Federal employee financial planning question

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Topic Author
bogota1972
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Joined: Tue Jul 09, 2019 7:03 pm

Federal employee financial planning question

Post by bogota1972 » Tue Jul 09, 2019 7:40 pm

Hi
So I am a federal employee who can retire in about 9 years and it's just me. My TSP is valued at approximately 650k (80-C, 10-S, and 10-I), I have a Vanguard account with about 25k among total stock, total bond, and total international funds (3 fund theory) as wells as approximately 6k in a Roth IRA with Vanguard Target Retirement 2030 Fund. In addition, I have about a 50k emergency fund. I don't own a house as I live overseas where it is taken care of. Also, the pension portion of my retirement should be about 45k a year. Couple of questions:

What else could I be doing to solidify my long term financial stability?
Would investing in rental properties be worthwhile?
At what point should I take a more conservative approach to the TSP? I seem to recall that a 60-40 stock to bond ratio was good to still generate income.

I guess my fear is that I have lot of money tied up in the stock market. Thank in advance for your response.
Last edited by bogota1972 on Tue Jul 09, 2019 8:32 pm, edited 2 times in total.

retiredjg
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Re: Federal employee finanacial planning question

Post by retiredjg » Tue Jul 09, 2019 7:54 pm

bogota1972 wrote:
Tue Jul 09, 2019 7:40 pm
What else could I be doing to solidify my long term financial stability?
The only answer is to "save more" but with this little bit of information, we don't know if that advice is relevant or not. You may be saving plenty. We just don't know.

Would investing in rental properties be worthwhile?
Only if you have a passionate desire to be a landlord. If not, rental properties are a pain in the you know where and you should not venture there unless you are really interested in it.

At what point should I take a more conservative approach to the TSP? I seem to recall that a 60-40 stock to bond ratio was good to still generate income.
That answer is different for each person/situation. There is not nearly enough information to say. Perhaps..."when you have enough" ?

I guess my fear is that I have lot of money tied up in the stock market. Thank in advance for your response.
If that is a fear, then maybe you are not invested in a way that is compatible with your risk tolerance. It appears that you have a very low percentage of bonds in your portfolio. Maybe you need to consider increasing that.

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tadamsmar
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Re: Federal employee finanacial planning question

Post by tadamsmar » Tue Jul 09, 2019 7:54 pm

bogota1972 wrote:
Tue Jul 09, 2019 7:40 pm
Hi
So I am a federal employee who can retire in about 9 years and it's just me. My TSP is valued at approximately 650k (80-C, 10-S, and 10-I), I have a Vanguard account with about 25k among total stock, total bond, and total international funds (3 fund theory) as wells as approximately 6k in a Roth IRA with Vanguard Target Retirement 2030 Fund. In addition, I have about a 50k emergency fund. I don't own a house as I live overseas where it is housing is taken care of. Also, the pension portion of my retirement should be about 45k a year. Couple of questions:

What else could I be doing to solidify my long term financial stability?
Would investing in rental properties be worthwhile?
At what point should I take a more conservative approach to the TSP? I seem to recall that a 60-40 stock to bond ratio was good to still generate income.

I guess my fear is that I have lot of money tied up in the stock market. Thank in advance for your response.
In my opinion, moving your whole TSP to L2030 would be a good move.

Another move that is a bit more complicated (and maybe marginally better) is to emulate the L2030 asset allocation in your overall asset allocation.

All the TSP funds except G (C,S,I, and F) have near equivalent Vanguard index funds, so you can emulate L2030. To simply it a bit you can assume that the Vanguard Total Stock Market Fund is equivalent to the combined C+S allocation.

Also, do some estimation to see if your saving rate will leave you with enough retirement income after you retire.
Last edited by tadamsmar on Tue Jul 09, 2019 8:02 pm, edited 1 time in total.

stan1
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Re: Federal employee finanacial planning question

Post by stan1 » Tue Jul 09, 2019 7:59 pm

So you are 48 or so? I agree you are over invested in the stock market.
I would not be 100% equities at your age (or close to it, sounds like you have a little bonds in the non-TSP accounts)

80/20 for an aggressive 48 year old, 70/30 for average, and 60/40 for conservative. As a point of reference Vanguard Target Retirement 2030 has 68/32 bonds so that lines up with "average".

For retirement income remember you also have SS and at least for the time being FERS supplement if you retire before 62.

Morgan Dollar 1921
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Re: Federal employee finanacial planning question

Post by Morgan Dollar 1921 » Tue Jul 09, 2019 8:02 pm

Is any of the TSP in the Roth option? Your match will still go into the traditional TSP but I would suggest you consider the Roth side of the TSP. Others may chime in with reasons that you should not, but I think you should consider it.

Are you nine years from early retirement or from age 62, 67 or 70? Great progress thus far, and you should be proud and confident. Taxes will impact all of your earnings including Social Security with only your Roth available tax free.

mattshwink
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Re: Federal employee finanacial planning question

Post by mattshwink » Tue Jul 09, 2019 8:07 pm

bogota1972 wrote:
Tue Jul 09, 2019 7:40 pm
Hi
So I am a federal employee who can retire in about 9 years and it's just me. My TSP is valued at approximately 650k (80-C, 10-S, and 10-I), I have a Vanguard account with about 25k among total stock, total bond, and total international funds (3 fund theory) as wells as approximately 6k in a Roth IRA with Vanguard Target Retirement 2030 Fund. In addition, I have about a 50k emergency fund. I don't own a house as I live overseas where it is housing is taken care of. Also, the pension portion of my retirement should be about 45k a year. Couple of questions:

What else could I be doing to solidify my long term financial stability?
The biggest question is what is your monthly spend now, and will it change in retirement?

