Author: Joel Schofer, MD, MBA, CPE
Throwback Thursday Classic Post – Step 6 to Crush the TSP – Rebalance Annually
We’ve talked about steps 1-5 to crush the Thrift Savings Plan (TSP). Now we move on to the final step (unless I think of more), step 6 – rebalance annually.
What is Rebalancing?
Let’s say that your desired TSP asset allocation is 70% stocks and 30% bonds. After the last year, though, stocks earned more than bonds and now you’re sitting at 85% stocks and 15% bonds. In order to rebalance back to your desired asset allocation, you’d sell approximately 15% of your stocks and buy bonds, restoring your desired asset allocation. It’s that simple.
Why Should You Rebalance?
If you don’t, you may be assuming more or less risk than you desire.
Also, by rebalancing you force yourself to sell what has overperformed and buy what has underperformed. Although this seems counter-intuitive because you are selling what has given you the largest return, by doing this you are systematically selling high and buying low. When left to themselves, investors typically buy high and sell low, the opposite of what you want to do. Rebalancing forces you to do it right.
How Often Should You Rebalance?
Vanguard has researched this, and you can read their full report here:
Best Practices for Portfolio Rebalancing
Their conclusion is:
We conclude that for most broadly diversified stock and bond fund portfolios (assuming reasonable expectations regarding return patterns, average returns, and risk), annual or semiannual monitoring, with rebalancing at 5% thresholds, is likely to produce a reasonable balance between risk control and cost minimization for most investors.
In other words, you rebalance annually or semiannually (twice per year) whenever your current asset allocations are off by 5% or more from your desired allocations. If the current and desired allocations are within 5% of each other, you do nothing.
How Do You Rebalance in the TSP?
You just log on and do what they call an “interfund transfer” or IFT. You can read all about it on this page from the TSP website.
Because you are doing it in a tax-advantaged retirement account, there are no expenses, fees, or taxes associated with rebalancing (unlike if you were rebalancing a taxable account).
You can only do it twice per month without restrictions, but since you are smart you are only doing it once per year anyway.
Do You Need to Rebalance With Lifecycle Funds?
No, you don’t. This is one of the major advantages of the L funds. If you are hitting the easy button on your TSP and just using a Lifecycle fund, you don’t need to rebalance…EVER!
That’s It. Crush the TSP!
That’s the final step to crush it in your TSP account. Read the whole series, maximize your TSP contributions, and get rich in the military.
CTF-80 Surgeon Position – Norfolk, VA
The CTF-80 Surgeon position is opening in 2021 and the PD with all the info on the billet is here:
Packages must include submission of a Bio, CV and Letter of Intent (LOI) no later than 1 NOV 20. The POC for submission is CAPT Todd Gardner, Senior Detailer. His e-mail address is in the PD above.
More Promotion Board Changes Likely Coming
Here are some promotion board changes that are likely coming our way:
- A recent SECDEF memo told the services to “review and revise promotion selection board precepts and convening orders, as applicable, to emphasize the importance of having senior leaders with Indo-Pacific region experiences.” Maybe going to Guam and Okinawa isn’t so bad after all.
- An article entitled “Military Leaders Reveal Plans to Make Promotion Packages Totally Anonymous” says that the DoD has plans to remove all personal identifying characteristics, such as gender and name, from promotion packets to avoid potential bias by selection boards.
- Here’s another article from Military Times about the same thing entitled “Services to consider removing all identifying information from promotion board packets.“
Defense News – The Pentagon is Eyeing a 500-Ship Navy
Here’s a link to this article:
MOAA – Tell Congress to Stop Cuts to Uniformed Services University
Here’s a link to this article:
September Message from the Assistant Secretary of Defense for Health Affairs to the Military Health System Team
MHS Team:
Last week I had the opportunity to see our MHS team in action and observe a training rotation at Joint Readiness Training Center at Ft. Polk, Louisiana. I was humbled by the warm hospitality and support for our visit, even in the midst of their recovery from Hurricane Laura. Through it all the Ft. Polk medical team has continued operations while also helping their community. The incredible team at Bayne-Jones Army Community Hospital showed me examples of their successes and challenges in providing safe, high-quality care to patients. I also got to observe the awe-inspiring training of 1st Brigade, 101st Airborne Division during their rotation at the world-class JRTC. Thank you to COL Jody Dugai, BJACH commander and BG Patrick Frank, Commanding General of Ft. Polk and JRTC – and their teams – for an extremely productive visit.
September is Suicide Prevention month. Suicide remains far too common in our ranks. It is unfortunate that so much stigma is still attached to mental health issues. I want to emphasize how important it is for us to establish and maintain an environment where people feel comfortable asking for the help they need. I encourage each of us to use the resources available if we are struggling, and I want all of us also to be one of those resources for those seeking help. We each may have the chance to intervene at any time with our friends, family, or coworkers if we reacquaint ourselves with the signs of trouble. Let’s renew our vigilance and work to reduce and ultimately eliminate suicides amongst our peers.
