Retirement Planning

Managing your TSP and alternate investment options after retirement or separation from service.

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Chulke
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Joined: Thu Aug 01, 2013 10:25 am

Retirement Planning

Post by Chulke »

Sooooo....As I get older and am becoming more aware of my own mortality I have been contemplating full retirement more and more, and the more I think about it the more I wanna retire early at age like 58....which for me is not that far off...like less than 15 years or so...still plenty of time to build a fairly substantial TSP account if I stay on track!

My Future planned income sources are as follows: Military Retirement, VA Disability, Federal Retirement, Social Security, I currently have a Traditional IRA but thinking of rolling it into my TSP, and of course my TSP!

Did I miss one or is one of these limited in any way?

Now the Federal Retirement I'm thinking about deferring until I hit age 62 or so...as well as Social Security, Thoughts?

My reason for wanting to retire by age 58 is simple....I wanna have time to do the things I wanna do while I'm still young enough to do them and enjoy them! I've come to the simple realization on Social Security and why they keep bumping up the retirement age....They're (the federal Gov't) are banking on the fact you will never withdraw everything you've paid in over the years! Guys like me who have a heart condition and worked hard lives, and have been exposed to bad things rarely make it to long post retirement.

I wanna live some life...How would you all handle your TSP withdrawls? Take a lump sum, Take monthly or quarterly withdrawls? Buy an annuity?


Thoughts?
Cheers!

Current Strat: Loosely following 152300 and 85660 more the former rather than the later
Current PIP: 24.04

md2018
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Re: Retirement Planning

Post by md2018 »

I also retired at 58, after 35 years of federal service. So for now I have FERS and SS supplement (until 62), and IRA’s and TSP. So far I am doing just fine with FERS and SS supplements. No withdrawals from TSP or IRA yet. I retired for the same reasons, to do what I want to do while I am still healthy. The key is to go into retirement with low to no debt. My house is paid off and I have no other large debts. I also live in Florida which does not have a state income tax, but home Insurance and home owners taxes are moderately high.
My plan for TSP withdrawals are to wait until I need it or at least age 71 but to not withdraw more than I earn in the previous year. I’m planning however on about a 2-3 % annual withdrawal (set to pay out monthly) when I do start.

Chulke
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Re: Retirement Planning

Post by Chulke »

md2018 wrote: Thu May 27, 2021 10:32 am I also retired at 58, after 35 years of federal service. So for now I have FERS and SS supplement (until 62), and IRA’s and TSP. So far I am doing just fine with FERS and SS supplements. No withdrawals from TSP or IRA yet. I retired for the same reasons, to do what I want to do while I am still healthy. The key is to go into retirement with low to no debt. My house is paid off and I have no other large debts. I also live in Florida which does not have a state income tax, but home Insurance and home owners taxes are moderately high.
My plan for TSP withdrawals are to wait until I need it or at least age 71 but to not withdraw more than I earn in the previous year. I’m planning however on about a 2-3 % annual withdrawal (set to pay out monthly) when I do start.
I agree with that whole heartedly! And the key like you said is LOW TO NO debt! now if I can just get my wife on board! lol!!


Cheers!
Cheers!

Current Strat: Loosely following 152300 and 85660 more the former rather than the later
Current PIP: 24.04

wingchaser
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Re: Retirement Planning

Post by wingchaser »

CHULKE:

One (1) of the most important Retirement Vehicles (for me) has always been the ROTH IRA. The theory (here) is that it’s the only instrument that is NOT taxed upon withdrawal.

Somewhere, someone told me that this is the one investment that you would want to maximize in every way.

I’m limited to $7,000/annum from a investment perspective & am a strong proponent (of such). By keeping my ROTH IRA @ Fidelity, I allow myself (virtually) unlimited investment opportunities.

