Retire at age 55?

[Wheels]

One more point here. I notice a lot of people are "figuring" on returns of 10% a year. While averaging 10% a year over a very long period of time is certainly not an unreasonable goal, counting on 10% a year over a much shorter period, like 10-15 years can be dangerous. To get 10% a year you would have to have a fairly large exposure to stocks. In doing so, you could easily hit a patch of 2, 3, or 4 consecutive years of negative returns. This would put quite a crimp in your plans, especially if you were "counting" on those 10% returns.

Stepping off my soap box now.

 

[ocean]

I am talking about withdrawing funds from my account in substantially equal payments based on the IRS life expectancy tables. The IRS will allow you to do this without assessing a 10% penalty (Rule 72t). There are several methods but the TSP only uses one, which would net me about 3% a year initially. If I didn't think it was going to be enough income, I could move my balance into an IRA and then use one of the other rule 72t methods to take out more (up to about 5 1/2%) I can show you the calculator if you are interested.

Wheels,

I got it now.

 

[Birchtree]

I have to take the liberty and support Wheels' position on annuities - they indeed do stink. I'd much prefer a defined contribution plan for my retirement.

 

[ocean]

There is no required mandatory distribution on a Roth IRA and the subsequent income is tax free - even to heirs. Use a grandchild as a beneficiary and the RMD will shift to the child at a very small amount leaving the rest to grow long after you are gone. The only problem is getting the income to the Roth via a regular IRA. Use a scheduled deposit from your TSP on a monthly basis into a regular IRA but be gentle and take some time leaving plenty of funds in TSP to grow. Then you can develope a program of consistently transferring money from the regular IRA into the Roth IRA - this amount will require tax consideration because it will generate a 1099. The heir is all important in this scenario to make the money live in perpetuity even if you don't. The heir is required to take a minimum distribution based on their life range but it is tax free - a great way to help with college.

I can see the power of continued growth in any retirement account. From what you said the transfer of IRA to Roth IRA which would make it tax free for heirs. Does this Roth transfer have time limit at all? When is it end?

How about this scenario, in year 2012, I transfer 20% ($200k) of TSP into IRA, leave 80% in TSP for withdraw and growth. The 20% IRA would slowly transfer to Roth in the range of 10 years. So each year I transfer $20K into Roth and pay tax for $20k as income for that year. And this Roth account can pass onto the heirs tax free while it continues to grow until their required withdrawal age.

I am learning new thing every day.

 

[Birchtree]

Your heir will have to begin immdeiate withdrawal in a Roth IRA but it initially won't be enough to matter - just recycle it back into a savings account. When the heir starts working then he/she can begin to contribute and pick a new heir so the plan continues into perpetuity. It can be all very tricky and the IRS doesn't care if you make a wrong life altering mistake - be careful. You nend up doing an average basis in lifetimes. And it never has to end. What I like about the Roth IRA concept is that you can purchase individual stocks that pay dividends every quarter and generally over time will increase those dividends. And the dividends can be reinvested for free.

 

[pyriel]

Pyriel,

Hmmm I did not know the IRA and TSP rules for passing onto the heir. The TSP rule really hurts. Let me try this again:

Age now: 52 (in few months)
Retire at: 57 (5 more years - Feb 2012)
TSP balance in Feb 2012: estimated $1M
Leave everything in TSP and take 6.7% each year for 15 years.
Expected annual returns in TSP = 10%
After 14 years of withdrawal at age 71 1/2, do an one time transfer to my IRA for all my TSP balance. (Hope I live long enough to do the transfer).

Pyriel,
How does my spreadsheet look like? Thanks again.

Ocean

Ocean, the excel worksheet still stands. The only difference is that you will only be paying 10% penalty for age 58 and 59. Once you turn 60, there is no penalty but the tax calculation will stay. Now, you don't have to transfer your TSP to IRA then ROTH. With the new law, you can go straight from TSP to ROTH as long as you pay the tax on it.

Agree with Birch and Wheels that MET annuity is not the way to go. Wheels systematic withdrawal is definitely an orange compared to your apple systematic withdrawal. Wheels is working on ensuring that he doesn't get hit with the 10% penalty since he plans to retire at age 49. Wheels way is also not set up (or he has other options to set it up himself later) for leaving something for his heir using tax deferment retirement account.

