Is the L Income fund too conservative?

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azanon
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Is the L Income fund too conservative?

Post by azanon » Wed Jul 10, 2019 1:45 pm

For those that don't know, the L Income fund is the federal employee balanced fund that the lifecycle funds (target date funds) eventually glide to at approximately retirement. So they're a "to" style target-date fund instead of a "through" style, such as Vanguards.

The L income fund was recently changed to glide from 20 to 30% equity for retirement. So my question is, is this fund still way too conservative and are they making a big mistake? It just seems like most places I look are recommending something more along the lines of a 60/40 for retirement (for instance, that comes up a lot with the 4% rule is mentioned). As another example, if you complete the Vanguard asset allocation questionnaire and answer that you'll be withdrawing the money for 15+ years, even if you're retired, that calculator recommends 60/40. Also, it seems like the vast majority of advisors are recommending about a 60/40, sometimes even more, and virtually never less than 40%.

Being more of a conservative investor, I'm actually considering letting my TSP glideslope down to that 30% anyway, and leaving it there for all of retirement possibly using either the withdrawls based on life expectancy option or VPW, but it sure is hard to "stay that course" with that plan given the high degree such a notion (holding just 30% stocks) is ridiculed by professionals. It was supposed to be professionally designed, so I'm just confused who's right.

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Re: Is the L Income fund too conservative?

Post by mhalley » Wed Jul 10, 2019 5:16 pm

The idea of an income fund is to preserve capital as much as possible while throwing off income yet keeping up with inflation. 30% stocks is a well known rule of thumb for those in the higher age ranges. I would say 70 and over maybe. Rick Ferri had an article recommending 30% stocks for retirees.
https://www.forbes.com/sites/rickferri/ ... 52f125dae9
If you think 30% is too low, then by all means pick the L fund that has the aa you want. I am retired and plan on staying 50/50 for the foreseeable future, but everyone has their own sleep well at night number.

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Re: Is the L Income fund too conservative?

Post by longinvest » Wed Jul 10, 2019 5:54 pm

azanon wrote:
Wed Jul 10, 2019 1:45 pm
Being more of a conservative investor, I'm actually considering letting my TSP glideslope down to that 30% anyway, and leaving it there for all of retirement possibly using either the withdrawls based on life expectancy option or VPW, but it sure is hard to "stay that course" with that plan given the high degree such a notion (holding just 30% stocks) is ridiculed by professionals. It was supposed to be professionally designed, so I'm just confused who's right.
I see no problem with a 30/70 stocks/bonds allocation. On the contrary, I think that it's a great allocation for getting stable VPW withdrawals out of a portfolio. A 50% stock loss would barely affect withdrawals by 15%. When combined with stable lifelong income like Social Security possibly delayed to age 70, this could represent a drop of at most 10% in total retirement income while the financial media is screaming about the end of the (investing) world. It's a very calm allocation.

The VPW method adapts its percentages to the chosen allocation. It's suggested to stay within a range of 30% to 70% in stocks, and obviously the same for bonds.

I wouldn't go below 30% in stocks, because there are many risks in investing other than volatility. I wouldn't concentrate my portfolio into any of the two major asset classes (stocks and bonds). Allocating at least 30% to each reduces the risk of overexposing the portfolio to deep losses in one of the two classes.

Keep in mind that most of the financial world models retirement using constant inflation-adjusted withdrawals from a portfolio of fluctuating assets, regardless of market returns. This illogical withdrawal model naturally leads to illogical asset allocation suggestions, because a high stocks portfolio gets a better odd of surviving a low returns period for a given constant inflation-adjusted withdrawal amount. What the financial world doesn't discuss is the incredible inefficiency of that model letting most retirees die with a gigantic unspent portfolio.

The VPW method gives back its role to asset allocation, that of controlling portfolio fluctuations and various risks.
Last edited by longinvest on Wed Jul 10, 2019 6:09 pm, edited 1 time in total.
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Re: Is the L Income fund too conservative?

Post by vineviz » Wed Jul 10, 2019 6:08 pm

azanon wrote:
Wed Jul 10, 2019 1:45 pm
So my question is, is this fund still way too conservative and are they making a big mistake?
It's probably not an optimal allocation, but 30% is the average allocation for the "retirement" or "income" fund among the largest fund companies. It's also pretty similar to the asset allocation in retirement plans for people in the 60+ age cohort (last data I saw had over 40% of these investors with zero equity allocation.

My guess is that 30% is probably a good compromise between what is economically optimal (probably 50% or 60% in stocks) and what most investors actually want.

