Federal Employee trying to retire early...

[aoak]

Hello all,

Here are my specifications:

My age = 30
Wife's age = 26

Thrift Savings Plan Balance for both of us = $141,916 (We both currently contribute 23% but are not yet maxed out at the total of $18,000/year that we are allowed to contribute.)

Roth IRA 1 = 11,000
Roth IRA 2 = 11,000
Brokerage Account = $22,000
Savings = $46,000

Expenditure 1 = $156k mortgage on home (15 year mortgage but 12 years remaining)
Expenditure 2 = $102k mortgage on rental property (25 years remaining, mortgage paid by tenants)

Annual Household Expenditures = $32000

I have been performing calculations for retiring at 45 for about 3 months. My assumption during those three months is that the Roth TSP would allow me to withdraw from my contributions after 5 years of vesting and before I reached 59 1/2, just like all other Roth IRA's allow you to. I came to a rude awakening that the Roth TSP does not allow this. I am glad that I found this out now, rather than 15 years from now

Now that my train of thinking has changed I am trying to figure out the best way to still try to retire by 45 and have enough money saved to fill in the gap between 45 and 57. I have calculated that the total amount of expenses during that 12 year gap, based on our annual expenditures ($32k) with 3% inflation would equivilate to $697,593. So I would need this amount saved to get by till age 57.

My plan is to take a deferred retirement and in doing so, I would lose out on FEHB throught the government. By the time I retire we should have over $4 million in our TSP not including our outside investments. We only need $750k to live happily in retirement. Based on this fact I should be able to pay for health insurance. On average I have found that the average cost for healthcare through retirement is $250k so if you factor in 3% inflation between now and when I am 57, it would actually equivilate to $539,147.

My question is, instead of maxing out my TSP, which will not enable me to take withdrawals between age 45 and 57, should I just match what the government will match (5% me and 5% government) and then put the rest (23%-10=10%) in a brokerage account for 15 years? If I do this, I would have over $2 million in my TSP balance at retirement instead of over $4 million.

That is the only option I see that will enable us to accrue a savings that will help me retire by 45.

Please provide constructive criticism of my plan because I do not know if I have taken everything into consideration. We have contemplated having kids which would be an additional consideration. On average I have read that a kid costs $350k till they turn 18. That being said, if we have 3 kids as planned, that is a total of $1,050,000 additional expenditures. I hate calling a kid a "variable", but I got to plan for everything!

One other option that I have considered for future investment is buying another rental property with our savings, since we have more than a year's worth of "emergency funds." Please provide your thoughts on this notion also.

Thanks for your time and consideration!

[ProGolferWannabe]

I have not done the math, but given your current TSP balance,your planned contributions, and your expected ending balance when you retire at 45, what is your assumed rate of return in your investments? It seemed on the optimistic side to me.


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[donheff]

You could fund TSP to the max and then roll your regular TSP account into an IRA at Vanguard or wherever and start taking 72T withdrawals when your retire without penalty. That requires that you take and continue taking equal payments so you are stuck with the decision but... Also, there was no Roth component in my days so I never checked it out, but doesn't the TSP allow you to roll your Roth over to an outside Roth where you could then access the funds like everyone else?

[MikeWillRetire]

I don't think you can get to $4 million in the TSP in 15 years, even if you contribute the maximum. Double check you calculations.
Also keep in mind that your pension will not get a Cola until you are 62. So from 45 to 62, the value of your pension will decrease.

[aoak]

Quote:

Originally Posted by ProGolferWannabe I have not done the math, but given your current TSP balance,your planned contributions, and your expected ending balance when you retire at 45, what is your assumed rate of return in your investments? It seemed on the optimistic side to me. Sent from my iPad using Early Retirement Forum

Thanks for the reply ProGolferWannabe. My assumed rate of return is 8% over 27 years. I will not touch my TSP till I am 57.

[aoak]

Quote:

Originally Posted by MikeWillRetire I don't think you can get to $4 million in the TSP in 15 years, even if you contribute the maximum. Double check you calculations. Also keep in mind that your pension will not get a Cola until you are 62. So from 45 to 62, the value of your pension will decrease.

