Author Topic: TSP plan for ER  (Read 3041 times)

MountainTown

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TSP plan for ER
« on: July 27, 2017, 09:53:21 PM »
Just curious what unique plans Fed employees have for early retirement?

Withdrawal: Mainly I am concerned about the current inflexibility of the TSP. This may make it not quite so easy to transfer money out...I believe you have to do a full withdrawal at this point. Also it would be hard to let go of the low expense fees.

-Also ...how do we separate this out from TSP roth? I used to do TSP roth so I have a substantial portion that is in TSP roth. My understanding is you can't withdraw it separately

Pension: Since the idea is to retire before retirement age....are you giving up on your pension? How do you plan for it?

I know some of this may improve with the new bill...but for now....

Also the half time early retirement would be sweet but currently it's really restrictive and not really that helpful for ER people

MommyCake

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Re: TSP plan for ER
« Reply #1 on: July 28, 2017, 07:17:55 AM »
I don't know anything about the Roth at all.  As far as withdrawals, thers will know better than me, but I think you can withdraw a portion of money once in a lifetime, aside from your regular monthly payments.  After that if you need another lump sum, you have to withdraw everything.

The pension, you don't have to give up.  You're eligible to receive a pension after 5 years of service, you just have to wait until retirement age to receive it. 

My plan is different from a lot of others on here, from what I see on the forums.  I have  VA disability and rental income which is currently (combined) exceeding my expenses.  I'm continuing to work and save, because I'm not convinced the disability will really go on for the rest of my life.  Because at the moment I'm not worried about needing a large stash for retirement, I'm only saving about 6k annually in TSP.  I figure I need to focus on saving/increasing income for the ER years, not the after 59 years.  I'm investing the bulk of my savings in rental properties, and after that will focus on taxable investments.  TSP plus pension plus social security is just buffer at this point.  If my disability gets cut, plans will change and I will have to save more in the TSP.  But if my medical conditions worsen, I'm able to stop working and be alright, as long as my expenses remain low.  I'm 36, so I feel as if I have plenty of time (hopefully) to firm up a plan in the coming years.

kendallf

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Re: TSP plan for ER
« Reply #2 on: July 28, 2017, 08:04:23 AM »
Just curious what unique plans Fed employees have for early retirement?

Withdrawal: Mainly I am concerned about the current inflexibility of the TSP. This may make it not quite so easy to transfer money out...I believe you have to do a full withdrawal at this point. Also it would be hard to let go of the low expense fees.

-Also ...how do we separate this out from TSP roth? I used to do TSP roth so I have a substantial portion that is in TSP roth. My understanding is you can't withdraw it separately

Pension: Since the idea is to retire before retirement age....are you giving up on your pension? How do you plan for it?

I know some of this may improve with the new bill...but for now....

Also the half time early retirement would be sweet but currently it's really restrictive and not really that helpful for ER people

Withdrawal options here:

https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals/withdrawals/withdrawingAccount.html

All of this is covered at that link, but in brief: you can do one partial withdrawal, and when you do the "full" withdrawal you can choose multiple options, i.e. receiving a lump sum in addition to monthly payments.  The withdrawals are proportional to your Trad/Roth amounts.  The TSP is planning changes to allow multiple withdrawals and more flexibility in line with common 401k plans; I expect we'll see something in the next year or two. 

As already mentioned, you can receive a deferred retirement pension if you meet minimum service/age requirements.  The major drawback here is that you receive no COLAs on this amount until you actually start receiving it so inflation will be eroding the value in the meantime.

https://www.opm.gov/retirement-services/fers-information/types-of-retirement/#url=Deferred-Retirement
 

DoubleDown

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Re: TSP plan for ER
« Reply #3 on: July 28, 2017, 12:07:33 PM »
I'd say a fair number of federal early retirees here intend to use their one final withdrawal from TSP to do a rollover into an IRA so that they can begin doing Roth conversions and take the money out tax-free starting 5 years later. That's assuming the TSP rules don't change to be more flexible, which is currently under consideration

In my case, I retired at 47 with 18.5 years of federal service. I'll start the deferred pension as @kendallf discussed probably when I'm 56 (minimum retirement age for me). I've left my TSP alone for now, living on regular taxable accounts until I need to start accessing 401k/IRA funds (probably around age 54). I cannot do tax-free Roth conversions because my wife is still working, so I'll likely just take the 10% penalty on early withdrawals when the time comes. That penalty won't be a big deal since our overall tax burden is likely to remain 0%, as it is now.