September is also Pain Management month. The MHS has implemented a comprehensive pain management and opioid safety strategy using the evidence-based Stepped Care Model for Pain developed in the Department of Veterans Affairs. We’re educating beneficiaries to better participate in their own pain management with an approach that considers opioid safety. We’re leading a culture change in pain management, towards a biopsychosocial approach that emphasizes use of non-pharmacologic treatments and, when necessary, safe opioid prescribing. Our data indicate MHS providers are actively modifying their prescribing behaviors in line with emerging evidence-based guidelines, clinical standards, and DHA policies. One positive data point is a decrease in cases of active-duty service member Opioid Use Disorder – from about 3,000 (in 2013) to about 550 (in 2019) – significantly lower than the U.S. adult population as a whole.
Operation Warp Speed. One of the ways the Department is participating in the whole-of-government COVID-19 vaccine effort is through the participation of five DoD MTFs in the AstraZeneca candidate vaccine’s Phase 3 trials at MTFs in San Diego, San Antonio, and the National Capital Region. We’re actively preparing those sites to meet the rigorous standards needed for these important trials. It is a tribute to the high-quality health care in the MHS that DoD locations are being included in the clinical trials.
Some updates on current MHS issues –
COVID-19 Convalescent Plasma: As directed by Secretary Esper, DoD made a strong months-long push to collect COVID-19 Convalescent Plasma. Thanks to COVID-recovered MHS beneficiaries who have answered the call, we’ll reach the Secretary’s goal of 10,000 units collected to increase the medical readiness of our uniformed forces. We will continue to collect convalescent plasma to ensure we maintain adequate amounts where we need it, to ensure readiness, and to provide high-quality care for families. https://go.usa.gov/xGEuj.
DoD COVID Testing: DoD has now administered more than 1 million COVID-19 tests and has been consistently conducting more tests per capita than the United States as a whole. This milestone is not a celebration but rather, an indication of the tireless work of the Diagnostics and Testing Task Force, working in lockstep with the DHA, the military Services, combatant commands, and other agencies. Our testing is showing a steady decline in overall DoD and active-duty service member positivity rates since mid-July, which is consistent with national trends. Now, we’re entering the next phase of this fight, with advanced therapeutics as well as vaccine development and dissemination. We’re dedicated to continuing to integrate new and proven technologies into the testing strategy with a variety of testing modalities, including point-of-care tests and oral-saliva tests – all focused on military medical readiness. Kudos to Maj Gen (Dr.) Lee Payne for leading this outstanding and sustained team effort!
One last thought about health care. As flu season approaches, I encourage everyone to get this year’s flu vaccine. There is a ready supply of vaccine this year and the DHA has planned for enough doses to support our beneficiaries. Either at an MTF or in the TRICARE network, flu shots will be available. Please help protect our medical resources by getting your flu shot. I remain humbled by all of your continued efforts to ensure our Nation has a medically ready force and ready medical force.
To close out, we note a couple of important new additions to the Health Affairs team. I would like to welcome Dr. Robert Mabry, our new Principal Deputy Assistant Secretary of Defense. His multi-disciplinary clinical expertise and experience as an operator will be a superb asset to Health Affairs and the entire MHS. I’d also like to take this opportunity to thank Dr. Dave Smith for stepping up these past many months to serve as acting PDASD. His time as acting PDASD has included not only some of the most significant changes to the MHS in decades, but also the Department’s response to the COVID-19 pandemic. Thank you, Dave, for an outstanding job.
And, finally, I would like to introduce Dr. David Strong, a White House Fellow coming to us from Detroit. He is an emergency medicine physician and holds a Ph.D. in Immunology. Dr. Strong will be spending the next year working with the Health Affairs front office and also with DHA. Welcome to the team, Dr. Strong.
Tom
Finance Friday Articles
Here are some more articles on the social security withholding change:
- More Guidance Released on Social Security Withholding Change
- Some Light Shed on Repayment of Social Security Tax Suspension
Here are my favorites this week:
- 5 Reasons to Pay Off Debt (Instead of Investing)
- Staying in Bounds
- The Power of Financial Freedom
- There is No Such Thing as “Good” Debt
Here are the rest of the articles:
- Achieve Better Cash Flow Diversification
- Coming Up With a TSP Withdrawal Strategy
- Early Retirement Checklist Part One
- Exclusive: The Billionaire Who Wanted To Die Broke . . . Is Now Officially Broke
- Guide to Financial Wellness for the Academic Physician
- How Much Lifestyle Creep is Okay?
