Batsignal @Nords.
Thanks
@secondcor521!
And Sam, congratulations on your last lap before your finish line!
You’re on a great track, and now your choices are mostly tinkering at the margins.
This is a very long post (for other readers as well as for you) so let me know if you have more questions about the details below.
Notes:
- I income'd out of contributing to a Trad IRA in 2017, switching to Roth IRA
- I opened a Roth TSP this month, and will contribute only to Roth TSP 2024-2027
- I'm not contributing to the brokerage, in favor of increasing cash reserves.
Any critiques of my plan, or my intended allocations? I admin that I'm struggling to come up with a locked in plan, while also wanting a variable annual spend. The math on the giant spreadsheet indicates my plan is sane, and survivable. However, uncertainty remains. I've appreciate any input y'all are willing to spend the time giving.
I'm definitely considering roth conversions, once I get into the pipeline of getting my pension, and figuring out how much static head I have in whatever bracket I end up in.
I’m not sure what “income’d out of contributing to a Trad IRA” means.
If it means you were no longer able to take a tax deduction for the contribution, then you were still able to (and still can) make non-deductible contributions to a traditional IRA. The mix of tax-deductible (tax-deferred) and non-deductible contributions gets tracked by tax software (and the IRS) and eventually at withdrawals it all gets sorted into its appropriate income-tax brackets.
Ironically, it’s hypothetically possible that today (on active duty) you’re in the lowest (marginal) income-tax bracket you’ll ever see. Contributing to your Roth TSP (and your Roth IRA) might be the most tax-efficient move today, although you could make different choices after active duty if you start earning other income.
If you’re planning to never earn another dollar in retirement then you might have a few years after active duty (with lower taxable income) for you do do Roth IRA conversions. But if your contact network (and your curiosity about challenging & fulfilling projects or even paid employment) leads you to the typical post-military bridge career, then you might not get much of your traditional TSP & IRA converted to your Roth IRA before your Required Minimum Distribution age of 72.
If we could all figure out our income-tax brackets for every year between now, RMDs, and death then we’d all know whether to contribute to traditional or Roth accounts now. We’d also do all of the conversions in between military retirement and age 63.
The reality is that (each year before & after retiring from active duty) you’re going to make the comparison between your latest marginal income-tax bracket and your projected RMD income-tax bracket (including Social Security deposits). You’ll also look at whether those RMDs (in your 70s) will push you up into IRMAA territory.
(Civilian health insurance premiums from the Affordable Care Act exchanges also come into consideration for Roth IRA conversions because their premiums are subsidized at various income levels. Since you’re on Tricare Prime or Tricare Select after retirement-- and on Tricare For Life when you start Medicare-- then you can ignore discussions about ACA subsidies, Health Savings Accounts, and high-deductible health plans.)
The simple, easy answer on RMD taxes is that it might make sense (in 2023-2027) to keep contributing to your Roth IRA & Roth TSP. Then during retirement you can use a Roth IRA conversion calculator (each year) to decide whether you want to do a partial Roth IRA conversion (and how much). If you minimize your taxable income during military retirement then maybe you could’ve spent your final years of active duty stuffing more into your traditional accounts and doing more Roth IRA conversions in retirement, but the tax difference over the next few years is more margin-tinkering.
I admit I don't have much grounding in stock vs bond splits. I was 100% in various stocks until about a year ago, when I started moving towards more conservative splits.
My logic behind the 80/20 and the 60/40 splits was driven by the traditional advice to be aggressive inside funds that have a long timeline, and less aggressive inside funds that have a shorter timeline. I'm currently planning on letting the 80/20 traditional accounts sit un-accessed until 2050's, and the Roth accounts sit until (at least) the 2030's.
Also, we have a very, very low bond allocation because I consider the inflation-adjusted pension to serve much the same purpose as bonds. You might consider whether that will work for you, especially in the early years when SORR is a concern. (Though given how low your projected WR is, it may not matter anyway.)
When you’re on active duty, you never know when you’ll want an asset allocation that supports leaving active duty. 80/20 (or even 60/40) is great for reducing the volatility of your investments and sleeping better-- especially if you’re in the middle of a transition and still searching for a post-military bridge career.
But an inflation-adjusted military pension is the equivalent of bond income from a huge bucket of I bonds or TIPS. (This analogy is flawed because bonds have maturity dates, but the analogy is good enough for discussing asset allocations.) When you have a military pension, then mathematically you can invest the rest of your assets in equities or real estate. You never have to care about bonds again, unless you want more sleep-at-night comfort from lower volatility. Your short-term assets can be in cash, and you might only need a year or two of expenses in cash.
Your military pension’s cost-of-living adjustment also makes you relatively immune to sequence-of-returns risk. You could invest in CD ladders (perhaps two years of expenses) for your discretionary spending if it makes you feel more comfortable, but most financially-independent people are only vulnerable to SORR during the first decade after FI. By the end of that decade with the 4% Safe Withdrawal Rate your spending has risen with inflation, yet your pension has also risen with inflation. More significantly, your investments (with a high-equity asset allocation) will grow faster than inflation. At the end of that decade, your withdrawal for your 11th year of spending might be around 3.5% of your latest net worth. Your lower withdrawal rate means that even Karsten Jeske of EarlyRetirementNow would grudgingly agree that your assets will survive for 50-60 years.
Don't forget to add any non-taxable VA benefits you'll likely qualify for. Otherwise you're set for life but taxes - yeah gotta reduce those. Isn't some of your Gov pension tax free?
