financial strategy.

As a U.S. Air Force veteran and former federal employee, I’ve been in the exact same seat, staring at the same fund choices. I navigated the TSP myself, not just as a planner, but as a participant on my own path to financial independence. I can tell you with confidence that not only is the TSP a fantastic tool, but with a clear understanding of its components, you can use its simple funds to construct a portfolio that is every bit as robust as those built with dozens of complex, high-cost products.

Let's break down the TSP funds and show you how they can be put together to match your goals.

Decoding the TSP: The Five Core Funds

The TSP is built on five individual investment funds. Understanding the role of each is the first step to mastering your retirement plan.

• G Fund (Government Securities Investment Fund):

  • What it is: The G Fund invests in unique, short-term U.S. Treasury securities issued specifically to the TSP.

  • Risk/Return: It is the safest fund in the TSP. Its principal is guaranteed by the U.S. government, meaning it will never lose value. Its return is based on the average rate of long-term Treasury bonds.

  • Purpose: Capital preservation. This is the cash-equivalent portion of your portfolio, designed to provide stability and protect against stock market downturns.

• F Fund (Fixed Income Index Investment Fund):

  • What it is: The F Fund tracks the Bloomberg U.S. Aggregate Bond Index, which represents the broad U.S. investment-grade bond market. This includes government, corporate, and mortgage-backed bonds.

  • Risk/Return: It has low to moderate risk. Its value can fluctuate as interest rates change (when rates go up, bond prices generally go down, and vice-versa), but it is far more stable than a stock fund.

  • Purpose: To provide diversification from stocks and generate modest income. Think of it as the brake pedal for your portfolio, designed to provide stability while the stock funds (C, S, and I) act as the engine. The brakes work in both directions: when the stock market engine is accelerating forward, the bonds will slow down your total return. But when the engine goes into reverse during a downturn, those same brakes help slow your portfolio's fall.

• C Fund (Common Stock Index Investment Fund):

  • What it is: The C Fund tracks the S&P 500 Index, which is composed of the 500 largest U.S. companies.

  • Risk/Return: High risk and high potential return. Its value moves with the U.S. stock market.

  • Purpose: Long-term growth. This is a core engine of your portfolio, representing a huge slice of the U.S. economy.

• S Fund (Small Cap Stock Index Investment Fund):

  • What it is: The S Fund tracks the Dow Jones U.S. Completion Total Stock Market Index. This includes virtually all U.S. stocks not included in the S&P 500. Think of it as the mid- and small-sized U.S. companies.

  • Risk/Return: High risk and high potential return, often considered slightly more volatile than the C Fund.

  • Purpose: Long-term growth and completion of the U.S. stock market.

• I Fund (International Stock Index Investment Fund):

  • What it is: The I Fund tracks the MSCI ACWI IMI ex USA ex China ex Hong Kong Index. This index includes stocks of all sizes across more than 40 developed and emerging market countries outside the United States, China and Hong Kong.

  • Risk/Return: High risk and high potential return. It is subject to currency fluctuations and the economic performance of international markets.

  • Purpose: Long-term growth and international diversification.

The L Funds: A Deeper Look at the "Set It and Forget It" Option

The Lifecycle (L) Funds are target-date funds, designed to be a simple, all-in-one solution. You simply pick the fund with the date closest to when you plan to start withdrawing your money, and the L Fund does the rest. It automatically invests in a mix of the five core funds (G, F, C, S, I) and gradually becomes more conservative (more G and F, less C, S, and I) as its target date approaches.

How an L Fund is Built: A Look Inside the L 2050

Let's deconstruct the L 2050 Fund. According to the TSP, this fund's objective "is to achieve a high level of growth with a very low emphasis on preservation of assets." It is designed for someone planning to retire around the year 2050. Because that date is far in the future, the fund has an aggressive allocation focused on growth. While the exact percentages are adjusted, a representative allocation for the L 2050 fund is as follows as of July 2025:

• C Fund: ~42%

• I Fund: ~29%

• S Fund: ~11%

• G Fund: ~11%

• F Fund: ~7%

As you can see, the L 2050 is nothing more than a pre-packaged mix of the five funds we just discussed. The fund's managers have combined them to create a diversified portfolio with an approximate 82% stock allocation (~42% C + ~11% S + ~29% I), and an 18% bond (~11% G + ~7% F) allocation. This mix is based on what they believe is an appropriate level of risk for an investor with about 25 years until retirement. This process isn't random; the fund's allocation is adjusted quarterly, following a predetermined 'glide path' to become safer as you age.

The Limits of Automation: Why L Funds Aren't for Everyone

While the L Funds are a fantastic, low-cost, and simple starting point, their "one-size-fits-all" approach has limitations. They are designed in a vacuum and cannot account for your unique financial situation outside of the TSP.

Here are a few reasons why an L Fund might not be the optimal solution for you:

• They Don't See Your Other Accounts: The L Fund's asset allocation is based on the assumption that your TSP is your only investment. But what if you have a large 401(k) from a previous job, a Roth IRA, or a taxable brokerage account? Or perhaps your spouse has their own retirement plan. Your TSP is just one piece of your total financial puzzle. For example, if your other accounts are heavily invested in bonds, the L Fund's bond allocation might make your overall portfolio too conservative. You might be better served by holding 100% stocks within your TSP to achieve your desired overall stock/bond mix across all your accounts.

