TSP Allocations in Retirement

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SKBellbrook
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Joined: Sun Jan 26, 2020 9:50 am

TSP Allocations in Retirement

Post by SKBellbrook » Sun Feb 09, 2020 12:54 pm

Hello, I’m looking for recommendations for how to allocate Federal Employee Thrift Savings Plan (TSP) funds once we begin taking distributions. My husband and I are both federal employees under FERS and are planning to retire this year (2020), however we don’t plan to draw from our TSP accounts until 2023.

The L Income Fund is for participants who are withdrawing their TSP. I’m concerned that it’s too conservative, but maybe not? We’re planning to draw 3 - 3.5%. Personally, I’d like to make enough to cover that, but ultimately having it provide us approximately 35% of our annual income for potentially 35 years is the goal.

Here is additional information:
Emergency funds: Yes, fully funded
Debt: Only our mortgage; interest rate 2.875%
Tax Filing Status: Married Filing Jointly
Tax Rate: 24% Federal
State of Residence: Ohio
Age: 56
Desired Asset allocation: ?
Size of our current total portfolio: TSP is $2M +
Current portfolio including all investment and retirement accounts: We have TSP and four ROTH IRAs (that are less than 10% of our total portfolio).

Question: Looking for recommendations on how to allocate TSP funds once we begin taking distributions. Thanks!

ExitStageLeft
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Re: TSP Allocations in Retirement

Post by ExitStageLeft » Sun Feb 09, 2020 2:19 pm

Welcome to the forum and congratulations! Are these both MRA+30 retirements?

You can choose a Lifecycle fund that matches your risk profile. Or you can manage your own asset allocation through a mix of the C,S,I,F and G funds. With two pensions you may want to keep a higher portion of stocks in your TSP. It all depends on your willingness, ability and need to take risks.

Something you should look into is what your expected Required Minimum Distributions will do to your tax bracket at age 72. Once you have full social security benefits you may end up in a much higher tax bracket than when you first retire. Roth conversions are a way to alleviate that. You pay taxes on the conversions at the lower tax rate and that can often ensure your RMD income doesn't bump you up to the next bracket.

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gmaynardkrebs
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Re: TSP Allocations in Retirement

Post by gmaynardkrebs » Sun Feb 09, 2020 2:38 pm

SKBellbrook wrote:
Sun Feb 09, 2020 12:54 pm
Hello, I’m looking for recommendations for how to allocate Federal Employee Thrift Savings Plan (TSP) funds once we begin taking distributions. My husband and I are both federal employees under FERS and are planning to retire this year (2020), however we don’t plan to draw from our TSP accounts until 2023.

The L Income Fund is for participants who are withdrawing their TSP. I’m concerned that it’s too conservative, but maybe not? We’re planning to draw 3 - 3.5%. Personally, I’d like to make enough to cover that, but ultimately having it provide us approximately 35% of our annual income for potentially 35 years is the goal.

Here is additional information:
Emergency funds: Yes, fully funded
Debt: Only our mortgage; interest rate 2.875%
Tax Filing Status: Married Filing Jointly
Tax Rate: 24% Federal
State of Residence: Ohio
Age: 56
Desired Asset allocation: ?
Size of our current total portfolio: TSP is $2M +
Current portfolio including all investment and retirement accounts: We have TSP and four ROTH IRAs (that are less than 10% of our total portfolio).

Question: Looking for recommendations on how to allocate TSP funds once we begin taking distributions. Thanks!
G-fund is a pretty good deal, so you want a lot of that. Can you get enough equity exposure funds in the Roths?

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Wiggums
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Re: TSP Allocations in Retirement

Post by Wiggums » Sun Feb 09, 2020 3:07 pm

With two pensions, medical and SS benefits, you need to look at RMDs. Roth conversions are likely to be a good next step once you retire. If you have any traditional IRAs with a balance, you will need to be aware of the pro rata rule.

If you take all the money from the TSP, you cannot go back.

02nz
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Re: TSP Allocations in Retirement

Post by 02nz » Sun Feb 09, 2020 4:48 pm

SKBellbrook wrote:
Sun Feb 09, 2020 12:54 pm
The L Income Fund is for participants who are withdrawing their TSP. I’m concerned that it’s too conservative, but maybe not?
TSP, like Vanguard and others, has implemented changes that make target retirement date funds more aggressive. The L Income fund used to be only 20% stocks, 80% G & F funds (mostly G), but it's now on a glide path that will take it to 30% stocks by 2028 (currently at 21.5% - you can see the change here: https://www.tsp.gov/InvestmentFunds/Fun ... ncome.html). To me 30/70 is a reasonable allocation in retirement. For me it would still be a hair conservative, but that depends a lot on your investing goals and risk tolerance.