The good thing about ROTH is that it doesn't follow the IRA rule of 72T. You never have to withdraw anything and you can give the whole thing to your heir. By using their life expectancy for withdrawal, they will be able to receive a large sum every year tax free...

Ocean, you said that you would like to do a one time transfer of your TSP to a ROTH IRA. Now, this is where the tax will come in. Griffin and ColonialMike had some input with this topic. I recommend for you to get a life insurance that will cover the tax that you will get hit for the transfer. Here is a scenario: Let's say an individual has a million dollars in his TSP when he dies. His beneficiary is his wife. The wife inherits the TSP but must start withdrawing and close the account within 5 years or do a one time withdrawal or a transfer to a ROTH. If she picks the latter, she can transfer the 1 million dollars into ROTH, pay the $360k in taxes (36%) using the insurance money. By using this method the ROTH IRA you plan to leave behind for your heir starts off in 1 million vs. $640k. By using the compounding interest for a rate of return, and his wife lives for another 10 years, the difference will be substantial and his heir will never have to pay a cent in taxes...;-) See excel worksheet below.

 

[Birchtree]

The objective of the grandchild heir for example is to take as least amount that is required - that way the majority of funds continue to grow without interruption. The younger the heir the better when named as beneficiary. I still think taking your TSP funds in a slow manner will serve you fine - and allow time to manage the Roth IRA. There is a time limit on when the heir beneficiary must start to withdraw the minimum funds. This is a very important date and should not be missed. All you have to do is plan.

 

[pogo]

that is correct i look into it because i'm under fers---i don't like it but that's the rule

under further review i was wrong you can get your wife to give up her survivor benifits by signing form SF-3017

 

[ocean]

The good thing about ROTH is that it doesn't follow the IRA rule of 72T. You never have to withdraw anything and you can give the whole thing to your heir. By using their life expectancy for withdrawal, they will be able to receive a large sum every year tax free...

Ocean, you said that you would like to do a one time transfer of your TSP to a ROTH IRA. Now, this is where the tax will come in. Griffin and ColonialMike had some input with this topic. I recommend for you to get a life insurance that will cover the tax that you will get hit for the transfer. Here is a scenario: Let's say an individual has a million dollars in his TSP when he dies. His beneficiary is his wife. The wife inherits the TSP but must start withdrawing and close the account within 5 years or do a one time withdrawal or a transfer to a ROTH. If she picks the latter, she can transfer the 1 million dollars into ROTH, pay the $360k in taxes (36%) using the insurance money. By using this method the ROTH IRA you plan to leave behind for your heir starts off in 1 million vs. $640k. By using the compounding interest for a rate of return, and his wife lives for another 10 years, the difference will be substantial and his heir will never have to pay a cent in taxes...;-) See excel worksheet below.

Pyriel,

Thanks for the info. The one time transfer from TSP to Roth will result in big tax payment. Rollover IRA to Roth in smaller amount in several years will spread the tax payments in those years and this is what I will do.

I also found the conversion can be done as long as the modified adjusted gross income is below $100K per year. This Roth account will provide tax-free income after 5 years and age 59 1/2. We need to pay attention to that $100K threshold.

Right now, I pretty much know what I will do with my TSP balance when it comes near my retirement.

Thanks to all.

Ocean

 

[Wheels]

Ocean and Pyriel,

After looking over the scenarios above I noticed one other thing that I don't think we are seeing eye to eye. Ocean if you retire at age 57, you will NOT be assessed a 10% penalty. If you retire during or after the year you turn age 55, you will not be assessed a penalty.

 

[pyriel]

Ocean and Pyriel,

After looking over the scenarios above I noticed one other thing that I don't think we are seeing eye to eye. Ocean if you retire at age 57, you will NOT be assessed a 10% penalty. If you retire during or after the year you turn age 55, you will not be assessed a penalty.

Dave, what did i missed?

 

[ocean]

Dave, what did i missed?

Pyriel,

Wheels is right. Under the FERS rules for civilian employee, one can retire between 55 and 57 depends on his/her age with 30 years of service. I fall in the 56 age group. So there is no 10% penalty to withdraw TSP payment when I retire.

Ocean

 

[pyriel]

Pyriel,

Wheels is right. Under the FERS rules for civilian employee, one can retire between 55 and 57 depends on his/her age with 30 years of service. I fall in the 56 age group. So there is no 10% penalty to withdraw TSP payment when I retire.