Me, I'd probably put 60% in the L fund and 40% in the S fund and call it a day.
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Re: Is the L Income fund too conservative?

Post by GCD » Wed Jul 10, 2019 6:18 pm

Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.

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Re: Is the L Income fund too conservative?

Post by azanon » Wed Jul 10, 2019 7:15 pm

Just want to quickly say I’m appreciating all of the comments and input on this. Thanks to everyone that’s responded so far. There are so many knowledgeable people here.

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Re: Is the L Income fund too conservative?

Post by LifeOfRiley » Wed Jul 10, 2019 7:22 pm

GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.
^ this is also my opinion.

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Re: Is the L Income fund too conservative?

Post by azanon » Wed Jul 10, 2019 7:51 pm

GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.
Just wanted to give more specifics on the pension if that helps with the opinions. The FERS pension is pretty generous and is roughly 1% of salary x years served so a 30-yr career will receive roughly 30% of their final (high 3) salary. So yes that is in addition to social security (and a social security supplement if retiring prior to age 62).

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Re: Is the L Income fund too conservative?

Post by fortyofforty » Wed Jul 10, 2019 8:00 pm

Keep in mind, too, that the TSP has access to the G Fund, which should help immensely. I do agree that the L Income Fund is too conservative for my taste, however, bear in mind that many federal employees over the years invested only in the G Fund so as not to lose any money, ever.
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Re: Is the L Income fund too conservative?

Post by azanon » Wed Jul 10, 2019 9:14 pm

fortyofforty wrote:
Wed Jul 10, 2019 8:00 pm
Keep in mind, too, that the TSP has access to the G Fund, which should help immensely. I do agree that the L Income Fund is too conservative for my taste, however, bear in mind that many federal employees over the years invested only in the G Fund so as not to lose any money, ever.
You might be hitting home with me with that comment. If I were completely honest, I was at least partially drawn to a government job because It’s fairly low risk in terms of job stability. So yeah maybe the design of the l funds including l income was presuming that the average government employee is more risk adverse in comparison to the general public.

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Re: Is the L Income fund too conservative?

Post by brad.clarkston » Wed Jul 10, 2019 9:31 pm

GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.

My wife is a GS13 with the Army Core Eng. with no pension, no one she's worked with in the last 20 years has one.

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Re: Is the L Income fund too conservative?

Post by GCD » Wed Jul 10, 2019 9:40 pm

brad.clarkston wrote:
Wed Jul 10, 2019 9:31 pm
GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.

My wife is a GS13 with the Army Core Eng. with no pension, no one she's worked with in the last 20 years has one.
How does that work? The US Army Corps of Engineers website says they are covered under FERS. Is she a contract employee without benefits or what? I find it hard to believe that there is a category of employee that has access to investing in the TSP that is not also covered by FERS or a military pension.

How does this info under retirement not apply to her? https://www.usace.army.mil/Careers/USAC ... -Benefits/

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Re: Is the L Income fund too conservative?

Post by azanon » Wed Jul 10, 2019 9:46 pm

brad.clarkston wrote:
Wed Jul 10, 2019 9:31 pm
GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.

My wife is a GS13 with the Army Core Eng. with no pension, no one she's worked with in the last 20 years has one.
It is possible I work for that same agency too, and I don’t know anyone that won’t receive some sort of pension unless maybe they were hired on contract. It’s possible this is a semantics issue as FERS refers to it as an “annuity”. Older feds with the Corps were under CSRS which also includes an even more substantial “defined benefits plan” (read: a pension).

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Re: Is the L Income fund too conservative?

Post by rascott » Wed Jul 10, 2019 9:58 pm

brad.clarkston wrote:
Wed Jul 10, 2019 9:31 pm
GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.

My wife is a GS13 with the Army Core Eng. with no pension, no one she's worked with in the last 20 years has one.


That's not valid info at all. If she's a GS employee, she's got a pension. It's not the old pension system....that is long gone, but there still is one for all Fed employees.

The FERS system is TSP+Social Security+Pension

CSRS was a pure pension system....those folks didn't even pay into SS (and don't get it).


So lucky surprise for you! It's 1% of her highest 3 years salary "x" years of service. A full 30+ year career would replace roughly 1/3rd her salary.

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Re: Is the L Income fund too conservative?

Post by GCD » Wed Jul 10, 2019 10:05 pm

CSRS participants were able to invest in the TSP they just didn't get any matching funds.

As I look at the TSP website, I see there may be a few other categories of person who could end up with a TSP account and no pension. You could be a beneficiary spouse whose govt. employee spouse did not elect survivor benefits on the annuity. After the govt. employee dies the surviving spouse could end up with a TSP account and no pension.