02nz
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Re: TSP Allocations in Retirement

Post by 02nz » Sun Feb 09, 2020 5:17 pm

Wiggums wrote:
Sun Feb 09, 2020 3:07 pm
If you take all the money from the TSP, you cannot go back.
$200 is the minimum you need to keep in TSP to avoid having your account closed and keep the ability to transfer in balances from a 401k or IRA.

rkhusky
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Re: TSP Allocations in Retirement

Post by rkhusky » Sun Feb 09, 2020 7:41 pm

You can get any stock/bond allocation you want with two lifecycle funds. For example, you could choose 70% Lifecycle 2020 and 30% Lifecycle 2030 to achieve 35% stocks and 65% bonds. 50% Lifecycle 2020 and 50% Lifecycle 2030 would result in 42% stocks and 58% bonds.

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tarnation
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Re: TSP Allocations in Retirement

Post by tarnation » Mon Feb 10, 2020 12:52 am

Probably not what your looking for, but you could put it all in G fund and take out 1/N of the initial Value every year adjusted for inflation. This strategy succeeds with probability 1; the other proposals do not. Basically a roll your own term certain annuity.

Edit: Where N is the number of years you want your withdrawals.
Last edited by tarnation on Mon Feb 10, 2020 8:34 am, edited 1 time in total.
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gmaynardkrebs
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Re: TSP Allocations in Retirement

Post by gmaynardkrebs » Mon Feb 10, 2020 1:13 am

tarnation wrote:
Mon Feb 10, 2020 12:52 am
Probably not what your looking for, but you could put it all in G fund and take out 1/N of the initial Value every year adjusted for inflation. This strategy succeeds with probability 1; the other proposals do not. Basically a roll your own term certain annuity.
Sorry, what is N?

mhalley
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Re: TSP Allocations in Retirement

Post by mhalley » Mon Feb 10, 2020 1:17 am

Paul Merriman has some recommendations here
https://paulmerriman.com/tsp/

tigermilk
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Re: TSP Allocations in Retirement

Post by tigermilk » Mon Feb 10, 2020 7:18 am

Wiggums wrote:
Sun Feb 09, 2020 3:07 pm
With two pensions, medical and SS benefits, you need to look at RMDs. Roth conversions are likely to be a good next step once you retire. If you have any traditional IRAs with a balance, you will need to be aware of the pro rata rule.

If you take all the money from the TSP, you cannot go back.
While retirement is still at least 6 years away for me, but it has not kept me thinking about my strategy, which is to drain my traditional TSP as much as possible in the early years, doing Roth conversions along the way. The goal will be to have less than $100k in the TSP by the time I hit 70 to avoid RMDs as much as possible and for tax purposes. The step I have taken this year is now all my TSP contributions are into Roth TSP (low likelihood of being in a lower tax bracket in retirement).

OP, with the pensions, SS supplement until 62, and SS, needs to get on the ball now rather than 2023 to reduce that traditional TSP balance.

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fortyofforty
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Re: TSP Allocations in Retirement

Post by fortyofforty » Mon Feb 10, 2020 7:31 am

Will you both receive full pensions, or will your pensions be reduced due to your ages?
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

MnD
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Re: TSP Allocations in Retirement

Post by MnD » Mon Feb 10, 2020 9:36 am

With a very similiar situation and retired at 56 (in late 2018) we are 70% stock/30% fixed income (fixed income mostly TSP G fund) in retirement with the large majority of our assets in the TSP along with lesser amounts in various IRA's and taxable. We have one FERS pension, FERS pension supplement and one pretty much maxed out and one above average claims on Social security. That's a large amount of safe income with a very high net present value and as we see it there's really no need for some huge allocation to safe assets in our investment portfolio. We are also drawing more from portfolio than you are but on a variable basis (% of annual portfolio value) to avoid portfolio depletion if a bad sequence of returns arises, avoid a huge runaway portfolio to the upside in favorable sequences and a base case of no real growth in portfolio in average sequences. Safe money from pension and later social security cushions the impact of variable income from portfolio.

Question - why are you waiting 3 years to draw income from your portfolio? It doesn't appear that you have any other income between 2020 and 2023 other than pension so why restrict income during arguably the best and most active years of early retirement?

Question: What is your current overall allocation of your portfolio? Were you OK with that during major downturns such that you did not panic and make poor decisions at the worst possible time? If you are fine with your current allocation there is no need to make any major changes just because one day you stop going in to the office and go hiking or to to the gym instead. :beer

Comment: You will get a lot of advice to spend a lot of money now on more taxes for Roth conversions. But be sure to consider the size of the 24% bracket which doesn't top out until $326,000 in taxable income after deductions. You may want to get a specific professional analysis on Roth conversions as the advice here in my opinion is quite biased towards Roth conversions. That's due to typical Boglehead base case of spending very little in retirement from portfolio, then facing the self-inflicted situation of millions compounding for decades in retirement with little or utility for it, especially when people reach the later slow-go or no-go years of retirement. Instead of voluntarily paying more taxes now on conversions are their things you want to do/acquire in early retirement like home remodeling/improvements, toys for travel/recreation, trips of a lifetime etc.? There is no guarantee of a long healthy retirement for both of you so given your hugely favorable situation in early retirement, you might want to make the best of it right out of the gate.

