G Fund vs Inflation
If you frequent the TSP corners of the Facebooks, you’ll see a lot of armchair financial experts with advanced degrees from YouTube University spouting such irrefutable investing laws as “Right now, everyone should have your TSP 80% C and 20% S” (or some such variation). To further illustrate their wealth-building acumen, they’ll follow that statement up with another one, “The G Fund doesn’t keep up with inflation.”
This is repeated so often that it is just assumed to be a fact. But what does the math say? “Math? Who cares about math? @KnowItAll123 on TSP said it and that gal has made me lots of money in my TSP!”
Well, first of all, KnowItAll123 hasn’t made you a lot of money in your TSP compared to the market—I’m sure of it— but that is a story for another time. Today we’ll focus on the second myth.
In fact, the G Fund has beaten inflation. By a LOT. Let’s look into actual numbers and actual math. (I know, I know, what a concept, right?)
First of all, let’s explain a few things to cut down on arguments and speculation. For this article, I am using official government inflation numbers. From the Bureau of Labor Statistics. If you don’t believe official government inflation numbers, I won’t argue with you, but I don’t know what else to use other than speculation. And that’s not what is going to be done here.
Where did I get Inflation Numbers?
Inflation numbers come directly from BLS. Available HERE.
I have simply taken year over year inflation. For example, December of 2014 CPI-U to December of 2015 CPI-U represents an inflation increase of .73%. I have calculated that for each year from 1987 to 2021. Yes, 2022 is about to come out. I’ll update this article once we have both the new CPI-U and the new G Fund return for 2022. (Spoiler alert, inflation wins this year.)
Where did I get G Fund Return Number?
Tsp.gov
You can easily see the returns for each year listed. The exception is 1987. The G Fund was born on April 1, 1987. Therefore it didn’t have a full 12 months of returns in 1987. However, you can break down the graph located at the bottom of the G Fund’s TSP performance for 1987. There you can see each monthly return for April through December, 1987. Adding them together, you can come up with the total return for 1987. If you add those numbers up, you’ll see that it is 6.25% for the partial year of 1987. The rest of the years are listed without you having to do any calculations.
(Technically, it’s closer to 6.5% for 1987 since those monthly returns compound on each other, but for sake of simplicity and allowing everyone to easily verify the numbers for themselves, I went with the simple interest, rather than the compound interest. It changes virtually nothing. If anything, it makes the G Fund appear even slightly more conservative that it really was for 1987.)
1987-2022
Ok let’s look at the numbers.
There have been 36 years of annual G Fund returns so far (1987-2022). The G Fund has a pretty good record vs inflation. 30 Wins and 6 Loses. The vast majority of time (83%), the G Fund wins.
In some years, it was not even close. From 1991 through 2003, the G Fund more than doubled inflation for each those years, with the exception of 2000, when it only beat it by 90%.
The only losing years have been in more recent times (2012, 2016, 2018, 2019, 2020, 2021, and now 2022).
And frankly, it was still very close most of those years:
2012 1.74% Inflation vs 1.47% G Fund
2016 2.07% Inflation vs 1.82% G Fund
2019 2.29% Inflation vs 2.24% G Fund
2020 1.36% Inflation vs .97% G Fund
It wasn’t until the artificially low interest rates combined with the government’s refusal to see the inflation that everyone else clearly saw, that the G Fund really started to lose out.
2021 : 7.04% Inflation vs only 1.38% G Fund.
2022: 6.45% Inflation vs only 2.98% G Fund. Similar, but not that large of a win by inflation because interest rates are starting to be allowed to be normalized again. (It is very hard to defy the laws of the free market forever, no matter the size of the government or how advanced the technology. It was not possible in Roman times, and it isn’t possible today).
Totals
From 1987 to 2022, inflation has average 2.8% a year, while the G Fund has averaged 4.7%. I think this is what most people don’t realize.
Most federal employees I speak to have really only been following the markets over the last 10 years or so. And they have extrapolated a long-term view and a set of beliefs from this rather short (and very unusual) investing timeframe. This is what psychologists call “Recency Bias”. And it’s pretty dang dangerous in the investment world. Increase the length of your perspective, please.
Most don’t know that the G Fund’s average return is over 4% annually. Not occasionally, but since 1987! (4.66% average to be exact).