Maxing your TSP contributions and Roth IRA are the absolute best things you can do (unless you have debt). You can contribute $19,000 in your TSP, and an additional $6,000 if you are 50 or older (sounds like you are). So total TSP is $25,000. For the IRA, you can contribute $6,000 plus another $1,000 i you are 50 or older (so $7,000 total). I am not as big a proponent of getting rid of a mortgage as some here are (though if the rate is higher it makes it more worthwhile). But that is another option.


Would investing in rental properties be worthwhile?
Not unless you are maxing the 401k and IRA contributions. But in general, they can be a pain (dealing with renters, property upkeep, etc). If you're just looking to have more assets, and you are maxing 401k and IRA, just invest excess cash in a taxable account.

At what point should I take a more conservative approach to the TSP? I seem to recall that a 60-40 stock to bond ratio was good to still generate income.
This is a completely personal question, but based on the comment you make below, I think you need to lower your stock exposure. You need to come up with a plan on how (and when) you want to do this. Rebalancing is easy. Just make a plan and stick to it no matter what the market does. The important points are to not react to the market. You are probably going to be invested through retirement (maybe 30 more years). You don't mention Social Security, but I am guessing you are under FERS. With a pension and some SS, you can actually probably be a little more aggressive then the "average" investor. But if 60/40 keeps you from making reactionary moves, its perfectly fine. Just remember that you will have at least one (and probably two) sources of guaranteed income.

Also, don't focus on income, focus on total return. The general rule is withdrawing 4% of your portfolio a year and then adjusting yearly for inflation. But that is only general guidance. Figuring out what you will spend will help you figure out what you need.


I guess my fear is that I have lot of money tied up in the stock market. Thank in advance for your response.
Invest we must. We all do (or at least the majority of us here do). Between my wife and I we have about twice what you do (but we most likely spend more and have no pensions and are not counting on SS). We are a little over 90% stocks and gliding to 60/40 at 60 (still 15 years away). Keep in mind retirement is not the end of the race (or investing) its the beginning of the next phase that could last 30 or more years. You still need to generate returns to help with inflation and expenses over that horizon. As I said above, keep in mind you do have some guaranteed income. But whatever allocation keeps you from making rash decisions. There certainly is a "right" ratio that will work optimally over the next 30 years but we have no way of knowing what it is. The best thing is to stick to what you pick.

Topic Author
bogota1972
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Joined: Tue Jul 09, 2019 7:03 pm

Re: Federal employee finanacial planning question

Post by bogota1972 » Tue Jul 09, 2019 8:14 pm

So, yes I am 47 and the plan is retire when I am 57 (early year birthday which is kinda annoying for annual leave balance turning into a nice cash goodbye). I don't have any debt and I am maxing out the TSP contribution as well the Roth IRA. My TSP contribution is 70-30 traditional to Roth TSP. Also, I have saving about 3k a month to build up the emergency fund (benefit of no mortgage) as well as contributing 300 bucks a month to three Vanguard index funds.
Last edited by bogota1972 on Tue Jul 09, 2019 8:38 pm, edited 1 time in total.

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Duckie
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Re: Federal employee financial planning question

Post by Duckie » Tue Jul 09, 2019 8:35 pm

bogota1972 wrote:My TSP is valued at approximately 650k (80-C, 10-S, and 10-I), I have a Vanguard account with about 25k among total stock, total bond, and total international funds (3 fund theory) as wells as approximately 6k in a Roth IRA with Vanguard Target Retirement 2030 Fund.
<snip>
What else could I be doing to solidify my long term financial stability?
You could increase your bond AA and put all of it in the TSP. Put just stocks in the taxable and Roth accounts.

The following example of a retirement portfolio has an AA of 60% stocks, 40% bonds, with 30% of stocks in international. That breaks down to 42% US stocks, 18% international stocks, and 40% bonds. You could have:

Taxable at Vanguard -- $25K -- 4%
4% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

Thrift Savings Plan -- $650K -- 95%
30% (N/A) C Fund (0.04%)
7% (N/A) S Fund (0.04%)
18% (N/A) I Fund (0.04%)
40% (N/A) G Fund (0.04%)

or just 95% (N/A) L 2030 Fund (0.04%)

Roth IRA at Vanguard -- $6K -- 1%
1% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

stan1
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Re: Federal employee financial planning question

Post by stan1 » Tue Jul 09, 2019 8:44 pm

You could also do:

TSP:
100% Lifecycle 2030 (about 60/40) [or Lifecycle 2040 if you want 70/30]

Taxable
100% Total Stock Market

IRA
100% Target Retirement 2030 (about 70/30)

It really could be as simple as this if you want something on autopilot. Your TSP account is much, much larger than your other accounts.

Note the TSP is more conservative with their Lifecycle 2030 fund than Vanguard is with Target Retirement 2030. Allocation for Lifecycle 2040 is about the same as for Target Retirement 2030 [10% more bonds at TSP than Vanguard].

02nz
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Re: Federal employee financial planning question

Post by 02nz » Wed Jul 10, 2019 2:28 am

Welcome to the forum and thanks for your service. Some very good suggestions already. My thoughts as a former FSO:

- For retirement savings, you're doing very well. It's good you're maxing out the TSP and Roth IRA. It looks like you just started with the Roth IRA. Depending on your salary and differentials, in some years you may find that your income is too high to contribute to the Roth IRA. In that case, it's worth doing the backdoor Roth: https://www.bogleheads.org/wiki/Backdoor_Roth.

- If you haven't already, you need to start to develop an idea of what your retirement expenses will be, because that determines whether you need to tap you retirement savings when you retire from the government, and if so how much. That in turn greatly influences the asset allocation. If you expect the pension and supplement will cover your living expenses and you don't need to tap the TSP right away, that would be an argument for a more aggressive asset allocation. Estimating expenses can be a little tough if you're used to being posted overseas for much of your career. An assignment back in the U.S. (gasp!) is a good opportunity to nail this down a bit - as well as get a better sense of where you might like to retire, which will have a big influence on housing expenses.

