Withdrawals From Target Retirement Type Fund

[yakers]

I posted this question over on a Morningstar board but I want to explore it here as this site has both a range of knowledgeable people and specifically some Federal retirees who may have the same isseu.

The Federal TSP (401k type) system is justifiably considered a good system at least in having very low cost index funds as its main feature. But it is a limited and complicated withdrawal system and I am trying to figure out how to make this as flexible as possible. I expect to retire in the next year or so, I will be over 55 but below 59.5. Accordingly I can elect to receive payments from the TSP without the 10% early withdrawal penalty. But I have to elect an amount to be paid each month and this can only be changed once a year on a specific date. This is not a bad option but it does not allow me to immediately discontinue withdrawals if the market tanks.

I have the choice of several index funds but have chosen a Lifecycle (Target Retirement type) fund as my major holding. So my question is whether a Target Retirement type fund is a good source for structured withdrawals in retirement? I could choose a small & large cap index and a total bond fund and put say 50% in each but withdrawals are calculated on the relative amounts in each fund; I cannot direct the payments from one specific fund.
There are other possibilities like rolling some or all of the TSP into an IRA but I would have to take 72t structured payments and that would fix the amount for 5 years although it would allow for more fund choices. I can think of more complicating issues but I just wondered if there is any insight as the the advantages or disadvantages of making regular withdrawals from a Target Retirement fund as opposed to having more adjustable asset allocations or other fund choices.

 

[Brat]

Can't you roll it over to an IRA after you retire?

 

[yakers]

Can't you roll it over to an IRA after you retire?

I can but I lose the lowest cost index funds available and, since I am under 59.5 yr old, I would have to take 72t withdrawals from the IRA which would tie me to specific withdrawal amounts for 5 years.

 

[Nords]

I can but I lose the lowest cost index funds available and, since I am under 59.5 yr old, I would have to take 72t withdrawals from the IRA which would tie me to specific withdrawal amounts for 5 years.

Two questions:
- Can you bridge the 4.5 years from other funds? You seem dissatisfied with the TSP's withdrawal options and will have to pay for flexibility. But bridging those withdrawal years from other funds would let you roll the TSP over to an IRA without 72(t). Yeah, a 0.05 ER is nice but a 0.09 or 0.10 from Vanguard or Fidelity won't break the bank, and if you're withdrawing your other spending money from taxable accounts with higher ERs then you'll be reducing your fund expenses anyway.
- Can you do both? What about rolling a portion of the TSP into an IRA and leaving the rest to compound wherever in the TSP you want? I don't know much about 72(t)s but maybe you could make the IRA as small a portion of the TSP as you could get away with for a five-year 72(t) withdrawal.

 

[FIRE'd@51]

Couldn't you move a year's worth of withdrawals to a money market fund at the beginning of the year and make your withdrawals from that?

 

[Kwirk]

Your problem will affect many government retirees. Maybe if many of us put pressure on the program they can come up with something more flexible, like withdrawals from a specific fund?

Annual withdrawals would be another solution, a la FIRE'd@51, but aren't an option. A one time withdrawal (combined with a quick re-balance) to cover several years would possibly have unpleasant tax effects.

I potentially face the same dilemma for a year or so. My tentative plan is to have the withdrawals largely come from the G fund (special government bonds) by rebalancing as frequently as makes sense. This is a crude technique, at best, since inter fund transfers have to be in whole number percentages.

 

[yakers]

Two questions:
- Can you bridge the 4.5 years from other funds? You seem dissatisfied with the TSP's withdrawal options and will have to pay for flexibility. But bridging those withdrawal years from other funds would let you roll the TSP over to an IRA without 72(t). Yeah, a 0.05 ER is nice but a 0.09 or 0.10 from Vanguard or Fidelity won't break the bank, and if you're withdrawing your other spending money from taxable accounts with higher ERs then you'll be reducing your fund expenses anyway.
- Can you do both? What about rolling a portion of the TSP into an IRA and leaving the rest to compound wherever in the TSP you want? I don't know much about 72(t)s but maybe you could make the IRA as small a portion of the TSP as you could get away with for a five-year 72(t) withdrawal.

1) Sort of, I do have some stocks I could sell but I had planned to hold on to those and the ER (but not the risk) is 0. And then there is my wife's IRA, she will be the requisite 59.5 before me, but its going to be a tricky sales job telling her we will run down HER IRA while we let mine grow (even though she is the designated beneficiary
2) Yes, I thought about rolling over some funds (to VG probably) just enough to cover the required 5 years of payments. Haven't figured out the whole 72t process, again, it doesn't sound flexible.

 

[yakers]

Your problem will affect many government retirees. Maybe if many of us put pressure on the program they can come up with something more flexible, like withdrawals from a specific fund?

Annual withdrawals would be another solution, a la FIRE'd@51, but aren't an option. A one time withdrawal (combined with a quick re-balance) to cover several years would possibly have unpleasant tax effects.

I potentially face the same dilemma for a year or so. My tentative plan is to have the withdrawals largely come from the G fund (special government bonds) by rebalancing as frequently as makes sense. This is a crude technique, at best, since inter fund transfers have to be in whole number percentages.

can you tell me more about your rebalancing approach? Do you think it would be better than the Lifecycle (maybe Lifecycle Income Fund? I know this sounds crazy but I assume that payments are taken out on a specific day of the month, it would be possible to set an AA for the day before the withdrawal and go back to another for 29 out of 30 days per month. Sounds too active management though, since I tend to like the Lifecycle funds for simplicity.

 

[Brat]

DH and I look at our retirement savings as one pot, what's his and mine is mine... and visa versa.

