G Fund For Retired Feds

[DoubleDown]

As an early retired federal employee, I'm becoming more and more interested in the G Fund within the TSP as a way to support a very long, risk-free retirement. The G Fund is interesting to me because while it does not provide a high return relative to stocks/etc., it provides a 100% risk free (short of the U.S. Government going out of business, which I am not interested in discussing or debating) and non-volatile return that has consistently outpaced inflation since its inception in 1987. The rate of return is set to keep pace with medium-term U.S. treasury bonds, and can never be negative. These are the historical returns per the TSP web site:

1-Year = 2.31%
3-Year = 1.89%
5-Year = 2.18%
10-Year = 3.19%
Since 1987 = 5.43%

It seems that the G Fund generally outpaces inflation by about 2% over the long run. Therefore, assuming a 2% real return, you could construct the following rock solid withdrawal rates, drawing your account down to Zero, with no volatility along the way and no risk of ever losing principal (other than the principal you withdraw).

30 Year Withdrawal to Zero: 4.5%
35 Year Withdrawal to Zero: 4%
40 Year Withdrawal to Zero: 3.7%

Some might say, "Big Deal" about the above withdrawal rates and compare them to the standard 3-4% SWR. But the "big deal" about this (to me, at least) is that you can get a 3.7 - 4.5% SWR with zero exposure to market ups and downs, zero chance of running out of money no matter what future market conditions might prevail, and zero risk of inflation eroding your purchasing power (because the G fund should always stay ahead of inflation by about 2%, by definition). The only risk is outliving your forecast withdrawal period (for example, if you greatly outlive your life expectancy in the examples above). If you live under the life expectancy, you leave an inheritance to your heirs (unlike the basic TSP annuities).

I think I'm going to follow the TSP Lifecycle "Income" fund very closely, which is 80% G Fund and the other 20% divided between bonds and stocks (F, C, S, and I funds). Even though that Income Fund is geared towards people closer to traditional retirement age, I see no reason not to take advantage of the kick-ass G Fund as an early retiree. Why take higher risks with a bunch of exposure to stocks when you can guarantee outpacing inflation and never lose principal along the way?

In my case, I'll start withdrawing around age 54 (living off other non-TSP assets in the meantime) and target a 35-year withdrawal. On the unlikely chance I live past age 89, I'll have plenty of income available from the pension and Soc. Sec.

Thoughts? And is this the same as other Treasury Funds that anyone can purchase, or is the G Fund "special"?

[forummm]

Interesting idea. I'm not sure how different it is from any other treasury bond fund. I guess the difference is that the treasury bond funds outside the TSP (like Vanguard's) can have price shifts up and down. But if you are a long-term holder and are spending the dividends, I don't think you really care that much about price shifts. I guess the volatility could cause you to sell low if you are selling shares too.

You can still be pretty conservative with the F fund (or any other large, blended bond fund). The F fund in particular has out-returned the G fund by 1-1.5% over decades. That's quite a bit of extra money--like a 20-30% retirement raise for you. Still pretty safe.

[Drifterrider]

"In my case, I'll start withdrawing around age 54"

How can you start drawing on your TSP at 54 without a penalty?  I'm 4 years away from federal retirement (not early). 

[rothnroll]

"In my case, I'll start withdrawing around age 54"

How can you start drawing on your TSP at 54 without a penalty?  I'm 4 years away from federal retirement (not early).

If you are Active duty retiring when you are 54 1/2 or Law Enforcement.

[DoubleDown]

"In my case, I'll start withdrawing around age 54"

How can you start drawing on your TSP at 54 without a penalty?  I'm 4 years away from federal retirement (not early).

There are a few options for rank-and-file federal workers that follow the tax laws surrounding 401ks and IRAs:

- You can take fixed monthly payments based on your age and life expectancy, similar to Substantially Equal Periodic Payments (SEPPs) for IRAs, and those payments are exempt from penalties (but monthly withdrawals not tied to life expectancy are not exempt from penalties).

- You can start a TSP annuity at any age and your payments will be penalty-free.

- You can transfer part or all of your TSP to an IRA and do Roth conversions that you hold for a minimum of 5 years, then withdraw contributions tax- and penalty-free. But this strategy would eliminate the advantages of having your money in TSP, including access to the G Fund and the low fees. So, for example, if someone retired at 40 and started Roth conversions at that age, they could start accessing the funds penalty-free at age 45.

- If you retire or resign from federal service at age 55 or later you can also withdraw any amount tax free.

