Speaker 1 (00:02.102)
Welcome to the Physician Family Financial Advisors Podcast, where physician moms and dads like you turn today's worries about taxes and investing into all the money you need for retirement and college. I'm Ben Utley.
and I'm Nate Rennecke. What is the best investment for VA and military doctors? This question comes from one of our readers who wrote in and said, Hello, I am a flight doc with the US Air Force Reserves and I have a question about my thrift savings plan. I was speaking with a financial advisor on my base about the different funds in my TSP.
and my options are for investing. He recommended putting 70 % in the C fund, 25 % in the S fund, and 5 % in the I fund. Or he said I could go with 100 % in the C fund. Then I could adjust my overall portfolio using my Fidelity account in my private practice. What are your thoughts? So Ben.
The physicians who choose to listen to this episode, probably know what the thrift savings plan is, But it's essentially a 401k for VA and military doctors. Is that about it?
Federal employees, it's part of the federal employees retirement system or FERS. call it, they call it the FERS TSP. And before we get too far, I want to thank you very much for your question listener flight doc, taking care of our, our troops out there in the air.
Speaker 2 (01:37.644)
Yes, and it's a great question because there's these funds that this doc mentioned in here that are kind of confusing. They're different than anything outside of the TSP. They're just letters. So we're going to dig into that, but let's set the stage a bit. So before we get into that, the funds, can you just tell us what's good about the TSP? Is it better than a normal 401k?
Yeah, it is decidedly better than a normal 401k. is, you know, a lot of times the government doesn't get credit for getting things right, but I have to say that the federal employees retirement system thrift savings plan, which is like their 401k, as you said, gets it right in that they have super low fees. I mean, just very, very low fees in terms of operating expenses. There's no fee to the participants. So that's essentially free. Another thing that I like is that the options
even though the names are somewhat ambiguous, the options themselves are fairly straightforward and they also have a limited number of options. Whereas I've seen some 401ks with 50 or 60 or 70 different choices inside and it's known that the more choices there are, the less people participate. And so I kind of look at the first TSP as a model for how retirement and 401ks really should be built.
And then, you know, people who participate get a decent match. It's really all just great.
We love sunshine and roses, just wonderful in the TSP world.
Speaker 2 (03:10.572)
Yeah. So let me break down these funds a little bit. This could get a little heady, but at same time, we made some assumptions that our listeners might know what these are. And so before we say, you know, give our thoughts on this advisor's advice to our listener, I'm going to break this down. So the C fund is the common stock fund inside the TSB. It's essentially
an S &P 500 index fund. Okay, so simple enough. And to go back to the question, he's contemplating 70 % C fund or all C funds. So essentially saying, you know, how much S &P 500? Then there's the S fund, which is the small stock fund. Without getting too far into it, essentially there is, you know, large cap, mid cap, small cap is the size.
of the companies you're investing in. So the small cap is what it's saying and this is more like a mid cap fund in reality. Then there's the I fund, the international fund and in the TSP, the international fund is a developed market index fund and it's Europe and Pacific but no emerging market.
It's a no emerging, yeah.
Then there's the F fund which is a fixed income fund Which is you know a total bond market index fund mm-hmm okay with me so far
Speaker 1 (04:44.994)
So, so far sounds good. It's got a lot of index funds in it and there's some very common names in there. No emerging markets exposure and the small cap is not really small. It's mid, you know, they're small and then there's real small like DFA small, know, bottom, bottom decile. But so far, I mean, for the, for the price, it sounds really good, like all the building blocks.
Yep. Okay. And then there is one more fund. Well, there's one more discrete fund here, which is the G fund. And this is special to the TSP. It's a government securities fund, stable value fund backed by the US government. You get the yield of a five year US treasury note without any principal risk.
Hmm. The bonds without a downside. That's what I'm hearing.
That's right. And we'll talk about that a bit. So I'm going to go back to this question. We set the stage here. So this flight doc is essentially asking if this is what advice to take. His advisor on base said he recommended putting 70 % C fund, 25 % S fund, 5 % I fund versus 100 % C fund. And then if he went this route,
He could adjust his other parts of his portfolio, like at Fidelity, outside of the TSP, maybe put bonds in it or something. I'm assuming is what he's asking. And he says, what are your thoughts? So Ben, what are your thoughts?
Speaker 1 (06:19.99)
my thoughts are that this is kind of a non, a non-choice choice. So in one hand, it's 70 % stocks plus 25 % stocks plus 5 % stocks. In the other hand, it's a hundred percent stocks. So this is stocks versus stocks. And, you know, we like to see a little bit of bond exposure in the typical client's account.
And, you know, at least 10 % because it doesn't shave much off of returns, but it reduces a lot of volatility, which makes it easier to live with a portfolio over time. I think we're going to talk a little bit about the, the idea of having all stocks in a, in a 401k, which is not my fave, but, it's, don't, I see it as diversified among stocks, but not very diversified, you know, especially the C fund versus the S fund.
You know, it's, it's known that the outperformance of small cap stocks, the diversifier there is in the bottom decile, which is the, know, if you stack all the, all the stocks from largest to smallest and you take the smallest chunk of those, it's one 10th of them. That's where you get the outperformance in small caps, if it's going to happen. And, uh, these small caps are more like mid caps. And so you're not really, it's like S and P 500 plus something that's kind of like S and P 500 plus this tiny little like, why bother with it?
international exposure because you know global international exposure is edging on like 40 percent international including a chunk of emerging markets so it's almost like why bother right right so not super well diversified and and complicated
Right complicated is is what came to my mind and while we do love the TSP it's not without its its faults as kind of some of the things you pointed out and Much like any 401k. So it's complicated for for really no reason like it. if it was complicated for a great reason
Speaker 1 (08:20.258)
I mean there's no gain in performance there by mixing it up that way. There's no risk reduction that way. It's just arbitrarily complicated.