Another option is starting penalty-free, equal, monthly withdrawals (you can look into this option, you must start "Substantially Equal Periodic Payments (SEPP) for at least 5 years). I probably won't do this since the amount you can take out is capped and it probably wouldn't be enough to fund my lavish lifestyle :-)

Or you can purchase a TSP annuity and start it at any age, without penalty. Honestly though, I think that's generally a poor overall strategy since you lock in very low rates of return, and give up all the capital (therefore having nothing to leave to heirs).

doggyfizzle

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Re: TSP plan for ER
« Reply #4 on: July 28, 2017, 12:24:12 PM »
In my case, I retired at 47 with 18.5 years of federal service. I'll start the deferred pension as @kendallf discussed probably when I'm 56 (minimum retirement age for me).

Don't you need 20 years of Federal Service to qualify for an MRA annuity?

sol

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Re: TSP plan for ER
« Reply #5 on: July 28, 2017, 12:34:02 PM »
In my case, I retired at 47 with 18.5 years of federal service. I'll start the deferred pension as @kendallf discussed probably when I'm 56 (minimum retirement age for me).

Don't you need 20 years of Federal Service to qualify for an MRA annuity?

Not under MRA+10, you just have to take the 5% per year penalty reduction.

And I agree with the other posters.  Your pension is still valid if deferred, at COLA eroded rates that really hurt the early retiree.  Your TSP can be rolled into a traditional IRA at no cost, and from the trad IRA you can start making annual Roth rollovers in the zero percent tax bracket, to access those funds after the five year seasoning period.

doggyfizzle

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Re: TSP plan for ER
« Reply #6 on: July 28, 2017, 03:24:49 PM »
Not under MRA+10, you just have to take the 5% per year penalty reduction.
You're right!  I only understood the MRA+10 to be an immediate annuity.  Boy the 5% reduction for each year under 62 would really erodes the value of the annuity though if you start at 56.

Cherry Lane

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Re: TSP plan for ER
« Reply #7 on: July 28, 2017, 05:36:04 PM »
I will leave federal service next spring at age 43, with 20.5 years of service.  A simplified version on my withdrawal plan:

- I have non-tax-advantaged investments (in index funds, of course) that will get me through a few years.  Meanwhile, I will
- do a partial lump-sum distribution from my TSP (allowed once), and roll that into a traditional IRA. (And I'll do partial, not full, in order to keep some in the ultra-low-cost TSP funds as long as possible).  I will then
- do annual Roth conversions of my rollover IRA, as my tax situation allows.

When my regular investments run out, I will:
- start withdrawing my Roth IRA contributions, until gone.  Then
- withdraw my Roth conversions from above.  If it looks like this won't be enough to get me to age 59.5, I'll roll over the rest of the TSP as a lump sum to an IRA and repeat the above process.

I'll start collecting my pension at age 60 (my understanding is with 20+ years of service I can start at 60 instead of 62 with no age penalty).

sol

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Re: TSP plan for ER
« Reply #8 on: July 28, 2017, 06:06:20 PM »
I'll start collecting my pension at age 60 (my understanding is with 20+ years of service I can start at 60 instead of 62 with no age penalty).

I can confirm that this is correct, having recently spoken with a benefits specialist about it.

Cherry Lane

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Re: TSP plan for ER
« Reply #9 on: July 28, 2017, 06:16:13 PM »
I'll start collecting my pension at age 60 (my understanding is with 20+ years of service I can start at 60 instead of 62 with no age penalty).

I can confirm that this is correct, having recently spoken with a benefits specialist about it.

Thanks for the confirmation!  I researched it a few years ago, but intended to re-verify it applied to deferred benefits.

