Near retirement

This topic contains 15 replies, has 2 voices, and was last updated by  TS Paul 5 years, 2 months ago.

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    What is your thought regarding someone who is near retirement? When do you begin to protect funds and how much? Would you continue to follow the same strategy (e.g. 100% S)?


    TS Paul

    Hi Mike

    This is another one of those areas where I diverge from the generic view of things and believe that, with some very rare exceptions, allocations should not change based on age. You don’t stop earning when you retire unless you handicap yourself. My allocation is the same as my retired mother’s, and the same as it would be if I had just started working for the government. This is because I believe that at any given time, there is one fund which is the right fund to be in and all of the others are going to do relatively poorly in comparison.

    My allocation almost certainly won’t change when I near retirement because my goals for my money won’t change. When I retire at 60, let’s say, I will figure that I still have another 30 years or so left and that I am going to want for my money to keep growing as much as possible for all of that time. Why would I switch to something “safe” like the G Fund which is going to just barely keep up with inflation as I start approaching retirement when my earnings horizon goes out for decades to come? Imagine the difference between the 1.5% I could get for the G Fund right now, compared to the 25%+ which I can get for the S Fund. Then compound that for 20 or 30 years.

    That said, the market is occasionally going to have a “correction” or “flash crash” or 10% or greater decline for reasons unrelated to the economic cycle. You can’t predict those. For that reason, if I am planning to take a large withdrawal from my TSP upon retirement to pay off a property, start a business, or travel the world – it would make sense to me to protect that portion of funds which I am counting on using from a significant decline for a year or two prior to withdrawing it. But the rest of my balance will remain invested in whichever fund is indicated by the phase of the economic cycle we are in.

    Best, TS

    The TSP Allocation Guide


    Tim Jacobson

    Thanks so much for the information contained on your site. I would be interested in your thoughts about diversification when getting close to retirement. I’m now 55 and will be mandatory in two years. I don’t think I will be touching my TSP for at least three years after I retire. Despite being 100% S now, would you start to scale back to some G or continue 100% in Stocks? I’ve also read about the “3-bucket” approach where you would have 2-3 years living expenses in something like the G-fund, and then the other 2-buckets would be an “equity” and “income” fund, respectively.
    Thanks for any insight, Tim


    TS Paul

    Someone who plans to be using a portion of the money from their TSP in the foreseeable future (or 401(k) or IRA or wherever they are keeping it) wants to make sure there isn’t going to be a major downturn and the money they are counting on will be there when they need it. So when I think about how far out I would feel I needed to protect that portion of my funds, I base that decision on how long it takes to get back to break-even from a downturn, correction or even a bear market.

    Typically when we see a downturn of 5-10% like the most recent one, the market is back to break-even within two months.

    Even when we see a major “crash” of 30% or more, the market has returned to break-even on average within 14 months.

    So as I plan for that approach to retirement, I will only consider “protecting” funds which I anticipate using in the next 18 months. Because I anticipate withdrawing from my TSP in small amounts over a very long period, I will likely not put anything into a safe fund as I approach that date unless it is indicated by where we are in the economic cycle.

    As I discussed above, if I plan to take out a large disbursement upon retirement I would certainly consider putting at least a portion of that into the TSP G Fund 18 months before I intended to pull it out.

    With respect to the notion of having several years of living expenses sitting in the TSP G Fund, I can’t think of a scenario where that would make any sense for me. My living expenses will easily be covered by FERS and Social Security, so that money would be in whichever fund is indicated by where we are in the business cycle.

    As for having equity and income buckets, my belief is that at any given phase of the business cycle, there will typically only be one fund indicated (ignoring the TSP I Fund for this purpose). So if the G or F Fund is supposed to be the “income” bucket, I don’t see myself doing that.

    When I think of income buckets, I tend to think of a basket of dividend producing stocks which generate income in the form of dividends. That is certainly worth considering and I have a few individual stocks which I own just because they have a high dividend payout and generate a few thousand dollars in income every year in addition to whatever value gain they have.

    All that said, as you approach retirement if being 100% in the stock market is causing you stress and you can afford it, there is something to be said for sleeping well at night if being a little more diversified is going to help with that. I recognize that I may have a higher tolerance for volatility and riding out downturns than a lot of folks do.

    Hope that helps a little and good luck

    The TSP Allocation Guide



    “My living expenses will easily be covered by FERS and Social Security”

    Thanks TS,
    When you talk about “FERS” I assume you’re talking about all three tiers: TSP; Pension; and SS. If so, wouldn’t this include the TSP? My issue with keeping all my money in the TSP after retirement is when I decide to start withdrawing it, probably on monthly basis, adjusting my withdrawals every year, the money comes out of all the funds equally, or for a 100% S-fund allocation, it would come out monthly, even if stocks go into a bad business cycle for that particular year after you already made your annual election for withdrawal in the TSP. I would think keeping 12-24 months of living expenses you expect to withdrawal to supplement your pension and SS would be great in the “G”, and the remaining money transferred out to an independent brokerage firm where you could then transfer money back into the TSP (“G”) when the stocks are in “up” cycle vs. a “down” cycle. Does this make sense?


    TS Paul

    Sorry, I was being lazy when I referred to the pension as my FERS.

    That’s an interesting idea to transfer money out and then back in. I have to admit that I am still so far away from retirement that I haven’t spent any time looking at the rules on moving in and out.

    My sense has always been that I will keep everything in the TSP after I retire, just because it is such a good deal with unmatchable low expenses. And I will still have the ability to trade in and out of the various funds to match the business cycle phase. I also expect that I will have a pretty sizable balance in my non-TSP investments, so I will feel that I have plenty of options and flexibility.

