How to plan what source to withdraw from

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“How to plan which source to withdraw from and when (TSP, Roth, other investments) over the retirement years to supplement pensions and SS. Are tax consequences the primary decision driver?” – Steve.

As a Federal employee your retirement is a three legged stool. You have your pension, social security and your TSP to help provide you with funds for retirement.

In addition to having a pension, social security and your TSP people may have a host of other assets that are earmarked for “retirement” use. For example, you could have savings in your bank account or investments outside of the TSP like an IRA, ROTH, or brokerage account.

Steve, you ask a phenomenal question that we won’t be able to completely answer in this context because it requires a lot more information to design a retirement income timeline that coincides with your ten-year tax plan.

What we can do though is walk you through some steps to help you make education decisions.

How much money do you need in retirement?

Hint: the answer is not less than you earn now, probably.

I do have clients that do not need as much money as they have during their working years when they retire but they are FEW and far between. Most people, when they retire, want to be able to enjoy retirement and travel, recreate, indulge in hobbies or learn new things. All of whic tend to cost money.

Most of our clients would like to have between $6,000 and $12,000 a month in retirement.

Once we know what they want to have on a monthly basis in retirement, we look at what sources of retirement income that they have.

For example, if we took an individual who wanted $10,000 a month in retirement and was going to have $3,000 from their pension and $3,000 from social security then we know that we have a retirement income gap of $4,000.

As you, Steve, are probably already assuming the time line between when you retire and when ou are eligible to receive some of your retirement funds doesn’t always line up. You may be eligible to retire at age 57 but can’t start social security until age 62. Is your FERS Supplement enough? When your FERS Supplement stops at age 62, does that mean you should turn on social security before you have reached your full retirement age or age 70?

This is one of the reasons that we like to draw out a 10 year timeline.

How to fill your retirement income gap

Next, we will accumulate all of your investments into one big “bucket.” What do all of your retirement savings look like? Regardless of which account or how it is taxed.

If I know from the example we used above, your retirement income gap is $4,000 a month hat is $48,000 year.

Money that you need to spend in the next 3-5 years does not belong invested in the stock market. Even if that means it is making nothing for interest, it is not worth the risk of investing if you need those funds in the short term.

This means, for our Example, we need $240,000 set aside as cash and income buckets.

Everything else can be in our growth bucket. A growth bucket should have a 10+ year timeline before you think. you will need to use the funds for your retirement.

  • Cash,
  • Income,
  • Growth.


Are the C, S, and I volatile investments for retirement?

YES! The C, S and I funds are volatile and are meant to move up and down with time. If you have 100% of your retirement funds here, and need to make a distribution do you think that you will need to withdraw funds when the markets are soaring or during a period of decline?

NO! This does not mean that you should take 100% of your investments in the TSP and put them in the G Fund. That is another mistake we see many Federal Employees make the year that they retire. Without a financial plan in place, they move 100% of their investments into the G fund which is free of the volatility that is prevalent in the C, S and I funds but make little to nothing. What happens when inflation creeps in at 8% and you’re earning close to 0% on your retirement funds?

You have to have a financial plan in place to navigate how you will handle distributions WHEN not IF the markets decline.

Buckets and Taxes

Once you have your investment buckets carved out between cash, income, and growth you need to start looking at the actual investment vehicles and their tax implications.

There are four tax buckets that you need to be aware of:

  • Ordinary income,
  • Tax-deferred,
  • Capital gains and,
  • Tax-Free.


To fill your retirement income gap, you need to apply a 10-year tax strategy to your 10-year plan.

We have to make decisions about taxes with the information that we have today. We don’t know what the tax laws will be when tax laws expire. Make decisions on the information that you have now.

This is what we help clients with on a daily basis. We want to help as many federal employees as possible so that they can avoid the mistakes we have witnessed – federal employees do it all!

If you have coworkers or know Feds in your agency that might benefit from this information, please share this article.

We continue to answer your questions and provide Federal Employees with the information they need to make informed decisions about their benefits and retirement because of you!

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