A less complicated route is to choose something else in the TSP called the L-fund. So Ben, we didn't talk about the L-fund. The L-fund stands for Life Cycle Funds. And the Life Cycle Fund gives you instant diversification into all the discrete funds that we just discussed. And your exposure to those funds is based on your target retirement date. Is that right?
Yeah, that's right. It doesn't give you exposure to the G fund, but we're going to talk about the G fund here in just a minute.
Yes, that's right, the GE Fund. So this is a very simple way to just choose and kind of move on, set it and forget it inside your TSP. This is target date funds. We love those, but let's talk about the GE Fund. So that's one simple way to do this, get full exposure to bonds and stocks. But tell me about how you've...
directed some clients to use the G fund if it's right for them.
Speaker 1 (09:33.58)
G, I'm glad you asked. I couldn't resist, sorry. So G is for government. And just to review again, is, to me, this is the coolest thing about the first TSP program is the G fund. So what happens is if you own, if you own bonds, they go up and down in value as interest rates change, right? Interest rates go up, bond prices go down and vice versa. So the G fund allows you to get the yield on a five year
government bond, so that's the interest, but when interest rates rise, the value of that fund does not go down. So it's a stable value fund issued by the government. And you can find stable value funds in other 401ks, but this one is unique in that you get the full yield. know, they're not taking a haircut off to feed the insurance company that's hosting this thing. if you want to maximize the G fund at the same time that you're maximizing
your future tax savings, there's a trick to do this and it's known as tax coordination. So let's imagine that an investor has a 50-50 target asset allocation, which admittedly is kind of conservative for most of the clients that we serve. Most of the clients we serve are in their, you know, to start with this in their mid thirties, they stay in their mid forties and we're having these conversations. But let's imagine for a moment that a doc is a 50-50 investor. So half stocks and half bonds, and they have
$50,000 in the first TSP plan and they have $50,000 in a taxable account, a Fidelity or Schwab or Betterment or someplace like that. Okay. So we have some choices. We can put half stocks and half bonds inside the FERS. We can put half stocks and half bonds outside the FERS. Or we could put all stocks outside the FERS and all G fund inside the FERS. And that's the one that not only makes the best use of the G fund,
It also minimizes future tax bills. Why is that? Okay. So inside the first, the first account that G fund will grow. And right now it's a single digit growth rate, which is not bad. Some of your investments need to be calmer, right? So it grows slowly. And then when you get out and you're in your seventies and you have to begin taking these mandatory retirement distributions, then the amount that you have to take out of that G fund is smaller than if you had invested it all in stocks.
Speaker 1 (12:00.852)
Meanwhile, the money that's invested in your taxable account and your brokerage account someplace else, if it's all in stocks and those stocks have grown, then when you sell them, you're going to pay the preferred capital gains tax rate. And depending on your income, that capital gains tax rate might be zero. Okay. So that minimizes the overall tax bill. Now let's take that back and compare it to what the financial advisor on base said. That financial advisor says, Hey, put everything.
in your TSP plan, put everything in your 401k and make it all stocks. And then outside that you can make adjustments. Well, if you do that, it maximizes the growth that's inside the first TSP, which does defer taxes, but you got to pay those taxes at some point. So when you get out in your seventies, you're going to be screaming about that tax bill.
And meanwhile, back at the ranch, you've ignored kind of the gem in the, the crown jewel of the first TSP, which is the G fund. So I know this is the deep end of the pool. requires some advanced planning, but, the end, the end result of his hard to understand, easy to do to pack your, pack your first TSP with the G fund and in your taxable account, hold mostly stocks and to get that balance right for you, whether it's 70 30.
50-50, 90-10, whatever it happens to be. Make the most of your money, no matter where it is. So I want to leave you with one more pro tip. So this is for the physicians that are working at the VA. This is for physicians that are in the military, whether you're a reservist or you're fully enlisted officer. It's this, you don't have to settle for just what is in the TSP. You can take money from an old 401k and roll it into the TSP.
In fact, you can take money from certain kinds of IRAs and roll that money back into the TSP and avail yourself of the G fund and all the inexpensive options that are in there. So that will save you some money and it might save you some taxes over the long haul. did we cover everything today?
Speaker 2 (14:00.277)
That was it. I think that was more than enough.
Okay, fantastic. Well, thanks again to the Hard Work and Flight Doc who sent us his question. If you have a question, you can send it to us. It's podcast at physicianfamily.com. You can call our answer line, 503-308-8733, or you can go to physicianfamily.com slash go. There'll be a link in the show notes. There, you can subscribe to our email newsletter, and you can also get your version of the Overtaxed Doctor's Guide to Retirement 2023.
Thank for listening to the Physician Family Financial Advisors Podcast. Is there a question you would like answered? Go to PhysicianFamily.com to record your question. While you're there, sign up for our newsletter and gain access to tools you can use to turn worries about taxes and into a lifelong feeling of financial security. That's PhysicianFamily.com.
on our next show.
Speaker 1 (14:48.91)
investing in extra money.