- Back to asset allocation: I do think 100% in stocks is too aggressive. Only you know your risk tolerance and can decide the right allocation for you. But most people 9 years away from retirement would probably want to be closer to 20-40% in bonds. On this forum we often talk about the "ability and need" to take risk. I would carefully assess those for your situation. You might estimate what you'll need to withdraw from TSP in the first 10 years of retirement (to avoid having to sell stocks in a down market), and aim to have that much in bonds by the time you retire. One possibility is to leave your existing balance alone but shift future contributions toward bonds - e.g., if you were to contribute the max going forward and allocate 100% of those contributions to the TSP G Fund, you would likely build up an adequate bond allocation by the time you retire.

- If and when you decide to add a bond allocation, I would recommend using the TSP G Fund for the entire bond allocation of your portfolio, i.e. do not use any other bond fund. The G Fund is a uniquely good deal (lots of threads here that discuss this in more detail).

- Like others here, I wouldn't especially advise investing in rental properties. It works out well for some, less well for others. I've done ok renting out my condo (in which I've also lived when posted back in DC), but even that hasn't been without its complications. If you find the dream condo/house in which you'd like to retire, consider buying it and renting it out when you're overseas. But I wouldn't advise going into this just as an investment.

- Have you considered an HSA? This is arguably the best tax-advantaged account of all, as it can be spent on qualified medical expenses (and even Medicare premiums) tax-free. It requires an HDHP, and the government makes a contribution toward the HSA (you can and should contribute up to the limit). An HDHP isn't right for everyone, but it probably makes sense for more people than realize it. You're likely in a relatively high tax bracket as a single filer, so the ability to reduce taxable income is especially valuable. More here: https://www.bogleheads.org/wiki/Health_savings_account

Hope this helps. Good luck!

Misciagno
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Re: Federal employee financial planning question

Post by Misciagno » Wed Jul 10, 2019 3:29 am

02nz wrote:
Wed Jul 10, 2019 2:28 am
Welcome to the forum and thanks for your service. Some very good suggestions already. My thoughts as a former FSO:

- For retirement savings, you're doing very well. It's good you're maxing out the TSP and Roth IRA. It looks like you just started with the Roth IRA. Depending on your salary and differentials, in some years you may find that your income is too high to contribute to the Roth IRA. In that case, it's worth doing the backdoor Roth: https://www.bogleheads.org/wiki/Backdoor_Roth.

- If you haven't already, you need to start to develop an idea of what your retirement expenses will be, because that determines whether you need to tap you retirement savings when you retire from the government, and if so how much. That in turn greatly influences the asset allocation. If you expect the pension and supplement will cover your living expenses and you don't need to tap the TSP right away, that would be an argument for a more aggressive asset allocation. Estimating expenses can be a little tough if you're used to being posted overseas for much of your career. An assignment back in the U.S. (gasp!) is a good opportunity to nail this down a bit - as well as get a better sense of where you might like to retire, which will have a big influence on housing expenses.

- Back to asset allocation: I do think 100% in stocks is too aggressive. Only you know your risk tolerance and can decide the right allocation for you. But most people 9 years away from retirement would probably want to be closer to 20-40% in bonds. On this forum we often talk about the "ability and need" to take risk. I would carefully assess those for your situation. You might estimate what you'll need to withdraw from TSP in the first 10 years of retirement (to avoid having to sell stocks in a down market), and aim to have that much in bonds by the time you retire. One possibility is to leave your existing balance alone but shift future contributions toward bonds - e.g., if you were to contribute the max going forward and allocate 100% of those contributions to the TSP G Fund, you would likely build up an adequate bond allocation by the time you retire.

- If and when you decide to add a bond allocation, I would recommend using the TSP G Fund for the entire bond allocation of your portfolio, i.e. do not use any other bond fund. The G Fund is a uniquely good deal (lots of threads here that discuss this in more detail).

- Like others here, I wouldn't especially advise investing in rental properties. It works out well for some, less well for others. I've done ok renting out my condo (in which I've also lived when posted back in DC), but even that hasn't been without its complications. If you find the dream condo/house in which you'd like to retire, consider buying it and renting it out when you're overseas. But I wouldn't advise going into this just as an investment.

- Have you considered an HSA? This is arguably the best tax-advantaged account of all, as it can be spent on qualified medical expenses (and even Medicare premiums) tax-free. It requires an HDHP, and the government makes a contribution toward the HSA (you can and should contribute up to the limit). An HDHP isn't right for everyone, but it probably makes sense for more people than realize it. You're likely in a relatively high tax bracket as a single filer, so the ability to reduce taxable income is especially valuable. More here: https://www.bogleheads.org/wiki/Health_savings_account

Hope this helps. Good luck!
Thanks for the detailed discussion from the retired FSO vantage point. My wife and I are FS tandems probably looking to retire in 6 years or so. We're almost maxing our respective pay scales (she is SFS) and are now doing straight traditional TSP, since our tax bracket is as high as it will ever be.