    But I am intrigued by the notion you present and will give some thought to the possibilities. And am very interested in hearing from anyone else who has some knowledge or experience in doing something similar.

    The TSP Allocation Guide



    TS you said “My living expenses will easily be covered by FERS and Social Security”, by FERS you mean just the annuity portion, not the TSP, correct?


    Abdias “Izzy” Irizarry

    I have so many questions!!! Where do I start? Okay, I just decided to start with one at a time. I am so new at this, that I am afraid my questions will come accross as stupid questions. HereI go.

    I am trying to replicate my TSP within my TDAmeritrade account. Following suggested fund equivalencies with existing Vanguard money market funds and/or ETFs. Thus, in setting up an S Fund equivalent with a Vanguard Index Fund ETF (VB). If the VB I have in my TDAmeritrade account were to be worth $100,000.00 (it is not) is VB a dividend-producing, income-generating investment? If so, how do I gain access to the income it produces? Do I cash out shares? Do I instruct TDAmeritrade to have dividends earned deposited in a cash account?

    As this is my first posted question, ever, I take the opportunity to thank TS Paul for sharing his wealth of knowledge, presented in a manner that a layman like myself can understand and follow. It makes me feel so energized and inspired to learn and master the business cycle. Over the years I had been searching for the key to TSP investing, and just now, at the end of my career and nearing retirement, I found his blog, full of wisdom and sensible advise. As posted by others, I too will be able to live off of my basic annuity and social security, leaving the TSP alone, and am thsnkful for the liberilizing feeling that knowledge brings. I am sharing with my younger colleagues, and with my grown children, the teachings of TS Paul.


    TS Paul

    Thanks very much for the kind words, although I take them with a grain of salt. Everybody likes me when the market is up. 😉

    With respect to how your small cap ETF (VB)’s dividends work – yes, you will receive a distribution which is deposited as cash into your brokerage account. VB pays an annual dividend in the last week of December. The last two years it has been $1.48 and $1.42 per share. So your hypothetical $100,000 balance would have resulted in about a $1300 distribution last year.

    Once you see that cash balance in your brokerage account, you can either reinvest the money or transfer it out to your bank account.

    Hope that answered your question. Good luck.

    The TSP Allocation Guide


    Abdias “Izzy” Irizarry

    Yes, partially answered the question. I got the part about receiving a distribution that gets deposited into a cash account in my brokersge account, which I treat as regular cash; reinvest or transfer and spend.

    As for the hypothetical VB $100,000.00 balance, is the December distribution the only gain from that money for the yesr? I suppose it is not, but given how new I am on this, I need to ask.

    On the subject of sharing my investing experiences and strategies (I am following your lead, and hoping to get to predict correctly (in sync with you) on my own, and not just leech off of yours, as it appears to me that it is your intention to teach us how to fish, not to hand fish out.) once
    i feel confident about what I am doing, I will share mu successes and failures. Meanwhile, I will do my best to generate questions that meet other’s needs. I do have a business cycle chart (msword) made with your information that I would like to share. How can I attach it here?


    TS Paul

    I love your enthusiasm. And my hope on this forum is to create a group of TSP investors who are looking at the various indicators, sharing ideas, and trying to divine the phase of the business cycle together.

    VB has an annual distribution, so that December distribution is the only one. With Vanguard ETFs you can take a look at the distributions on their webpage, here is VB’s:

    You should be able to attach your Word file to your reply on the message board – there should be an Attachments section between where you enter the text and the submit button. The message board software is a little buggy, so if you don’t have any luck with that please just email it to me and I’ll upload it to the server and give you a link to put in your reply.

    Thanks very much. -ts

    The TSP Allocation Guide


    Abdias “Izzy” Irizarry

    I tried a few things, but was unable to attach the document. I will keep on playing with this until I find a way. I am sending this note so that you don’t think I forgot.


    Doug H.

    Hi TS. Above, you mention that as you near retirement, you may take out a chunk of your TSP to pay off a property. I’m 26 months away from retirement (not that I’m counting), and I’m thinking of taking out enough to pay off my house when that day comes. It would be about $130k, leaving a TSP balance I estimate somewhat conservatively to be around $700k. My question is, how badly will I get hit with taxes on a large, single withdrawal like that? If it’s too ridiculous, it might be better to keep the mortgage and take the small tax deduction on the interest. Thanks.


    TS Paul

    I imagine that would lead to a pretty huge tax hit. Without knowing more about your situation, by the time you factor in salary for that year, whatever annuity comes in, plus any other income, you could wind up in a much higher tax bracket than normal. While I threw that in there as an example because I know some people do so, I believe I will be inclined to carefully craft my distributions to try to minimize the taxes I pay on them, and won’t do any sort of lump distribution at retirement.

    Unless you have an oddly high interest rate for some reason, keeping that $130,000 invested is almost certainly the better solution mathematically when you factor in the mortgage deduction and the return you can expect on the invested funds.

    By the way, congratulations on that hefty Thrift Savings Plan balance. If the next 26 months are good, you could top $1 million in there before you go. You have definitely maximized your opportunity with the TSP and are a great example for newer Feds to try to emulate.

    The TSP Allocation Guide



    Will my local police department retirement(pension) be counted as income against the earnings test on the social security supplement for 6c retirement?


    TS Paul

    This is definitely not my area of expertise, but my understanding is the Social Security earnings limit is based solely on earnings from wages or self-employment. All other forms of income, including annuities like the pension you mention above, aren’t counted.

    The TSP Allocation Guide

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