Do you have a sense of whether you'll have a significant VA rating. (As I understand it, that makes part of your pension non-taxed at the federal level.) And will you live in a state that taxes your pension. (IDK if CG pensions are treated the same as other services.)
Yeah, @spartana and you both brought up good points about the VA free monies. I was originally assuming I'd get around a 30% rating, for the knees and the back. I don't anticipate pushing the VA overly hard to maximize benefits, because that sounds life draining and I'm lucky enough that the extra funds are nice-to-have instead of must-have.
VA disability compensation is tax-exempt federally, state, and locally. It never even shows up on a tax form.
You’ll be surprised how high your VA disability rating could be. You’ve already paid the price for it, and now the military is just trying to lighten your tax burden. At even higher levels you’re getting more lifestyle-adjustment benefits like job retraining, hiring preferences in the civil service, lower state property taxes, and even clothing allowances.
You do not want to get competitive about having a high VA disability rating. Nobody wants to be a member of that club. However you’ve already paid the price, and VA disability compensation is an inadequate amount for that sacrifice.
Let me ease your concerns on the life-draining aspect and the nice-to-have issue.
Military healthcare is about making you fit to fight, or at least keeping you on active duty. (It’s more about the military than about us.) We’re all very good at minimizing (or even hiding) the symptoms in order to avoid adverse career impacts like losing sea pay or even getting beached. In extreme cases, if the pain can be managed then you’re back to full-duty status.
VA disability ratings are based on compensating you for your impaired ability to support yourself after the military. It’s no longer about how much pain you can endure in your knees or back, but rather when the pain starts. (And frankly, maybe it never stops hurting.) When you do the Compensation & Pension exam, and the doc is measuring your range of motion, they not only care about how big a ROM you have-- but also when the pain starts in that ROM and how severe it is.
It’s also not about nice-to-have. (The VA does not limit compensation by their available funding-- they simply tell Congress that they need more money for your higher disability rating.) You want to get this claim done now, while all the memories and details are in your mind (and in all of your official records). You want to get all of your symptoms in your baseline (your initial claim) because 10-20 years from now-- even with great cardio health and strength-- you’re gonna see some higher pain levels and even osteoarthritis. If spinal stenosis rears its ugly head you may even be facing surgery.
You minimize the life-draining part by using a Veteran Service Officer. They’re free to us (they’re paid by the VA or other funds.) Most servicemembers contact one from their local VA clinic or their local chapter of the American Legion, DAV, VFW, or even MOAA. (You don’t have to be members of these organizations-- you just check their website or call your local chapter to get a VSO’s contact info.) The VSOs are highly skilled at going through records to spot issues, and they know how to use the applicable medical vocabulary as well as document the issues.
Let me be clear: it’s not gaming the system or Tough Guy Syndrome. It’s about documenting everything now (with the VSO’s experienced help) and then using the Disability Benefits Questionnaires to communicate with doctors in their vocabulary to enable them to complete their assessments with the criteria that’s needed by some anonymous rater at the VA who actually assigns the numbers. Most of the VSOs are very good and they will support you. Most of the docs are all right, but it’s essential to use their vocabulary so that they don’t draw the wrong conclusions.
Ironically, the people who are most in need of the VA’s compensation and support... tend to be the people who are least able to navigate the bureaucracy. Use the VSO now to avoid more bureaucracy later.
More importantly, in 10-20 years when the VA documents a new presumptive condition from the things you’ve been exposed to, you’ll already have everything in your record and you won’t have to go through another round of life-draining effort to update your rating.
Anecdotally, when the word “back” or “spine” pops up along with knees, you’re possibly looking at a VA disability rating of 50% or higher.
At a rating of 40% or below your pension is offset by the VA disability compensation. (Your DFAS Form 1099-R is smaller and you pay lower income taxes.) At a rating of 50% or higher you’re eligible for Concurrent Retirement and Disability Pay. Instead of replacing a little of your taxable pension with the same amount of tax-exempt VA disability compensation, CRDP means that you’ll now get to keep your entire pension as well as the additional VA disability compensation.
I wasn't aware of IRMMA, I'll have to read up on the rules, and see if they apply to me. I'll be under TRICARE for Life, but there are still gaps in my understanding of the difference between bog standard Medicare, and military retirement TRICARE.
I wouldn’t worry about researching IRMAA until you’ve actually retired and you’re doing your comparisons on Roth IRA conversions versus RMDs. IRMAA is more tinkering at the margins.
After military retirement and before Medicare, you’re getting the world’s cheapest health insurance from Tricare Prime or Select. Your retiree ID is coded to expire at age 65 so that you’re forced to get a new ID then. At that point you show the ID-card facility your Medicare card and they update your DEERS record to Tricare For Life. Tricare’s regional manager eventually updates your status in their system.
TFL is Medicare supplemental insurance, which means that Medicare covers 80% of the bills and TFL covers the remaining 20%. TFL also includes some prescription co-pays, so you don’t need Medicare’s prescription insurance.
When you start Medicare (typically age 65), the Medicare staff uses your two-year-old income-tax returns (as early as age 63) looking for high income (or big spikes of income) from cashing out of real estate, large dividend/interest income, large capital gains distributions, or Roth IRA conversions. You might pay higher Medicare premiums for the following year, and then next year the comparison starts all over again to see if you’ll still pay the higher premium for another year.
Aside from Roth IRA conversions (minimizing RMDs) and managing your income spikes, your only other control over IRMAA is delaying your Social Security deposits until age 70.
