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Advice for a sibling who wants to ER
Old 05-19-2016, 02:03 PM   #1
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Advice for a sibling who wants to ER

Hi all,

I read a ton of great stuff here, thanks in advance for advice on the following.

My sister is a Federal employee. She is 47, and hoping to ER at 62. I volunteered to look over her finances to help figure out if she is on track to do so, but sneakily am planning to outsource the job to this board. Then she will think she owes me a favor...

Current income: 178k increasing 1% annually
Side gig: 6-10k yearly but wants to quit that within 5 years.

TSP balance: 460k, allocated as follows:
3% I fund (Morgan Stanley Capital Int'l EAFE index )
6% L2050 fund (target date fund of all the tsp funds)
27% C fund (S & P 500 index)
30% F fund (Barclays US Aggregate Bond Index)
33% G fund (guaranteed principal gov't treasury)

She contributes 18k yearly to the tsp, and Uncle Sam adds 6800.

After tax brokerage: 119k currently, half in FFFEX 30 and half in FFFEX 40 (Fidelity target date funds). She intends to add 20k yearly to the after tax savings.

Cash savings: 30k

At age 65 she will be eligible for a 50k cola'd pension.

Her yearly expenses are 88k all in. Her mortgage balance is 177k, and she is in the middle of refinancing into a 15 year 2.875 loan. She seems to want to make extra principal payments of $1000 every month on the new loan (already included in the yearly expenses).

She is planning a large remodeling project and new car in the next few years, and anticipates needing 140k for those. She thinks her yearly expenses will remain the same after retirement, but she has an expensive hobby and I bet she would like more money, say 110K. Also, she doesn't have kids so spending it most of the way down probably works for her.

I don't know her financial risk tolerance, but she is not interested in learning much about asset allocation, just wants some common sense advice. I feel she would be comfortable with a 60/40 stocks/bonds allocation in the TSP and brokerage accounts. I realize she is way more conservative than that now, and wonder if she should dump the Fidelity funds, pay the cap gains tax on the approx 20k in gains and move on to a single Vanguard ETF. And adjust the TSP of course.

What would you tell your dear sister to do?
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Old 05-19-2016, 02:12 PM   #2
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Isn't she pension-eligible at age 62 (assuming she has 5 years of Federal service)?
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Old 05-19-2016, 02:18 PM   #3
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Isn't she pension-eligible at age 62 (assuming she has 5 years of Federal service)?
Hmmm, maybe. I will ask again.
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Old 05-19-2016, 02:23 PM   #4
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Isn't she pension-eligible at age 62 (assuming she has 5 years of Federal service)?
Yes, that's confirmed, thanks.
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Old 05-19-2016, 04:37 PM   #5
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And isn't she also eligible for social security as a fed (presuming she's under FERS). Seems like at 62 she should have a 50k cola'd pension, maybe 30k in cola'd social security, well over $1 million in TSP (she'll be adding roughly $25,000/year for 15 years to her current $460,000, a few hundred thousand in other investments and a paid up house. This should give her a secure income of $120,000 or more. Seems like a "no brainer!"
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Old 05-19-2016, 09:38 PM   #6
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Yes, she will qualify for social security. I do think she is in good shape, except I would be more aggressive in her asset allocation. Does anyone think she is fine staying with her current setup?

And what about if I suggest she divert the extra mortgage payments to the Ameritrade account instead? Perhaps in VTI and VEU?
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Old 05-20-2016, 12:34 AM   #7
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I agree. If she's 15 years out, has a pension and SS that will cover living expenses and 60% bonds, that seems pretty conservative to me. I'd probably be closer to 80/20 stocks/bonds; but that depends a lot on risk tolerance as well.

I'd PROBABLY recommend something like a 4 fund boglehead portfolio 80/20 stocks bonds, but maybe 60/40 as you recommend is better.

I also agree with your simplification/consolidation. I've been doing this myself recently and it really calms the mind. Having the money in 1 or 2 accounts across 3-4 investments with an asset allocation you don't worry about seems like the way to go... and of course, keeping fees as low as possible.

Seems like she's in really good shape!
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Old 05-20-2016, 07:14 AM   #8
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I don't think you should just give her a recommendation. I would advise her to do the standard drill we all go through. Look at her expenses (take a real tally of monthly outflow not including retirement contributions) and then estimate how they will likely change in retirement. Will she be done with the mortgage, will she move, blah, blah. Compare her pension/SS income (minus lower taxes) to those expenses. Evaluate how the likely TSP/Savings amount compares to the expenses delta and pick a rule of thumb to apply (3%, 4%). If her conservative approach will get her to where she needs to be she can stick with her approach if she wants. While I would go for a more aggressive portfolio she should allocate to meet her own preferences. What is important is that she understand the risk/benefits of staying her course or changing.
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Old 05-20-2016, 07:33 AM   #9
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At the risk of appearing snarky, I'd think that someone making $170K would not only be capable of researching this, but also have a strong incentive to do so.