I'm curious if you have an opinion on whether a HDHP is a good deal for a family with three young (elementary age) children with no major medical issues? Our FSBP high option gives us peace of mind about our coverage, but a HDHP would obviously open up new avenues to tax advantaged savings. Until now we've never really considered it. Appreciate your thoughts!
"History doesn’t repeat itself, but it often rhymes." -- Mark Twain

Topic Author
bogota1972
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Joined: Tue Jul 09, 2019 7:03 pm

Re: Federal employee financial planning question

Post by bogota1972 » Wed Jul 10, 2019 6:51 am

Thanks for the responses so far. I do have a HSA. but it is only 1,000 dollars a year. I guess my concern with G funds is that while the money is safe, it doesn't really grow. I also get at some point the market is going to correct/hit a rough spot. I would like to hit the million dollar mark, but more so because of the figure than anything else. So, I guess the question is with TSP, do I reallocate the existing 650k into something like 70 (C, S, and I ) and 30 (G) or keep 650k as i have it and do future earnings as 70 (C, S, and I ) and 30 (G). My tolerance for risk is pretty high; however, the closer I get to retirement, the more I worry about timing of a market crash and the ability for it to recover.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Federal employee financial planning question

Post by retiredjg » Wed Jul 10, 2019 7:06 am

bogota1972 wrote:
Wed Jul 10, 2019 6:51 am
I guess my concern with G funds is that while the money is safe, it doesn't really grow.
Every investment, including the G fund, must be considered in light of how much bang you get for your buck (return for risk taken). You are correct that the G fund does not grow very fast. But it does grow A LOT for the risk it takes. In investment terms, that's a very good thing - almost a free lunch.

There is nothing saying that you have to use all G Fund. If you want a little more growth, use a combination of G Fund and F Fund (total bond market index). This is what the L Funds do.


I So, I guess the question is with TSP, do I reallocate the existing 650k into something like 70 (C, S, and I ) and 30 (G) or keep 650k as i have it and do future earnings as 70 (C, S, and I ) and 30 (G). My tolerance for risk is pretty high; however, the closer I get to retirement, the more I worry about timing of a market crash and the ability for it to recover.
If you only change your contributions, it will take many decades to get your bond allocation to 30% because the account is already so large. That is not a viable way to achieve what you want.

You are 9 years out - if the market slides down 40% this month and stays there awhile, what would you want your stock to bond ratio to be now?

My suggestion is to move the entire portfolio to 30% bonds right now and try to be at least 40% bonds when you retire.

Tatupu
Posts: 28
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Re: Federal employee financial planning question

Post by Tatupu » Wed Jul 10, 2019 7:37 am

Misciagno wrote:
Wed Jul 10, 2019 3:29 am
02nz wrote:
Wed Jul 10, 2019 2:28 am
Welcome to the forum and thanks for your service. Some very good suggestions already. My thoughts as a former FSO:

- For retirement savings, you're doing very well. It's good you're maxing out the TSP and Roth IRA. It looks like you just started with the Roth IRA. Depending on your salary and differentials, in some years you may find that your income is too high to contribute to the Roth IRA. In that case, it's worth doing the backdoor Roth: https://www.bogleheads.org/wiki/Backdoor_Roth.

- If you haven't already, you need to start to develop an idea of what your retirement expenses will be, because that determines whether you need to tap you retirement savings when you retire from the government, and if so how much. That in turn greatly influences the asset allocation. If you expect the pension and supplement will cover your living expenses and you don't need to tap the TSP right away, that would be an argument for a more aggressive asset allocation. Estimating expenses can be a little tough if you're used to being posted overseas for much of your career. An assignment back in the U.S. (gasp!) is a good opportunity to nail this down a bit - as well as get a better sense of where you might like to retire, which will have a big influence on housing expenses.

- Back to asset allocation: I do think 100% in stocks is too aggressive. Only you know your risk tolerance and can decide the right allocation for you. But most people 9 years away from retirement would probably want to be closer to 20-40% in bonds. On this forum we often talk about the "ability and need" to take risk. I would carefully assess those for your situation. You might estimate what you'll need to withdraw from TSP in the first 10 years of retirement (to avoid having to sell stocks in a down market), and aim to have that much in bonds by the time you retire. One possibility is to leave your existing balance alone but shift future contributions toward bonds - e.g., if you were to contribute the max going forward and allocate 100% of those contributions to the TSP G Fund, you would likely build up an adequate bond allocation by the time you retire.

- If and when you decide to add a bond allocation, I would recommend using the TSP G Fund for the entire bond allocation of your portfolio, i.e. do not use any other bond fund. The G Fund is a uniquely good deal (lots of threads here that discuss this in more detail).

- Like others here, I wouldn't especially advise investing in rental properties. It works out well for some, less well for others. I've done ok renting out my condo (in which I've also lived when posted back in DC), but even that hasn't been without its complications. If you find the dream condo/house in which you'd like to retire, consider buying it and renting it out when you're overseas. But I wouldn't advise going into this just as an investment.

- Have you considered an HSA? This is arguably the best tax-advantaged account of all, as it can be spent on qualified medical expenses (and even Medicare premiums) tax-free. It requires an HDHP, and the government makes a contribution toward the HSA (you can and should contribute up to the limit). An HDHP isn't right for everyone, but it probably makes sense for more people than realize it. You're likely in a relatively high tax bracket as a single filer, so the ability to reduce taxable income is especially valuable. More here: https://www.bogleheads.org/wiki/Health_savings_account

Hope this helps. Good luck!
Thanks for the detailed discussion from the retired FSO vantage point. My wife and I are FS tandems probably looking to retire in 6 years or so. We're almost maxing our respective pay scales (she is SFS) and are now doing straight traditional TSP, since our tax bracket is as high as it will ever be.

I'm curious if you have an opinion on whether a HDHP is a good deal for a family with three young (elementary age) children with no major medical issues? Our FSBP high option gives us peace of mind about our coverage, but a HDHP would obviously open up new avenues to tax advantaged savings. Until now we've never really considered it. Appreciate your thoughts!
Current FSO here, glad to see some others on the forum. The most famous FSO Boglehead is a fabulous Career Ambassador in case you weren't aware. I had been on this forum for a few years before I discovered that fact.

