Using TSP G fund as your cash bucket in retirement?

[flalaw97]

I have had seen several retirement experts talk about having three buckets - cash, income and growth based on when you will need the money. The "cash" bucket holds money that you will need in the next 3 to 5 years - your anticipated cash needs (i.e. monthly spending minus FERS and SS income). I was wondering if I could make the G fund my cash bucket? Can I move all but 5 years of anticipated cash needs from my TSP into a traditional IRA(s) where those buckets would be invested for growth and income, and then replenish the TSP G fund account as it is used with money from the "surplus" Traditional IRA growth and income? What are the plusses and minuses of separating it out that way?

 

[tsptalk]

I may have misunderstood, but if you are already retired I don't think you will be able to add money to the G-fund. If you're still working I suppose you can redirect contributions to G to build it up. But money markets in an IRA are similar to the G fund, and probably easier to get to if you need it.

 

[Bullitt]

Bucket approaches make things more complicated than they need to be. Don't forget, money in the G fund is still subject to taxes when withdrawn.

L-Income is a very solid allocation for an emergency fund that will beat any money market account in real returns over 3-5 years. You could keep it in TSP which will auto rebalance, or roll your own with a few ETF's

 

[flalaw97]

I may have misunderstood, but if you are already retired I don't think you will be able to add money to the G-fund.

I was under the impression that I can move money from a traditional IRA to the Traditional TSP using the TSP form 60. So for example if my TSP is 100K when I retire, I move 70K to a traditional IRA at retirement and leave the other 30K in G fund for regular monthly distributions to cover my cash needs. At the end of the year (or other appropriate time based on the market), I transfer money from that traditional IRA back to the G fund in my TSP account. In theory, as that IRA fund grows, the spillover can replenish the TSP account. This prevents money from coming out of C, S, and I when the market is down (proportional withdrawals required by TSP). Bullit's point about L income is well taken - perhaps it is in L-Income vs. G, but my point is if I am going to make regualr withdrawals from TSP, I want it to come out of G (or L-income) NOT C, S or I when the market dips - that would be like "dollar cost averaging" the wrong way - taking out more shares when the market dips to realize the same monthly payments.

 

[Bullitt]

I see what you're saying, but it all sounds like a matter of mental accounting.

If the market is down, lets say a 2008 scenario, not some ridiculous 5% drop, and you're drawing down from that G fund, you're going to have to move money back to TSP by selling whatever holdings you have in the Traditional IRA to keep your allocations proper according to your risk levels.

How much risk are you looking to take in retirement? If you have a balanced portfolio in retirement, it won't be as much of a hit in a down market when you withdraw funds. If you have 50G/50C, you're still withdrawing half your G fund, so it's not all C fund being liquidated. When you pull the plug, you should have your number in TSP with a conservative allocation that affords some growth with minimal risk of drawdown.

There is a great deal of luck involved, more than most want to admit. It was much easier to retire in the last 10 years than it was in 2007-2008, but if you hit your number, you should be able to sustain any market turbulence as long as you keep a conservative withdrawal rate.

 

[tsptalk]

I was under the impression that I can move money from a traditional IRA to the Traditional TSP using the TSP form 60.

OK, gotcha. I thought you were talking about making contributions after retirement. IRA rollovers seem to work. Sorry for the misinfo.

 

[Maricar19]

Won't it be easier to do it the other way around? IRA is your cash fund and TSP is your growth/emergency fund.
Based on my experience, it is a lot easier to withdraw from IRA.
Every Time I needed to withdraw from TSP, I need to have the form notarized for spouse's signature.
I tried a monthly with TSP to avoid monthly notarization (just one time form), but then I can't time the withdrawal.

 

[47_Dodge]

Following.......

Thank you for posting this question and for those providing input/suggestions. I am in the process of retiring and our Charles Schwab Financial Consultant has suggested the same Bucket Strategy. I'm hesitant about moving large amounts of my TSP at one time. Might look at moving 10-20% over a five to ten year period with Roth conversions in the mix.