Best of Luck (everyone) in all you choose to endeavor!!!
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t... pays it.” ~ Albert Einstein

Pss3757
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Re: Retirement Planning

Post by Pss3757 »

im a big fan of the Roth IRA too....if you got in when you were younger, making less than the caps. its gonna be like gold in retirement.

wanted to comment on the SS thing....IMO, take it at 59.5 you..... calculations (todays) show that you will make more with wisely investing the lesser amount at 59.5....than waiting until 62.

also, on the TSP distributions.....I would go with the 4-5% rule. Withdrawing that amount of your balance on an annual basis. Most calculations show that you would barely but a dent in your original balance. Furthermore, based on genetics and lifestyle, withdraw and amount based upon life expectancy. Just because you may take out more than you need in a given month, you can always invest that amount somewhere else.

Chulke
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Re: Retirement Planning

Post by Chulke »

Pss3757 wrote: Thu May 27, 2021 8:02 pm im a big fan of the Roth IRA too....if you got in when you were younger, making less than the caps. its gonna be like gold in retirement.

wanted to comment on the SS thing....IMO, take it at 59.5 you..... calculations (todays) show that you will make more with wisely investing the lesser amount at 59.5....than waiting until 62.

also, on the TSP distributions.....I would go with the 4-5% rule. Withdrawing that amount of your balance on an annual basis. Most calculations show that you would barely but a dent in your original balance. Furthermore, based on genetics and lifestyle, withdraw and amount based upon life expectancy. Just because you may take out more than you need in a given month, you can always invest that amount somewhere else.
I like this take on things....and While I like the thought of a Roth IRA/TSP I just don't see it being plausible for the federal government to leave it alone entirely...and while it may be law now...laws can be changed and amended....What I mean by that is politicians, such as the current President, have been looking for ways to dip into folk's IRA/TSP/ Roth's for years....They can't stand the idea that you wouldn't pay taxes on your retirement income that you already paid taxes on...Heck he's talking about a retroactive capital gains tax now! So I don't put anything past the politicians shenanigans! They're gonna find a way to get at all that money...come hell or high water! THEY WILL FIND A WAY!!! No doubt in my mind!!

I have a traditional TSP because, I don't expect to have so much money when I retire so its highly unlikely my tax bracket will change dramatically....I just started saving waaayyyy too late in my lifetime to build millions...Which by the time I retire millions will not be a ton of money! Just my 2 cents!


Cheers!
Cheers!

Current Strat: Loosely following 152300 and 85660 more the former rather than the later
Current PIP: 24.04

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Scarfinger
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Re: Retirement Planning

Post by Scarfinger »

Chulke wrote: Fri May 28, 2021 7:40 am I have a traditional TSP because, I don't expect to have so much money when I retire so its highly unlikely my tax bracket will change dramatically.
Most likely you will be in about the same tax bracket as you are now. A Roth just gives you more options.

You should figure out how much money you need to retire based on bills and income.

After you figure out you total cost of living:

Say you need 60,000 a year

60,000 (-) 18,000 pension = 42,000

42,000 (-) 24,000 Social Security = 18,000

you need $18,000 from retirement sources.

18000 divided by .04 = $450,000 in your TSP.

In theory, you could withdraw 4% of your TSP. Assuming your TSP would make a conservative 4% a year, you would never run out of principle.

If you don't have enough, you could work longer to invest more and retire later to increase SS and lower your cost of living.

At least this is what I have done to give myself a general idea of how much I need in my TSP to retire.

Good Luck!
I am just an average Joe. I have no clue to what the market will do.
TimboSlice wrote: "People really need to stop overthinking this."
Paul Merriman 2 fund strat: (age - 25) x2.5 = TDF + balance into S fund or variation of

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Aitrus
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Re: Retirement Planning

Post by Aitrus »

Scarfinger,

I like the breakdown, but I have concerns over inflation. How do you account for having enough to cover inflation over a 30+ year retirement? Mind if we run through a thought experiment?

Let's say we start out at needing $60,000 and retire today and have a 30 year retirement (age 57 - 87 doesn't seem unreasonable to me), and assume a 3% inflation rate. (note: actual inflation from 2000 - 2018 was an average of 2.168%, but it seems reasonable to assume higher inflation will occur for a while due to the massive spending we've seen recently) Let's run the numbers to see what it looks like by the time we hit 87.

- At age 87, we'll need $145,635 to maintain the same standard of living as $60,000 buys us today.