- Finally, you can withdraw the funds directly without restrictions, and incur the 10% "penalty." That very well may be the strategy I will take for the 5 years between 54 and 59, if the SEPP amounts are not high enough. Paying 10% is not too bad overall as a tax rate, and is certainly better than getting taxed at 25%+ while working. I resigned at age 47, and have enough taxable and Roth IRA funds to cover me until I'm around 54 or 55. So, my TSP can continue to grow tax-free in those intervening years, and paying 10% on the amounts I need to withdraw won't be bad at all (I'll start my pension at MRA age 56.3, so that will also offset the amount I need to take out of TSP).

[Drifterrider]

"I'll start my pension at MRA age 56.3, so that will also offset the amount I need to take out of TSP)."

You mentioned you resigned.  How are you able to draw at 56.3 (I assume you are under FERS) if you resigned?  OR are you LEO or other "special" category?

My MRA is 56 (FERS).  I found out last year that I can "buy back" the temporary time I had before I got a permanent job (almost 4 years of temp time) but this is only for temp time before January 1989.  I have no intention of retiring early (I found out early in life that I'm either making money or spending it but not both at the same time) because I like my job and am well compensated but I do save like the next depression is on the way.  I learned the "secret" of compound interest at age 7.  Anyone remember "Pass book savings accounts"?

[DoubleDown]

"I'll start my pension at MRA age 56.3, so that will also offset the amount I need to take out of TSP)."

You mentioned you resigned.  How are you able to draw at 56.3 (I assume you are under FERS) if you resigned?  OR are you LEO or other "special" category?

My MRA is 56 (FERS).  I found out last year that I can "buy back" the temporary time I had before I got a permanent job (almost 4 years of temp time) but this is only for temp time before January 1989.  I have no intention of retiring early (I found out early in life that I'm either making money or spending it but not both at the same time) because I like my job and am well compensated but I do save like the next depression is on the way.  I learned the "secret" of compound interest at age 7.  Anyone remember "Pass book savings accounts"?

You can resign prior to your MRA and then defer your annuity until you reach MRA, which is what I'm doing. It's the same as if you retired at your MRA. The only downside is that since your pension is calculated on your actual high-3 salary, and those intervening years can have inflation eroding the purchasing power of that high-3 salary (i.e., it isn't going up in those years like it would if you were still employed). And, of course, another significant downside is giving up all the other benefits you get if you formally retire at MRA, like health coverage for life, Social Security supplement, FERS life insurance and disability benefits, etc. The upside is you don't have to work!

[Wolf359]

Related to this topic -- the current Republican budget proposal cuts the return on the G fund.

Obviously, it's just a proposal at this point.  But the Republicans do control both sides of Congress at the moment, so it might make it into the version that goes to the President.  It's something to keep an eye on.

http://www.washingtonpost.com/blogs/federal-eye/wp/2015/03/24/federal-worker-groups-slam-grossly-unfair-and-misguided-gop-budget/

[RFAAOATB]

he only risk is outliving your forecast withdrawal period (for example, if you greatly outlive your life expectancy in the examples above). If you live under the life expectancy, you leave an inheritance to your heirs (unlike the basic TSP annuities).

Thoughts? And is this the same as other Treasury Funds that anyone can purchase, or is the G Fund "special"?

My thoughts are, this plan isn't for me.  I have my TSP 100% in the S fund, and am looking forward to amassing a fortune that can sustain me and my progeny forever, which is a lot longer than 30-40 years.  A lot of other posters on this board don't put as much importance of ensuring your legacy through inheritance as I do, and considering you mention it as a happy bonus on your premature demise, perhaps you are the same.  Missing out on gains to avoid the losses is also going to make you kick yourself during the bulls a lot more than smiling at your foresight during the bears.

[DoubleDown]

Related to this topic -- the current Republican budget proposal cuts the return on the G fund.

Obviously, it's just a proposal at this point.  But the Republicans do control both sides of Congress at the moment, so it might make it into the version that goes to the President.  It's something to keep an eye on.

http://www.washingtonpost.com/blogs/federal-eye/wp/2015/03/24/federal-worker-groups-slam-grossly-unfair-and-misguided-gop-budget/

Thanks for mentioning this. Funny, I read the exact same article the day after my OP and thought, "It figures." It did answer one of my questions, though: Obviously the G Fund is special and the Republicans would like to "fix" that for us. If it doesn't get axed, it cements my decision to rely heavily on the G Fund as a guaranteed way to make retirement funds last forever with no volatility.