You could also have a part-time employee that contributed to the TSP but who never acquired enough time in to earn a pension.

Or you could be a "civilian in certain other categories of government service", meaning not FERS, CSRS or military. I have no idea what this is. I've never known anyone to be in this category so I'm really at a complete loss here.

I don't think there is any debate about the L fund being too conservative if you belong to FERS, CSRS or the military and have a pension. If you do not get a pension then it is debatable per the many arguments above. I was operating under the assumption that all federal employees had a pension to go along with their TSP. Clearly that isn't the case, although that class of employee seems to be pretty miniscule.

But again, USACE is covered by FERS, unless they are contractors and not employees. But that also goes for pretty much every agency in the USG.

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Re: Is the L Income fund too conservative?

Post by tj » Wed Jul 10, 2019 10:24 pm

Or you could be a "civilian in certain other categories of government service", meaning not FERS, CSRS or military. I have no idea what this is. I've never known anyone to be in this category so I'm really at a complete loss here.
Well, even the NAF employees get the NAF pension....

https://www.armymwr.com/m/emplyee-porta ... retirement

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Re: Is the L Income fund too conservative?

Post by GCD » Wed Jul 10, 2019 10:31 pm

tj wrote:
Wed Jul 10, 2019 10:24 pm
Well, even the NAF employees get the NAF pension....

https://www.armymwr.com/m/emplyee-porta ... retirement
But NAF has a 401K, not the TSP.

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Re: Is the L Income fund too conservative?

Post by brad.clarkston » Thu Jul 11, 2019 12:31 am

GCD wrote:
Wed Jul 10, 2019 9:40 pm
brad.clarkston wrote:
Wed Jul 10, 2019 9:31 pm
GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.

My wife is a GS13 with the Army Core Eng. with no pension, no one she's worked with in the last 20 years has one.
How does that work? The US Army Corps of Engineers website says they are covered under FERS. Is she a contract employee without benefits or what? I find it hard to believe that there is a category of employee that has access to investing in the TSP that is not also covered by FERS or a military pension.

How does this info under retirement not apply to her? https://www.usace.army.mil/Careers/USAC ... -Benefits/
She's been a Federal employ for nearly 20 years never a contractor.
Yes that's the correct webpage and it's completely accurate that is what she has.

As far as I know the top3x1% is not a pension like her father has as a older Fed or a classical company pension like mine but I'll ask her I could be wrong (and usually am).

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Re: Is the L Income fund too conservative?

Post by tj » Thu Jul 11, 2019 1:01 am

brad.clarkston wrote:
Thu Jul 11, 2019 12:31 am
GCD wrote:
Wed Jul 10, 2019 9:40 pm
brad.clarkston wrote:
Wed Jul 10, 2019 9:31 pm
GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.

My wife is a GS13 with the Army Core Eng. with no pension, no one she's worked with in the last 20 years has one.
How does that work? The US Army Corps of Engineers website says they are covered under FERS. Is she a contract employee without benefits or what? I find it hard to believe that there is a category of employee that has access to investing in the TSP that is not also covered by FERS or a military pension.

How does this info under retirement not apply to her? https://www.usace.army.mil/Careers/USAC ... -Benefits/
She's been a Federal employ for nearly 20 years never a contractor.
Yes that's the correct webpage and it's completely accurate that is what she has.

As far as I know the top3x1% is not a pension like her father has as a older Fed or a classical company pension like mine but I'll ask her I could be wrong (and usually am).
It absolutely is a pension.

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Re: Is the L Income fund too conservative?

Post by fortyofforty » Thu Jul 11, 2019 7:43 am

brad.clarkston wrote:
Wed Jul 10, 2019 9:31 pm
GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.

My wife is a GS13 with the Army Core Eng. with no pension, no one she's worked with in the last 20 years has one.
You realize she was trying to keep it a secret from you, right? Seriously, as the other posters wrote, I don't know anyone who is employed full-time by the federal government directly (not a contractor) who is ineligible for a pension, called the FERS Annuity.

From Dan Jamison's excellent and thorough FERSGUIDE:
Under FERS, you will receive a 1% per-year credit for each of your years of service creditable under FERS. For example, if you worked 20 years under FERS, you would receive (20 x 1%) = 20% of your High-3 basic pay. If you retire at age 62 with at least 20 years of creditable service, OPM will increase your per-year credit to 1.1% for each of your years of service, which would yield an additional 2% of your High-3 in the previous example, or 22% instead of 20%. For General Schedule employees, your High-3 excludes night differential, allowances, bonuses, awards and overtime. Wage Grade employees receive credit for night differential pay. The High-3 includes locality pay for all participants.
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Re: Is the L Income fund too conservative?