 

[flalaw97]

Won't it be easier to do it the other way around? IRA is your cash fund and TSP is your growth/emergency fund.
Based on my experience, it is a lot easier to withdraw from IRA.
Every Time I needed to withdraw from TSP, I need to have the form notarized for spouse's signature.
I tried a monthly with TSP to avoid monthly notarization (just one time form), but then I can't time the withdrawal.

You might be right that it is easier to pull money from the IRA but most people I have seen said they want the growth/equities bucket to be outside of TSP to increase their investing options and movement (not limited to 2 IFTs). My thinking is if I know I will need a monthly check of $2000 to make up for the gap between my monthly spending of $7000 and my $5000/mo retirement income (pension plus supplement/SS) then I don't have to time it if it is only invested in L-income or G fund. I just have to replenish it from the Growth IRA at some point (when the market is up).

 

[flalaw97]

Following.......

Thank you for posting this question and for those providing input/suggestions. I am in the process of retiring and our Charles Schwab Financial Consultant has suggested the same Bucket Strategy. I'm hesitant about moving large amounts of my TSP at one time. Might look at moving 10-20% over a five to ten year period with Roth conversions in the mix.

Definitely have to be careful about tax implications of pulling money out of TSP in large chunks - transfer to IRA vs taxable distribution to you. I also am hoping to move some money in small chunks from TSP to Roth IRA after retirement when hopefully I am in a lower tax bracket than now. That math is taxing my brain (no pun intended).

 

[flalaw97]

I see what you're saying, but it all sounds like a matter of mental accounting.

If the market is down, lets say a 2008 scenario, not some ridiculous 5% drop, and you're drawing down from that G fund, you're going to have to move money back to TSP by selling whatever holdings you have in the Traditional IRA to keep your allocations proper according to your risk levels.

How much risk are you looking to take in retirement? If you have a balanced portfolio in retirement, it won't be as much of a hit in a down market when you withdraw funds. If you have 50G/50C, you're still withdrawing half your G fund, so it's not all C fund being liquidated. When you pull the plug, you should have your number in TSP with a conservative allocation that affords some growth with minimal risk of drawdown.

There is a great deal of luck involved, more than most want to admit. It was much easier to retire in the last 10 years than it was in 2007-2008, but if you hit your number, you should be able to sustain any market turbulence as long as you keep a conservative withdrawal rate.

Love this response! You are correct that in 2008 I didn't think I would be able to consider retiring in 2023 at MRA (56&4mo) but now it is a possibility. With life expectancies into the 80s, I think even in retirement I will need to have a decent chunk of money still invested pretty heavily in the market - that is almost 25 years away and I don't know if I have enough to invest conservatively with an expected 4-6% growth? The bucket strategy is mental math converted to paper for me. If I can see 5 years of cash needs in that bucket (account) and another 5 years in an income bucket and everything else (more than 10 years away from need) in a diversified growth account, then it seems easier to understand what each pile of money is intended to do and therefore how risky I can be without upsetting the applecart. Great discussions.

 

[Bullitt]

Right. Longevity is probably the biggest risk we all face in retirement. Most of us will require a higher allocation to stocks at an older age than previous generations for that reason alone.

I also think it's a good idea to keep TSP forever for the G Fund. Minimum amount is something like $300 to remain active. You never know, you might want to move it all back to the G Fund 25 years from now. It's a safer place than a money market fund (FDIC limitations), bond or stock fund.

 

[evilanne]

Following.......

Thank you for posting this question and for those providing input/suggestions. I am in the process of retiring and our Charles Schwab Financial Consultant has suggested the same Bucket Strategy. I'm hesitant about moving large amounts of my TSP at one time. Might look at moving 10-20% over a five to ten year period with Roth conversions in the mix.

Definitely have to be careful about tax implications of pulling money out of TSP in large chunks - transfer to IRA vs taxable distribution to you. I also am hoping to move some money in small chunks from TSP to Roth IRA after retirement when hopefully I am in a lower tax bracket than now. That math is taxing my brain (no pun intended).

