Handling Your Cashflow After the Military

A reader made a comment about tax-deferred investing that’s worth expanding into an entire post:

I have been reading about early retirement a lot lately since we’re years out from military retirement, wanting to know where to stash our extra income for those seven years, and where we can have access to it before 59½. After maxing out both Roth IRAs, you state using the TSP. If we throw all the rest into Roth TSP for the next seven years, are you assuming rolling it over into the Roth IRA so that we can then pull out from contributions tax-free? Or would it be better to start putting it all into a taxable low-cost portfolio so that we can get our hands on it to supplement military retirement income? We would also like to pay off the mortgage right at retirement. Any advise or point us to an article that lists the order of allocating our extra income right now with the goal of early retirement in 7-10 years would be greatly appreciated! Looking to read the book soon!”

The biggest advantages of the TSP are its low expenses, its “G” fund, and the ability to automatically deduct contributions from your pay. The longer you can use those advantages, the faster you’ll get to financial independence. But you’re right– as you approach retirement, it’s more important to manage cashflow.

Once you forecast how much cash you’ll need between retirement and age 59½, the simplest option is to start saving it in a taxable account. Since you’re seven years from retirement, you could use CDs or I bonds to build up the cash with minimal risk. If you’re willing to take a little risk then you could use a short-term bond fund for the amount that won’t be needed right at retirement, but you don’t want to take on much principal risk. You’ll need the cash for expenses and you won’t be able to wait very long for the markets to recover.

A second option for retirement spending is withdrawing your Roth IRA contributions. (Penalty-free, anytime.) A third option is continuing your contributions to the Roth TSP until retirement, and then rolling that over to a Roth IRA to withdraw those contributions. A fourth option, the most complex, is to roll your TSP over to a conventional IRA at retirement and then start a series of 72(t) distributions. You’ll want to consult a tax professional for help with that choice, but take a look at 72t.net.

You should also forecast whether your military pension will cover your spending at retirement. You have seven years of pay raises, one or two longevity raises, and perhaps a promotion before the pension starts– that will help with your cashflow! Consider whether you’ll also be working a bridge career (full-time or part-time) in retirement. You may decide that you don’t need to pile up a lot of cash in a taxable account, especially if you have employment income and you’re able to withdraw Roth IRA contributions when necessary.

If you pay off the mortgage at retirement, you may need to cash in assets from a taxable account– and that means you’ll be paying capital gains taxes. If being mortgage-free helps you sleep better at night then that’s what you should do. Another option (especially for a fixed-rate mortgage) would be to continue mortgage payments in retirement, and instead use your “mortgage payoff” account for your budget expenses. Once you reach age 59½ you could withdraw Roth IRA funds to pay off the entire mortgage. Your pension will rise with inflation during retirement but a fixed mortgage payment will stay constant. You could always make a lump-sum mortgage payment if you feel you have extra cash, but keeping the mortgage allows you the maximum cashflow flexibility without consuming a large amount of your assets right at retirement.

Of course if you have an adjustable-rate mortgage then your choices are more complicated, and one factor would be when the interest rate resets.

Forecasting your retirement spending and handling your cash flow management can get complicated. After you feel you have a solid spreadsheet then you may want to run the numbers by a fee-only CFP to make sure you didn’t miss anything. Then you’d be able to dig into the choices with saving cash in taxable accounts and what you want to do with the mortgage.

Related articles:
Retiring on multiple streams of income
TSP withdrawal options
TSP annuity options
Is the Roth Thrift Savings Plan right for you?
Guest post Wednesday: The importance of your retirement account Exit Strategy.
When do you stop contributing to tax-deferred accounts?
How many years does it take to reach financial independence? (Tables version)
How many years does it take to reach financial independence? (Calculator version)

WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

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