G Fund vs. (I Bonds/EE Bonds) for Cash Component

[Greg]

On the TSP website, here is the *.pdf for the G Fund.

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

It shows that the average interest is a weighted average of U.S. Treasury securities of 4 or more years to maturity. It looks like they have an average maturity of 10 years. This is greater than the F fund or even a aggregate bond index such as BND (average maturity as of 7/9/12 is 7.2 years). There is however no duration for the G fund that I have found which would mean there is no loss of the bond price if rates go up but no capital appreciation if rates go up.

It actually looks like the opposite would help. If interest rates go up, the G fund starts paying higher interest and share price goes up. This seems like it'd be a great counterbalance to owning long-term treasury bonds to compensate for their loss in price if interest rates go up. Because of this feature, I'm wondering about for my 25% cash component, I will have 17k to put into the TSP fund this year and wondering if it is more worthwhile to put money into the G fund or purchasing I/EE bonds instead. I bonds right not I believe are earning slightly less than the G fund but over 20 years, the EE bond would be beating the G fund with the phantom 3.5ish% return.

Is it worthwhile to just put more money into the G fund and not purchase as many I/EE bonds because of it for the cash component.

As another note, putting more money into the G fund means that I am using up more tax-deferred space that I could use for the stock component instead and use the I/EE bonds as extra tax-deferred space (since I/EE bonds don't count towards your contribution limits for IRA or 401k/TSP plans). Just wondering what people's thoughts are.

[foglifter]

I don't have personal experience with TSP, but in general, if there are decent investment choices for LTTs and stocks in your TSP account I would use those instead and keep my PP cash somewhere else. Ideally, cash needs to be easily accessible as many people consider their emergency fund as part of their PP cash bucket. Keeping cash in a tax-deferred account doesn't seem to have any benefits: you "bury" your money and you occupy usually scarce tax-deferred space.

Of course, if your other 3 PP buckets are appropriately invested, your emergency cash sits somewhere else (EE/I Bonds or FDIC savings), and you still have room in TSP then by all means use it.

[Greg]

I don't have personal experience with TSP, but in general, if there are decent investment choices for LTTs and stocks in your TSP account I would use those instead and keep my PP cash somewhere else. Ideally, cash needs to be easily accessible as many people consider their emergency fund as part of their PP cash bucket. Keeping cash in a tax-deferred account doesn't seem to have any benefits: you "bury" your money and you occupy usually scarce tax-deferred space.

Of course, if your other 3 PP buckets are appropriately invested, your emergency cash sits somewhere else (EE/I Bonds or FDIC savings), and you still have room in TSP then by all means use it.

The TSP has a great investment choice for stocks (indices that track S&P 500, Small Cap, and International at expense ratio .025%) but the only choices they have for bonds are a fixed income aggregate bond index (maturity 7.2 years with corporate bonds/other non U.S. treasuries, etc.)  and the G Fund. I could put most of my cash components in I bonds and EE bonds as a make-shift LTT bonds to raise my allocation in it. I'm just thinking if I try to utilize the G fund, I'd still want to utilize I bonds, and that would make my cash portion grow to be too big too quickly. I'll have to figure out a way to get them roughly close-ish to 25% (unless I want to do a prosperity tilt of having more stocks in TSP as a VP play).

[AdamA]

Is it worthwhile to just put more money into the G fund and not purchase as many I/EE bonds because of it for the cash component.

I think it's a good idea to spread it out between the two if you can for two reasons:

1.  Institutional diversity

2.  You only get the 3.53% rate on the EE bonds if you hold them for 20 years.  For that reason, it's nice to have some cash in the G-fund for potential rebalancing so you can preserve your "deep" EE bond cash and actually get the 3.53% yield.

I would build up a good chunk of cash in the G-fund and then buy some EE or I bonds.

[Greg]

Is it worthwhile to just put more money into the G fund and not purchase as many I/EE bonds because of it for the cash component.

I think it's a good idea to spread it out between the two if you can for two reasons:

1.  Institutional diversity

2.  You only get the 3.53% rate on the EE bonds if you hold them for 20 years.  For that reason, it's nice to have some cash in the G-fund for potential rebalancing so you can preserve your "deep" EE bond cash and actually get the 3.53% yield.

I would build up a good chunk of cash in the G-fund and then buy some EE or I bonds.

I'd certainly be interested in the institutional diversity. I've already got 3 taxable accounts right now for equities, bonds, and gold all separate between Vanguard, Fidelity and Sharebuilder.