I personally don't see issue with the proportional monthly withdrawals from TSP. I'm currently doing life expectancy payments and TSP withdraws the same day each month...some months may be up and some may be down but it all balances out over time and you are only withdrawing a small fraction of the total balance. I also have a small inherited IRA with an RMD. In the beginning, if there wasn't cash available I would have to sell something when RMD was due. Then I stopped reinvestments on certain shares so that it would cover the RMD. It also isn't a bad idea to have some cash available in a market pullback to buy something at a reduced price. As long as you earn more than what you withdraw each year the balance continues to grow. In years that are really bad like 2009 and early last year with COVID, congress passes special legislation where you don't have to take RMDs

For moving money out of TSP to convert to Roth, I don't think it is a bad idea to move what you think you will need to convert over the next 3-5 years to a traditional IRA (Institution to Institution Transfer). After dealing with TSP, I would not want to be making transfers on a regular basis. It is easy to convert a traditional IRA to a Roth IRA. You can move the money directly or you can transfer the shares already invested in the Traditional IRA directly to the Roth for the conversion. I think the Roth IRAs should be focused on Growth. But depending on where you want to be withdrawing from, you should consider what type of investments are in each and how they may be impacted by market swings. I didn't see anything regarding any investments in a regular brokerage account. When you need to pull money out for whatever reason, having a traditional brokerage account is beneficial. Anything taken from tradition IRA or TSP is taxed at ordinary rates but LT capital gains are at a reduced rate. This can be beneficial if you are trying to stay within a certain tax bracket for conversions.

When thinking about the original question, I'm sure that the strategy is possible but it really doesn't make sense IMO to use TSP as cash withdrawal system. I think of a Cash bucket as what is in my checking and money market account and in the back of my mind I'm thinking that this proposed bucket system is a way that some financial advisor is trying you get you to transfer all or part of your TSP to them. As a government employee, you will have a pension and you are eligible for SS at 62. So I did an internet search and found this article that may be useful https://www.forbes.com/sites/robert...is-broken-heres-a-better-way/?sh=22c522031b33

 

[James48843]

I'm not sure I read the question correctly, but you cannot take money out of only one fund, if you have money in multiple funds. As the TSP is configured now, all you can do is request an AMOUNT of money as either a one-time payment, or a monthly withdrawl.

for example, if you have 50% of your TSP in the G fund, and 50% in the C fund, you can't ask for just money from the G fund out. TSP will divide your request among all the funds you hold. You'll get half the amount from the G, and half the amount from the C in that case.

I THINK they were talking about changing that in the future- but to the best of my knowledge, still how it works.

 

[flalaw97]

As long as you earn more than what you withdraw each year the balance continues to grow. In years that are really bad like 2009 and early last year with COVID, congress passes special legislation where you don't have to take RMDs


As a government employee, you will have a pension and you are eligible for SS at 62. So I did an internet search and found this article that may be useful https://www.forbes.com/sites/robert...is-broken-heres-a-better-way/?sh=22c522031b33

I think the bucket approach is designed for the very fact that, historically there have been years where you didn't earn more than you withdraw - in fact you didn't earn anything - you lost money that year (2008) and by the next year you still were not back to where you were two years prior (2009). That means that those monthly payments (not necessarily RMDs but monthly cash expenditures to pay for costs above your pension and SS income) that you took out were selling when the price was low (locking in the losses) - and you had to sell more shares to get the amount you needed. The concept of the buckets is that you don't refill the cash bucket from stocks during a 2008 year. You wait and let the market recover and then refill. I liked the article you linked except he was very dismissive of the fact that you are locking in losses -"Where does her spending money come from, you may be asking. From an asset allocation perspective, it doesn't matter because she is withdrawing spending money and then rebalancing what’s left. The end result will be the same once she rebalances her portfolio back to her target asset allocation." The rebalancing happens AFTER the losses have been locked in. I think the big problem is people are still analyzing this as an asset building timeframe when it is an asset spending timeframe. Yes you still allocate resources to continue building but you are selling assets because you no longer have the same income you had in your building years. And Feds have a different dynamic because we have both FERS pension and SS so the need for monthly income is less than someone whose monthly income relies on a small SS payment supplemented by pulling money from their retirement accounts and savings.
The LT capital gains point you made is excellent - and something I still need to do a lot of research on because I haven't dealt with a traditional brokerage account. Thanks for the input and article!