In terms of your question on whether the HDHP makes sense, I think in part it depends on where you are assigned. I'm committed to the HDHP route and max it out every year. I pay any med expenses out of pocket and invest the balance. I'm happy to have over 60K now in the HSA and will keep this rolling until retirement. I know I'll value that account in my retirement years as health care expenses climb. That said, I have found it easier to manage while posted overseas where there is a med clinic at Post and/or inexpensive health care. That to me makes it a no-brainer. If I was in DC with a large family, I think the HDHP options are less advantageous but I still may do it anyway. I'm married with 1 child with low med expenses to date. I've stuck with the HDHP in DC but no doubt when posted in DC the budget is tighter, and health care is much more expensive if paying out of pocket than when one is overseas. If I was in DC but couldn't cover all my med expenses out of pocket, I'd probably reconsider the HDHP. One nice thing is that any transfer abroad or back to DC triggers the option to change your health care election, giving you some added flexibility. Good luck.

02nz
Posts: 1815
Joined: Wed Feb 21, 2018 3:17 pm

Re: Federal employee financial planning question

Post by 02nz » Wed Jul 10, 2019 8:37 am

bogota1972 wrote:
Wed Jul 10, 2019 6:51 am
I also get at some point the market is going to correct/hit a rough spot. I would like to hit the million dollar mark, but more so because of the figure than anything else. So, I guess the question is with TSP, do I reallocate the existing 650k into something like 70 (C, S, and I ) and 30 (G) or keep 650k as i have it and do future earnings as 70 (C, S, and I ) and 30 (G). My tolerance for risk is pretty high; however, the closer I get to retirement, the more I worry about timing of a market crash and the ability for it to recover.
You need to be comfortable with your asset allocation regardless of market conditions. If it makes you worry now or - worse - do something rash after a market dip, then it's not the right asset allocation. Related to all this, read about "sequence of returns risk."

I wouldn't get too fixated on some number. A million is just a number. Someone retiring with a government pension and supplement that pays until Social Security starts needs significantly less than most people (although in your case you need to account for housing).

As I noted a big factor is expenses. How much are you likely to need to draw from TSP in the first decade of retirement? Makes a big difference whether it's 0 or 200K.

Also, the underlined portion above isn't a realistic choice as it will take forever to reach a 70/30 portfolio; actually you're likely never to get even close. As I noted in my earlier post, you could consider allocating all future contributions to the G Fund. At 19K/yr (25K starting in about 3 years), you'll have over 200K in bonds by the time you retire. That's likely less than 30% but depending on your expenses and timeframe (which are different from most retirees), it could make sense.

GCD
Posts: 960
Joined: Tue Sep 26, 2017 7:11 pm

Re: Federal employee financial planning question

Post by GCD » Wed Jul 10, 2019 9:09 am

As a Fed retiree I am familiar with FERS, but apparently you are under the Foreign Service Pension System. It looks like FSPS contains something similar to FERS in that locality pay is included in your high-3 calculation. For FSPS, 'overseas virtual locality pay" is what gets included, whatever that is. It sounds similar to locality pay differentials in CONUS for FERS recipients.

There is some amount of gaming going on with FERS employees to move to a high cost of living area in their final 3 years to boost their retirement pay. I say "some" because you need to have a personal life that allows it and for many people this doesn't work for all the obvious reasons. However, you are different. You don't have a spouse, kids, or own a home. You are exceptionally mobile. For normal CONUS Feds, moving to the highest locality can potentially boost pay by 24.68%. I would look into this. Usually high cost of living areas are undesirable and getting transferred there is not difficult.

You also need to decide if you are going to remain overseas or return to the US in retirement. That is going to affect your cost of living significantly. If you are able to live comfortably on your pension you can remain very aggressive in your investments.

WRT rental properties... Take a look at some of the threads on here about the reality of being a landlord. Would you be buying these rental properties in the US or overseas? These threads have convinced me that being a landlord is not a hands-off affair. Aside from all the other issues, I would be very reluctant to get into the landlord business if I lived in a different country from the property.

02nz
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Re: Federal employee financial planning question

Post by 02nz » Wed Jul 10, 2019 9:40 am

GCD wrote:
Wed Jul 10, 2019 9:09 am
As a Fed retiree I am familiar with FERS, but apparently you are under the Foreign Service Pension System. It looks like FSPS contains something similar to FERS in that locality pay is included in your high-3 calculation. For FSPS, 'overseas virtual locality pay" is what gets included, whatever that is. It sounds similar to locality pay differentials in CONUS for FERS recipients.

There is some amount of gaming going on with FERS employees to move to a high cost of living area in their final 3 years to boost their retirement pay. I say "some" because you need to have a personal life that allows it and for many people this doesn't work for all the obvious reasons. However, you are different. You don't have a spouse, kids, or own a home. You are exceptionally mobile. For normal CONUS Feds, moving to the highest locality can potentially boost pay by 24.68%. I would look into this.
If OP is a State FSO, he/she doesn't get paid all of DC locality pay when overseas, but the pension is calculated based on all of DC locality pay. That's the "virtual locality pay." He/she can get a higher pension if posted to say San Francisco for the last 3 years, but there are very few State or other foreign affairs agency jobs there or anywhere else outside DC.

Also, before people get the idea that feds are "gaming" this, I'd point out that this only works if your job takes you to another location with a higher locality pay or you find another fed job in that location, not just "move to a HCOL area" as you say. Yes, a fed relocating from Paducah, KY to DC would indeed get a bump (of less than 12%), but that's not a ton of people as most feds are in major metropolitan areas covered by higher locality pay rates.

(The highest locality pay is the San Francisco area, it's about a 21% increase over "rest of U.S." Surely very few people from a "rest of U.S." area will want to pay dramatically higher housing costs to get a little more in their pensions.)

