Is this a valid strategy?

[Lacy]

Hello to all. This site was a great find for me! :)

:?Now, I'd like to describe my situation and hope someone can tell me where I may be going wrong or if I'm possibly on the right track.

My balance is just under 200,000 now and I'm contributing 15% of my $45000/yr salary. I'm 45 yrs old. I want to retire as soon as I become eligible so my horizon is about 10 years. I know I won't be able to become "rich" in this scenario, but I want to be sure that my funds are sufficient to carry me modestly/comfortably to about age 100;)I'm not market savvy and I've never tried to predict the market; I've always just decided upon a moderate/aggressive allocation of some sort and stuck it out, changing very seldom. That has panned out okay, but now I'm thinking of following your daily/weekly recommendations and trying my hand at interfund shifts from time to time to see if maybe I can do a little better for a change....either that,or I'll just give some thought to your long-term fixed allocations....the aggressive one is very similar to mine already. Recently, I'verevised my strategy somewhat in that I've decided to limit my TSP automatic paycheck contributions to 6%(being sure to grab all the agency-matching "free" money) and I've established a ROTH which I'm going to fund with the remaining 9-10% of my monthly savings...so I'll still be saving around 15-16%. (I'm not financially able to max out BOTH my TSP and the ROTH simultaneously so that is why I'm splitting it up this way) My logic is this....I'm thinking that when I retire at age 55, I'll have enough accumulated in the TSP to draw on monthly for quite a few years, and then the ROTH will also be there, hopefully still growing somewhat and available for me to draw on tax-free a bit later in life. Is this a ridiculous strategy or am I on the right track? Also, if this is viable, should I take the plunge and still try my hand at a few interfund transfers while executing this strategy?

:zzSorry this is so long. Hopefully you're not sleeping. Thanks.

Lacy

[Rolo]

Welcome, Lacy!

What you can do, to get your feet wet, is only "play" with a portion of your TSP account; partition it into two "accounts": one buy-and-hold with your current allocation, the other for trend-trading. Then see which one performs better.

Or, if yer like me, impatient, all-or-none kinda person, just screw it and move it all around. Don't eat Tums like candy, though (it causes constipation, heh). :shock:



Question: If you were to fund your TSP the full 15%, how much $ do you save on taxes buy funding that 9% over what you are funding now? You could then take those tax savings and fund the Roth. example:

9% * $45K = $4K, which is max for IRAs

say 25% tax rate (+state taxes?) * $4K = $1K savings on taxes that can be put into Roth. That's an extra 2.22% gross salary invested.

15% * 45K = 6750

6750 + 1K = 7750 / 45K = 17.22% invested while still paying 15%.

[Lacy]

:dah:Hi Rolo. Thanks for the response! Now, this is probably a great big "duh!!!" but, if I understand you correctly, you are agreeing that my TSP/ROTH strategy is a good one......yes? ...or do I have it backwards? I'm hearing you say that, with the tax savings, I'll be actually saving/contributing approx. 2.2% more than I would be doing with all my eggs going to the TSP basket. Am I getting it? I'd like to be able to max out a ROTH and contribute the max to the TSP also, but as of yet, 15% is all I have to spare from my budget.

[Rolo]

What my Cryptic Writings are saying is this:

- TSP contributions are not subject to income tax (I estimated 25% tax rate for you)

- .'. on whatever you contribute to TSP, you will save 25% in taxes

- If you contribute 15% to TSP rather than 6%, you will save ~$1K/year since you are not paying income tax on that $4K (9% diff)

- That extra $1K can be put to a Roth. Total invested: 15% TSP, 2.2% Roth. When your income increases/spending decreases, you can add more to Roth.

Does that make sense?

[Lacy]

:'

GeezZZzzz....No, Rolo, that is very clearnow.Thanks for clearing that up. I had been under the impression that all my TSP contributions "were" taxed, upfront as part of my gross income,and then again at withdrawal, so there was my confusion.

Thanks again.

[Rolo]

Nope, they actually lower your declared income automatically. This is where tax planning and investing occur concurrently. (say that five times in a row, heh)

[Lacy]

:^

My gosh, I don't know how I missed that. I guess I once knew and just forgot it or something....at least I hope I did. I'm a dim-bulb about all this but I've done okay I guess to know so little. Just hooking up with you this a.m. has helped me tremendously. I am going to continue with my entire 15% to the TSP and will work on the ROTH a little along and along. I'm kinda excited about watching and following this site and trying to maximize my returns with some fund-shuffling now and then.

Again, thanks a bunch for switching on the light for me....I'll be watching for your posts.

Have a great weekend!!