[CheapskateWife]

Goodness, to me, these changes just seem like they are eroding away all those things that make working for the Federal Government tolerable.  Keep it up congress and FIRE is just looking more and more attractive.

[DoubleDown]

he only risk is outliving your forecast withdrawal period (for example, if you greatly outlive your life expectancy in the examples above). If you live under the life expectancy, you leave an inheritance to your heirs (unlike the basic TSP annuities).

Thoughts? And is this the same as other Treasury Funds that anyone can purchase, or is the G Fund "special"?

I have my TSP 100% in the S fund

That is certainly an aggressive allocation, to say the least*! Are you already retired, or still in the accumulation phase? There is no way I can stomach that kind of aggressive allocation as a retiree.

* For the non-Feds out there, the "S" Fund stands for Small Cap fund.

[RFAAOATB]

he only risk is outliving your forecast withdrawal period (for example, if you greatly outlive your life expectancy in the examples above). If you live under the life expectancy, you leave an inheritance to your heirs (unlike the basic TSP annuities).

Thoughts? And is this the same as other Treasury Funds that anyone can purchase, or is the G Fund "special"?

I have my TSP 100% in the S fund

That is certainly an aggressive allocation, to say the least*! Are you already retired, or still in the accumulation phase? There is no way I can stomach that kind of aggressive allocation as a retiree.

* For the non-Feds out there, the "S" Fund stands for Small Cap fund.

Still in the accumulation phase.  between all my retirement accounts I am 5-10% of where I want to be and see a long time from now until I get there.  I think I might add some C and I funds when I increase my contributions in the coming years, as right now I am only contributing 10% of my drill pay to TSP.

[sol]

Yes, the G Fund is special.  As we've previously discussed here, it's special in a way that isn't very useful to the aspiring early-retiree.

Punching out after 15 years of working is much harder if your money has been making 2% for those 15 years.  Part of the attraction of the typical early retiree's aggressive asset allocation is that if things do go really poorly in the markets, you still have that job income to right the ship. 

And most people who have access to the G fund already have enormous investments in the G fund, through their pension and social security account.  Both of those are effectively invested in the G fund already, which explains why they are such terrible tools for wealth building. 

If two of the three legs of your retirement stool are already tied up in the G fund, I'd be willing to take on a little more risk with the third leg.

[DoubleDown]

To be clear, I completely agree about being far more heavily allocated in stocks during the accumulation phase. My OP was intended to talk about going heavy into the G Fund after retirement (sorry if I didn't make that clear earlier). My post was nothing revolutionary -- it's the traditional "quit playing once you've won the race" retirement plan where you switch from growth assets like stocks, to income assets like bonds/securities once you retire. What was revealing to me is that the G Fund is an absolute no-lose proposition (unlike bonds, which can go down) that still outpaces inflation by a small but decent amount. You can craft a reliable and known draw-down strategy that gives you a very stable income for life.

Given that information, I see little point in playing the lottery, so to speak, by staying more heavily allocated in C/S/I funds once you're retired. Once you've got "enough" getting "more" through more aggressive allocation doesn't provide anything except maybe leaving you with a larger pile of cash to pass on to heirs. And, of course, with a more aggressive allocation there's at least some risk you can lose a significant amount of money, leaving one of the three legs of your retirement stool too short.

[forummm]

To be clear, I completely agree about being far more heavily allocated in stocks during the accumulation phase. My OP was intended to talk about going heavy into the G Fund after retirement (sorry if I didn't make that clear earlier). My post was nothing revolutionary -- it's the traditional "quit playing once you've won the race" retirement plan where you switch from growth assets like stocks, to income assets like bonds/securities once you retire. What was revealing to me is that the G Fund is an absolute no-lose proposition (unlike bonds, which can go down) that still outpaces inflation by a small but decent amount. You can craft a reliable and known draw-down strategy that gives you a very stable income for life.

Given that information, I see little point in playing the lottery, so to speak, by staying more heavily allocated in C/S/I funds once you're retired. Once you've got "enough" getting "more" through more aggressive allocation doesn't provide anything except maybe leaving you with a larger pile of cash to pass on to heirs. And, of course, with a more aggressive allocation there's at least some risk you can lose a significant amount of money, leaving one of the three legs of your retirement stool too short.

Yeah, since you essentially are oversaving by quite a bit, you can be pretty conservative in your allocation. You would have 3 stable, government guaranteed sources of income. And government health insurance.