 

[flalaw97]

I'm not sure I read the question correctly, but you cannot take money out of only one fund, if you have money in multiple funds. As the TSP is configured now, all you can do is request an AMOUNT of money as either a one-time payment, or a monthly withdrawl.

for example, if you have 50% of your TSP in the G fund, and 50% in the C fund, you can't ask for just money from the G fund out. TSP will divide your request among all the funds you hold. You'll get half the amount from the G, and half the amount from the C in that case.

I THINK they were talking about changing that in the future- but to the best of my knowledge, still how it works.

You are right and that is why the contemplation is moving most of the money out of TSP and into a traditional (more flexible) IRA and leaving the rest in TSP as "the cash bucket" in G or L income to support a monthly withdrawal that covers the gap between your pension/ss income and your monthly expenditures. Since your entire TSP will be in one fund (G or L-Inc) market doesn't matter for those monthly withdrawals.

 

[Maricar19]

Hi- came across this and you might be interested. It's almost similar to a 3 bucket strategy.
https://www.schwab.com/resource-cen...olio?cid=25176197|6069808|153811422|292984198

 

[evilanne]

flalaw97,
I think you are focused too much on the idea of locking in losses. It is a different mindset in retirement...a balance between preservation of capital and continued growth so a lot depends on your risk tolerance and your actual needs. As a federal employee with a pension, you will have a steady source of income.
Questions to consider: How long before you plan to retire? Have you determined how much money you really need?
Do you have enough in TSP to be comfortable? Do you need to work longer?
This calculator is helpful tool https://www.tsp.gov/calculators/tsp-payment-and-annuity-calculator/#top

If you transfer everything to an IRA, how will those fund be invested? Will it be similar to TSP funds, individual stock or bonds?
Are there any management fees or trading costs?

In a downward market, how long are you going to stay in the C/S Funds before you move to safety or reduce your stock exposure?

There are many options within TSP...monthly, quarterly or annual withdrawals and 2 IFTs per month that can use to manage the risk.
--You don't have to withdraw anything until 72 when RMDs kick in
--If you are doing a full withdrawal with monthly payments, you can reduce the payments down to $25/month which would make the impact on withdrawals minimal.
--Life expectancy payments adjust automatically each year and are similar to 4% rule
--If you are sitting in G or have a much higher allocation in the G Fund during a down market, how big of an issue is it really?
--You can make one withdrawal annually and IFT to G or an acceptable allocation based on market conditions prior to the withdrawal, if necessary
--Just consider any losses you incur related to withdrawals attributable to the 5% matching from the government that has grown over many years
--You may want to have a larger emergency or cash fund if you are really worried about a lengthy down turn

I think the TSP works just fine in retirement but I wouldn't suggest doing any more transfers than necessary. Your proposal is more complicated and will require more transfers in and out of TSP so although it is possible, I'm not seeing much up side.

 

[alevin]

I'm in the boat of trying to figure out withdrawal strategy as well, familiar with bucket approach and ability to put trad IRA into tsp, or back and forth if that seems the right thing to do. not planning on either of those at this point, but the trad ira back into tsp G is a hole card to pull if circumstances warrant.

One thing to be aware as I understand it, is that trad IRA is fair game for lawsuit settlement if on the losing end, but tsp holdings are not. I don't understand the legal logic there, but I've read that little factoid/red flag warning somewhere.

 

[flalaw97]

Hi- came across this and you might be interested. It's almost similar to a 3 bucket strategy.
https://www.schwab.com/resource-cen...olio?cid=25176197|6069808|153811422|292984198

Thank you for this - it is very much a description of the bucket strategy. Keeping cash for "immediate" needs that you don't have to worry about the market, short term reserve in CDs or bonds for income for intermediate needs and then the rest invested in stocks according to your risk/age. This is the first one that I have seen express the percentages as you progress through retirement 60-69, 70-79, 80+ gradually becoming more conservative because there is less time for stocks to rebound before you need the money. And this one actually recognizes that some people have an income stream (they call it an annuity - it is our pension) which reduces the amount you need in cash.