Planning for a Military Retirement

[ATC Guy]

As stated in other posts, I am a young officer in the USAF. The more I am in, the more I am looking at staying to try and reach 20 years (both because I enjoy the service and the obvious benefits).

I hear a lot of people on here talking about maxing the TSP and then going to ROTHs. I would like to at least be able to fully retire after 20-22 years. If I want to continue to work in the civilian side, so be it, if not, no worries. Doesn't investing in the TSP and IRA kind of tie your hands. If DW and I could amass a couple million $ over the course of a 20 year career, I would prefer for it to not be locked up until I am 59.5.

I am aware of the 72(t) however that still somewhat ties your hands. It restricts how much you can take out. I am considering investing in taxable accounts only and only creating taxable events such as buying and selling when absolutely necessary to reduce my tax burden. In the end, however, at age 42 or so, if my cards are played right, I could be fully retired living the FIRE life with a large lump sum of cash not tied up in a tax advantaged account that could be earning me tax free income from a t-bill.

I'd like to get the input from others since I feel like this idea goes against conventional wisdom I consistently hear on this forum. Is there something I'm missing, or is it just a choice? Most of us plan to retire before that 59.5 age so why use a vehicle made for those planning to retire at or after that age?

Thanks!

 

[Emeritus]

See how long it takes you to amass the first 100,000 in cold hard cash. If you do it in 4 years see how long the second 100,000 takes. When you have the first 200,000 you can start worrying about how to invest it.

 

[ronocnikral]

hmmm....i think it is hard to really understand what will happen 20 years from now. i'm not suggesting the rules will change, but merely we will change, as well as our investment return.

i plan to have a healthy mix of both taxable, tax deferred and tax free (read: ROTH) funds available. my line of thinking is, max out the tax advantaged accounts, then start your taxable investing. i just started my taxable accounts this year. i'm not too worried about how to get the cash out, but mainly just amassing it.

i'm curious, how is 72t limited? i imagined you could just set a schedule and start withdrawing.

 

[ATC Guy]

The 72t withdrawal rate is limited to 120% of the Fed Mid-Term rate

 

[ronocnikral]

The 72t withdrawal rate is limited to 120% of the Fed Mid-Term rate

thanks. i still don't really see how this is limiting. if nothing else, it only confirms my need for a healthy mix of taxable, tax deferred and roth money.

 

[Nords]

I hear a lot of people on here talking about maxing the TSP and then going to ROTHs. I would like to at least be able to fully retire after 20-22 years. If I want to continue to work in the civilian side, so be it, if not, no worries. Doesn't investing in the TSP and IRA kind of tie your hands. If DW and I could amass a couple million $ over the course of a 20 year career, I would prefer for it to not be locked up until I am 59.5.

You have to decide whether you're willing to trade flexibility for higher taxes and higher expense ratios.

Most ERs got there through sustained superior savings. The TSP/IRA limits are much higher now and perhaps a little more difficult to max (especially with spousal IRAs) but still under $30K/year for most couples. So one solution to your retirement cashflow issues would be to aggressively save enough to max the TSP & IRAs and then save even more for taxable accounts that can be drawn down first.

Roth IRA contributions can be withdrawn any time without penalty. That offers one part of a solution, along with 72(t) withdrawals.

If you're staying to 20-22 years, take a look at how much of your cashflow is covered by your pension. I wouldn't suggest staying on active duty just to get the big pension, but it will certainly resolve much of the cashflow concern.

For now, the best solution might be to forecast an ER budget and then see how much of that could be covered by pension/Roth contributions. Then add in a 72(t) if necessary. If spending isn't covered by this point then you'd want to start replacing tax-deferred contributions with taxable accounts (also accounting for their after-tax returns) until you felt you had enough in taxable accounts to spend down to the 59.5 point.

You may also want to max the tax-deferred contributions early in your career so that they have more compounding time. Then as you get closer to retirement (and have better budget/spending forecasts) you could back off the tax-deferred contributions when necessary and start piling up taxable assets. I'd hate to miss out on 20-30 years of tax-deferred compounding (to say nothing of lower investing expenses) just for potential flexibility.

 

[WM]

+1 on what Nords said.

DH is military, and we are planning to retire in a little under 5 years when he finishes 20 years. We started with Roths and taxable accounts but that's mainly because we didn't know about the TSP or maybe it wasn't available then to military? But as soon as I wised up, we quit adding to the taxable accounts and maxed the Roths and TSP.

Given that there are limits to how much you can tax-defer, I would go that route first. Because what we're finding is that at this point in our lives, we are able to save more than we can put in those accounts. And with five years to go we'll have plenty of cash on hand by the time he retires (especially since the pension will cover most of our projected expenses).

We did make the decision not to put my self-employment income from the last couple years into a tax-sheltered account, because we feel that we'd rather have it readily available. But that's a decision that we'll continue to revisit.