Best way to maximize TSP income in retirement?

[tsptiger]

So I've been with the Government for 30 plus years and am planning to retire in 2025. A chunk of my retirement income will come from my tsp which i'm looking to withdrawal 4% per year. I have no IRAs as of yet.

What are the current recommendations to manage TSP $ when you retire? I am planning to withdraw at 57.
Should I shift some or all of my funds into a private retirement account like fidelity?

I am also just finding out that withdrawals come from your account in proportion to where you are invested. In other words, you cannot just withdraw funds from say the G fund if say the market is down.

Anyway what is a tried and true method to secure at least 4% a year? Thanks

[jimmyk]

Hey TSPtiger. Congrats on the upcoming retirement. Nice accomplishment. I am getting close also and have given this some thought and working on a strategy but don't have it fully thought out. Right now, I am thinking of making sure I have a bank account with a year's worth of living expenses in it when the time comes. First for working through the retirement process as they get the pension numbers figured out. I have seen buddies retire and take a while to get it straight. Second, it would be a way not to draw down your investments by selling shares especially in a down market. Live off the bank account and let the market do its work over a bit longer time and hopefully, market would recover by the time you need to tap into it. An important thing I realized is that once you retire you still need to make your money work for you as you will still have a lot of investing years left. Second, with the constraints on TSP and upcoming changes I think it will ultimately push overall fees up. Right now some mutual fund companies are already competitive with TSP. I am thinking more control over my investments is better and will probably pull out the majority of tsp money. My plan right now is to roll it into an IRA and invest in solid companies with good balance sheets that pays a growing dividend (it could be dividend pay mutual funds also, etc). A well built dividend growth portfolio could reasonably give a 3.5-5% annual dividend without too much work. You could go higher with the dividend yield but there are trade offs like perhaps increasing risk (balance sheet issues) and lower stock appreciation growth. That is something that needs to be tailored to your personal situation. You can go high dividend yield and no stock appreciation if you are only looking for income (for example MO has a 6-7% dividend yield pays a growing dividend for many years). I have been building a portfolio like this (wish I started it years ago) the last couple of years and right now have a dividend yield of 4% in companies I believe are solid (so far they have held up well in this market and up about 7% year-to-date in stock appreciation better than sitting in G as I have this year with my TSP). To make this work in retirement you obviously need a pretty big bucket of money for the investment to get the passive income you might need. If you had $1 million a 4% dividend is $40K/yr in passive income that you collect without selling shares of your initial investment. The stock price could go up or down but the 4% is rolling in. You obviously need to manage this portfolio a bit more carefully and prune dividend cutters and businesses that get into serious trouble.

I highly recommend reading David Bahnsen's book, "The case for dividend growth". It really is a good book and made me a convert in the way I look and buy companies. I am sure there are many that would disagree with this approach. It is not sexy for sure but I am a bit tired of watching tech stocks I have go up a large amount and then not selling as they go back down. It is hard for me to know when to capture the gain. Dividends are hard cash in your bank account.

I too would like to hear comments on approaches to this and issues with what I have suggested.

[Scarfinger]

I plan on a Bucket strategy at retirement.

1: moving all my Roth TSP to Fidelity with equities Small Cap Value, Large Cap Value, International Small cap Value and International large cap Value and probably a REIT fund

2: Keeping 10 years of needed income in the "G" fund, all traditional TSP

3: Move the remaining TSP traditional to fidelity so that the proportional withdrawals are only "G" fund.

4: If I can, then replenish the "G" Fund from my Fidelity account. **Some people have suggested this type of bucket strategy using the "G" fund as your safe money.

I am not sure if you can move money to the TSP after retirement. I need to find out if #4 is possible after retirement.

[wingchaser]

I plan on a Bucket strategy at retirement.

1: moving all my Roth TSP to Fidelity with equities Small Cap Value, Large Cap Value, International Small cap Value and International large cap Value and probably a REIT fund

2: Keeping 10 years of needed income in the "G" fund, all traditional TSP

3: Move the remaining TSP traditional to fidelity so that the proportional withdrawals are only "G" fund.

4: If I can, then replenish the "G" Fund from my Fidelity account. **Some people have suggested this type of bucket strategy using the "G" fund as your safe money.

I am not sure if you can move money to the TSP after retirement. I need to find out if #4 is possible after retirement.

Here you go, Scar’…

https://www.fedweek.com/tsp/rollover-in ... n-ira/amp/

Best of Luck (everyone) in all you choose to endeavor!!!

[Scarfinger]

I plan on a Bucket strategy at retirement.

