Earlier this year, I received a call from Laura, a federal employee with the DOJ who was referred to me by a colleague that was already working with us on their own federal retirement plan. When we spoke, I learned that she had applied for the deferred resignation in February and is now awaiting her official retirement at the end of this September.
Laura had done an excellent job saving and had paid off all her debts except her mortgage, which had about 10 years remaining. But like many of the federal employees we work with, even with her strong financial foundation, she is still not sure if she is truly ready to stop working. For her, retirement is no longer an abstract idea—it is only weeks away, and naturally, that makes her nervous.
She finds herself asking the same questions that keep many others up at night:
- Do I really have enough money saved to stop working?
- Should I take another job to cover the income gap?
- What if I make the wrong move with my TSP and regret it later?
Like many people in a similar situation, Laura’s decision to retire is not just about the numbers; it is about confidence and peace of mind.
The Situation
Laura is 57 years old and has just over 31 years of civilian federal service, which makes her immediately eligible for both the FERS annuity and the FERS Supplement. Together, those benefits provide a solid foundation for her fixed income in retirement, but they are not enough to fully replace her salary.
To make up the difference, she plans to take monthly withdrawals from her Thrift Savings Plan (TSP). But she has concerns. How much could she safely take out each month? What is considered too much or too little? And perhaps the most pressing question—how will these decisions affect her long-term security?
On top of those questions, Laura also wanted to know how to:
- Balance growth and safety in her portfolio.
- Use Roth conversions strategically to lower future taxes.
- Handle the transition from full-time salary to retirement income without feeling like she is losing her financial footing.
The Numbers
Current TSP balance: $900,000
Planned withdrawal: ~$2,500/month to augment her FERS annuity and FERS Supplement
Goal: Balance growth and safety while proactively handling taxes on her TSP prior to RMD age
The Challenge: Withdrawing Before 59 ½
Here’s where things get more complicated.
Normally, when someone retires and rolls over their TSP to an IRA, they cannot touch that IRA without a 10% IRS penalty until age 59 ½. Laura is only 57, which means she has a 2 ½ year gap to navigate.
Fortunately, there’s an important rule many federal employees are unaware of: because Laura is separating from service at age 57, she qualifies for the Rule of 55. This allows penalty-free withdrawals directly from the TSP as long as you separate from service on or after the calendar year you turn 55—but only from TSP, not from an IRA.
That means Laura has a critical decision to make: how much of her $900,000 should stay in TSP, and how much should move into an IRA?
The Strategy We Built Together
We started by looking at the math. At $2,500/month, Laura should need at least $75,000 in her TSP to cover the next 2 ½ years until she turns 59 ½. But retirement planning is never just about the expected. What if OPM processing delays her pension? What if any large, unexpected expenses come up? What if she later wants the freedom to draw more than $2,500 each month?
To bolster her peace of mind, we plan to leave $150,000 in the TSP. $150,000 will remain in TSP – invested conservatively, since this money is earmarked for short-term withdrawals. Combined with her lump-sum payout for unused annual leave, this gives her a comfortable buffer even if payment of her pension and supplement are delayed. $750,000 will be rolled into an IRA – invested more aggressively, with a balanced allocation tilted toward growth. This money will not be touched until reaching age 59 ½, which means it could ride through normal market ups and downs without jeopardizing any short-term security.
This approach gives Laura:
- Liquidity for the next few years
- Protection from IRS penalties
- A long-term investment plan already in motion
- The opportunity to begin Roth conversions, lowering her future tax burden
(Note: Starting in 2026, TSP is expected to allow in-plan Roth conversions, but we are unsure how easy that feature will be to utilize until it is implemented.)
Why This Matters
The decision about how much to leave in TSP versus moving into an IRA is highly personal. For some people, leaving the bare minimum makes sense. For others, a larger cushion provides the peace of mind they need to sleep comfortably at night. In Laura’s case, leaving $150,000 strikes the right balance. It gives her both short-term security and long-term flexibility. And this is a point many overlook—retirement isn’t just about the numbers. It’s about having a plan that gives you confidence in the numbers.
The Process
This wasn’t something we solved in one conversation; over the course of several meetings, we worked through Laura’s plan step-by-step:
Federal Benefits Review
We laid out her annuity, supplement, FEHB coverage, and all other benefits to which she was entitled.
Financial Picture
We pulled together a complete snapshot of her assets, debts, and the timing of her income streams.
Investment Strategy
We discussed her risk tolerance, asset allocation, whether to consider annuities, the role of bonds, and opportunities for Roth conversions. We also factored in her personal preferences, such as avoiding certain sectors of the stock market.
Implementation Timeline
Most importantly, we had these conversations before retirement. She was able to put a plan together with our help at her pace and will be ready to implement those changes as soon as she is officially separated from federal service.
The Outcome
When Laura’s retirement date arrives, she will still feel a little nervous—after all, leaving the workforce is a major life change. However, she now has the confidence that she can handle whatever retirement may throw at her. Her income plan is clear, her investments are structured for both short- and long-term needs, and her taxes are already part of the strategy—not an afterthought. Instead of feeling uncertain or worrying she might need another job, Laura will be able to focus on enjoying her next chapter.
The Bigger Picture
Laura’s story is just one example, but it highlights the challenges many federal employees face, especially when retiring prior to age 59 ½. Questions about income replacement, how much to leave in TSP, and when to consider Roth conversions are not one-size-fits-all.
Tackle Your Retirement Strategy With Dugan Brown
If you’re thinking about retiring at your MRA or before 59 ½, the decisions you make about your TSP, IRA, and withdrawal strategy can have lasting consequences. And the sooner you start planning—ideally years before you retire—the smoother the transition will be. At Dugan Brown, we specialize in helping federal employees build these strategies, so retirement isn’t a guessing game, it’s a confident next step forward.
Investment Advisory Services offered through Smith & Wyatt, a Registered Investment Advisor. This publication contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.