Enjoy your upcoming retirement - you won't regret pulling the plug!
Last edited by MnD on Mon Feb 10, 2020 10:12 am, edited 2 times in total.
70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

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Watty
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Re: TSP Allocations in Retirement

Post by Watty » Mon Feb 10, 2020 9:44 am

Be sure that you understand that the TSP inheritance laws are different than IRA inheritance laws and they are sometimes worse. You may want to consider rolling the money out to an IRA to get the better inheritance rules.

The IRA RMD rules were recently revised but your heirs would still have ten years to withdraw the money from an inherited IRA, at least as far as I understand it.


This is what I have posted about this before.

Be sure that you understand that the TSP inheritance laws are different than IRA inheritance laws and they are sometimes worse. There is a wiki on this;

https://www.bogleheads.org/wiki/TSP_estate_planning

There was a post awhile back where where someone had run into this situation;

1) Dad had a large TSP, he died and left it to his wife.
2) Wife left the money in the TSP as a beneficiary participant, that worked OK for her.
3) A few years later the wife died and left the TSP to their kid. 

The problem was because of the TSP inheritance rules that the kid could not roll the money out to an inherited IRA and they could also not leave the money in the beneficiary participant account so the kid had to withdraw the money and pay taxes on it. If either the Mom or Dad had rolled the money into an IRA then the kid could have avoided, or at least delayed, a six figure tax bill since they could have the money in an inherited IRA.

You might want to consider rolling the money out to an IRA.

When I have posted about this before there have occasionally been comments to the effect of "I will leave a note for my wife to roll the money out to an IRA if I die first." I would not want to count on an 80 year old recently widowed person actually doing that.

MnD
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Re: TSP Allocations in Retirement

Post by MnD » Mon Feb 10, 2020 10:00 am

Watty wrote:
Mon Feb 10, 2020 9:44 am
Be sure that you understand that the TSP inheritance laws are different than IRA inheritance laws and they are sometimes worse. You may want to consider rolling the money out to an IRA to get the better inheritance rules.

The IRA RMD rules were recently revised but your heirs would still have ten years to withdraw the money from an inherited IRA, at least as far as I understand it.


This is what I have posted about this before.

Be sure that you understand that the TSP inheritance laws are different than IRA inheritance laws and they are sometimes worse. There is a wiki on this;

https://www.bogleheads.org/wiki/TSP_estate_planning

There was a post awhile back where where someone had run into this situation;

1) Dad had a large TSP, he died and left it to his wife.
2) Wife left the money in the TSP as a beneficiary participant, that worked OK for her.
3) A few years later the wife died and left the TSP to their kid. 

The problem was because of the TSP inheritance rules that the kid could not roll the money out to an inherited IRA and they could also not leave the money in the beneficiary participant account so the kid had to withdraw the money and pay taxes on it. If either the Mom or Dad had rolled the money into an IRA then the kid could have avoided, or at least delayed, a six figure tax bill since they could have the money in an inherited IRA.

You might want to consider rolling the money out to an IRA.

When I have posted about this before there have occasionally been comments to the effect of "I will leave a note for my wife to roll the money out to an IRA if I die first." I would not want to count on an 80 year old recently widowed person actually doing that.
With two TSP accounts at least one account would not be subject to this situation. It also begs the question if the surviving TSP participant can roll the deceased TSP balance into their own TSP. I doubt this is allowed but if possible it would avoid he beneficiary account inheritance issue altogether. Also with having two TSP participants, it's likely the survivor is going to be a lot more on top of TSP beneficiary inheritance issues than a non-participant surviving widow. Assuming accounts can't be combined the most prudent course would be rolling over the deceased TSP and retaining ones own TSP account and adjusting the allocations to maximize the benefit of the G fund. The potential benefit of the G fund in unfavorable fixed income sequences far outweighs both rolling out now just to potentially avoid a pretty far-fetched estate planing error in this situation.
70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

Topic Author
SKBellbrook
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Re: TSP Allocations in Retirement

Post by SKBellbrook » Mon Feb 10, 2020 8:43 pm

Thank you all very much! Lots of info we need to decipher. Afterwards I’ll post again, probably with questions :D

Topic Author
SKBellbrook
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Re: TSP Allocations in Retirement

Post by SKBellbrook » Mon Feb 10, 2020 9:29 pm

ExitStageLeft wrote:
Sun Feb 09, 2020 2:19 pm
Welcome to the forum and congratulations! Are these both MRA+30 retirements?