Thanks for the reply Mikewilltetire! I did not explain myself good enough....sorry. I will not touch my TSP for another 27 years and so over 27 years at 8% ROR, given my our current balances, my wife and I should have $2 million each.

I did not research the COLA part of Social Security! Thanks for bringing that up.

[aoak]

Quote:

Originally Posted by donheff You could fund TSP to the max and then roll your regular TSP account into an IRA at Vanguard or wherever and start taking 72T withdrawals when your retire without penalty. That requires that you take and continue taking equal payments so you are stuck with the decision but... Also, there was no Roth component in my days so I never checked it out, but doesn't the TSP allow you to roll your Roth over to an outside Roth where you could then access the funds like everyone else?

Thanks for the reply donheff! I looked through the Federal Almanac regarding your question about whether or not you can rollover your Roth TSP into a Roth IRA. The answer is, "Yes you can." I do not know if my contributions to the Roth TSP would become available for withdrawal if/when I roll it over to a Vanguard Roth IRA at 45. I would think that I can but I will have to ask and make sure.

I think I will stray from 72tb withdrawals just because I believe I can save enough during the 12 year gap till I start withdrawing at 57. I believe I can even start withdrawing from retirement at 55 but with a penalty to my pension.

[Gerard3]

In order to withdraw penalty free from TSP you will need to retire from government during the year you turn 55, not sure if deferral at an early age will help, so you need to check that out. Also, unless you are a fed law-enforcement type, the reduction to your FERS pension will be 5 percent for every year under 62--if you won't have 30 years non-law enforcement. You would be retiring under MRA+ 10 provisions, which is different. Under MRA+ 10 you will have to be 60 to get an unreduced pension. You need to check out everything carefully, but you have plenty of time. If you are law enforcement, that's different.

[aoak]

Hello all, I would appreciate if someone could answer my question regarding whether or not I should just match my employers retirement contribution and save the rest? In my case, I would just contribute 5%, and my company would contribute 5%. I currently contribute 23% towards retirement. This would mean that I would be saving 18% (23%-5%) into a brokerage account, where I would be able to access the money for the 12 years that I am waiting till I retirement at 57.

[davismills]

I hesitate to advise, but I would like to commend you on thinking this out at your young age.

A few things surprised me when I started researching retirement. One in particular was the machinations to remain in a low tax bracket at age 70.5 with the RMDs. Another was Social Security and its taxation on only 85%. Yet another was the fact that if you can maintain a 15% tax bracket in the early years after retirement, the Feds will not tax capital gains of stocks sold in a non-qualified acct. I wish I had invested more money in non-qualified (post tax) stocks.

[Arif]

I did not know there was a such thing as a Roth TSP. Time to change my wife's TSP account again.

[zinger1457]

I wish the Roth TSP was available when I was working for the FEDS, I would definitely look into putting my contributions into that rather than a regular brokerage account.

I would suggest you re-evaluate your estimated expenses in retirement and make sure they are realistic. Even with the mortgage paid off $32K/year for two people seems somewhat tight to me, especially for a young retired couple. What are your plans in retirement, like to travel and do things? I retired early from the FEDS and my travel/golf budget definitely went way up but I also planned for it, something you'll want to think about and consider. If not already done I would highly recommend doing a very detailed expense spreadsheet of all your current expenses and then next to it what you expect your expenses to be in retirement.

One option to consider for dipping into your TSP prior to reaching 59.5, and not paying a penalty, is the 72t option (see 72t.net). You could transfer a portion of your TSP to an IRA and use the 72t option to live off of if needed. Just need to research this option carefully, any mistakes made in using it could be expensive.

[aoak]

Quote:

Originally Posted by zinger1457 I wish the Roth TSP was available when I was working for the FEDS, I would definitely look into putting my contributions into that rather than a regular brokerage account. I would suggest you re-evaluate your estimated expenses in retirement and make sure they are realistic. Even with the mortgage paid off $32K/year for two people seems somewhat tight to me, especially for a young retired couple. What are your plans in retirement, like to travel and do things? I retired early from the FEDS and my travel/golf budget definitely went way up but I also planned for it, something you'll want to think about and consider. If not already done I would highly recommend doing a very detailed expense spreadsheet of all your current expenses and then next to it what you expect your expenses to be in retirement. One option to consider for dipping into your TSP prior to reaching 59.5, and not paying a penalty, is the 72t option (see 72t.net). You could transfer a portion of your TSP to an IRA and use the 72t option to live off of if needed. Just need to research this option carefully, any mistakes made in using it could be expensive.