No one cares as much about your money as you.
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Old 05-20-2016, 11:03 AM   #10
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The OP's sister may be very talented in areas that don't involve finances and would like a little consultation. I think it's great that she is looking to her sister rather than someone who wants to take a percentage of her assets for the privilege of getting advice. And that OP is asking her buddies here for some help. Getting several perspectives is often very helpful.
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Old 05-20-2016, 11:04 AM   #11
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I can't offer any investment advice but she is eligible to retire at age 60 with 20 years of service. Currently there is a FERS supplement that would partially compensate for SS from age 60 to 62 or from when she has 30 years of service to age 62; however, that element of the FERS retirement plan is often on the chopping block and could be rescinded in 13 years. She can increase her contributions to the TSP by about $5K once she reaches 50 with the TSP catchup.

Since she is in a high tax bracket and a conservative investor, this probably will not be appealing but there is also a Roth TSP available. She can contribute her annual $18K limit to the traditional TSP or the Roth TSP or a combination of both but the government contributions will go into the traditional TSP bucket. Perhaps the carrot of retiring at 60 which is more of an early retirement than 62 would entice her to be a little more aggressive in her investments.
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Old 05-22-2016, 07:01 PM   #12
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The OP's sister may be very talented in areas that don't involve finances and would like a little consultation. I think it's great that she is looking to her sister rather than someone who wants to take a percentage of her assets for the privilege of getting advice. And that OP is asking her buddies here for some help. Getting several perspectives is often very helpful.
That's exactly it. She is very intelligent and skilled in her field, but not particularly interested in personal finance, or investing. She is naturally frugal though and was pretty sure she would be comfortable after leaving her job, and also knew I read this forum a lot.

I've suggested she reduce her G fund by half and redistribute it to the stock funds. And she is going to dump the Fidelity funds and put them into Vanguard ETFs. She will then be at 50/50 allocation, and will also stop prepaying the mortgage to build up the cash she wants to renovate her home and buy a new car (to replace the 2001 model she drives). Any further suggestions?

Thanks everyone!
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Old 05-22-2016, 07:07 PM   #13
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I can't offer any investment advice but she is eligible to retire at age 60 with 20 years of service. Currently there is a FERS supplement that would partially compensate for SS from age 60 to 62 or from when she has 30 years of service to age 62; however, that element of the FERS retirement plan is often on the chopping block and could be rescinded in 13 years. She can increase her contributions to the TSP by about $5K once she reaches 50 with the TSP catchup.
I don't know if she knew about the 5K catchup. That will be useful in just a few years, thanks.

But is the FERS supplement for people who are eligible for SS?
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Old 05-22-2016, 07:51 PM   #14
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I don't know if she knew about the 5K catchup. That will be useful in just a few years, thanks.

But is the FERS supplement for people who are eligible for SS?
Yes. It is prorated depending on years of federal service assuming that a full career for Social Security is 40 years. For example if you were age 60 and had 25 years of federal service, you would receive 25/40 or 5/8 of the expected Social Security amount at age 62. You would receive the FERS supplement from the retirement age of 60 to age 62. However if you continue to work after retirement from federal service, the FERS supplement is subject to the same earnings test as early SS (e.g., at about $15K the supplement starts to be reduced).
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Old 05-23-2016, 07:00 AM   #15
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AA is too conservative at this point... should be 100% equities or 80/20... 70/30 at worst. Otherwise she is set.... have you run her numbers through Firecalc?
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Old 05-23-2016, 09:34 AM   #16
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I'm making a few assumptions here, but is it possible her all-in annual expenses are higher than stated?

I'm guessing she's had maybe 13-15 years in her job (roughly dividing 460K by 25K/year [her + employer]). If her total income is around $185K and her all-in expenses are $88K, she should have a basis of around $1.3-1.5mm and then add in gains on top of that.
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Old 05-23-2016, 10:30 AM   #17
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I'm making a few assumptions here, but is it possible her all-in annual expenses are higher than stated?

I'm guessing she's had maybe 13-15 years in her job (roughly dividing 460K by 25K/year [her + employer]). If her total income is around $185K and her all-in expenses are $88K, she should have a basis of around $1.3-1.5mm and then add in gains on top of that.
I should say first that she is not unhappy at work, and retiring at 62 is not an imperative but a nice goal. She mainly wants to know if she is on the right path to FI. Firecalc is ok with the 50/50 allocation.

I agree that she must have been saving less in the past, since she has been a fed employee longer than 15 years I think. I am sure her salary was lower the first few years, and she may not have been contributing the max to her tsp. She has an expensive hobby, but one which is very physical and I don't know if people do it after their 60s.

She can buy into the FEHP cheap for health insurance, and return to the side gig for extra income if she needs. So I am not sure the added risk in more stocks is really needed? I will have to have a chat with her in person about it, I am overseas for a bit. Personally I am 75% in stocks but that's what makes me happy...
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