GCD
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Re: Federal employee financial planning question

Post by GCD » Wed Jul 10, 2019 10:03 am

That's interesting re: the virtual locality pay. I had no idea how that worked.

When I say move to a high cost of living area I meant as part of a job transfer. I wasn't clear about that. I knew several people who moved to San Francisco from "rest of the US" for just this reason. A few left their spouse behind and just rented a small apartment. None of the people I knew who did this bought a home, they just rented. "Gaming" might have a negative connotation I didn't intend. The obvious price you pay is living in a HCOL area for 3 years. As I noted this is a small subset of people for whom this works, but per your post the difference in retirement rules precludes this from being a realistic option for OP regardless of their personal mobility.

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dm200
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Re: Federal employee financial planning question

Post by dm200 » Wed Jul 10, 2019 10:11 am

Since medical expenses are a significant part of retirees' budgets, be fully aware of retirement options and choices. At 65, you also become eligible for Medicare - and you can choose Part B or not.

You will also have the choice to select a Medicare Advantage plan. Research them - including how or if your current plan can be more compatible.

Educate yourself about this entire, admittedly complicated, matter. There are financial, health and convenience aspects to this. The good news for you is that Federal retirees get benefits into retirement - even after Medicare eligible.

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dm200
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Re: Federal employee financial planning question

Post by dm200 » Wed Jul 10, 2019 10:12 am

I don't know the current status, etc. BUT Federal employees can participate in the federal Long term care plan. Suggest you research it as well.

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bogota1972
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Re: Federal employee financial planning question

Post by bogota1972 » Wed Jul 10, 2019 5:42 pm

Thanks again for the advice. It's appreciated. I am not FS, I work for an agency that has a lot of overseas spots. I can stay overseas for approximately six more years which leaves me with approximately 3 years. Regarding the LTC insurance, I wonder, aside from being expensive, if it is worth it.I see a lot of conflicting info on this subject. As was noted earlier, I really need to educate myself on the topic health insurance in retirement.

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Re: Federal employee financial planning question

Post by grabiner » Wed Jul 10, 2019 6:20 pm

Misciagno wrote:
Wed Jul 10, 2019 3:29 am
02nz wrote:
Wed Jul 10, 2019 2:28 am

- Have you considered an HSA? This is arguably the best tax-advantaged account of all, as it can be spent on qualified medical expenses (and even Medicare premiums) tax-free. It requires an HDHP, and the government makes a contribution toward the HSA (you can and should contribute up to the limit). An HDHP isn't right for everyone, but it probably makes sense for more people than realize it. You're likely in a relatively high tax bracket as a single filer, so the ability to reduce taxable income is especially valuable. More here: https://www.bogleheads.org/wiki/Health_savings_account
I'm curious if you have an opinion on whether a HDHP is a good deal for a family with three young (elementary age) children with no major medical issues? Our FSBP high option gives us peace of mind about our coverage, but a HDHP would obviously open up new avenues to tax advantaged savings. Until now we've never really considered it. Appreciate your thoughts!
The way the US government subsidizes insurance makes the HDHPs particularly attractive; the HDHP is almost always better than the conventional plan from the same insurer.

The plan makes a contribution to your HSA, and you can get a tax benefit by contributing your own money (compared to contributing the same amount to the Roth TSP, or an equivalent benefit versus the traditional TSP because HSA withdrawals are tax-free). If you compare the standard and HDHP plans from the same insurer, the HDHP usually gives you a net benefit about equal to the deductible.

However, you need to look at the differences between insurers. The Foreign Service plan might provide better coverage, particularly if you are overseas. Even in the US, you may find that the doctors you use are not in network on another plan.
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PoppyA
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Re: Federal employee financial planning question

Post by PoppyA » Wed Jul 10, 2019 6:48 pm

FEGLI

If you plan to carry this into retirement, you might want to get quotes from the market place. I am told it can cost less than the Fed Benefits if you are young and healthy.
“Your labor income makes you rich, not your investments.”

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Re: Federal employee financial planning question

Post by Hitchcock_Fan » Wed Jul 10, 2019 7:07 pm

bogota1972 wrote:
Wed Jul 10, 2019 5:42 pm
Regarding the LTC insurance, I wonder, aside from being expensive, if it is worth it.I see a lot of conflicting info on this subject. As was noted earlier, I really need to educate myself on the topic health insurance in retirement.
I highly recommend a FERS retirement class (if you haven't taken it already). The class I took was 2 days and covered FERS, TSP, Social Security, FEHB, MEDICARE, LTC, life insurance, planning, etc. It was really helpful.

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bogota1972
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Re: Federal employee financial planning question

Post by bogota1972 » Wed Jul 10, 2019 8:21 pm

My agency has a retirement seminar, but you aren't eligible until you're five years eligible for retirement. By that time, I think it is too late....

02nz
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Re: Federal employee financial planning question

Post by 02nz » Thu Jul 11, 2019 12:04 pm

bogota1972 wrote:
Wed Jul 10, 2019 8:21 pm
My agency has a retirement seminar, but you aren't eligible until you're five years eligible for retirement. By that time, I think it is too late....
Check to see if they also offer a mid-career retirement course, as State does.

tigermilk
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Re: Federal employee financial planning question

Post by tigermilk » Fri Jul 12, 2019 6:01 am

GCD wrote:
Wed Jul 10, 2019 10:03 am
That's interesting re: the virtual locality pay. I had no idea how that worked.

