I have been working on our 2020 budget and started wondering if I am making a mistake putting so much into retirement accounts at the expense of nearer term savings.
Some more details; once retired we will have about $6500/month in government backed pension/VA that receives an annual COLA adjustment. We are looking to spend about $8500/month (I know this is a lot).
My thoughts; Originally I was going to continue maxing out my Roth TSP and our Roth IRAs, however doing so would leave about $1500/month to put in the taxable account. This leaves us about $700/month short of the $8500 goal (I use a conservative 5% rate of return). If we flip-flop retirement and taxable contributions (about $3k/month in taxable) we will be just about spot on. The other consideration is that the taxable could be withdrawn from at >4% since within 10 years we will be able to tap the retirement accounts, that we I go with the original plan will be somewhere in the 800-900k range.
This is tinkering at the margins, and I don’t think it’s going to make much difference.
If your annual taxable income is $50K and you’re filing your income taxes as married filing jointly then you’re already in a low income-tax bracket. If you have kids then you’re also receiving the benefit of the Earned Income Tax Credit and paying very low taxes:
https://www.eitcoutreach.org/blog/how-much-are-the-eitc-and-ctc-worth-in-2020/ If you forecast your spending between ages 50-59.5, you might already have enough in your taxable brokerage account and from your Roth IRA contributions to support your expenses (in excess of your income). After age 59.5 you can tap your retirement accounts free of penalty and (for the Roth TSP & Roth IRAs) free of income tax.
If you invest your next decade of savings into your taxable accounts then you’ll pay more annual income taxes (on the dividends and capital gains distributions). You might also lose some tax credits, although that’ll happen anyway as you promote.
Since your assumed portfolio return is already conservative, I’d recommend continuing to maximize your contributions to your Roth TSP, your Roth IRAs, and your spouse’s 401(k) match. Then invest the rest of your savings into a taxable account, and continue to add the majority of every annual pay raise, every biennial longevity pay raise, and every promotion to your taxable accounts.
Current finances look something like; Roth TSP $90k, combined Roth IRAs $60k, wife 401k $10k...
For the last 2 years we have been fortunate enough to be in a position where we could max my TSP ($19k), both IRAs ($12k), and throw enough in the wife's 401k to get full employer match.
I have read a bit about conversion ladders but don't fully understand them and am unsure if this is something could apply to us.
Let me be more specific on the vocabulary.
Your Roth TSP account will not be subject to taxation (because you already paid taxes on your contributions) but it’s still a “designated Roth account” and subject to Required Minimum Distributions at age 70.5.
https://www.irs.gov/retirement-plans/ten-differences-between-a-roth-ira-and-a-designated-roth-account If you’re in the military’s Blended Retirement System (and contributing at least 5% of your base pay to your TSP) then you have DoD BRS agency/matching contributions in your traditional TSP. Those are tax-deferred (you’ll pay taxes someday) and also subject to RMDs.
In addition, your spouse has employer matching contributions in her traditional 401(k). You don’t specifically mention whether her 401(k) is a traditional 401(k) or a Roth 401(k), so perhaps her contributions & growth are also tax-deferred and subject to RMDs.
Roth IRA conversions make sense when you know that your future income-tax bracket will be higher. For many taxpayers (including military retirees) that happens when you’re receiving Social Security and forced to take RMDs in your 70s. To avoid RMDs (and higher taxes), each year you convert a little of your traditional TSP and traditional 401(k) into a Roth IRA. After you leave your employer (military or civilian) you roll over the traditional TSP and traditional 401(k) to a traditional IRA and do the conversion a little every year. You’ll probably start this after you reach FI (and stop working for paychecks), and the goal is to complete the conversions by the time you reach age 70.5.
In the case of me and my spouse, we spent 16 years on the conversion project. (We definitely paid lower income taxes by converting now rather than taking RMDs.) Ironically, in less than six months I’ll be age 59.5. It’s become blatantly clear that our taxable investment accounts are far more than enough. We might never touch our Roth IRAs.
If you need a higher amount of early withdrawals from your retirement accounts (beyond your taxable accounts and your Roth IRA contributions) then you’d roll over and convert that higher amount every year for five years before the first year of your need. After five tax years you’d be able to withdraw the amount of the conversion (but not its growth) free of penalties and further taxes.
Here’s the list of military options along with Roth IRA conversions:
https://the-military-guide.com/early-withdrawals-from-your-tsp-and-ira-after-the-military/You can read the technical details (with links to the tax code) at Michael Kitces’ most excellent post.
https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/ If you want to walk through the annual details with a fee-only CFP and build your own plan, then I can recommend a firm founded by two military veterans. They offer free information, and there are no commissions or upsells. You’re only paying them for their time & expert labor.
Hello. I am currently in the US Navy and planning to retire in about 10 years - I even have permission from the wife! This will put us both at just about 50 years old.
Here’s my response whenever I see this “10 year” comment.
You’re going to reach financial independence on your high savings rate. Although it’s mathematically easier to reach FI with a military pension and cheap healthcare, it’s not necessary. You have tremendous human capital and you don’t need to deplete it on active duty. The lifestyle costs of gutting it out to 20 may be more expensive than you’d care to pay.
Stay on active duty as long as you’re feeling challenged & fulfilled. When the fun stops, then consider leaving active duty for the Reserves or National Guard. You’ll still accrue retirement points for a pension that starts at age 60 (with cheap healthcare). You’ll also enjoy most of the good things about the military with much less of the sucky parts. You’ll have a better work-life balance and a higher quality of life.
https://the-military-guide.com/dont-gut-20-leave-active-duty-reserves-national-guard/
