Quote:
Originally Posted by navydavey
pb4uski/nash031: I was actually surprised to hear that you think I'm too heavy in bonds. I've generally heard 100 minus your age as a rule of thumb which puts me light on bonds.
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Most of the people who write that advice don't understand military compensation.
Right now you have a very high likelihood of continued employment. If you do get "laid off" by the military, it'll be with plenty of warning and at least six months to build up a cash stash. As long as you expect to be able to incur another obligation then you can count on a steady paycheck and a more aggressive asset allocation.
"100-age in bonds" is also advised for investors who are concerned about volatility. You have to find an asset allocation which helps you sleep at night, and you've done a good job there. You're far ahead of most other investors your age (and very far ahead of most military). But because you have a steady income then (while you're in the military) you can afford to keep a high percentage of your investment portfolio in equities. By "high" I mean 80%-100%. You should find your own comfort level in that range.
Quote:
Originally Posted by navydavey
nash031: I'm kind of hesitant to commit to the TSP. As I understand it, if I don't do a full 20 year career then I won't be able to get to the money until 59 1/2 or whatever that number is these days. I'm just nervous to potentially tie up all my retirement money until that age if the goal is to retire sooner. I've been using the ROTH option but may change that this year as I'll probably push further into the 25% bracket. I'll look into simplifying. Would certainly make things a little easier. Thanks for the 35 cents!
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Bluntly, you're missing out on the benefits of the TSP. This is a very common misconception, unfortunately, and it's part of the reason why less than half of the military's servicemembers invest in the TSP.
Tapping tax-deferred assets is easier than people realize. For example, you can withdraw your Roth IRA contributions any time with no tax and no penalty. There are other approved exceptions like a first-time home purchase and mobilizing for Reserve duty.
Tapping the TSP is a little more challenging but straightforward. You can roll over a Roth TSP to a Roth IRA and then five tax years later withdraw the amount of the rollover without taxes or penalties. You can roll a conventional TSP over to a traditional IRA and then convert that to a Roth IRA using a conversion ladder. Five tax years after each small Roth IRA conversion, you can withdraw the amount of the conversion.
Early Withdrawals From Your TSP and IRA After The Military - Military Guide
Funding The Gap: "I Need Money From My TSP!" - Military Guide
It's unlikely that you'll even "need" to tap your TSP account before age 59.5. If you're saving aggressively for early retirement then you'll not only maximize your TSP and Roth IRA contributions but save even more in taxable accounts. Before you leave the military, you'll save up funds to pay your living expenses while you explore a bridge career (and save even more in taxable accounts). If you retire from the military, your pension will cover most of your expenses and you'll begin to draw down your taxable accounts to last until age 59.5. I've been retired since age 41 in 2002 and we haven't even touched our Roth IRAs, let alone our TSP funds. It's unlikely that we'll ever touch them.
Quote:
Originally Posted by navydavey
Would you be able to edify the thought process behind using a Roth IRA and TSP simultaneously? It seems to me that you're opting to pay taxes now AND later rather than maximizing the benefit of one or the other.
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By maximizing your tax-deferred contributions, you're compounding the gains without paying taxes. (You could do the same in a taxable account if you never took dividends or cashed in capital gains, but diversification and rebalancing make that highly unlikely.) By investing in the TSP, you're getting the world's lowest expense ratios with diversified passive index funds. But you need to save more than $18K/year, so you're also using a Roth IRA.
You can choose to pay taxes now (while you're more likely to be in a lower tax bracket) by contributing to the Roth TSP as well as your Roth IRA. But if you're making more contributions of tax-free pay from a combat zone, the TSP rules still limit the Roth TSP to $18K/year and you have to contribute the rest of the CZTE funds to a conventional TSP.
If you end up with a conventional TSP account, then when you stop working for a paycheck (both military and a bridge career) you'll be in a very low income tax bracket-- possibly 0%-10%. At that point you can roll over your conventional TSP to an IRA and start the Roth IRA conversions up to the top of the 10% or 15% income tax brackets. But if your income tax bracket in the military is already in that range then it makes just as much sense to contribute to the Roth TSP.
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