Monkey Uncle

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Re: TSP plan for ER
« Reply #10 on: July 29, 2017, 08:39:28 AM »
Not under MRA+10, you just have to take the 5% per year penalty reduction.
You're right!  I only understood the MRA+10 to be an immediate annuity.  Boy the 5% reduction for each year under 62 would really erodes the value of the annuity though if you start at 56.

But you get six more years of payments, and those payments reduce the amount that you have to pull from your portfolio early in retirement, when sequence of returns risk is greatest.

MountainTown

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Re: TSP plan for ER
« Reply #11 on: July 29, 2017, 10:44:34 PM »
Interesting discussion everyone. Thanks!

I am lucky in that my wife has a 457 plan. Right now that is loosely calculated into the plan. We are young and FIRE is a long way...and plus it means she would have to quit. The way I see it though if she wants to quit we get access, and if she doesn't want to quit---well then we still have her money from when she is working. Between the two of us we have about $54,000 of deferred income opportunities(not including IRA's) so right now we are just working on getting there. It's difficult because she has the lower salary.

I am struggling to get to the point where I have taxable investments though. I can't imagine, after maxing out the 66,000 in Tsp/457/403b/IRA's...we would still have money leftover for capital gains investments. Should I be focusing on those as well and lowering contributions for the 403b or something? From the MADFI research I have read, that deferred tax savings is so superior and I guess I am hoping with access to the 457 being a potential maybe that could fill the gap years.

Drifterrider

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Re: TSP plan for ER
« Reply #12 on: July 31, 2017, 11:36:15 AM »
I intend to retire in 18 months (if the rules don't change).  I'll be 56 with 35 years of service.  I will draw my pension, my supplemental until I'm 62 (then social security) and I plan to take my TSP as SEPP over a ten year period (unless the rules change and let me make withdrawals as wanted).

I would retire now but I'd forgo the supplemental until age 56 and my house isn't ready to sell anyway so I might as well stay at work.


Monkey Uncle

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Re: TSP plan for ER
« Reply #13 on: August 01, 2017, 04:32:33 AM »
I intend to retire in 18 months (if the rules don't change).  I'll be 56 with 35 years of service.  I will draw my pension, my supplemental until I'm 62 (then social security) and I plan to take my TSP as SEPP over a ten year period (unless the rules change and let me make withdrawals as wanted).

I would retire now but I'd forgo the supplemental until age 56 and my house isn't ready to sell anyway so I might as well stay at work.

You'll be over 55 when you leave, so no need to do a SEPP with your TSP:

Quote
However, if you separate from service during or after the year you reach age 55 (or the year you reach age 50 if you are a public safety employee as defined by section 72(t)(10)(B)(ii) of the Internal Revenue Code), then the 10% early withdrawal penalty tax does not apply.

https://www.tsp.gov/LifeEvents/career/enteringRetirement.html


Drifterrider

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Re: TSP plan for ER
« Reply #14 on: August 01, 2017, 11:37:52 AM »
I intend to retire in 18 months (if the rules don't change).  I'll be 56 with 35 years of service.  I will draw my pension, my supplemental until I'm 62 (then social security) and I plan to take my TSP as SEPP over a ten year period (unless the rules change and let me make withdrawals as wanted).

I would retire now but I'd forgo the supplemental until age 56 and my house isn't ready to sell anyway so I might as well stay at work.

You'll be over 55 when you leave, so no need to do a SEPP with your TSP:

Quote
However, if you separate from service during or after the year you reach age 55 (or the year you reach age 50 if you are a public safety employee as defined by section 72(t)(10)(B)(ii) of the Internal Revenue Code), then the 10% early withdrawal penalty tax does not apply.

https://www.tsp.gov/LifeEvents/career/enteringRetirement.html

True for the 10% penalty (SEPP) but as a federal employee I can take one withdrawal and one later if I don't do a SEPP.  I don't want to get hit with the tax bill which would be a higher rate based on the amount I have..  There is legislation on the hill to make the TSP more like commercial 401Ks in that you can take periodic withdrawals.  I would prefer that.  Otherwise I would have to move my funds to a commercial 401K and pay higher fees.


sol

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Re: TSP plan for ER
« Reply #15 on: August 01, 2017, 12:18:49 PM »
Otherwise I would have to move my funds to a commercial 401K and pay higher fees.