Post by retiredjg » Thu Jul 11, 2019 8:14 am

All of the "income" funds I know of have been in the neighborhood or 20% to 30% stocks. Even Wellesley Income is about 33% stocks.

So, no, they are not too conservative for what they are.

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Re: Is the L Income fund too conservative?

Post by tadamsmar » Thu Jul 11, 2019 9:35 am

azanon wrote:
Wed Jul 10, 2019 1:45 pm
Being more of a conservative investor, I'm actually considering letting my TSP glideslope down to that 30% anyway, and leaving it there for all of retirement possibly using either the withdrawls based on life expectancy option or VPW, but it sure is hard to "stay that course" with that plan given the high degree such a notion (holding just 30% stocks) is ridiculed by professionals. It was supposed to be professionally designed, so I'm just confused who's right.
The pros who recommend 40% stock are typically advising the general public who do not have access to the G fund.

Due to the G Fund, the L Funds tend to have a higher return at a given risk level, and more so for the L Income fund. The efficient frontier is flatter and has higher return on the conservative end due to the G Fund.

So, L Income Fund has a lower risk than the pro advice, but it may not have a lower return, certainly the return difference is mitigated by the G Fund.

Also, the Vanguard Target Retirement Income Fund is 30% stock. Perhaps those funds target retirees that are more conservative than average.

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Re: Is the L Income fund too conservative?

Post by azanon » Thu Jul 11, 2019 10:08 am

tadamsmar wrote:
Thu Jul 11, 2019 9:35 am
azanon wrote:
Wed Jul 10, 2019 1:45 pm
Being more of a conservative investor, I'm actually considering letting my TSP glideslope down to that 30% anyway, and leaving it there for all of retirement possibly using either the withdrawls based on life expectancy option or VPW, but it sure is hard to "stay that course" with that plan given the high degree such a notion (holding just 30% stocks) is ridiculed by professionals. It was supposed to be professionally designed, so I'm just confused who's right.
The pros who recommend 40% stock are typically advising the general public who do not have access to the G fund.

Due to the G Fund, the L Funds tend to have a higher return at a given risk level, and more so for the L Income fund. The efficient frontier is flatter and has higher return on the conservative end due to the G Fund.

So, L Income Fund has a lower risk than the pro advice, but it may not have a lower return, certainly the return difference is mitigated by the G Fund.

Also, the Vanguard Target Retirement Income Fund is 30% stock. Perhaps those funds target retirees that are more conservative than average.
Thanks.

I think the assurance I'm looking for is just the ok that's it's a reasonable choice and would not dub me "extremely and irrationally risk adverse" and that i'd be making "a big mistake that will cost me dearly" (something I was told by a CFA on twitter upon saying I intend to use 30% equities in retirement). I can live with it's more conservative than the average, but an implication that it's just flat out wrong by a CFA professional does trouble me and causes me to question whether I'm being wise.

I noticed a few people say that it is in-line and consistent with "income" funds. I can affirm that's exactly how I intend to use it, and I don't have a legacy goal on top of that (though it'd probably be highly likely I'll still have plenty of money upon my expiration). I mentioned earlier I'll pick a retirement income solution that gradually eats the principle (top choices being the "based on life expectancy" that TSP has as an option, or Boglehead VPW).

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Re: Is the L Income fund too conservative?

Post by delamer » Thu Jul 11, 2019 10:20 pm

brad.clarkston wrote:
Thu Jul 11, 2019 12:31 am
GCD wrote:
Wed Jul 10, 2019 9:40 pm
brad.clarkston wrote:
Wed Jul 10, 2019 9:31 pm
GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.

My wife is a GS13 with the Army Core Eng. with no pension, no one she's worked with in the last 20 years has one.
How does that work? The US Army Corps of Engineers website says they are covered under FERS. Is she a contract employee without benefits or what? I find it hard to believe that there is a category of employee that has access to investing in the TSP that is not also covered by FERS or a military pension.

How does this info under retirement not apply to her? https://www.usace.army.mil/Careers/USAC ... -Benefits/
She's been a Federal employ for nearly 20 years never a contractor.
Yes that's the correct webpage and it's completely accurate that is what she has.

As far as I know the top3x1% is not a pension like her father has as a older Fed or a classical company pension like mine but I'll ask her I could be wrong (and usually am).
The FERS pension/annuity is the same type of pension as her father had.