1: moving all my Roth TSP to Fidelity with equities Small Cap Value, Large Cap Value, International Small cap Value and International large cap Value and probably a REIT fund

2: Keeping 10 years of needed income in the "G" fund, all traditional TSP

3: Move the remaining TSP traditional to fidelity so that the proportional withdrawals are only "G" fund.

4: If I can, then replenish the "G" Fund from my Fidelity account. **Some people have suggested this type of bucket strategy using the "G" fund as your safe money.

I am not sure if you can move money to the TSP after retirement. I need to find out if #4 is possible after retirement.

Here you go, Scar’…

https://www.fedweek.com/tsp/rollover-in ... n-ira/amp/

Best of Luck (everyone) in all you choose to endeavor!!!

Thanks wingchaser.

So the above bucket strategy would be viable with you replenishing the "G" fund from a traditional IRA, which you could open with a "direct rollover" from your TSP.

The only caveat that breaks this bucket strategy of using the "G" fund would be if you only had Roth money. It looks like the only Roth money that can go back to the TSP would have to be a Roth 401K plan from another employer. Once TSP Roth money is removed to a Roth IRA, it can't go back to the TSP.

Even if you had 100% Roth TSP, you could still leave 7 to 10 years in the "G" fund and move the rest to a Roth IRA so it wont be subject to RMD's at age 72. You just wont be able to replenish "G". A one trick pony.

So, you do have options either way.

[Scarfinger]

Here is another thread that talks about the bucket strategy

http://tspcenter.com/forums/viewtopic.p ... fa19873986

Bubba brought my attention to the bucket strategy:

Federal retirees can augment their TSP account with an outside IRA and use the bucket system. One bucket for INCOME (TSP G-fund), and the other bucket for GROWTH (IRA).


So why would you do that? Well, a shortcoming of the TSP is the inability to withdraw from only the G-fund. Your withdrawals will come out of your TSP account proportionately to where your funds are allocated. And does anyone believe it would have been a good idea to withdraw from their TSP account allocated in equities (C, S & I) right after COVID hit in 2020? Of course not. But many people depend on regular, monthly TSP withdrawals for income and cannot wait for their accounts to recover. That’s why you see so many questions about moving to the G-fund close to or after retirement. Many others recommend a split between stocks/bonds/G-fund. But that still doesn’t solve the shortcoming mentioned above.


NOTE: (Modify the $ and % amounts below to fit your own situation.)


Now consider this. Let’s say when you retire you have about $900,000 in your Traditional TSP account. You also have an outside Traditional IRA account. You could roll over about $700,000 of that TSP amount into your IRA and still have $200,000 in your TSP account which you would keep in the ultra-safe G-Fund. That $200,000 in your TSP G-fund is now your INCOME bucket. Now you can set up regular monthly withdrawals of about $3,000 from TSP and it will last you for about 5 years. During those same 5 years, you invest the $700,000 in your IRA into something like the *Vanguard Growth Index Fund Admiral Shares (VIGAX). This is your GROWTH bucket. If you use a conservative growth rate of only 7%, that bucket grows to $900,000 in 5 years. The actual growth of VIGAX over the last 5 years is over 19%. You can do the math on that rate if you want.


The TSP has a little-known rule that can be your friend in retirement years. As long as a TSP account has $200 or more in the account, you may transfer money back into the TSP.


So after 5 years of withdrawals from your TSP G-fund, you can roll another $200,000 from your IRA back into your TSP account G-fund for 5 more years of income.


By the way, *fees the Vanguard Growth Index Fund Admiral Shares (VIGAX) referenced above are $5 for every $10,000 invested. That’s no higher than TSP funds expenses. And there are many more funds out there with similar expense ratios and returns.


Additionally, if you also have a Roth IRA, you then have the ability to convert portions of your Traditional IRA to your Roth IRA. That’s something you cannot do in the TSP. Just don’t convert any more than you can pay in taxes in any one year. Again, your IRAs constitute your GROWTH component, so it’s important NOT to react to short-term market fluctuations. Resist the urge to buy and sell. Another great thing about a Roth IRA is there are no RMDs…..ever! And, there is no income tax on Roth IRA funds inherited by your beneficiaries.


Just keep in mind that you have to be at least 59½ years old to make penalty-free withdrawals from a Traditional IRA. However, you can withdraw your Roth IRA contributions at any age for any reason, penalty-free.


https://www.tsp.gov/account-basics/move-money-into-tsp/


Also.....IRAs and TSP accounts generally become subject to IRS Required Minimum Distributions (RMD) at age 70½ and beyond. A great way to hedge against the subsequent tax hit as well as significantly improving your long-term tax planning strategy is to convert a portion of your traditional IRA into a Roth IRA before age 70½. You CAN’T convert your traditional TSP money to Roth within your TSP account.