Thank you Zinger1457! I agree with your observation that my annual expenditures are tight. The only thing that my expenditure spreadsheet does not take into consideration are traveling expenses. I plan on traveling, being a stay at home parent and relaxing in retirement. What is a good annual travel expenditure value to put into my spreadsheet?

I knew about the 72t early retirement option from a former forum member but I did not know that I could transfer a portion to an IRA. Thank you for letting me know about this option!

If I were to implement this idea this is how I would do it:
45 years from now we will have $1.2 million in our TSP. I only need $714,507 to reach 57 based on my current expenditures at 3% inflation from age 45 till age 57. If I transfer the remaining balance into an IRA ($1,246,190-$714,507=$531,643) it will grow purely on interest. Theoretical yield on remaining balance till my wife and I, God-willing, reach 85 would be $10 million at 8% ROR over 38 years, untouched. Of course I would draw from that amount so the valuation would be lower than $10 million but there would still be some left for future generations

Now that I know that I can transfer a portion of my TSP to the 72t option, I will look further into the rules on the option. Did you take an early retirement using the 72t option?

[Mulligan]

As far as having kids go....I wouldn't peg it at a million dollars in stone. So many variables, and if you are fortunate to have normal healthy children the cost could be considerably less. If you have good inexpensive employer based health insurance that helps also. You also will get some juicy tax deductions also. Day care... Hmm, glad my kid is grown up!


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[zinger1457]

Quote:

Originally Posted by aoak I plan on traveling, being a stay at home parent and relaxing in retirement. What is a good annual travel expenditure value to put into my spreadsheet?

That would be difficult for anyone but you and your wife to estimate. For some folks their idea of travel is a week at the lake in a tent, others want trips to Europe and Asia. I made a generous travel budget and have always stayed below it.

Quote:

Originally Posted by aoak If I were to implement this idea this is how I would do it: 45 years from now we will have $1.2 million in our TSP. I only need $714,507 to reach 57 based on my current expenditures at 3% inflation from age 45 till age 57. If I transfer the remaining balance into an IRA ($1,246,190-$714,507=$531,643) it will grow purely on interest.

The maximum that you can withdraw using 72t is tied to current interest rates so I would suggest you google '72t calculator' and play with it to get a feel for how much you can get. Because interest rates today are so low it probably isn't as much as you would expect but in 15 years if interest rates are higher than the numbers all change.

Quote:

Originally Posted by aoak Now that I know that I can transfer a portion of my TSP to the 72t option, I will look further into the rules on the option. Did you take an early retirement using the 72t option?

Not yet but I'm still considering using the 72t option mostly for tax reasons. You are wise for planning early, there are a lot of things to consider, you'll get some very good information from this site.

[beowulf]

If I understand correctly, your current expenses, without kids are $32K a year. Once you have kids, you should expect them to increase significantly - no matter what you expect, they will cost more . And with inflation. Which will return. I do like your idea of not putting everything into the TSP. I would put in the max to meet the match into the regular TSP and put the rest into a combination of Roth TSP and Roth IRA. Also put a portion into regular after tax investment accounts. You want to have funds readily available if you do retire at 45 that are not locked up in Tax deferred accounts. I also believe, if you are going to plan for lots of variables, that you take into consideration that returns may not be 8% a year and that we could have a prolonged recession at any time - like in the 3 to 5 year period before you reach 45. The 2008 recession destroyed many folks retirement plans (as did the one in 2000).

All in all, you have an aggressive plan and you are saving a lot . Best of luck. And remember to enjoy life - you only pass this way once.

