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A Tale of Successful Retirement Planning

A story of high achievement, savvy investments and frugality.

Successful retirement planning under the Federal Employees Retirement System is a career-long endeavor. Federal employees who were hired after 1983 have had to plan for retirement using three different benefits: a pension administered by the Office of Personnel Management, Social Security retirement benefits and a tax-advantaged retirement investment program called the Thrift Savings Plan. It’s now possible for someone to have had 35 years of service under this system. That’s a full career in my book.

Today we’ll hear from “Alexander,” an employee who retired at the end of March 2018. He began working for the federal government as a seasonal Park Service employee in the 1970s. He went on to serve as a law clerk in another agency and later as a staff attorney. In 1987, he voluntarily transferred into FERS. He finished his career at the top of the General Schedule pay scale.

Alexander and his wife recently completed their first year of life after retirement. In reviewing our email exchanges over the past year, I was struck by the fact that they continue to plan their life after retirement in the same manner as they planned for his retirement. It looks like they’re on track for a financially secure life. How did they do it? Let’s look back at our email exchanges.

Alexander, March 27, 2018: After 35+ years of federal service, tomorrow is my last actual day in the office. I'll then use most of my travel credit hours and March 31 will be my last official day as a federal employee before retirement. I'm in FERS and my TSP balance is over $1.8 million. I began saving in the TSP in 1987. As long as permitted, I invested only in the C, I, and S Funds until about a year before I retired. In the spring of 2017, I transferred over $1 million of that into the G Fund, so I think I'm in good shape to have a stable amount of money to last me the eight years I have before I turn 70 and will begin to collect Social Security benefits. I've got just over 10% of my TSP balance in the Roth TSP. My wife and I also have other 401(k) and Roth IRA savings.

Once retired, I will receive a payment for 504 hours of accumulated and accrued annual leave that includes the 240 hours of annual leave carried over from 2017, plus 192 hours of leave that was restored by my agency from 2017, plus 24 credit hours, plus 48 hours of annual leave I accumulated in the current year. In addition, I am retiring with a Voluntary Separation Incentive Payment, which means that my agency will pay me $25,000 to retire. As a result of all this, I don't think I'll need to touch my TSP in 2018. Also, I'll use some of this money to pay the remaining balance on our home mortgage next month.

It's my hope to not touch my TSP until the the liberalized TSP withdrawal rules are implemented later in 2019. The sooner the better. I plan on making substantial Roth conversions between this year and the year I begin to collect Social Security benefits.

Alexander, April 29, 2019: It's been over a year since I wrote to you. At that time, I was just about to retire. I've now been retired for about 13 months. Since my retirement, I haven't yet touched my TSP. I'm waiting until the new withdrawal rules take effect in September before I make my first withdrawal. My current TSP balance is over $1.88 million. Since I retired, the balance has grown over $80,000. Of that, I've got about $1.09 million in the G Fund and about $201,000 in the Roth TSP. To avoid having to make TSP withdrawals, I took a $40,000 loan from my whole life insurance policy. I'll pay that back in full, with interest, when I access my TSP account in October.

In October, I plan on transferring my Roth TSP to a low-cost brokerage firm, and will collect a bonus for doing so. I'll also move all my non-G Fund monies to an IRA with a low-cost brokerage firm and collect another bonus. I'll make substantial Roth conversions from that IRA over the next few years.

My response: Congratulations on your retirement and for managing your first year like a pro! You are making decisions that make sense for individuals who have a decent (understatement in your case) TSP balance and the luxury of being able to afford to delay their Social Security application. I am impressed that you are able to live mostly on your FERS retirement benefit along with the $40,000 loan from your insurance policy. Once the TSP withdrawal options become liberalized, you indicate that you will begin your second income stream to get you to age 70 when you will then benefit from the maximum delayed credits. Does your spouse qualify for Social Security? If so, it might make sense for your spouse to claim early (if they are 62 and their Social Security is less than yours) while you delay your benefit to age 70.

Alexander’s response: In addition to my FERS pension and the life insurance loan I took, we also rented our house and downsized into our basement apartment. The net rent is a fairly large amount. These three sources, plus the cash savings I accumulated before I retired have funded my first 13 months of retirement. So, I'm not quite as frugal as you give me credit for.

I feel somewhat bulletproof in terms of our overall finances. With about $1.1 million in the G Fund when we start to draw it down in October 2019, that, along with my FERS pension (plus rental income for two more years) will easily last us beyond the time we begin to collect Social Security. If the U.S. and international equities markets drop by the time we turn 70, we should still be pretty well off with only my FERS pension and our combined Social Security benefits.

My wife has about 17 years of Social Security credits in the U.S. and about 21 years of social security credits in her country of birth. Our plan is for her to start collecting her U.S. benefits when she reaches her full retirement age, which happens to be a few months before I turn 70. I like her not having too much Social Security income early on so we can continue to make maximum Roth conversions from my regular TSP account to a traditional IRA and then to a Roth IRA. For example, we may be making a Roth conversion at the end of this year in the range of between $180,000 and $200,000.

One other thing: We have a high-value, large house in a nice neighborhood in Washington, D.C., right on the Metro (Washington’s subway system). Our plan is to sell it in a few years and to downsize to a condo. I figure even if we purchase an expensive condo for cash, we'll net at least $200,000 to add to our retirement pot.

It took many years to get to this point, but I feel pretty confident that we've done well and will have no serious financial problems.