TSP I Fund Allocation Strategy: What to Do After 32% Returns
The TSP I Fund returned 32% in 2025. Should you shift your allocation? Learn the data-driven approach to I Fund investing for federal employees.
TSP I Fund Allocation Strategy: What to Do After 32% Returns
Last Updated: January 17, 2026 Reading Time: 9 min
The TSP I Fund returned 32.45% in 2025, its best year ever. Now questions about TSP I Fund allocation are flooding federal employee forums. Should you shift your money into the I Fund?
The answer requires understanding why the I Fund surged, what risks remain, and how much international exposure actually makes sense for your situation.
Key Takeaways
- The I Fund's 32.45% return in 2025 was its highest since inception in 2001, beating the previous record of 30.04% from 2009
- Only 3.3% of TSP assets are in the I Fund, meaning most federal employees have little or no international exposure
- Moving entirely to the I Fund now would be chasing past performance, a strategy that historically underperforms
- The Lifecycle funds allocate about 35% of stock exposure to the I Fund, suggesting many feds are significantly underweight
- The 2023 index change expanded the I Fund from 790 stocks to over 5,600 across 44 countries, making it meaningfully different from before
What Happened: The I Fund's Record-Breaking Year
The I Fund crushed every other TSP option in 2025:
| Fund | 2025 Return |
|---|---|
| I Fund | 32.45% |
| S Fund | 20.12% |
| C Fund | 17.85% |
| G Fund | 4.75% |
| F Fund | 1.18% |
This was the I Fund's highest annual return since TSP launched it in May 2001. The previous record was 30.04% in 2009, coming off the financial crisis bottom.
But before you rush to reallocate, understand what drove these returns.
Three Factors Behind the I Fund's Performance
1. The Dollar Fell 9.4%
The U.S. dollar had its worst year since 2017. When the dollar weakens, your international investments automatically become more valuable when converted back to dollars.
This currency effect alone added several percentage points to I Fund returns. It works like a tailwind pushing your returns higher.
The catch: If the dollar strengthens in 2026, that tailwind becomes a headwind.
2. International Stocks Were Cheap
Non-U.S. stocks were roughly 35% cheaper than U.S. stocks based on forward price-to-earnings ratios entering 2025. Money rotated out of expensive U.S. tech into undervalued European and Asian markets.
The AI trade also spread globally to chipmakers in Japan, South Korea, and Taiwan.
3. Regional Catalysts Fired
Several markets had standout years:
- Europe: German defense spending reforms drove Rheinmetall up 154%. Fiscal stimulus boosted broader markets.
- Japan: The Nikkei gained 26% as corporate governance reforms took hold and mild inflation returned after decades of deflation.
- Emerging Markets: The new I Fund index captured South Korea (+76%), Poland (+47%), and Greece (+44%).
The 2023 Index Change: Why the I Fund Is Different Now
Here's something many federal employees don't realize: The I Fund you avoided for years is no longer the same fund.
In 2023, TSP switched the I Fund from the MSCI EAFE index to the MSCI ACWI IMI ex USA ex China ex Hong Kong index. That mouthful translates to a massive improvement:
| Old Index (Pre-2023) | New Index (2023+) |
|---|---|
| ~790 stocks | ~5,600 stocks |
| 21 developed countries | 44 countries |
| Large-cap only | Large, mid, and small cap |
| No emerging markets | Includes emerging markets |
| Heavy Japan/Europe | More globally diversified |
The old index was structurally limited. It missed high-growth emerging markets entirely. The new index provides true global diversification.
This doesn't guarantee better returns. But it addresses the legitimate criticism that the old I Fund was too narrow.
Why Most Federal Employees Are Underexposed
Only 3.3% of TSP assets sit in the I Fund.
That's remarkably low. It suggests the average federal employee has either zero I Fund exposure or a tiny allocation.
Why? The I Fund severely underperformed the C Fund from 2011 to 2021. A decade of disappointing returns trained people to avoid it. Many went 100% C Fund after watching U.S. tech dominate.
That strategy worked for years. Until 2025.
The Lifecycle Fund Benchmark
Want to know what professional allocation looks like? Check the Lifecycle funds.
TSP's L Funds are managed by Aon Investments and automatically diversify across all five TSP funds. Here's how they allocate to the I Fund:
| L Fund | I Fund Allocation (% of Stocks) |
|---|---|
| L 2070, 2065, 2060, 2055 | ~35% |
| L 2050, 2045 | ~30-35% |
| L 2040, 2035 | ~25-30% |
| L 2030 | ~20-25% |
| L Income | 8% |
The takeaway: For long-term investors, TSP's professional allocation strategy puts roughly 35% of stock exposure in the I Fund.
If you have 0% in the I Fund, you're significantly underweight compared to this benchmark.
What Financial Advisors Recommend
Advisors who specialize in federal employee benefits generally recommend:
| Investor Profile | I Fund Allocation (% of Stocks) |
|---|---|
| Aggressive/Young (20+ years to retirement) | 15-35% |
| Moderate (10-20 years) | 10-25% |
| Conservative/Near Retirement (5-10 years) | 5-15% |
| In Retirement | 5-10% |
From Haws Federal Advisors: "A common guideline is to allocate 20-40% of your total stock portion to the I Fund."
