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Your pre-retirement questions answered, part 2  

The second in a series tackling your pressing questions.

Here, I answer more of your questions from my inbox.

Q. I am 63 yrs. old and will retire in two years (65 years old) or earlier, does it make sense for me to invest only in the G Fund now vs. L 2025 Fund. 

According to the Thrift Savings Plan website, the L 2025 Fund’s investment objective is to achieve a moderate level of growth with a moderate emphasis on preservation of assets. The Fund's allocation in the G, F, C, S, and I Funds is adjusted quarterly. The L 2025 Fund will roll into the L Income Fund automatically in July 2025 when its allocation becomes the same as the allocation of the L Income Fund.   

Unfortunately, without more details pertaining to your circumstances, goals, objectives and risk tolerance, this question cannot be answered.

However, I would caution against being too conservative. If the TSP is not your only source of retirement savings, this could be important in determining allocation between all of them. The amount of income you will need from the TSP to meet your monthly living expenses is another consideration in how to allocate your funds. There is a rule of thumb for allocating your retirement savings called the “age minus 100 rule.” The result is the percentage of your assets you should put in stocks, also referred to as "equities" which in the TSP, would be the C fund, S fund, and I fund. You thus would have a 35% allocation to stocks at age 65. The rule is based on the idea that younger investors have a longer time horizon and can afford to take on more risk, while older investors' time horizons shorten, and they can't take on as much risk. However, there are many financial professionals who say the rule, like any “rule of thumb,” has some exceptions and should only be considered a starting point: 

  • Life expectancy: The rule was created when life expectancy in the US was much lower, so you might want to add 10 or 20 years to it. 
  • Spending needs: Your actual asset allocation should depend on your spending needs as they relate to your assets or income sources. 
  • Risk appetite: The rule depends on your appetite for risk. For example, if you're more financially stable, a 70% stocks / 25% bonds /5% cash retirement strategy may be better.  

Research by Wade Pfau and Michael Kitces shows that the 100-minus-age approach has delivered the worst outcome in a poor stock market. The best way to determine the best investment strategy for your situation is by consulting a financial professional before you make any investment decisions.  

Q. Will the TSP automatically send me a Required Minimum Distribution at 73? 

If you do not elect a withdrawal that satisfies your RMD in the year you turn 73, the TSP will automatically send an amount to satisfy the remaining required amount. The required beginning date for your first RMD is April 1 following the year you turn 73. However, if you delay until the following year, you will have to take two RMDs that year. One for the year you turned 73, and one for the current year. On Dec. 20, 2023, the TSP processed any remaining RMD amounts for 2023. For income tax purposes, these payments will be reported to the IRS as income for 2023. For income tax purposes, these payments were reported to the IRS as income for 2023.   

Q. Is it permissible to take a portion of my TSP towards the annuity option and still have the flexibility with the balance of my TSP for partial and installment withdrawals?

You can take a partial distribution of part of your account even if you’re currently receiving installment payments or have purchased a TSP annuity with a portion of your account balance. There is no longer a 30-day waiting period between withdrawal requests, so if you request a withdrawal from your TSP account, you no longer need to wait 30 days to request another withdrawal. You can now complete your withdrawal requests entirely online in My Account. You can stop, change, or start your installment payments anytime. You can learn more by reviewing the TSP Distributions booklet, TSP Annuity Fact Sheet, and the Tax Rules About TSP Payments booklet.

Q. Do you have advice on what method is best when you must withdraw money from TSP (minimizing taxes): partial withdrawal or monthly withdrawal (i.e., $150,000 once or $12,500 a month for 12 months)? 

The total amount you take out in the year is what matters. A $150,000 lump sum payment or monthly installments of $12,500 will result in the same tax liability. 

Q. Where would I look on the TSP website if I want to request a withdrawal from my pre-tax traditional TSP money and not from my balance invested in the TSP Roth portion of my account?   

To request a TSP withdrawal after you leave federal service and to designate the money distributed from Roth or Traditional funds, log in to My Account to begin the request or contact the ThriftLine. Check out the TSP Booklet on Distributions and the booklet on Tax Rules About TSP Payments.