[mikelish]

4 Ways to take Partial Withdrawals from the TSP | GubMints

Partial Withdrawal – the ‘Freebie’ – TSP Loan Rollover at Separation.
Kudos to Tammy Flanagan over at GovExec for revealing this Oolie.
Strategy: There is technically a ‘Backdoor’ Partial TSP Withdrawal available to Feds just before they resign or retire. It involves taking a TSP loan at the last minute before you head out the door.
This one’s not for the faint at heart – There are some treacherous tax land mines here, and I’d consult a Tax Professional prior to executing this strategy.
But since there are so many restrictions on when and how you can withdraw from TSP, this loophole is worth mentioning because it is a ‘freebie’ withdrawal - If executed properly.
Example: Quinn Quitter is resigning from federal employment in July at age 43 with a TSP balance of $150,000. In June, Quinn takes a TSP loan for $50,000. Quinn may either

• Pay back the TSP Loan,
• Pay Taxes and Penalties (roughly HALF of the TSP Distribution/Loan amount) on an Early TSP Distribution and keep what’s leftover, OR
• Quinn has 60 days from the TSP Loan Distribution Date to roll the $50,000 over to an IRA Account (or new employer’s 401k plan) and pay no penalties.
  

Quinn takes the third option. In Mid-July, Quinn rolls his $50k TSP loan disbursement funds from his checking account to a new Rollover IRA Account at Schwab. Quinn has $100,000 left in his TSP.
*** (Gubmints’ note: If you are resigning from federal employment before Eligible Retirement Age, this is a brilliant strategy to take a ‘free’ Partial TSP Withdrawal. I wish I had known about this prior to Separation(!)) ***

[unno2002]

If the goal is to end up with TSP funds in a private sector IRA, I do not see why Mr. Quitter would need to go thru the loan process. 30 days after ending federal employment the entire TSP account can be rolled out into a private IRA, remaining tax deferred.

[aoak]

Thank you everyone for your insight, constructive criticism and retirement advice! I really appreciate it all.

I have another question that I have been pondering over for about a year and still have not made a decision. We have over a year's worth of savings for an emergency fund and I am contemplating three ideas:

1) If I use 6 months worth of our savings ($30k) to pay towards the principal of our existing, primary mortgage we would only have 10 years to pay it off instead of 12 years and we would save $7k in interest payments. This seems like a good option but. ..

2) ....what about the idea of buying another rental property and putting $24k towards the down payment? I have been looking at prospective rental properties in the $120k price range.

I feel that in the long run a rental property would be more profitable than paying down our house. My thinking is that the amount of leverage that my $24k down payment provides me far outweighs the benefits of saving $7k in interest by paying towards the principal of my mortgage. I am willing to take on the extra debt that I would be getting into because I am confident that we can find another great rental property just like our current one.

The only thing holding me back from option 2 is the enticing thought of paying off my home in 10 years vs 12 years. I have also thought that if I pay off my home in 10 years that I could start putting the extra money that I would have from not paying a mortgage anymore towards a down payment on a rental property. I would have $26k saved in 2 years from not having to pay for a mortgage.

3) How about putting $30k in my brokerage account? At a 8% return over 15 years, I will have $95,165.

Please provide your input on what option you think is best....given my goal to retire at 45. My gut tells me to go with option 2 but I would like to see if anyone sees/foresees any flaws with my thinking. Also please provide any other options that may be better!

[aoak]

Quote:

Originally Posted by aoak Thank you Zinger1457! I agree with your observation that my annual expenditures are tight. The only thing that my expenditure spreadsheet does not take into consideration are traveling expenses. I plan on traveling, being a stay at home parent and relaxing in retirement. What is a good annual travel expenditure value to put into my spreadsheet? I knew about the 72t early retirement option from a former forum member but I did not know that I could transfer a portion to an IRA. Thank you for letting me know about this option! If I were to implement this idea this is how I would do it: 45 years from now we will have $1.2 million in our TSP. I only need $714,507 to reach 57 based on my current expenditures at 3% inflation from age 45 till age 57. If I transfer the remaining balance into an IRA ($1,246,190-$714,507=$531,643) it will grow purely on interest. Theoretical yield on remaining balance till my wife and I, God-willing, reach 85 would be $10 million at 8% ROR over 38 years, untouched. Of course I would draw from that amount so the valuation would be lower than $10 million but there would still be some left for future generations Now that I know that I can transfer a portion of my TSP to the 72t option, I will look further into the rules on the option. Did you take an early retirement using the 72t option?

I meant to say. .."15 years from now we will have $1.2 million"....instead of saying, "45 years from now I will have $1.2 million."