Most don’t know the G Fund returned almost 9% in 1990.
Most don’t know that as of this article in January of 2023, the G Fund is currently paying 3.875%
Most don’t know that the most accurate way to determine the G Fund’s current rate is to simply look at the current TSP loan interest rate. Ever wonder how they come up with that rate? It’s simply the G Fund’s current yield. Don’t believe me? Look at page 5 in the TSP Loan Booklet, where it clearly states that. It has been this way since loans have been allowed. TSP Loan Interest Rate = Current G Fund Interest Rate.
So What?
This article isn’t a plea for everyone to move into the G Fund. For you younger folks, I see no reason why you’d trade an average 9% in the market for an average 4% in the G Fund, given your time horizon. BUT, and this is a HUGE BUT………SOME OF YOU DON’T HAVE THAT SAME TIME HORIZON!!!!
For you that are in your 50’s or even 60’s and you’re still 100% in the market because you think that’s the only place to preserve your money, or because some reckless stranger on a TSP Facebook page is calling for you to do that, I highly recommend you speak to an actual financial advisor. You’re taking on a tremendous amount of risk for someone without the same investing horizon as a 25-year-old.
Yeah, the market has returned 9% over the long term, but there have been periods of time when it lost roughly 40% over 3 years. (2000-2002). Can you afford to have your $700k TSP turn into $430k over the next couple of years? What if you need withdrawals to live on? And what if it then take 13 years to make it all back?
“13 years?! Chris, that can’t happen!!!”
The SP 500 (C Fund) closed at 1,517 in July of 2000. It didn’t hit that again until 2007, when it promptly crashed later that year. It finally crossed that number permanently (at least permanently, so far) in February 2013. You could have bought the SP 500 in 2000, sold it in 2013 and still lost money.
That’s a looonggg time for a 60-year-old to wait for that market average to come back around.
And that’s not the only “Lost Decade” in market history. There have been others. Research that term.
As you know, I’m a huge proponent of being in the market. But at a certain point (aka age), your investing strategy should include provisions for preservation, not just accumulation. Please seek out a pro that has a longer knowledge of investing history and planning than you do, if you think being all in the market for all your life is the only good approach.
Regardless of where you invest, if you’re still working, please continue to feed that TSP!
I still get calls from people who have never contributed anything to TSP. It is important to understand that the TSP, to a large extent, determines your comfort level in retirement. You’ll never be homeless or starve to death—you have a pension—but the TSP really is what allows you options in retirement.
DISCLAIMER. This shouldn’t have to be said after I just wrote about you making investment decisions based on reading some random weirdo’s information on the internet. That warning includes this weirdo too. Don’t invest based on something I said. None of this investment advice. Unless of course you consider “Talk to a financial advisor” as investment advice, which is the only advice I’m giving you.
As I tell people in my consultations, don’t accept my math at face value. Go investigate it for yourself. I’ve provided all the raw data for you to do just that.
As the sign in Warren Buffett’s office reads, “Invest Like A Champion Today”. Don’t trust your financial future to memes, blogs, or Facebook posts.
Oh, and @Knowitall123 is just a made up handle. if that’s actually someone out there, no offense.
DATA
Inflation is the first number; G Fund Return is the second.
1987 4.43 6.25
1988 4.42 8.81
1989 4.65 8.81
1990 6.11 8.90
1991 3.06 8.15
1992 2.90 7.23
1993 2.75 6.14
1994 2.67 7.22
1995 2.54 7.03
1996 3.32 6.76
1997 1.70 6.77
1998 1.61 5.74
1999 2.68 5.99
2000 3.39 6.42
2001 1.55 5.39
2002 2.38 5.00
2003 1.88 4.11
2004 3.26 4.30
2005 3.42 4.49
2006 2.54 4.93
2007 4.08 4.87
2008 0.09 3.75
2009 2.72 2.97
2010 1.50 2.81
2011 2.96 2.45
2012 1.74 1.47
2013 1.50 1.89
2014 0.76 2.31
2015 0.73 2.04
2016 2.07 1.82
2017 2.11 2.33
2018 1.91 2.91
2019 2.29 2.24
2020 1.36 0.97
2021 7.04 1.38
2022 6.45 2.98