- Medical Degree to Financially Free Course Review
- My Recent State Tax Audit
- Negativity Is Not an Investment Strategy
- Our 2019 Tax Return Revealed: Total Income $522,662, Taxable Income $253,906
- Positive Cash Flow: Open Secret In Early Retirement
- Saved by a Crash
- The Disability Insurance Process
- The Ultimate Passive Income
- The Vanishing Difference Between ESG and Conventional Funds
- When to Change
Throwback Thursday Classic Post – Step 5 to Crush the TSP – Roth vs Traditional
We’ve talked about steps 1-4 to crush the Thrift Savings Plan (TSP). Now we’re on to step 5, deciding between the Roth vs traditional TSP. Let’s take a look at the difference between the two and help you to decide which is the right choice for you.
The Traditional TSP
The traditional TSP is the first of two potential tax treatments for your TSP contributions. If you elect it, you defer paying taxes on your contributions and their earnings until you withdraw them. This is the only option for any money you get as a result of the 5% government match in the new Blended Retirement System (BRS).
If you are in a combat zone making tax-free contributions, your contributions will be tax-free at withdrawal but your earnings will be subject to tax.
The Roth TSP
The Roth TSP is the second of two potential tax treatments for your TSP contributions. If you contribute to it, you pay taxes on your contributions now and your earnings are tax-free at withdrawal.
The Roth TSP is similar to a Roth 401(k) that a civilian would have, not a Roth IRA. There are no income limits for Roth TSP contributions. You can contribute to both your Roth TSP and a Roth IRA without contributions to one affecting how much you can contribute to the other. For example, in 2019 you can contribute the full $19,000 to your Roth TSP and $6,000 to your Roth IRA.
Which One is Best for You?
Here’s a table that compares the two options from the TSP website:
| The Treatment of… | Traditional TSP | Roth TSP |
|---|---|---|
| Contributions | Pre-tax | After-tax1 |
| Your Paycheck | Taxes are deferred*, so less money is taken out of your paycheck. | Taxes are paid up front*, so more money comes out of your paycheck. |
| Transfers In | Transfers allowed from eligible employer plans and traditional IRAs | Transfers allowed from Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s |
| Transfers Out | Transfers allowed to eligible employer plans, traditional IRAs, and Roth IRAs2 | Transfers allowed to Roth 401(k)s, Roth 403(b)s, Roth 457(b)s, and Roth IRAs3 |
| Withdrawals | Taxable when withdrawn | Tax-free earnings if five years have passed since January 1 of the year you made your first Roth contribution, AND you are age 59½ or older, permanently disabled, or deceased |
* If you are a member of the uniformed services receiving tax-exempt pay (i.e., pay that is subject to the combat zone tax exclusion), your contributions from that pay will also be tax-exempt.
1. Roth contributions are subject to Federal (and, where applicable, state and local) income taxes, while traditional contributions are not taxed until withdrawn. However, both Roth contributions and traditional contributions are included in the amount of wages used to calculate payroll taxes (e.g., Social Security taxes).
2. You would have to pay taxes on any pre-tax amount transferred to a Roth IRA.
3. Transfers to a Roth IRA from a Roth TSP are not subject to the income restrictions that apply to Roth IRA contributions.
The issue of whether Roth is a good option for you was discussed in this TSP Highlights called Is Roth For You?
If you like interactive calculators, this one from Betterment is pretty good.
If you don’t trust anything I say and want to read what someone else thinks, I don’t blame you. Here’s a good article from Money.
The decision really boils down to whether you’d like to pay taxes now (Roth) or later (traditional) and how your current tax rate compares to your likely future tax rate during retirement. While predicting the future is not easy, if you are young or early in your career, your earnings and tax rate are likely to rise in the future, so you should probably lean toward the Roth option. If you are in your peak earning years and you expect your tax rate to fall in retirement, you should probably lean toward the traditional and defer taxes to a future date.
If you are not sure which option to choose, many people recommend you diversify your retirement accounts and simply split the Roth and traditional 50/50. That way in the future you’ll have options depending on how future tax rates and your financial situation changes.
What do I do? I can afford the taxes now and want as much tax-free money available to me as I can get, so I put all the money in the Roth TSP that I can. That said, the first part of my career I didn’t have a Roth option, so a large percentage of my TSP balance is in the traditional TSP as well, so I’m about 50/50 split between the two options.
Some Rules to Be Aware Of
The TSP keeps your traditional and Roth money in separate “buckets” in your TSP account.
You cannot convert any portion of your existing traditional TSP balance to a Roth balance.
You can make both traditional and Roth contributions if you want. You can contribute in any percentages or amounts you choose and can change your election at any time.
If you are getting government contributions (perhaps because you are in the Blended Retirement System), they are deposited into your traditional TSP. You can put your portion in the Roth, but the government’s portion must go in the traditional.
The Bottom Line
Use the resources above to decide if you want to invest in the traditional TSP, the Roth TSP, or some combination of the two. If you’re not sure what to do, I’d just split it 50/50 so you have options in the future.
Keep your eye out for the last step to crush the TSP, rebalancing.
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