TSP L 2045 Fund

The TSP L 2045 Fund is one of the TSP Lifecycle Funds, designed for investors who plan to withdraw their money beginning 2043 through 2047. It aims to achieve a high level of growth with a low emphasis on preservation of investment capital.

The L Funds are essentially a diversified investment portfolio of stocks and bonds in a single fund. Like the other Lifecycle Funds, the TSP L 2045 Fund is an investment mix of the TSP G, F, C, S, and I Fund. Its target asset allocation is adjusted every quarter. The goal is to strike a good balance between expected risks and returns, and to gradually decrease the allocation to the riskier TSP funds (such as the stock funds) as the fund's target date approaches. When the L 2045 Fund reaches its target date, its allocation will be the same as the allocation of the L Income Fund: 72% G, 6% F, 11% C, 3% S, and 8% I Fund. The fund managers assume that to pursue a potentially higher return, investors are willing to tolerate more risk (investment volatility) while they are still many years away from their planned retirement date.

The charts below show the historical performance and risk of investing in the TSP L 2045 Fund. As of 11/7/2024, the fund has a compound annual growth rate of 11.7%, annualized standard deviation of 12.2%, and Sharpe Ratio of 0.74. An initial investment of $1,000 on 7/1/2020 would be worth $1,619 today:

The chart below shows the historical drawdowns for the TSP L 2045 Fund. The worst drawdown since inception was -21.5%:

Similar Target Retirement Date Funds

Target retirement date funds are becoming more popular investment options. The TSP L 2045 Fund can be compared to a Vanguard Target Retirement Fund, such as the Vanguard Target Retirement 2045 Fund.

Risks and Potential Rewards of Investing in the L 2045 Fund

An investment in the L 2045 Fund is subject to the investment risks associated with the G, F, C, S, and I funds. The L Funds can have periods of gains and losses, just as the individual TSP investment funds do.

The L Funds are rebalanced to their target allocations every business day. Some investors and financial advisors would consider this to be too frequent, preferring instead to “let their winners ride” and let their allocation drift a little before rebalancing. Rebalancing a portfolio too frequently can lead to slightly inferior investment returns.

By being invested in all five individual TSP funds, the L 2045 Fund is broadly diversified. The underlying funds invest in thousands of U.S. and international stocks and bonds, to help spread out risk.

With an extremely low annual expense ratio of 0.042%, the L 2045 Fund helps to keep more of your money working for you.

How to use the L 2045 Fund in a TSP account

TSP investors who are considering an L Fund should carefully examine the fund's target asset allocation. It can be quite aggressive for funds with a distant horizon. For example, when the L 2045 fund was introduced in January 2011, its asset allocation was 10.5% bonds and 89.5% stocks. With that much invested in stocks (including a substantial allocation to international stocks), investors should be prepared for occasional severe declines in portfolio value, such as what happened during the global financial crisis in 2008 and 2009.

The L Funds simplify fund selection. Investors simply choose the fund that is closest to their target retirement date, and they can invest their entire TSP account balance (and future monthly contributions) in a single fund.

The TSP L 2045 Fund is a low maintenance investment option: no action is required by the TSP investor to rebalance their portfolio, or to adjust their investment mix as they approach retirement age. It's all handled automatically by the fund's manager.