It is just that the formula isn’t quite as generous.

And FERS annuitants contributed to and receive Social Security, which her father under the old system would not have.

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Re: Is the L Income fund too conservative?

Post by tadamsmar » Fri Jul 12, 2019 7:46 am

azanon wrote:
Thu Jul 11, 2019 10:08 am
tadamsmar wrote:
Thu Jul 11, 2019 9:35 am
azanon wrote:
Wed Jul 10, 2019 1:45 pm
Being more of a conservative investor, I'm actually considering letting my TSP glideslope down to that 30% anyway, and leaving it there for all of retirement possibly using either the withdrawls based on life expectancy option or VPW, but it sure is hard to "stay that course" with that plan given the high degree such a notion (holding just 30% stocks) is ridiculed by professionals. It was supposed to be professionally designed, so I'm just confused who's right.
The pros who recommend 40% stock are typically advising the general public who do not have access to the G fund.

Due to the G Fund, the L Funds tend to have a higher return at a given risk level, and more so for the L Income fund. The efficient frontier is flatter and has higher return on the conservative end due to the G Fund.

So, L Income Fund has a lower risk than the pro advice, but it may not have a lower return, certainly the return difference is mitigated by the G Fund.

Also, the Vanguard Target Retirement Income Fund is 30% stock. Perhaps those funds target retirees that are more conservative than average.
Thanks.

I think the assurance I'm looking for is just the ok that's it's a reasonable choice and would not dub me "extremely and irrationally risk adverse" and that i'd be making "a big mistake that will cost me dearly" (something I was told by a CFA on twitter upon saying I intend to use 30% equities in retirement). I can live with it's more conservative than the average, but an implication that it's just flat out wrong by a CFA professional does trouble me and causes me to question whether I'm being wise.

I noticed a few people say that it is in-line and consistent with "income" funds. I can affirm that's exactly how I intend to use it, and I don't have a legacy goal on top of that (though it'd probably be highly likely I'll still have plenty of money upon my expiration). I mentioned earlier I'll pick a retirement income solution that gradually eats the principle (top choices being the "based on life expectancy" that TSP has as an option, or Boglehead VPW).
Look at the L Fund efficient frontier:

https://www.tsp.gov/PDF/formspubs/FundsL.pdf

L income is about 30% stocks and L2020 is about 40% stocks.

The estimated risk proxy (sd) goes up 50% (from 4% to 6%).

But the expected return only goes up a smidge.

If you looked at an efficient frontier for similar AAs where the G Fund was not available, the return on risk would be a bit more favorable. The efficient frontier would be steeper.

So the more generalized professional advice does not apply as well to the L funds.

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Re: Is the L Income fund too conservative?

Post by trueblueky » Fri Jul 12, 2019 1:08 pm

GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.
Does a typical federal retiree have the ability, willingness and need to take risk?
Ability? Probably yes
Willingness? Depends
Need? Probably not

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Re: Is the L Income fund too conservative?

Post by Carmen1409 » Fri Jul 12, 2019 3:30 pm

brad.clarkston wrote:
Thu Jul 11, 2019 12:31 am
GCD wrote:
Wed Jul 10, 2019 9:40 pm
brad.clarkston wrote:
Wed Jul 10, 2019 9:31 pm
GCD wrote:
Wed Jul 10, 2019 6:18 pm
Yes, it is too conservative. It's for federal retirees who have a pension! Many (most? all?) of these other arguments against 60/40 and for 30/70 are for people with no pension and just SS.

My wife is a GS13 with the Army Core Eng. with no pension, no one she's worked with in the last 20 years has one.
How does that work? The US Army Corps of Engineers website says they are covered under FERS. Is she a contract employee without benefits or what? I find it hard to believe that there is a category of employee that has access to investing in the TSP that is not also covered by FERS or a military pension.

How does this info under retirement not apply to her? https://www.usace.army.mil/Careers/USAC ... -Benefits/
She's been a Federal employ for nearly 20 years never a contractor.
Yes that's the correct webpage and it's completely accurate that is what she has.

As far as I know the top3x1% is not a pension like her father has as a older Fed or a classical company pension like mine but I'll ask her I could be wrong (and usually am).
Brad, I’m thinking you’re in for a big surprise. Can’t wait to find out what you learn from her. If she’s a GS13 with 20 years service she’s going to have a pretty nice “pension.” It’s probably FERS which is definitely a “pension.” She’ll probably also have eligibility for the annuity supplement. Congratulations!

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