- From 2000 - 2018, the FERS COLA has been behind actual inflation by an average of -0.383% per year. Source: https://federalretirementbenefitscenter ... n-vs-cola/

- Using the FERS COLA of roughly 2.6% (roughly -0.383% behind inflation) an $18,000 pension will increase to $38,877. $145,635 needed income - $38,877 pension = $106,758.

- SSA has averaged a COLA increase of 2.3% annually from 2000 - 2018. Source: manually crunched the numbers from https://www.ssa.gov/OACT/COLA/colaseries.html

- Using the 2.3% COLA rate for SSA, a $24,000 payment would grow to $47,476 in 30 years. $106,758 needed income - $47,476 SSA = $59,282.

- Assume the retiree has their TSP funds in L Income. From 2005 (date of inception) to 2020, it has grown at a rate of CAGR 4.16%. After pulling out the 4% each year, the remainder in the account will only grow by 0.16%. Using the TSP.gov calculator, withdrawing 4% a year while the account grows by 4.16% will result in the $450,000 amount growing to $468,257 in 30 years, resulting in a 4% withdraw rate of $18,730 in year 30. However, $59,282 needed money - $18,730 TSP = $40,552 still unpaid.

- To make up that $40,552 difference, the TSP account would need to be much bigger. 4% from a $1,000,000 account is $40,000. So the retiree's account would need to be around $1,468,000 at age 87 to maintain the same standard of living.

- If the TSP account doesn't grow enough, then where does the extra money come from? We can expect that SSA payments will be reduced somehow in the future, so that's even more that has to be made up from somewhere. The gap is $40,552 + whatever SSA cutbacks occur in the meantime. The SSA's pre-COVID estimates were that cutbacks to 75% of current payouts would have to occur sometime around 2031 - assuming nothing else changes.

From what I can see, the result is that either the retiree will have to cut back on spending severely as he ages, be more risky with his TSP during retirement, he will just have to make the TSP account as big as he can before retirement and resist drawing from it until he needs it, or he will have to pull / spend less than 4% of his TSP in retirement.

Thoughts?
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Scarfinger
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Re: Retirement Planning

Post by Scarfinger »

This is so great!!. Great Points. I love that you took my simplified example and calculated it out with inflation. My initial thought is that you would have to make an average of 7% returns on your principle.

If so, I can give you some break downs of Bond to Stock ratios that would give you this return.
I am just an average Joe. I have no clue to what the market will do.
TimboSlice wrote: "People really need to stop overthinking this."
Paul Merriman 2 fund strat: (age - 25) x2.5 = TDF + balance into S fund or variation of

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Scarfinger
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Re: Retirement Planning

Post by Scarfinger »

Scarfinger wrote: Fri May 28, 2021 3:08 pm This is so great!!. Great Points. I love that you took my simplified example and calculated it out with inflation. My initial thought is that you would have to make an average of 7% returns on your principle.

If so, I can give you some break downs of Bond to Stock ratios that would give you this return.
So to get enough returns on principle to fight inflation you will have to invest in something other than the L-Income fund which is mainly the "G" fund. You will need more equities. For example:

1970 to 2019: S&P 500 Equity Portfolio

100% Bonds = Annualized Return: 6.9%
10% Equity/90% Bonds = Annualized Return: 7.4%
20% Equity/80% Bonds = Annualized Return: 7.8%
30% Equity/70% Bonds = Annualized Return: 8.3%
40% Equity/60% Bonds = Annualized Return: 8.7%
50% Equity/50% Bonds = Annualized Return: 9.0%
60% Equity/40% Bonds = Annualized Return: 9.4%

These numbers are taken from the Paul Merriman website. Of course there is no guarantee that the next 49 year period will give the same results. Take it from there Aitrus :)
I am just an average Joe. I have no clue to what the market will do.
TimboSlice wrote: "People really need to stop overthinking this."
Paul Merriman 2 fund strat: (age - 25) x2.5 = TDF + balance into S fund or variation of

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Aitrus
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Re: Retirement Planning

Post by Aitrus »

That would go a good ways toward solving the problem.