You can choose a Lifecycle fund that matches your risk profile. Or you can manage your own asset allocation through a mix of the C,S,I,F and G funds. With two pensions you may want to keep a higher portion of stocks in your TSP. It all depends on your willingness, ability and need to take risks.

Something you should look into is what your expected Required Minimum Distributions will do to your tax bracket at age 72. Once you have full social security benefits you may end up in a much higher tax bracket than when you first retire. Roth conversions are a way to alleviate that. You pay taxes on the conversions at the lower tax rate and that can often ensure your RMD income doesn't bump you up to the next bracket.
Thank you and yes both retirements are MRA+30. Wrt choosing a Lifecycle fund, that’s what my husband wants to do. But for me, I don’t understand having our allocations getting less risky as time goes on while we’re drawing from TSP. It makes more sense to me to have a set allocation. What am I missing? Wrt Roth conversions, when would we do that?

Topic Author
SKBellbrook
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Re: TSP Allocations in Retirement

Post by SKBellbrook » Mon Feb 10, 2020 9:48 pm

02nz wrote:
Sun Feb 09, 2020 4:48 pm
SKBellbrook wrote:
Sun Feb 09, 2020 12:54 pm
The L Income Fund is for participants who are withdrawing their TSP. I’m concerned that it’s too conservative, but maybe not?
TSP, like Vanguard and others, has implemented changes that make target retirement date funds more aggressive. The L Income fund used to be only 20% stocks, 80% G & F funds (mostly G), but it's now on a glide path that will take it to 30% stocks by 2028 (currently at 21.5% - you can see the change here: https://www.tsp.gov/InvestmentFunds/Fun ... ncome.html). To me 30/70 is a reasonable allocation in retirement. For me it would still be a hair conservative, but that depends a lot on your investing goals and risk tolerance.
THANK YOU! I had no idea the L-income fund would be changing. I was on tsp.gov recently and thought it said Lifecycle 2020 would become the L income in July 2020 and the allocations would not change after that. I think I will be comfortable with the L income now - at least for my TSP. My husband may want his a little more aggressive.

Topic Author
SKBellbrook
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Re: TSP Allocations in Retirement

Post by SKBellbrook » Mon Feb 10, 2020 10:01 pm

fortyofforty wrote:
Mon Feb 10, 2020 7:31 am
Will you both receive full pensions, or will your pensions be reduced due to your ages?
Under FERS, our pensions will not be penalized in any way since we’ll both be MRA and each have 30+ years. The formula is roughly 1% x # years x high three. So not great to live on if we hadn’t also invested in TSP.

Topic Author
SKBellbrook
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Re: TSP Allocations in Retirement

Post by SKBellbrook » Mon Feb 10, 2020 10:29 pm

Question - why are you waiting 3 years to draw income from your portfolio? It doesn't appear that you have any other income between 2020 and 2023 other than pension so why restrict income during arguably the best and most active years of early retirement?

Answer: We are planning to do contract work part time for two years.

Question: What is your current overall allocation of your portfolio? Were you OK with that during major downturns such that you did not panic and make poor decisions at the worst possible time? If you are fine with your current allocation there is no need to make any major changes just because one day you stop going in to the office and go hiking or to to the gym instead. :beer

Answer: We panicked once and I’ve kicked myself ever since. But when financial gurus talk, it seems they always refer to people having a long time to invest and ride the ups and downs until retirement. I don’t hear about when retirement is here and afterwards.

Comment: You will get a lot of advice to spend a lot of money now on more taxes for Roth conversions. But be sure to consider the size of the 24% bracket which doesn't top out until $326,000 in taxable income after deductions. You may want to get a specific professional analysis on Roth conversions as the advice here in my opinion is quite biased towards Roth conversions. That's due to typical Boglehead base case of spending very little in retirement from portfolio, then facing the self-inflicted situation of millions compounding for decades in retirement with little or utility for it, especially when people reach the later slow-go or no-go years of retirement. Instead of voluntarily paying more taxes now on conversions are their things you want to do/acquire in early retirement like home remodeling/improvements, toys for travel/recreation, trips of a lifetime etc.? There is no guarantee of a long healthy retirement for both of you so given your hugely favorable situation in early retirement, you might want to make the best of it right out of the gate.

Response to Comment: Very interesting, I will share your comment with my hubby. We’re super nerds and already have a retirement budget created (even though we plan to work part time a couple more years). It has a vacation fund and other fun parts to the budget increased substantially from what we’ve ever had.

Enjoy your upcoming retirement - you won't regret pulling the plug!
[/quote]
Thank you!

MnD
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Re: TSP Allocations in Retirement

Post by MnD » Wed Feb 12, 2020 9:00 am

SKBellbrook wrote:
Mon Feb 10, 2020 10:29 pm
Question - why are you waiting 3 years to draw income from your portfolio? It doesn't appear that you have any other income between 2020 and 2023 other than pension so why restrict income during arguably the best and most active years of early retirement?

Answer: We are planning to do contract work part time for two years.