For a portfolio that's 60% stocks and 40% bonds, that means 12-24% of your total TSP in the I Fund.
The Case Against Chasing the I Fund
Before you move everything to the I Fund, consider the risks:
Currency Risk Works Both Ways
The I Fund is not hedged against currency fluctuations. When the dollar weakens, you win. When it strengthens, you lose, even if the underlying international stocks go up.
Analysts have mixed outlooks for the dollar in 2026. A rebound is possible.
Historical Volatility Is Higher
The I Fund has the worst maximum drawdown of any TSP stock fund: -60.89% during 2008-2009. The C Fund dropped about 55% in the same period.
The I Fund's standard deviation (a measure of volatility) runs around 18.8% compared to about 15% for the C Fund.
One Great Year Doesn't Make a Trend
No TSP fund achieved 32%+ returns between 2014 and 2024. Exceptional years often followed by modest ones.
The Fed Corner puts it bluntly: "Chasing TSP fund returns will ruin your wealth. By the time you recognize the huge demand illustrated by TSP's performance, the money has been made."
A Data-Driven Approach to I Fund Allocation
Instead of chasing last year's winner or avoiding the I Fund entirely, consider a middle path based on data.
If you have 0% in the I Fund: Adding some international exposure makes sense for diversification. Consider 15-25% of your stock allocation as a starting point.
If you already have 20-35% in the I Fund: You're roughly in line with L Fund allocations. No need to change based on one year's performance.
If you're considering 50%+ in the I Fund: That's a concentrated bet on international markets outperforming. It could work, but understand you're taking more risk than the L Fund model suggests.
Model Your Own Scenarios
The right I Fund allocation depends on your age, retirement timeline, risk tolerance, and existing investments outside TSP.
Use our free TSP Calculator to model how different allocations affect your projected balance at retirement. Run scenarios with 0%, 20%, and 35% I Fund allocation to see the range of outcomes.
Frequently Asked Questions
Should I move my TSP to the I Fund after its 32% return?
Moving entirely to the I Fund would be chasing past performance, which historically leads to poor outcomes. However, if you have zero I Fund exposure, consider adding 15-35% of your stock allocation for diversification. The TSP Lifecycle funds allocate roughly 35% of stocks to the I Fund for long-term investors.
What caused the TSP I Fund's historic 32% return in 2025?
Three main factors: The U.S. dollar fell 9.4%, boosting international returns when converted to dollars. International stocks were 35% cheaper than U.S. stocks, attracting value investors. Strong performance in Europe (defense spending), Japan (corporate reforms), and emerging markets like South Korea (+76%).
Is the TSP I Fund riskier than the C Fund?
Yes. The I Fund has higher volatility and experienced a -60.89% maximum drawdown during 2008-2009, compared to about -55% for the C Fund. It also carries currency risk that the C Fund does not have. However, adding I Fund to a portfolio can reduce overall risk through diversification.
How much of my TSP should be in the I Fund?
Financial advisors typically recommend 20-40% of your stock allocation in international stocks. For a 60/40 stock/bond portfolio, that means 12-24% of your total TSP in the I Fund. The TSP Lifecycle funds allocate approximately 35% of stock exposure to the I Fund for investors with 20+ years to retirement.
Did the 2023 I Fund index change make it a better investment?
The change expanded the fund from about 790 stocks in 21 developed countries to over 5,600 stocks across 44 countries, including emerging markets. This provides broader diversification and exposure to faster-growing economies. Whether it leads to better returns depends on future market conditions, but it addresses criticisms of the old, limited index.
What happens to my I Fund if the dollar strengthens in 2026?
A stronger dollar hurts I Fund returns because international earnings become worth less when converted back to dollars. The 2025 dollar weakness was a significant tailwind. If the dollar rebounds, I Fund returns would face a headwind even if international stock prices rise. This currency risk cuts both ways.
Should I use the Lifecycle fund instead of picking my own allocation?
If you're uncertain about allocation, Lifecycle funds remove the guesswork. They automatically diversify across all five TSP funds (G, F, C, S, I) and rebalance quarterly. The L 2055-2070 funds allocate roughly 50% C, 15% S, and 35% I, providing significant international exposure without requiring you to time markets.
The Bottom Line
The I Fund's 32% return in 2025 was historic. It doesn't mean you should pile in now, and it doesn't mean you should avoid it either.
The data suggests most federal employees are underexposed to international stocks. The L Funds allocate about 35% of stock exposure to the I Fund for long-term investors. If you have 0% or close to it, adding some makes sense for diversification.
But don't chase last year's winner. A balanced approach based on your timeline and risk tolerance beats reactive reallocation every time.
Related Resources
- TSP Calculator: Model different allocation scenarios
- TSP Guide 2026: Complete guide to contribution limits and fund options
- TSP 2025 Performance Review: Full breakdown of all fund returns
- TSP Roth In-Plan Conversion Guide: New option for 2026
Sources
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