If one can achieve a 7% average return in retirement while pulling out a static 4% of whatever is in the account at the start of the year, then the initial account balance of $450,000 will end up around $980,000 at the beginning of year 30. A 4% pull from that is $39,198.

$145,635 needed for year 30 - $38,877 pension - $47,476 full SSA - $39,198 TSP = $20,084 unpaid.

Not all the way there, but certainly better than what we had before. If we assume a cut to 75% of current SSA payouts ($47,476 drops to $35,607), then that's another $11,869 added to the unpaid amount, resulting in $31,953 unpaid. Not pretty, but more manageable than the $59k (assuming full SSA) I mentioned before.

The result might be that as time goes on and inflation eats into the somewhat-static pension value / SSA payments, that more and more will need to be taken out of TSP to make up the difference. And that's on top of the retiree being comfortable with being risky enough to earn a 7% return. Of course, if the retiree doesn't care about leaving a large sum to heirs, then there's more flexibility.

$145,635 needed - $38,877 pension - $35,607 reduced SSA = $71,151 needed from TSP from year 30 onward. If the account has $980,000 in it, then if it earns just G-Fund rates of return it'll last another 12 years or so (including inflation) before being cleaned out. That would take the retiree to age 99 and a 42-year retirement, but leave little in the account for end-of-life care or inheritance.

I bet that if we can increase the initial TSP amount we'll have better results. Let's try $650,000...

Take $650,000 initial, withdrawing 4% from the account balance annually ($26,000 in year 1), and keeping pace thereafter. Keep inflation at 3% and annual returns at 7%.

Results: At the start of year 30, the account balance will be around $1,415,000. The 4% pull for that year will be $56,619.

$145,635 needed - $38,877 pension - $35,607 reduced SSA - $56,619 TSP = $14,532 left unpaid.

I'm betting that a retiree can manage to reduce their spending by $10k a year at that late stage and pull an extra few thousand a year from TSP to fill the gap. Plus, the first year has the retiree pulling $26,000, when they only need $18,000. By pulling less in the early years they let the principle grow just a bit more - although it's not going to affect the final numbers too much. $8k is only 1.23% of the initial balance of $650k. Still, pulling less early on will help hedge the bets a bit in the later years.

So using your theoretical numbers of an $18k pension and $24k SSA, I think that such a retiree would do well to aim for $650+k in their TSP to have enough flexibility to not worry too much about inflation over the long haul.

As for achieving a 7% return in retirement, I'm thinking that a 50/50 split of bonds / S&P500 would do the trick - or close enough to it that it would be comfortably held through the market swings. If we need 7% and Paul Merriman's historical stats say that gets us 9%, then it's a nice buffer. Wouldn't want Grandpa to die of financially-induced heart attack in year 5 of our 30-year retirement plan, now would we?
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Aitrus
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Re: Retirement Planning

Post by Aitrus »

Something else I forgot to mention...the value of the pension / SSA in terms of meeting retirement needs drops the longer one is in retirement.

In year 1, the pension / full SSA equals $42,000, or 70% of the $60k needed for the year 1 lifestyle. In contrast, the year 30 pension / full SSA will equal $86,353, or just 59% of the $145,635 needed for the year 30 lifestyle.

Part of the problem we're facing is the tendency of static incomes to slowly fall further and further behind as time goes on. It's also one of the reasons why purchasing an annuity isn't a great idea - it will just fall behind as time goes on as well, even if it's purchased with a COLA increase.

To help people understand the eroding effect inflation has on pensions, I like to say that inflation acts like compound interest that's working against the value of the pension. The erosion builds on itself because it causes the cost of living to go up faster than the pension's COLA can keep pace.
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md2018
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Re: Retirement Planning

Post by md2018 »

“100% Bonds = Annualized Return: 6.9%”
This might be hard to get in the future. In the past 5 years the F funds average return is about half this. Bonds seemed to earn more in the 70’s to 90’s. So you might have to take more risk in equities which can be risky for a retiree. Each year you will have to adjust your withdrawals to not pull out more then earnings or find a way to cut back on spending.
Also how much will increased taxes cut into your net income if you are pulling out too much to throw you into a higher tax bracket?