Question: What is your current overall allocation of your portfolio? Were you OK with that during major downturns such that you did not panic and make poor decisions at the worst possible time? If you are fine with your current allocation there is no need to make any major changes just because one day you stop going in to the office and go hiking or to to the gym instead. :beer

Answer: We panicked once and I’ve kicked myself ever since. But when financial gurus talk, it seems they always refer to people having a long time to invest and ride the ups and downs until retirement. I don’t hear about when retirement is here and afterwards.

Comment: You will get a lot of advice to spend a lot of money now on more taxes for Roth conversions. But be sure to consider the size of the 24% bracket which doesn't top out until $326,000 in taxable income after deductions. You may want to get a specific professional analysis on Roth conversions as the advice here in my opinion is quite biased towards Roth conversions. That's due to typical Boglehead base case of spending very little in retirement from portfolio, then facing the self-inflicted situation of millions compounding for decades in retirement with little or utility for it, especially when people reach the later slow-go or no-go years of retirement. Instead of voluntarily paying more taxes now on conversions are their things you want to do/acquire in early retirement like home remodeling/improvements, toys for travel/recreation, trips of a lifetime etc.? There is no guarantee of a long healthy retirement for both of you so given your hugely favorable situation in early retirement, you might want to make the best of it right out of the gate.

Response to Comment: Very interesting, I will share your comment with my hubby. We’re super nerds and already have a retirement budget created (even though we plan to work part time a couple more years). It has a vacation fund and other fun parts to the budget increased substantially from what we’ve ever had.

Enjoy your upcoming retirement - you won't regret pulling the plug!
Thank you!
[/quote]

Sounds like you have a good plan but uncertainty about asset allocation due to many rules of thumb that often guide those in distribution to a low equity allocation such as the L income fund allocation. I'd consider a couple of things.

One - You are a couple retiring at age 56 and per joint life expectancy are looking at possibly a 40-year retirement horizon or even longer given that married, higher income, more educated folks are typically longer-lived than average. That is a very long time to ride ups and downs in the market despite the fact that you are retired.

2nd - with two FERS annuities, possibly two FERS supplements depending on after-retirement earned income levels and later two significant claims on Social Security you have a ton of safe income. This gives you tremendous capacity to take risk on the portfolio side. Your safe income streams are akin to having 7-figures in safe income producing bonds for someone that didn't have those income streams. You could be 100% equity and very likely everything would work out great for you in retirement regardless of market sequences.

Capacity to take risk is not the same as willingness to take risk. Your willingness to take portfolio risk via an equity allocation could range from 0% to 100%. No rule of thumb or formula can tell you what your willingness for risk is. Given that you did "panic" a bit in the past at some given allocation, you may want to recall what that allocation was and dial it down now that you are enering a possibly decades-long distribution phase. Somewhere in-between the L Income which is on a path to 30/70 and the allocation you had when working that you found to be a bit too risky might be appropriate.

Lastly I'm not suggesting you go hog-wild on spending in early retirement but rather I'm just observing that on this board, many folks entering early retirement in the best and most active years seem unwilling or unable to spend much if anything from portfolio on themselves, yet are very gung-ho about spending large sums of money on additional taxes at their highest bracket or even higher to do Roth conversions. I'd be wary of knee-jerk Roth conversion advice as a fair amount of that seems to come from folks with little utility for the income their portfolio could provide in retirement and more interested in protecting/growing money mountain for the rest of their lives as an end in itself.
70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

Topic Author
SKBellbrook
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Re: TSP Allocations in Retirement

Post by SKBellbrook » Fri Feb 14, 2020 8:26 am

tigermilk wrote:
Mon Feb 10, 2020 7:18 am
Wiggums wrote:
Sun Feb 09, 2020 3:07 pm
With two pensions, medical and SS benefits, you need to look at RMDs. Roth conversions are likely to be a good next step once you retire. If you have any traditional IRAs with a balance, you will need to be aware of the pro rata rule.

If you take all the money from the TSP, you cannot go back.
While retirement is still at least 6 years away for me, but it has not kept me thinking about my strategy, which is to drain my traditional TSP as much as possible in the early years, doing Roth conversions along the way. The goal will be to have less than $100k in the TSP by the time I hit 70 to avoid RMDs as much as possible and for tax purposes. The step I have taken this year is now all my TSP contributions are into Roth TSP (low likelihood of being in a lower tax bracket in retirement).

OP, with the pensions, SS supplement until 62, and SS, needs to get on the ball now rather than 2023 to reduce that traditional TSP balance.

Hi, if you’re planning to pull mostly out of TSP by the time you’re 70, where will you put it?

tigermilk
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Re: TSP Allocations in Retirement

Post by tigermilk » Fri Feb 14, 2020 8:58 am

SKBellbrook wrote:
Fri Feb 14, 2020 8:26 am
tigermilk wrote:
Mon Feb 10, 2020 7:18 am
Wiggums wrote:
Sun Feb 09, 2020 3:07 pm
With two pensions, medical and SS benefits, you need to look at RMDs. Roth conversions are likely to be a good next step once you retire. If you have any traditional IRAs with a balance, you will need to be aware of the pro rata rule.