When I say move to a high cost of living area I meant as part of a job transfer. I wasn't clear about that. I knew several people who moved to San Francisco from "rest of the US" for just this reason. A few left their spouse behind and just rented a small apartment. None of the people I knew who did this bought a home, they just rented. "Gaming" might have a negative connotation I didn't intend. The obvious price you pay is living in a HCOL area for 3 years. As I noted this is a small subset of people for whom this works, but per your post the difference in retirement rules precludes this from being a realistic option for OP regardless of their personal mobility.
Locality pay is not related to COL but to comparable salaries in the region. While it may look like there is correlation because San Francisco is highest on the list with a 40% locality pay adjustment, there is more to it. I live in the region with the third highest locality pay adjustment at 32.5%. That region, Houston area, clearly can't compete with SF or LA (our ratemmis higher than LA's) in terms of outrageous COL. I have colleagues in both locations as well as areas in other states with much lower locality pay rates but higher COL. Here in Houston, I have to thank the energy sector and the salaries they pay for my good fortune.

To be more on topic with the thread, I was 100/0 equities in the TSP until age 47. Moved to 90/10 that year and currently sit at 85/15 at age 50. Current mix is 35% in both C and S, 10% in G, 5% in F, and 15% in I. I have won the game.

fundseeker
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Re: Federal employee financial planning question

Post by fundseeker » Fri Jul 12, 2019 6:56 am

Great that you're planning and saving. Don't forget to stay in your FEHB plan for the five years preceding retirement if you want to have the same plan in retirement. Good luck.

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Re: Federal employee financial planning question

Post by f35phixer » Fri Jul 12, 2019 8:47 am

Being an FSO are you allowed to claim = "The FERS Supplement is also called the Special Retirement Supplement or SRS. It is designed to help bridge the money gap for certain FERS who retire before age 62. It will supplement your missing Social Security income until you reach age 62. But not all FERS are eligible to receive the Supplement."

Something to look into !!!!!!!!!!

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Re: Federal employee financial planning question

Post by grabiner » Fri Jul 12, 2019 7:35 pm

f35phixer wrote:
Fri Jul 12, 2019 8:47 am
Being an FSO are you allowed to claim = "The FERS Supplement is also called the Special Retirement Supplement or SRS. It is designed to help bridge the money gap for certain FERS who retire before age 62. It will supplement your missing Social Security income until you reach age 62. But not all FERS are eligible to receive the Supplement."
Most FERS employees are eligible; Annuity Supplement

However, the supplement is only if you don't have much earned income between normal retirement and 62; it is reduced by the same formula as Social Security itself, $1 for every $2 in earnings over the limit. (In contrast to SS, this is a complete loss; if you lose a year of SS to the earnings test, your SS is recalculated as if you claimed benefits a year later.)

And the supplement itself isn't very large; it is the SS benefit you would have earned at 62 based on your federal salary, multiplied by the fraction of your career (with 40 years a full length) that you spent under FERS. The effect is that a full-career FERS employee can retire completely at normal retirement age, claim SS at 62, and have almost no change in retirement benefits.
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Misciagno
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Re: Federal employee financial planning question

Post by Misciagno » Sat Jul 13, 2019 2:56 am

Tatupu wrote:
Wed Jul 10, 2019 7:37 am
Misciagno wrote:
Wed Jul 10, 2019 3:29 am
02nz wrote:
Wed Jul 10, 2019 2:28 am
Welcome to the forum and thanks for your service. Some very good suggestions already. My thoughts as a former FSO:

- For retirement savings, you're doing very well. It's good you're maxing out the TSP and Roth IRA. It looks like you just started with the Roth IRA. Depending on your salary and differentials, in some years you may find that your income is too high to contribute to the Roth IRA. In that case, it's worth doing the backdoor Roth: https://www.bogleheads.org/wiki/Backdoor_Roth.

- If you haven't already, you need to start to develop an idea of what your retirement expenses will be, because that determines whether you need to tap you retirement savings when you retire from the government, and if so how much. That in turn greatly influences the asset allocation. If you expect the pension and supplement will cover your living expenses and you don't need to tap the TSP right away, that would be an argument for a more aggressive asset allocation. Estimating expenses can be a little tough if you're used to being posted overseas for much of your career. An assignment back in the U.S. (gasp!) is a good opportunity to nail this down a bit - as well as get a better sense of where you might like to retire, which will have a big influence on housing expenses.

- Back to asset allocation: I do think 100% in stocks is too aggressive. Only you know your risk tolerance and can decide the right allocation for you. But most people 9 years away from retirement would probably want to be closer to 20-40% in bonds. On this forum we often talk about the "ability and need" to take risk. I would carefully assess those for your situation. You might estimate what you'll need to withdraw from TSP in the first 10 years of retirement (to avoid having to sell stocks in a down market), and aim to have that much in bonds by the time you retire. One possibility is to leave your existing balance alone but shift future contributions toward bonds - e.g., if you were to contribute the max going forward and allocate 100% of those contributions to the TSP G Fund, you would likely build up an adequate bond allocation by the time you retire.

- If and when you decide to add a bond allocation, I would recommend using the TSP G Fund for the entire bond allocation of your portfolio, i.e. do not use any other bond fund. The G Fund is a uniquely good deal (lots of threads here that discuss this in more detail).

- Like others here, I wouldn't especially advise investing in rental properties. It works out well for some, less well for others. I've done ok renting out my condo (in which I've also lived when posted back in DC), but even that hasn't been without its complications. If you find the dream condo/house in which you'd like to retire, consider buying it and renting it out when you're overseas. But I wouldn't advise going into this just as an investment.

- Have you considered an HSA? This is arguably the best tax-advantaged account of all, as it can be spent on qualified medical expenses (and even Medicare premiums) tax-free. It requires an HDHP, and the government makes a contribution toward the HSA (you can and should contribute up to the limit). An HDHP isn't right for everyone, but it probably makes sense for more people than realize it. You're likely in a relatively high tax bracket as a single filer, so the ability to reduce taxable income is especially valuable. More here: https://www.bogleheads.org/wiki/Health_savings_account

Hope this helps. Good luck!
Thanks for the detailed discussion from the retired FSO vantage point. My wife and I are FS tandems probably looking to retire in 6 years or so. We're almost maxing our respective pay scales (she is SFS) and are now doing straight traditional TSP, since our tax bracket is as high as it will ever be.