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Scarfinger
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Re: Retirement Planning

Post by Scarfinger »

Aitrus,

Great discussion. A lot of grey clouds hanging over retirement.

Inflation, static incomes of pension and SS not keeping up with inflation and maybe throwing in increased taxes. I will throw one more catastrophic even in the mix. An economic recession with a bad 5 year stock market return in your first 5 years of retirement. Bummer!
md2018 wrote: Fri May 28, 2021 7:21 pm Also how much will increased taxes cut into your net income if you are pulling out too much to throw you into a higher tax bracket?
Taxes affect on retirement could be limited some by having ROTH investments and maybe lowering spending cost as you get older. The 80's and 90's had some really good bond returns. So repeating 6.9% on Bonds may be hard to do. But one thing guaranteed is that the "G" fund won't get you there.
Aitrus wrote: Fri May 28, 2021 4:59 pm I bet that if we can increase the initial TSP amount we'll have better results. Let's try $650,000...

Take $650,000 initial, withdrawing 4% from the account balance annually ($26,000 in year 1), and keeping pace thereafter. Keep inflation at 3% and annual returns at 7%.
My simple example had us needing $450,000 which really was at least $200,000 short when you calculated for inflation. So is there an answer lurking in here that would give us "The Number" needed for a safe retirement which calculated for inflation?

1) Maybe $18,000 divided by .03 = $600,000
2) Maybe $18,000 divided by .025 = $720,000

I am not sure if this dividing method carries through for all calculations.
Aitrus wrote: Fri May 28, 2021 4:59 pm As for achieving a 7% return in retirement, I'm thinking that a 50/50 split of bonds / S&P500 would do the trick - or close enough to it that it would be comfortably held through the market swings.
For me personally, I think 50/50 split of bonds / equities would be the maximum amount of bonds I would want. I will probably fall somewhere between 50/50 split to 30 bonds / 70 equities once I retire.

And to combat the potential stock market crash for the first 5 years of retirement, cash/bonds equal to 5 to 10 years of needed income in my Fidelity account. 10 years would be the safer bet to ride out a downturn in the market.
(5 years) The S&P 500 Index, shown in bright red, delivered its worst five-year return of -6.6% a year over the five years ending in February 2009.
(10 years) The S&P 500 Index, shown in bright red, delivered its worst ten-year return of -3% a year over the ten years ending in February 2009.
(15 years) The S&P 500 Index, shown in bright red, delivered its worst fifteen-year return of 3.7% a year over the fifteen years ending in August 2015.
Lets keep Grandpa alive :) Take Care
I am just an average Joe. I have no clue to what the market will do.
TimboSlice wrote: "People really need to stop overthinking this."
Paul Merriman 2 fund strat: (age - 25) x2.5 = TDF + balance into S fund or variation of

Chulke
Posts: 382
Joined: Thu Aug 01, 2013 10:25 am

Re: Retirement Planning

Post by Chulke »

I love the breakdowns y'all! Sure gives a person a lot to think about!!!

Not sure what I'm gonna do yet, all I know for now is, I wanna increase the money I got in TSP as much as possible!

Good luck to everyone!


Cheers!
Cheers!

Current Strat: Loosely following 152300 and 85660 more the former rather than the later
Current PIP: 24.04

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Fund Prices2022-08-12

FundPriceDayYTD
G $16.99 0.01% 1.51%
F $19.10 0.37% -8.58%
C $65.23 1.74% -9.34%
S $70.95 1.86% -14.97%
I $34.16 0.59% -13.39%
L2065 $13.19 1.35% -11.37%
L2060 $13.19 1.35% -11.37%
L2055 $13.19 1.35% -11.36%
L2050 $27.11 1.14% -9.72%
L2045 $12.43 1.07% -9.06%
L2040 $45.65 1.00% -8.33%
L2035 $12.13 0.92% -7.53%
L2030 $40.66 0.84% -6.69%
L2025 $11.70 0.58% -4.50%
Linc $23.03 0.35% -1.93%

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