If you take all the money from the TSP, you cannot go back.
While retirement is still at least 6 years away for me, but it has not kept me thinking about my strategy, which is to drain my traditional TSP as much as possible in the early years, doing Roth conversions along the way. The goal will be to have less than $100k in the TSP by the time I hit 70 to avoid RMDs as much as possible and for tax purposes. The step I have taken this year is now all my TSP contributions are into Roth TSP (low likelihood of being in a lower tax bracket in retirement).

OP, with the pensions, SS supplement until 62, and SS, needs to get on the ball now rather than 2023 to reduce that traditional TSP balance.

Hi, if you’re planning to pull mostly out of TSP by the time you’re 70, where will you put it?
Partial rollover from TSP to Vanguard (i.e., leave enough to keep the TSP) upon retirement, combination of annual conversions into Roth, spend some, toss some in taxable. I have a 2 comma TSP balance currently and 6 years to MRA. The last thing I want is to lose control of our tax liability when I hit 70.

tigermilk
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Re: TSP Allocations in Retirement

Post by tigermilk » Fri Feb 14, 2020 9:56 am

SKBellbrook wrote:
Mon Feb 10, 2020 10:29 pm
Question - why are you waiting 3 years to draw income from your portfolio? It doesn't appear that you have any other income between 2020 and 2023 other than pension so why restrict income during arguably the best and most active years of early retirement?

Answer: We are planning to do contract work part time for two years.
If planning to do contract work and not withdraw from TSP, have you thought about phased retirement (If offered in your agency)? Admittedly there is something attractive about working 40 hours a pay period, collecting half salary, half pension,and still accruing service time. It may or may not be the better financial choice, but it may be less of a headache (i.e., you know the work, the work environment, ...). I know a few folks who have done this as a transition and really liked it. You would be losing the SS supplement during this time, but it is still something to consider if available.

Topic Author
SKBellbrook
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Joined: Sun Jan 26, 2020 9:50 am

Re: TSP Allocations in Retirement

Post by SKBellbrook » Sat Feb 15, 2020 8:53 am

That’s a good point. I only briefly looked into phased retirement and it didn’t seem as financially favorable for me. I will take a closer look. No one in my organization has done it to my knowledge. But if it’s a better option, I’ll certainly ask. Thanks!

Topic Author
SKBellbrook
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Re: TSP Allocations in Retirement

Post by SKBellbrook » Sat Feb 15, 2020 9:07 am

tigermilk wrote:
Fri Feb 14, 2020 8:58 am
SKBellbrook wrote:
Fri Feb 14, 2020 8:26 am
tigermilk wrote:
Mon Feb 10, 2020 7:18 am
Wiggums wrote:
Sun Feb 09, 2020 3:07 pm
With two pensions, medical and SS benefits, you need to look at RMDs. Roth conversions are likely to be a good next step once you retire. If you have any traditional IRAs with a balance, you will need to be aware of the pro rata rule.

If you take all the money from the TSP, you cannot go back.
While retirement is still at least 6 years away for me, but it has not kept me thinking about my strategy, which is to drain my traditional TSP as much as possible in the early years, doing Roth conversions along the way. The goal will be to have less than $100k in the TSP by the time I hit 70 to avoid RMDs as much as possible and for tax purposes. The step I have taken this year is now all my TSP contributions are into Roth TSP (low likelihood of being in a lower tax bracket in retirement).

OP, with the pensions, SS supplement until 62, and SS, needs to get on the ball now rather than 2023 to reduce that traditional TSP balance.

Hi, if you’re planning to pull mostly out of TSP by the time you’re 70, where will you put it?
Partial rollover from TSP to Vanguard (i.e., leave enough to keep the TSP) upon retirement, combination of annual conversions into Roth, spend some, toss some in taxable. I have a 2 comma TSP balance currently and 6 years to MRA. The last thing I want is to lose control of our tax liability when I hit 70.
Oh my this is making my head hurt. :shock: Definitely more to consider. Thanks!

MnD
Posts: 4456
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Re: TSP Allocations in Retirement

Post by MnD » Sat Feb 15, 2020 9:35 am

tigermilk wrote:
Fri Feb 14, 2020 8:58 am
SKBellbrook wrote:
Fri Feb 14, 2020 8:26 am
tigermilk wrote:
Mon Feb 10, 2020 7:18 am
Wiggums wrote:
Sun Feb 09, 2020 3:07 pm
With two pensions, medical and SS benefits, you need to look at RMDs. Roth conversions are likely to be a good next step once you retire. If you have any traditional IRAs with a balance, you will need to be aware of the pro rata rule.