Ocean

OK. But I thought the 10% penalty is an IRS rule not FERS rules. According to the IRS a 10% penalty is assessed when a withdrawal is made before the individual reach 59 1/2. The only way to go around this is if the individual decides to use the life expectancy in the IRS rule book. I am definitely missing something. Thanks...
P

 

[ChemEng]

Under the FERS rules for civilian employee, one can retire between 55 and 57 depends on his/her age with 30 years of service.

Is this right? I thought my MRA is 57 (born on 28NOV79) and I will hit 30 years of service (assuming I stay that long) when I turn 53. Does that mean that I can retire at 55 because I have 30 years or 57 which I thought was my MRA?

It probably doesnt matter at this point. There will inevitably be changes to the retirement program between now and that point in the very distant future...

 

[Pilgrim]

Is this right? I thought my MRA is 57 (born on 28NOV79) and I will hit 30 years of service (assuming I stay that long) when I turn 53. Does that mean that I can retire at 55 because I have 30 years or 57 which I thought was my MRA?

It probably doesnt matter at this point. There will inevitably be changes to the retirement program between now and that point in the very distant future...

At 57, in your case.
http://www.opm.gov/retire/html/faqs/faq11.asp

 

[Spaf]

Pilgrim,

Nice chart, maybe we could archive it!

................................................................................................

Change of subject!​

Retiring at a age prior to full social security benifits takes some planning. Just because someone proposes an earlier retirement doesn't mean squat. Otherwise pigs would fly!

 

[Wheels]

OK. But I thought the 10% penalty is an IRS rule not FERS rules. According to the IRS a 10% penalty is assessed when a withdrawal is made before the individual reach 59 1/2. The only way to go around this is if the individual decides to use the life expectancy in the IRS rule book. I am definitely missing something. Thanks...
P

Again we are mixing apple and oranges. Ocean is talking about the OPM rules that make him eligible to retire under FERS. I can't say I am very familiar with them since I am ATC and my rules are different. However, I was discussing the IRS rules on withdrawing your funds as you suggested. The equal life expectancy payments is one of the age 59 1/2 exceptions. There are others. If you go to the TSP homepage and click on TSP features and then click on "Getting Your Money Out After You Separate" and then click on "How Will My TSP benefits Be Taxed", you'll see a link at the bottom of that paragraph to a PDF file titled "Important Tax Information About Payments From Your TSP Account. The fourth page of that document includes this paragraph. I've highlighted my point.

Hope this helps.

Additional 10% penalty tax if you are under age 59½

If you receive a TSP distribution before you reach age
59½, in addition to the regular income tax, you may
have to pay an early withdrawal penalty tax equal to
10% of any portion of the distribution not transferred
or rolled over. The additional 10% tax generally does
not apply to payments that are:

• Paid after you separate from service during or
after the year you reach age 55;
• Made because you are totally and permanently
disabled;*
• Paid as substantially equal payments over your
life expectancy;
• Annuity payments;
• Ordered by a domestic relations court;
• Made because of death; or
• Made in a year you have deductible medical expenses
that exceed 7.5% of your adjusted gross
income.*

 

[colonialmike]

72T early withdrawal rule with NO 10% penalty. Also, does anyone see where it reflects that after a retiree collects for 5 years or until age 59 1/2, the retiree can do what he/she likes with the account? If it is in plain sight, I appologize.

http://www.dinkytown.net/java/Retire72T.html and http://www.irs.gov/pub/irs-drop/rr-02-62.pdf

 

[Wheels]

72T early withdrawal rule with NO 10% penalty. Also, does anyone see where it reflects that after a retiree collects for 5 years or until age 59 1/2, the retiree can do what he/she likes with the account? If it is in plain sight, I appologize.

http://www.dinkytown.net/java/Retire72T.html and http://www.irs.gov/pub/irs-drop/rr-02-62.pdf

It's 5 years or age 59 1/2, whichever is LONGER. It's on the same page that I referenced. It's also in the calculator page that you posted

"Substantially Equal Periodic Payments (SEPP)

The rules for 72(t)/(q) distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy to avoid a 10% premature distribution penalty on any amounts you withdraw. 72(t) payments must last for five years or until you are 59 1/2, whichever is longer."

 

[colonialmike]

Wheels, I was looking for verbage that indicates the retiree can do what he/she would like with the reamining account balance.