Don't you think these new TSP features will also come with higher fees?

The TSP is cheap precisely because it is such a bare bones plan.  It is heavily restricted and controlled by legislation, and offers many fewer services and less support to participants than a commercial 401k, in order to keep the costs so low. That's great for us index investors who don't need daily hand holding phone calls.

Every time the TSP adds some new twist, my first question is "how are they going to pay for that?"  The Roth expansion made sense to me, because it accelerated tax collection, but that's also the reason why it's such a bad idea for most people.

I don't see the payfor in the current proposal loosening the withdrawal restrictions.  That seems like something that will incur costs for the board, so unless they're currently operating at a profit, the TSP fees will have to go up, or at least not go down as quickly as they otherwise would have.

Fomerly known as something

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Re: TSP plan for ER
« Reply #16 on: August 01, 2017, 01:18:37 PM »
Otherwise I would have to move my funds to a commercial 401K and pay higher fees.

Don't you think these new TSP features will also come with higher fees?

The TSP is cheap precisely because it is such a bare bones plan.  It is heavily restricted and controlled by legislation, and offers many fewer services and less support to participants than a commercial 401k, in order to keep the costs so low. That's great for us index investors who don't need daily hand holding phone calls.

Every time the TSP adds some new twist, my first question is "how are they going to pay for that?"  The Roth expansion made sense to me, because it accelerated tax collection, but that's also the reason why it's such a bad idea for most people.

I don't see the payfor in the current proposal loosening the withdrawal restrictions.  That seems like something that will incur costs for the board, so unless they're currently operating at a profit, the TSP fees will have to go up, or at least not go down as quickly as they otherwise would have.

I agree with Sol, personally the one feature I'd like to see is being able to put in after tax money which they should have an idea how to do since they allow extra money to be deposited in war zones the bolts shouldn't be all that much different.

Drifterrider

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Re: TSP plan for ER
« Reply #17 on: August 02, 2017, 05:13:16 AM »
Otherwise I would have to move my funds to a commercial 401K and pay higher fees.

Don't you think these new TSP features will also come with higher fees?

The TSP is cheap precisely because it is such a bare bones plan.  It is heavily restricted and controlled by legislation, and offers many fewer services and less support to participants than a commercial 401k, in order to keep the costs so low. That's great for us index investors who don't need daily hand holding phone calls.

Every time the TSP adds some new twist, my first question is "how are they going to pay for that?"  The Roth expansion made sense to me, because it accelerated tax collection, but that's also the reason why it's such a bad idea for most people.

I don't see the payfor in the current proposal loosening the withdrawal restrictions.  That seems like something that will incur costs for the board, so unless they're currently operating at a profit, the TSP fees will have to go up, or at least not go down as quickly as they otherwise would have.

I don't know.  I'd bet if the fees do go up they are still less than those whose intent is to make a profit.  I mostly like the G fund which I don't see others offering secure funds. 

I want to be able to withdraw my money on a schedule I want in order to minimize my taxes.  Some years I might want to take more and some years less.  At present the SEPP is the alternative to rolling over or taking up to two distributions. 

DoubleDown

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Re: TSP plan for ER
« Reply #18 on: August 05, 2017, 08:43:27 PM »
Not under MRA+10, you just have to take the 5% per year penalty reduction.
You're right!  I only understood the MRA+10 to be an immediate annuity.  Boy the 5% reduction for each year under 62 would really erodes the value of the annuity though if you start at 56.

But you get six more years of payments, and those payments reduce the amount that you have to pull from your portfolio early in retirement, when sequence of returns risk is greatest.

Exactly. @doggyfizzle, the "break even" point is 14 years after starting payments (age 76). That is, the amount you collect over those six years starting at age 56 would take 14 additional years at the higher payment (starting at age 62) to break even. Using a simple example, if you could collect $10k/year at age 62, but instead you take $7k/year at age 56, then in those six years you'd collect $42k. To make up that $42k starting at age 62 takes 14 years ($3k/year additional amount over 14 years equals $42k). I'd also like to add:

1. From a statistical/actuarial standpoint, there's no difference (unless one has special magical powers that lets them know exactly when they'll die; in which case you can choose the perfect time to start pension payments to maximize the benefit). It is designed to break even from an actuarial stanspoint no matter when you start payments.

