Moving TSP Money to G Fund – Here is What You Need To Know

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I am 8 years from retirement and currently invested 100% in the C fund. When should I start moving money to the G fund and should it be based on a percentage of my current balance, or should I base it on how many years of withdrawals I want to protect once fully retired i.e. 8-10 years. –  Paul 

Micah Shilanski  00:00

Well, you’ve done an excellent job of saving money getting ready for retirement, you’re seeing that wealth build and grow. And you know, you’re on the precipice of being able to financially retire. But, now the question comes, should you make any changes in your TSP? How do you need to set it up for withdrawals? If you’ve ever wondered the answer to that question, then stay tuned for this FERS Federal Fact Check. Hi, I’m Micah Shilanski, from Plan Your Federal Retirement and we have a great question that came in from Paul. All right. I know it’s a great question all the time. I love your guys’s questions, because we really want to help federal employees improve their retirement! Your questions are our insight into seeing what you guys are concerned about, what questions you have, what information should we provide, so I really appreciate it. Keep those comments, smash that like button. Go ahead and jump in the comments. Leave us some great comments in there we can respond as well, but keep those questions flowing would be fantastic. All right back on script. So Paul asks, he says I’m eight years from retirement currently invested 100% in the C fund. When should I start moving my money the G fund and should it be based on a percentage of my current balance? Or should it be based on how many years of withdrawals I want to protect once I’m fully retired, ie in eight to 10 years? Well, that is a fabulous question. Right? Now I’m going to tell you the way that we approach it and different people have different ideas. And of course, Paul, I don’t know your situation. So just to be clear, this isn’t investment advice. This isn’t recommendations. I’m talking about a concept right here and painting with a broad brush that you need either work with a financial advisor to really help you implement, or really understand these rules yourself to implement them. All right, all those appropriate disclosures in place, let’s dive into it. Number one, I want to start with what are we solving for? How much money a month do we want coming in? And so I like to say okay, just great starting place what your net paycheck right now? Let’s say for discussion, you’re bringing home $8,000 a month. Awesome. That’s $8,000 a month and take home pay. For simplicity, let’s say that’s both spouses, just to make my math really easy, to get $8,000 a month. So how do we replace that eight grand a month? Well, one question is going to be how much is your net pension going to be? How much is your supplement going to be? These other questions… Right? So let’s say from out of that $8,000 a month, let’s say between pension income supplement etc. you have $4,000 a month coming in. Great, well then that means we need to replace it another $4,000 a month. We need to be able to pull that from our investments. Now we start setting up our investment plan. My general rule of thumb, right it’s always a little bit different. My general rule of thumb – any money that you want to spend in the next five years doesn’t belong invest in the stock market. Why five years? 2008, 9, 10, 11, 12. It took five years for the market to get back to even, from the peak to the crash, to the recovery in 2008. Most recessions are longer than that, right? That was a depression, that was kind of a five year period. Most recessions, or corrections, are in that three years from peak to valley to recovery. But I like to err on the side of caution. So on to your question, Paul, I’m a distribution guy, not so much a percentage guy, right? Yes, those are correlated. You could look at him the same, but I’m a cash flow type of guy. So what that means is, let’s say that I wanted to have, you know, my goal was this $8,000 a month and let’s just say 4,000 of that was coming from your TSP, and you’re gonna have 4,000 of that coming from your FERS pension, just for discussion with that. And then what I’m going to do with this $8,000 a month, let me draw this on screen, sorry about that. What I’m gonna do it’s $8,000 a month I’m going to look that four grand and just for simplicity, let’s kind of gross this up and say, well, that’s 4,000 net. So, I probably need 5,000 gross, right? And IRS unfortunately is still going to be part of your retirement. So we need 5,000 a month gross. So, the first thing I’m going to do is I’m going to set up and look at my buckets. And in my buckets I want to cash bucket. And inside of my cash bucket, I want one to two years of your distributions inside a cash right? So, for it’s $5,000 a month, that’s $60,000 a year. You’re talking somewhere between 60 and $120,000 in cash. Now what do I mean by cash? I do not mean take it out of the bank, your TSP excetera, stick it in your mattress, right? That’s not what I’m referring to. I’m referring to something that is fully liquid. What is liquid? Liquid means I can access it virtually immediately with no risk of loss. That is not the C fund. Right? And Paul, I know you’re not saying it is, but you know for example, that’s not the C fund just because I can do it. That’s not a brokerage account invested in stocks that move up and down. Liquid is a money market fund. It is a bank account. It is a G fund, private equivalent, right that’s kind of our cash bucket. Then I like to see an income bucket of two to three years of money that you might need inside of here. So this would be 120,000 Oops $280,000 in there. And in the balance I’d like to see in our growth bucket. And our growth bucket, the growth the markets are going to do this. They’re going to go up and down. Right? Who knows where we are in that potential. cycle. But with our growth bucket, the biggest thing we have is time, we don’t need that money right now. So it’s not if it goes down it’s when it goes down in value -we have time to let that recover. And that’s what these other two buckets right here give us, that cash and income. Now income, this is what I like to call like fixed income, this could be bonds, this could be dividents, could be different things, something that might move a little bit, but something that doesn’t have a great risk of loss. And so this is how I create our five year window for our clients. And this is where we’ll be pulling out $5,000 a month. Unfortunately 1k in this example is gonna go to the IRS, and that would be $4,000 a month that would be coming in to you, and we kind of pull this money out. So getting back to directly your question, Paul. I like to look as I’m getting within five years of the soonest you’d want to retire. I started looking at the distributions – can we move this money over in there? Now this comes to a second question about you know, can you really, how much do you really need in order to pull out 60 grand a year out of your account? What’s a safe distribution strategy, how to invest that those are all a secondary questions that we got to be thinking about as well and making sure that’s in place. But again, to your question, I’m a dollars guy, I want to park that money in a certain place. And here’s what I know. One of my jobs as a financial advisor is when the market goes down to help my clients stay invested so it will go back up. Right? So that when that market goes back up, they have a chance to recover. If the market drops and they sell out and they say I’m gonna wait for the bottom, and the market takes off they’re gonna wait for the other correction to market keeps going and keeps going and keeps going. They’re never in that period of time. They never get back in and it’s an easy way to run out of money. So one of my jobs is to make sure we have money on the sidelines to keep our distributions coming. Keep our retirement cash flow going, so your investment money can do its investments. Paul, I hope that answers your question. Still a million other things on how to take money out of the TSP, proportionate distributions, other things to talk about as well. But I think that’s going to help, give you a little bit of a hit. Again, if you have questions like this, leave us in the comments. Shoot us an email, we love to get your guys’s feedback, and until next time, happy planning

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