I'd certainly want to have enough cash in I bonds/FDIC banks/G Fund/ST bonds so I would not have to sell the EE bonds before 20 years. I'd probably consider them more LT bonds in my mind or very deep cash that you'd not sell unless the world explodes. I guess I'll just try to contribute to everything tax-deferred I can for the year (5k to IRA, 17k for TSP, 10k EE, 10k I bond, possible 5k I Paper Bond if can still do trick with Tax Refunds) and not put much in taxable accounts at all this year.

I'm still right near the beginning of accumulation stage so the more I can get in tax-deferred in the beginning the better.

[beafet]

I use the G-Fund for my cash portion. (I also use an 80/20 ratio of C/S as my total stock market portion). Then I just have the gold and long term treasuries in a separate ROTH.

[MomTo2Boys]

I'd certainly be interested in the institutional diversity. I've already got 3 taxable accounts right now for equities, bonds, and gold all separate between Vanguard, Fidelity and Sharebuilder.

Greg,

My husband has been a federal employee for a nice, long time. And for most of that time, I had our money in the G Fund. This is because the stock market crash scared the living fright out of me, and it took me a long time to cement in my mind what our family's long term investing strategy was going to be.

All that long time in the G Fund and our money almost literally never ever grew. We kept contributing to it but it's like it went nowhere.

And I see you're thinking of keeping the TSP for the G Fund and keeping some stocks and such in taxable and all I can think of is - you're going to be sticking stocks, which have a higher likelihood of growing exponentially long term, in a *taxable* account and cash, which I swear to you the G Fund feels like it goes nowhere in decades, in tax deferred. That and the TSP stock funds have tiny expense ratios compared to a lot of other stock funds. So I see you thinking of putting your no-growth money in tax deferred and your high-growth money in taxable (with higher expense ratios) and I think you might end up where I am - for I am wishing I hadn't spent a large amount of time on the G Fund. It might be God's gift in terms of cash accounts but - really?

I can see where people could call the G Fund a "cash" account, but really? It's not. Because if you need the money, what are you going to do? Take a loan against your TSP account? That's not the idea of cash in the PP, in my mind. An I bond you can cash in if need be. Same with an EE bond. Same with SHY in a taxable account. But the G Fund? Have fun getting to that "cash" if you need it.

I don't know. I know the idea of the G Fund is all wonderful and everything, but in terms of real life usage, to me, I regret having taken up tons of tax deferred space on something that literally never grows. If I were you, I would use the TSP account for the C fund and the S funds and, if you're into that sort of thing, for the I fund. Take advantage of the ability for the stock funds to grow tax-advantaged and with super duper low expense ratios. Keep the cash where it doesn't matter if it doesn't grow (taxable) and where you can actually get to it if need be.

[Greg]

Mom2myBoys,

I agree with you for the most part. I'm barely in the G Fund at all actually, that was actually an old post of mine before I even started working for the federal government (I'm still pretty "green" in that regard). For the TSP, I'm about 70% F fund because my Bond allocation is a bit low, 20% I Fund (to act as a stock/pseudo-gold in that it is tied in non-U.S. currencies I believe), and 5% each in both C and S Funds. I've got most of my stocks however in taxable as of now and all of my roth ira is in LT bonds. My cash I'm mainly using FDIC ING savings account and I/EE bonds. At some point I plan to get a short term bond ladder going when rates get higher.

I also wouldn't really want the G Fund until rates go higher as you said. To me, it is not worthwhile to have your Roth TSP amount not grow moderately fast because the faster it grows, the more you can then use for rebalancing with taxable accounts.

[MomTo2Boys]

Mom2myBoys,

To me, it is not worthwhile to have your Roth TSP amount not grow moderately fast because the faster it grows, the more you can then use for rebalancing with taxable accounts.

Ah, it's an old thread.

Well, and with you now thinking of putting a large percentage (or all) of your TSP money into the TSP Roth rather than the TSP tax-deferred, I'm thinking it's DOUBLY more important to have the assets that are the ones that will grow the most/fastest (everything BUT the G Fund) into your TSP Roth and leave your cash for your taxable accounts. That's my take. But I know I'm not even close to as smart as the other folks on this board...

FWIW, we also use the F fund. I know it's not PP grade, but we use it very liberally in our TSP. About a year ago I transitioned all of our G holdings into other things, and I wish I had done it sooner. I won't be using the G Fund again until we're very close to (or even well into?) retirement. And since you're just starting out, and since you have lots of other accounts/choices that you can put your cash into, if I were you I wouldn't be using the G Fund either, especially for TSP Roth money. But that's just me.