2. Taking the pension earlier can allow one to draw Social Security later. In my case, Social Security will be a much higher payment than my pension, so deferring that one makes a larger difference. And, it offsets the decision on drawing the pension earlier (if you die earlier than your actuarial life expectancy, you made a bad choice on SS but a good choice on pension; and vice versa if you die later than your actuarial life expectancy). Taking one early and one later ensures you'll be "right" on one choice and "wrong" on the other, thereby offsetting each other.

Beach_Stache

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Re: TSP plan for ER
« Reply #19 on: August 06, 2017, 07:03:55 AM »
At what age are you planning on retiring and how many years from today is that?  I think that's the big question and then during those early retirement years, what funds are you going to be tapping?  If you defer your pension and your wife doesn't start collecting a pension then during those years are you going to be tapping your TSP (Roth TSP or regular TSP)?  Or will you be using your post-tax investments or savings?  I believe you can roll your Roth TSP into a Roth IRA, right?  I also believe that the Roth TSP is subject to RMD's so rolling into a Roth IRA is probably preferable.  During those gap years where you are not collecting a pension, I would at least move some of your TSP (non-Roth) into an IRA in Vanguard/Fidelity and slowly start converting it to your Roth IRA so you are paying taxes at the lowest income level (when you are not collecting pensions) if you are both retired.  If you convert from your taxable TSP (first rolled into a regular IRA and then into a Roth IRA) to Roth IRA during those years that you have no other income then you'll be taxed much lower than when you are working or when you are collecting your pension.

I put everything into my TSP right now, maxing it out each year since I started in the gov't, then I do a Roth IRA separately, my wife also maxes out her 401k and we plan to start maxing out her Roth IRA now until at least a decade from now.  I still have at least 13 more years in the gov't (hopefully) at which point I'll be 50 and have 22 years worth of service.  At that point if I decide to retire and take deferred pension then (if my wife were retired as well) we'd have 10-20 years where I could take a lot of money from my TSP and her 401k, roll it into an IRA and then slowly convert a chuck each year at the lower tax rate to a Roth IRA.  Once I start collecting a pension at 57 or 58 or whenever it is, that's taxable income so would be a bit less I could convert each year.  So really focus on the years you'll be earning the least amount and that's when you should convert from taxable to Roth IRA.

I think the TSP rules will change eventually where you can take multiple withdrawls, maybe not w/this bill but eventually.  The TSP is great in terms of it's low fees but it is basically a legacy fund that is so low b/c it has limited options, it's very basic and that will change as time goes on, especially when more and more FERS employees will retire which is starting to happen and will snowball over the next decade, so the laws will change.  With that change though and the military pension changing (and probably Civilians as well) more and more money will be flooding into the TSP, which means changes will happen but it also means with those changes that the fees will get higher.  My Roth IRA and post-tax investments are in Fidelity, in low cost S&P and Total Market funds which I think are like 0.045%, so VERY low.  Not as low as TSP but almost, so you have options that compare to the TSP and their fees.

I enjoy my job now, and don't see myself retiring until I'm 58 (at which point I'll have 30 years in), but things change, you have new managers and that can sour your job, but even if I retire as early as 50, I'll have at least a decade or two where I won't want to tap my Roth IRA or TSP and will try to live off of my post-tax investments, and during those  years I will at least take a big chunk of my TSP/401k and slowly convert it to Roth IRA money so I'm paying less in taxes. 

I imagine a lot of the MMMers who are in the TSP program and who will retire early will be in the same boat.  If they've been maxing out TSP for decades then they'll eventually have the problem where they may have so much money that their retirement tax rate is higher than their tax rate during the working years.  A nice problem to have and people will really have to plan strategically for when they will take retirement money out or convert it so they are paying the lowest possible tax rates.