If you take all the money from the TSP, you cannot go back.
While retirement is still at least 6 years away for me, but it has not kept me thinking about my strategy, which is to drain my traditional TSP as much as possible in the early years, doing Roth conversions along the way. The goal will be to have less than $100k in the TSP by the time I hit 70 to avoid RMDs as much as possible and for tax purposes. The step I have taken this year is now all my TSP contributions are into Roth TSP (low likelihood of being in a lower tax bracket in retirement).

OP, with the pensions, SS supplement until 62, and SS, needs to get on the ball now rather than 2023 to reduce that traditional TSP balance.

Hi, if you’re planning to pull mostly out of TSP by the time you’re 70, where will you put it?
Partial rollover from TSP to Vanguard (i.e., leave enough to keep the TSP) upon retirement, combination of annual conversions into Roth, spend some, toss some in taxable. I have a 2 comma TSP balance currently and 6 years to MRA. The last thing I want is to lose control of our tax liability when I hit 70.
Rather than using loaded terms like "get on the ball now" and "lose control of tax liability" with regards to Roth conversions I'd suggest that one consider that real taxable income for a FERS retiree retiring at age 56 is likely going to be flat to declining for decades. The FERS annuity isn't inflation adjusted until age 62 and then, only partially indexed to inflation. The FERS supplement isn't inflation adjusted at all and drops off and terminates at age 62. Social security has no real growth and replaces the FERS supplement so it isn't much "new" additive income even if delayed. If one utilizes a realistic and flexible SWR instead of some ultra-low fixed one, real growth of portfolio can be mitigated. Under the new IRS tables and RMD dates, RMD's at age 72 start below a realistic SWR, don't reach 5% until age 81 and don't exceed 8% until age 90.

If one doesn't have anything better to do with ones income than voluntarily pay higher taxes at ones top marginal rate or even higher several decades prior to when taxes "might" be an issue, that's fine. But it's an equation that if implemented carries enough very substantial present tax costs that IMO it should be looked at by a professional that specializes in this matter prior to committing anything other than chump-change levels of income to Roth conversions. The baggage of things like "tax torpedo" "the government owns XX% of your retirement portfolio!" just clouds the issue and leads to knee-jerk emotional choices rather than rational decision making.
Last edited by MnD on Sat Feb 15, 2020 10:15 am, edited 1 time in total.
70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

MnD
Posts: 4456
Joined: Mon Jan 14, 2008 12:41 pm

Re: TSP Allocations in Retirement

Post by MnD » Sat Feb 15, 2020 9:53 am

Watty wrote:
Mon Feb 10, 2020 9:44 am
Be sure that you understand that the TSP inheritance laws are different than IRA inheritance laws and they are sometimes worse. You may want to consider rolling the money out to an IRA to get the better inheritance rules.

The IRA RMD rules were recently revised but your heirs would still have ten years to withdraw the money from an inherited IRA, at least as far as I understand it.


This is what I have posted about this before.

Be sure that you understand that the TSP inheritance laws are different than IRA inheritance laws and they are sometimes worse. There is a wiki on this;

https://www.bogleheads.org/wiki/TSP_estate_planning

There was a post awhile back where where someone had run into this situation;

1) Dad had a large TSP, he died and left it to his wife.
2) Wife left the money in the TSP as a beneficiary participant, that worked OK for her.
3) A few years later the wife died and left the TSP to their kid. 

The problem was because of the TSP inheritance rules that the kid could not roll the money out to an inherited IRA and they could also not leave the money in the beneficiary participant account so the kid had to withdraw the money and pay taxes on it. If either the Mom or Dad had rolled the money into an IRA then the kid could have avoided, or at least delayed, a six figure tax bill since they could have the money in an inherited IRA.

You might want to consider rolling the money out to an IRA.

When I have posted about this before there have occasionally been comments to the effect of "I will leave a note for my wife to roll the money out to an IRA if I die first." I would not want to count on an 80 year old recently widowed person actually doing that.
It appears that the surviving spouse in a dual federal retiree household can (and absolutely should) roll/combine the TSP account of the deceased into their own TSP account and then all funds are classified as a primary TSP account. This eliminates the distribution tax risk you are referring to above. Upon the surviving spouses death the kids can roll the TSP funds account into their inherited IRA's and take advantage of the 10-year distribution rule.
https://www.tsp.gov/PlanParticipation/B ... ounts.html

Are there any fun/easy temporary/summer federal jobs that a person can take and walk away with a small TSP account? I might encourage with wife to look into that given this benefit. :mrgreen:
70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

ChrisC
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Location: North Carolina