Keep in mind that traditional IRA funds converted to a Roth IRA are taxed as income within that tax year, so you need to calculate the amount of tax you will owe. Keeping the conversion to 10% or less of the total balance is a good rule of thumb. If you invest the Roth IRA in the same fund in which the traditional IRA was invested, brokerage firms typically do not charge a fee for the conversion. Also, note that Roth balances provide tax-free growth when held for 5 years or more, although you should anticipate that your Roth balances will be invested and growing for many more years beyond 5. Roth IRA balances are exempt from IRS RMD. (BUT ROTH TSP IS NOT!). In addition, Roth IRAs are not taxed as income to beneficiaries so they become extremely useful tools in estate planning.

[jimmyk]

Scar-
Thanks for posting these past threads and sharing your plan. Your info is helpful in thinking through different withdrawal approaches and tax considerations. I came across an interesting post outlining several strategies such as living off dividends and bucket strategy in terms of sequence risk.

https://movement.capital/one-portfolio- ... -them-all/

The closer to retirement I get it seems like saving is the easy part.

[Scarfinger]

Scar-
Thanks for posting these past threads and sharing your plan. Your info is helpful in thinking through different withdrawal approaches and tax considerations. I came across an interesting post outlining several strategies such as living off dividends and bucket strategy in terms of sequence risk.

https://movement.capital/one-portfolio- ... -them-all/

The closer to retirement I get it seems like saving is the easy part.

Yes this is a great article. Thanks Jimmy. The biggest risk to retirees is a bad market the first 5 years that they retire. You need a withdrawal strategy which deals with sequential risk. Paul Merriman talks about a flexible withdrawal strategy and over-saving for retirement to avoid the downfalls of sequential risk in the distribution phase of retirement.

The two that I like are:
1. A small cash reserve 1 or 2 years and then bonds so that you can rebalance one or twice a year.
2. "Trend Following" which basically means a balanced approach using different asset classes.

Large blend, Large Value, Small blend, Small value and REIT, including International equities as proportions of your portfolio in the same asset classes to help balance out the portfolio. Paul Merriman and Larry Swedroe are big proponents of this asset class diversification.

But even with the perfect plan, a bad first 5 or 10 years throws a kink in it and in the end the only way to adjust for that is to OVER save vs just saving enough and reduce spending if possible.

Summary
The sequence of your portfolio returns is just as important as the level of those returns.

Dynamic withdrawal strategies are most useful for retirees with a lot of discretionary spending.
A cash reserve, when taken from bonds, doesn’t financially hurt and can emotionally help.
Trend following reduces the chance of a deeply negative return sequence.

What Is Trend Following?
Trend following is a diversified alternative strategy investing across multiple liquid asset classes.
Trend Following’s Role Within a Target-Date Fund (TDF):
• Tendency to offer downside protection during prolonged equity market drawdowns.
• Diversifies return sources and may enhance long-term risk-adjusted returns.

Thanks for the article JimmK

[Scarfinger]

I too would like to hear comments on approaches to this and issues with what I have suggested.

I can't say that I am total for a 100% dividend portfolio. How many portfolio managers and retirement professionals are pushing a 100% dividend portfolio? But again, you would have a FERS pension and SS so maybe you wouldn't need as much to get the return you required.

I just don't know enough about a Dividend portfolio. Pros and Cons. I have watched several videos on it and some youtubers maintaining their dividend portfolio and to me... it looked like to much work.

I usually error on the side of moderation. I could see having a portion of my portfolio as dividends but not the whole thing. For me if I had dividends it would probably be in a mutual fund and probably 10% to 15% to help smooth the portfolio out in down years.

Only time will tell. I wish you the best.

[evilanne]

There is an advantage to Dividend paying stocks in a Retirement account with RMDs. Rather than reinvesting everything, you can withdraw the cash from the dividends to cover your RMD instead of having to liquidate any assets.

[jimmyk]

Hey all-
Been thinking about retirement and this thread again. budgets and safe withdrawal rates once retired. Came across this blog site that has an interesting spreadsheet that is free to download. You can enter your savings balance, portfolio make up (stocks, bonds, etc.) retirement horizon, and how much money you want left when you pass (0-100% of initial investment). On another tab you can enter pension, SS, and other income and expenditures and when they kick in. It then gives you a safe spending rate based on the assumptions and an annual dollar amount. This could be very useful for plannning and budgeting.

Spreadsheet: https://earlyretirementnow.com/2018/08/ ... s-part-28/
and 50 part blog series

You tube quick start on the spreadsheet: https://youtu.be/CClhsaBbTm0

Let me know what you think.