I suggest you lay out the totality of the retirement withdrawal options for her to consider. Then schedule a couple conversations as the both of you explore the details. She might opt for drawing down her's first as it provides more flexibility for the both of you. Her IRA could be tapped first, then just your IRA with some kind of equitable adjustment.

There may be issues if you are recently married and she brought her IRA into the marriage, or if there are kids at issue. In that case the two of you may want to make a written agreement about this resource and how it will be distributed.

 

[Kwirk]

can you tell me more about your rebalancing approach?

I'm fairly certain that you know more about it than I do but...

My ideal would be to have money in the G fund designated for monthly withdrawals. I could then replenish the G fund by inter fund transfers after strong years for the index funds. This ideal is not possible.

Since there is no current way to do exactly that, I would try to approximate it by timing (monthly or less frequent) inter fund transfers from the G fund to the index funds. This would be feasible timing-wise because I expect the monthly withdrawals to be predictable. It's not precise because you can only designate money in full percentage amounts, 1% of your TSP balance but not 0.1%, for each fund when doing a transfer. After (hopefully) strong market years I would move some substantial chunks to the G fund to fund future years of withdrawal.

The life cycle funds would not meet my needs because the monthly withdrawals would come from all components rather than just the G component. I only want a few years of withdrawal money in the G fund. With my and my wife's pensions and social security x2 we plan to be fairly aggressive with the percentage of the TSP invested in stocks.

 

[martyb]

I still have over 5 yrs before I start thinking about withdrawing from my TSP, but as far as dealing with a market tank. my thinking is that even though I can't stop withdrawals immediately, I can immediately move all my funds into the G fund where they'll be safely earning somewhere in the 5 to 6 percent range, if things got real bad. Then, when the clouds go away & the sun shines again, I can re-allocate to wherever I wanna be. I'm figuring I'll stay in one of the Lifecycle funds even after retirement. I'm L2030 now, but thinking about L2040.

 

[samclem]

I still have over 5 yrs before I start thinking about withdrawing from my TSP, but as far as dealing with a market tank. my thinking is that even though I can't stop withdrawals immediately, I can immediately move all my funds into the G fund where they'll be safely earning somewhere in the 5 to 6 percent range, if things got real bad. Then, when the clouds go away & the sun shines again, I can re-allocate to wherever I wanna be. I'm figuring I'll stay in one of the Lifecycle funds even after retirement. I'm L2030 now, but thinking about L2040.

Marty, I'm not sure I follow you. If you are planning to move your funds into the G Fund at the early phase of a market decline so that you don't lose much momey, I'd say this is unlikely to be successful. The drops sometimes happen very quickly, and even when the declines are gradual, you never know that "this is the big one" until it is too late.

Many have tried, few have been successful.

 

[ats5g]

yakers,

I think we already discussed withdrawing from a Target/Balanced fund in Rich's Can't Prune a Target Fund. Here's what I wrote last time:

Hi Rich,

Perhaps a between-the-lines question in your first post was something to the effect of do the balanced/lifecycle funds run the risk of reverse dollar cost averaging? See also bob’s explanation. For example, since liquidating shares of balanced funds liquidates both stocks and bonds at the same time, does this sell the worse performing asset class as well as the better performing asset class?

I don’t think selling the shares of a balanced/lifecycle fund would be reverse dca-ing. This is because in a sense, the money is just being transferred an extra step or through another fund before the withdrawal. The balanced fund rebalances from the better performing asset class to the worse. When you sell shares of the balanced fund, you can think of it like selling the better performing asset as well as selling the gains of the better performing asset that have been transferred into the worse performing asset.

If you didn’t have a balanced fund, but say a stock and bond fund, if stocks were doing worse than bonds, in addition to the fund distributions, you’d just (1) sell the enough of the bonds for your withdrawal, and then (2) sell some more of the bonds to rebalance fully if necessary.

With the balanced fund, 1 and 2 are just reversed, with the rebalancing coming first. If you want to mimic the balanced fund, you would (1) sell enough of the bond fund to rebalance, and then (2) immediately sell enough shares of both the stock and bond fund for your withdrawal.

The gains that are sold for withdrawal are still gains from the bond fund, they’re just transferred to the stocks/stock fund first. I don’t think this changes the fact that the money you’re withdrawing are the gains from the better performing asset class.

- Alec

 

[martyb]

I agree that hopping in & out of the market isn't the way to success, and that's not my plan, but Yakers mentioned not being able to stop or reduce withdrawals if the market should "tank" and I was just pointing out that while you can't stop the withdrawals from the TSP (except once a year) you can at least stop the bleeding from your account by shifting funds to the safe G fund. I do indeed realize what the consequences could be with ill-timed fund hopping, I just thought I'd point out, as I'm sure the OP is aware that he can at least minimize his pain somewhat. It's at least a little better than being stuck with your withdrawals still coming out AND losing your butt in the market at the same time. And.....I'd be willing to bet that before long, there will be some more postive changes to the TSP that will have it comparing more favorably with regular 401k's and IRA's. There's been a good deal of talk about that stuff lately. Uncle Sam unfortunately moves pretty slow on stuff like this. It's coming though....I can feel it!

 

[yakers]

yakers,

I think we already discussed withdrawing from a Target/Balanced fund in Rich's Can't Prune a Target Fund. Here's what I wrote last time:

- Alec

Yes, that was a good thread, don't know how I missed it. I am trying to understand the Target Retirement funds prospective return, risk and whether being in the withdrawal phase has a more negative impact than DCA in the accumulation phase and how to deal with fixed withdrawals. So far its looking good for just holding the Target fund until its target date at which point it becomes an income fund. If I need to take out more than I want (similar to an RMD issue)then I don't have to spend that money and can invest it elsewhere and adjust my overall portfolio around the target fund. Thanks for the link and a bunch of good postings. I think similar issues will become more common as these types of funds become more popular.