• Your Risk Tolerance May Differ: The L Fund's glide path is based on an average risk tolerance for a person of a certain age. But you are not average. You might be more comfortable with market volatility and wish to maintain a higher stock allocation for longer to maximize growth. Conversely, you might be more risk-averse and prefer to de-risk faster than the L Fund's schedule. Building your own allocation with the core funds gives you complete control.

• Pensions and Other Income Streams: If you are eligible for a FERS pension or have other guaranteed income sources in retirement (like rental income or an annuity), your need for the stability of bonds may be lower. Your pension acts like a bond, providing a steady income stream. This might free you up to take on more growth-oriented risk within your TSP portfolio than the corresponding L Fund would suggest.

The L Funds are an excellent tool for getting started and for those who value simplicity above all else. However, as your financial life becomes more complex, taking a more hands-on approach can lead to a more optimized and personalized strategy.

Understanding the Building Blocks: Assembling a Portfolio

Think of the C, S, and I funds as software libraries—pre-built modules of code you can use to assemble a larger application. For many investors, a primary strategic goal is to build a portfolio that approximates the total world stock market. For an investor who has decided on this approach, here is the logic for how the TSP funds could be combined to achieve that goal:

• Component 1: The Total U.S. Stock Market (C Fund + S Fund): The C Fund gives you the 500 largest U.S. companies. The S Fund gives you everything else. By combining them, you can own a piece of nearly every publicly traded company in the United States. A common approximation for this is an 80/20 split: 80% C Fund and 20% S Fund. This combination effectively mirrors a total U.S. stock market index fund.

• Component 2: The Rest of the World (I Fund): Once you have your U.S. market exposure, you add the I Fund for international diversification. Global stock markets are currently weighted at roughly 60% U.S. and 40% International. An investor seeking to match this global weight would allocate their stock holdings accordingly.

It's important to remember that these 80/20 and 60/40 splits are just rough approximations that can change over time as markets evolve. To get a more current picture of these weightings, investors can look at the holdings of a total world stock market index fund.

Of course, not everyone wants to mirror the global market exactly. Some investors intentionally 'tilt' their portfolios. For example, an investor might hold a higher percentage of the S fund to emphasize smaller U.S. companies, or overweight the C and S funds for a 'home-country bias.' These are valid personal decisions, but they represent an active choice to deviate from the global market-cap. The key is to first decide on your strategy, then use the TSP funds as the tools to build it.

Putting It All Together: An Illustrative Example

To make this concrete, let's walk through a purely illustrative example. It's critical to understand that this is not a recommendation for any specific allocation. Rather, it is a demonstration of how an investor who has already decided on an 80% stock / 20% bond strategy could implement it using the TSP's core funds to approximate the total world market:

• Total Stock Allocation (80% of portfolio):

  • U.S. Stocks (60% of stock portion, or 48% of total portfolio):

    • C Fund: 80% of the U.S. portion -> 38.4% of total portfolio

    • S Fund: 20% of the U.S. portion -> 9.6% of total portfolio

  • International Stocks (40% of stock portion, or 32% of total portfolio):

    • I Fund: 32% of total portfolio

• Total Bond Allocation (20% of portfolio):

  • You could put this entire portion in either the F Fund or G fund; or split it between the F Fund and the ultra-safe G Fund based on your risk tolerance.

This simple, three-fund stock allocation (C, S, I) combined with your choice of bonds (F, G) creates a sophisticated, low-cost, and globally diversified portfolio designed for long-term growth.

The Unbeatable Advantage: Low Costs

We can't talk about the TSP without highlighting its single greatest feature: its incredibly low expense ratios. According to the official TSP website, "the net expense ratio for TSP funds is often less than 0.04%, or 4 basis points." For comparison, the average expense ratio for a 401(k) plan can be 1% or more. This difference might sound small, but over a 30- or 40-year career, it can save you tens, or even hundreds, of thousands of dollars in fees, all of which stays in your pocket, compounding for your future.

Conclusion: Your Plan, Your Future

The Thrift Savings Plan isn't a black box; it's a toolkit. By understanding the distinct roles of the G, F, C, S, and I funds, you move from being a passive passenger to the pilot of your financial future. Whether you use the simple automation of an L Fund or build your own custom allocation, the power is in making an informed choice that aligns with your personal financial plan, your timeline, and your tolerance for risk. The TSP provides all the tools you need to build a powerful financial engine; the rest is up to you to draw the map and take the controls.

Navigating federal benefits and integrating them into a comprehensive financial plan can feel overwhelming. If you have questions about how to make the most of your TSP or how it fits into your broader financial life, please don’t hesitate to reach out.

Resources

• Official TSP Website: For official information on fund performance, expenses, and forms, the primary source is always the TSP itself.

  • Expenses and Fees: https://www.tsp.gov/tsp-basics/expenses-and-fees/

• Bogleheads Wiki: For excellent community-driven information, the Bogleheads wiki is an invaluable resource. The Bogleheads are a community of investors who champion the low-cost, passive investing philosophy of John Bogle, the founder of Vanguard. Their page on the TSP is incredibly detailed and helpful.

  • Bogleheads TSP Wiki: https://www.bogleheads.org/wiki/Thrift_Savings_Plan