Re: TSP Allocations in Retirement

Post by ChrisC » Sat Feb 15, 2020 12:23 pm

MnD wrote:
Sat Feb 15, 2020 9:35 am

If one doesn't have anything better to do with ones income than voluntarily pay higher taxes at ones top marginal rate or even higher several decades prior to when taxes "might" be an issue, that's fine. But it's an equation that if implemented carries enough very substantial present tax costs that IMO it should be looked at by a professional that specializes in this matter prior to committing anything other than chump-change levels of income to Roth conversions. The baggage of things like "tax torpedo" "the government owns XX% of your retirement portfolio!" just clouds the issue and leads to knee-jerk emotional choices rather than rational decision making.
I'm pretty sure people here on this forum who take into account short hand financial proxies like "tax torpedo" for future increases in tax liability or who wish to manage or diminish the government's level of taxing your retirement portfolio are not making "emotional choices." Have you seen evidence of this here? My take has been that folks here are engaged in rational decision making calculations, especially when taking into account legacy concerns for transfering their retirement accounts to heirs.

Moreover, with the new requirements diminishing stretch RMDs it's more imperative that Roth conversions be taken as early as possible -- this is not an emotional reaction but simply sound planning if the intended beneficiaries of your retirement accounts are non-spouses or are those who can't take advantage of the exceptions from emptying out those accounts over 10 years. Many Federal civil service annuitants, especially those fortunate with CSRS pensions like myself or perhaps those like the OP who might have other sources of income in retirement, will never touch or draw down their TSP accounts or other pre-tax retirement accounts for any living expenses, including buying a new BMW or paying for that vacation junket to Fiji or for an African safari, and so tax management with Roth conversions is hardly doing something less efficient or less optimal than naked consumption of retirement account income with little plans for managing the tax on your wealth.

MnD
Posts: 4456
Joined: Mon Jan 14, 2008 12:41 pm

Re: TSP Allocations in Retirement

Post by MnD » Sat Feb 15, 2020 4:34 pm

ChrisC wrote:
Sat Feb 15, 2020 12:23 pm
MnD wrote:
Sat Feb 15, 2020 9:35 am

If one doesn't have anything better to do with ones income than voluntarily pay higher taxes at ones top marginal rate or even higher several decades prior to when taxes "might" be an issue, that's fine. But it's an equation that if implemented carries enough very substantial present tax costs that IMO it should be looked at by a professional that specializes in this matter prior to committing anything other than chump-change levels of income to Roth conversions. The baggage of things like "tax torpedo" "the government owns XX% of your retirement portfolio!" just clouds the issue and leads to knee-jerk emotional choices rather than rational decision making.
I'm pretty sure people here on this forum who take into account short hand financial proxies like "tax torpedo" for future increases in tax liability or who wish to manage or diminish the government's level of taxing your retirement portfolio are not making "emotional choices." Have you seen evidence of this here? My take has been that folks here are engaged in rational decision making calculations, especially when taking into account legacy concerns for transfering their retirement accounts to heirs.

Moreover, with the new requirements diminishing stretch RMDs it's more imperative that Roth conversions be taken as early as possible -- this is not an emotional reaction but simply sound planning if the intended beneficiaries of your retirement accounts are non-spouses or are those who can't take advantage of the exceptions from emptying out those accounts over 10 years. Many Federal civil service annuitants, especially those fortunate with CSRS pensions like myself or perhaps those like the OP who might have other sources of income in retirement, will never touch or draw down their TSP accounts or other pre-tax retirement accounts for any living expenses, including buying a new BMW or paying for that vacation junket to Fiji or for an African safari, and so tax management with Roth conversions is hardly doing something less efficient or less optimal than naked consumption of retirement account income with little plans for managing the tax on your wealth.
If one reads the OP's question she's seeking guidance on "Question: Looking for recommendations on how to allocate TSP funds once we begin taking distributions. Thanks!" Later on she indicates that she does in fact has utility for retirement income from their retirement savings (what a concept).

Predictably we get several loaded and completely off-topic responses about the necessity of Roth conversions instructing her to "get on the ball" with regards to those and dire warnings about "losing control" of ones tax liability at age 70. Thankfully the "tax torpedo" stayed in the torpedo bay this time but it generally emerges under full steam in these threads sooner or later.

I would agree that if someone such as yourself has absolutely zero utility for retirement income (including gifts and charitable donations while one is alive) from tax-deferred retirement savings plans one can certainly gamble by spending substantial sums now on additional income taxes at ones highest bracket (or higher) on speculation of even higher tax brackets in the future for ones aged surviving self or for heirs. It does beg the question why one built a retirement savings portfolio in the first place but to each his own. Thanks for ideas of the BMW, African safari or a vacation junket to Fiji. We're currently focusing in a fully loaded Toyota Rav4, several weeks in Scotland and some sort of tropical vacation for ourselves, our young adult children and their SO's so we'll keep those ideas in mind. I'm not sure what "naked consumption" is but it sounds fun and reminds me our hot tub that we enjoy ourselves and with friends is getting up there in years so probably looking at a new one of those in the near future too. :beer
70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

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