TSP G Fund vs L Fund for a New Military Retiree With a Pension

Before your last day in uniform

Many retirees believe the TSP has to move to the G Fund on retirement day. It doesn't. Contributions from service pay stop at separation, and the balance stays invested exactly where it is. No fund change is required.

Price the pension as income first. Under High-3, 2.5% × 22 years = 55% of the High-3 average. For Ramon, a hypothetical Army master sergeant with 22 years, that check covers rent, insurance and the car payment. When it does, the TSP is not the household paycheck.

Two rules changed in recent years. The TSP now allows multiple partial withdrawals after separation, where older rules allowed only one. And RMDs start at 75 for anyone born in 1960 or later, which includes Ramon. Older plans often parked the whole balance in G while waiting for one big withdrawal decision. That reason no longer exists, so a plan built on it deserves a second look.

Ask the TSP 2 questions. What is my current allocation by fund, and do withdrawals come out of each fund in proportion? They do. Be concerned if anyone tells you that you must:

• Current allocation by fund
• Pro rata withdrawals from each fund
• Red flag: told to move to G
• Red flag: told to cash out or roll over

When does the TSP pay a bill?

The TSP pays a bill when your pension and paychecks stop covering spending, and for Ramon that is probably 15 to 20 years away. His $120,000 contractor salary starts in month 3, and the pension handles the fixed bills. That gap, not retirement status, sets the G versus L split. Ask the contractor's HR how the 401(k) match vests. Whether to keep or roll the TSP is covered on its own page.

Year one: an inheritance rewrites the plan

A hypothetical couple, Ramon (43) and Keiko (41), kept $80,000 of Ramon's $380,000 TSP in the G Fund for a house down payment in 2 years. After 7 moves they have never owned a home, and their kids, 9 and 12, need a school district they can stay in.

Pulling that money at 45 would cost a 10% early withdrawal penalty: $80,000 × 0.10 = $8,000. Federal tax at an assumed 24% adds $80,000 × 0.24 = $19,200. That's $27,200 gone and $52,800 left.

Then Keiko inherits $90,000 in cash. The down payment comes from the inheritance, and the TSP has no withdrawal due before Ramon's 60s. One interfund transfer moves the $80,000 from G into an L Fund. Before, G was 21% of the balance ($80,000 ÷ $380,000). After, G falls to whatever the L Fund itself holds.

On taxes: inherited cash is not federal income (some states tax inheritances, so check your state's rules). Moving money between TSP funds creates no taxable event. The withdrawal they avoided would have stacked a 10% penalty and ordinary income tax on top of salary plus pension.

Now the back-of-the-envelope math for any retiree. Count the years to your first TSP withdrawal. Estimate the first 5 years of spending from the TSP, say $20,000 each year × 5 = $100,000. Build that amount in G only once the first withdrawal is within 5 years. For Ramon today, the G amount needed for spending is $0, so any G he holds is there for comfort, not bills.

The trade-off is plain. G gives you no principal loss and steady value, and you give up growth and inflation protection over 15 or more years. An L Fund shifts toward a more conservative mix on its own, and you give up control over exact percentages. Choose L if you won't rebalance on a schedule. Run your own mix only if you will.

The quick test: if your pension covers fixed bills and your first TSP withdrawal is more than 5 years away, the G Fund usually has no spending job yet. This doesn't fit anyone who needs withdrawals within 5 years, has no pension covering fixed bills, or would sell after a 30% drop.

• Count years until the first TSP withdrawal
• Estimate 5 years of planned withdrawals
• Build that amount in G only when close
• Ramon's G needed for spending today: $0

Before year two, set your TSP G Fund vs L Fund split

Savant Wealth Management advisors walk clients through this order, and Ramon would do it the same way. Step 5 has a limit: 2 transfers each month can move money among funds, and after that, only into G.

Compare the 'Stocks fall 30%' row ($370,000 vs $316,000) with the 'Each quarter' row, which shows who does the rebalancing. The table shows swings and workload. It is not a return forecast, and L Fund percentages change over time.

Keeping a G cushion and assuming withdrawals come out of it is a mistake careful people make. The TSP takes withdrawals pro rata. On a mix that is 70% stock after a 30% drop, a $20,000 withdrawal sells $14,000 of stock. Those shares were worth $20,000 before the drop, which locks in $6,000 of loss. The fix: right after the withdrawal, make an interfund transfer from G back into the stock fund.

• 1. Write down net monthly retired pay and fixed bills
• 2. Count years to the first withdrawal
• 3. Apply the 5-year quick test
• 4. Pick one L Fund near that year, or a fixed mix
• 5. Make the change by interfund transfer

Each January, check the tax side

No Form 1099-R arrives for fund changes, only for money that leaves the plan. Once withdrawals start, every traditional TSP dollar is ordinary income stacked on the pension and any salary. A larger traditional balance at 75 means larger RMDs, and income-based Medicare premiums come later (IRMAA has its own page). Stock funds can fall, and you can end up with less than you put in.

Where Savant Wealth Management looks first

Savant Wealth Management first checks the years until your first TSP withdrawal against your net retired pay and fixed bills, then reads the fund percentages on your latest TSP statement. From those three numbers it writes down the next due date and the one decision tied to it, for example the month an L Fund switch makes sense. No outcome is promised.