I'm curious if you have an opinion on whether a HDHP is a good deal for a family with three young (elementary age) children with no major medical issues? Our FSBP high option gives us peace of mind about our coverage, but a HDHP would obviously open up new avenues to tax advantaged savings. Until now we've never really considered it. Appreciate your thoughts!
Current FSO here, glad to see some others on the forum. The most famous FSO Boglehead is a fabulous Career Ambassador in case you weren't aware. I had been on this forum for a few years before I discovered that fact.

In terms of your question on whether the HDHP makes sense, I think in part it depends on where you are assigned. I'm committed to the HDHP route and max it out every year. I pay any med expenses out of pocket and invest the balance. I'm happy to have over 60K now in the HSA and will keep this rolling until retirement. I know I'll value that account in my retirement years as health care expenses climb. That said, I have found it easier to manage while posted overseas where there is a med clinic at Post and/or inexpensive health care. That to me makes it a no-brainer. If I was in DC with a large family, I think the HDHP options are less advantageous but I still may do it anyway. I'm married with 1 child with low med expenses to date. I've stuck with the HDHP in DC but no doubt when posted in DC the budget is tighter, and health care is much more expensive if paying out of pocket than when one is overseas. If I was in DC but couldn't cover all my med expenses out of pocket, I'd probably reconsider the HDHP. One nice thing is that any transfer abroad or back to DC triggers the option to change your health care election, giving you some added flexibility. Good luck.
Thanks Tatupu, that makes sense. We're (DW and kids) in a low cost European post ith decent care options and a great HU while I'm doing a year in a PSP. Med care is cheap - I already pay for alot of things out of pocket when necessary, since it's hardly worth claiming. We're on the FS plan and like it, but I will definitely check into whatever HDHP version there is. Appreciate the discussion, and now I'm curious who our famous Boglehead CA is...
"History doesn’t repeat itself, but it often rhymes." -- Mark Twain

Misciagno
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Re: Federal employee financial planning question

Post by Misciagno » Sat Jul 13, 2019 3:02 am

grabiner wrote:
Wed Jul 10, 2019 6:20 pm
Misciagno wrote:
Wed Jul 10, 2019 3:29 am
02nz wrote:
Wed Jul 10, 2019 2:28 am

- Have you considered an HSA? This is arguably the best tax-advantaged account of all, as it can be spent on qualified medical expenses (and even Medicare premiums) tax-free. It requires an HDHP, and the government makes a contribution toward the HSA (you can and should contribute up to the limit). An HDHP isn't right for everyone, but it probably makes sense for more people than realize it. You're likely in a relatively high tax bracket as a single filer, so the ability to reduce taxable income is especially valuable. More here: https://www.bogleheads.org/wiki/Health_savings_account
I'm curious if you have an opinion on whether a HDHP is a good deal for a family with three young (elementary age) children with no major medical issues? Our FSBP high option gives us peace of mind about our coverage, but a HDHP would obviously open up new avenues to tax advantaged savings. Until now we've never really considered it. Appreciate your thoughts!
The way the US government subsidizes insurance makes the HDHPs particularly attractive; the HDHP is almost always better than the conventional plan from the same insurer.

The plan makes a contribution to your HSA, and you can get a tax benefit by contributing your own money (compared to contributing the same amount to the Roth TSP, or an equivalent benefit versus the traditional TSP because HSA withdrawals are tax-free). If you compare the standard and HDHP plans from the same insurer, the HDHP usually gives you a net benefit about equal to the deductible.

However, you need to look at the differences between insurers. The Foreign Service plan might provide better coverage, particularly if you are overseas. Even in the US, you may find that the doctors you use are not in network on another plan.
Grabiner - I appreciate the advice. We like the FS plan, and switched to it from BCBS a few years ago when heading overseas, since the benefits seemed better. In our current post though, outside private med prices are low, and I don't even bother claiming them all. I will definitely look into an HDHP when I transfer again this fall. Thanks!
"History doesn’t repeat itself, but it often rhymes." -- Mark Twain

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Re: Federal employee financial planning question

Post by bayview » Sat Jul 13, 2019 3:14 am

Misciagno wrote:
Sat Jul 13, 2019 2:56 am
Thanks Tatupu, that makes sense. We're (DW and kids) in a low cost European post ith decent care options and a great HU while I'm doing a year in a PSP. Med care is cheap - I already pay for alot of things out of pocket when necessary, since it's hardly worth claiming. We're on the FS plan and like it, but I will definitely check into whatever HDHP version there is. Appreciate the discussion, and now I'm curious who our famous Boglehead CA is...
https://en.wikipedia.org/wiki/Laura_Farnsworth_Dogu
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

Misciagno
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Re: Federal employee financial planning question

Post by Misciagno » Sat Jul 13, 2019 3:29 am

bayview wrote:
Sat Jul 13, 2019 3:14 am
Misciagno wrote:
Sat Jul 13, 2019 2:56 am
Thanks Tatupu, that makes sense. We're (DW and kids) in a low cost European post ith decent care options and a great HU while I'm doing a year in a PSP. Med care is cheap - I already pay for alot of things out of pocket when necessary, since it's hardly worth claiming. We're on the FS plan and like it, but I will definitely check into whatever HDHP version there is. Appreciate the discussion, and now I'm curious who our famous Boglehead CA is...
https://en.wikipedia.org/wiki/Laura_Farnsworth_Dogu
Excellent, thank you. Turns out my wife knows her. Small world....
"History doesn’t repeat itself, but it often rhymes." -- Mark Twain

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