From A-100 to RetirementDesigning your retirement paycheck.

Foreign Service Officers (FSOs) can be eligible for immediate retirement benefits in one of three ways:

1. 20 years of service at 50 years of age.
2. 10 years of service at minimum retirement age (MRA), typically 57 unless born before 1970.
3. 5 years of service and hitting mandatory retirement age at 65.

After retirement, the regular paycheck stops coming in and you have to design one yourself. Depending on when you retire, retirement can last 30 to 50 years. This means that you’ll have to manage your TSP and additional investments in such a way to support your retirement for the long term. The design of that paycheck becomes just as important as the process of saving for it.

For FSOs retiring with a pension, this retirement paycheck consists at a minimum of three different income sources: FSPS annuity, the supplement if eligible, Social Security, and withdrawals from retirement accounts. Not all these income streams come online at the same time. If you fall in one of the three categories described above, the only income stream that comes online at the start of your retirement is the FSPS annuity and possible supplement. TSP withdrawals become penalty-free at 59½, at 55 if you retire during or after the year you turn 55, or if you qualify for another exemption such as the 72(t) rule.

In this article, we’ll cover investment strategies, tax strategies, and withdrawal strategies to help you make more informed decisions about how to create a retirement paycheck for the long term.

Investment strategies

The TSP has a set-it-and-forget-it fund available for retirees: the L Income Fund. The Lifecycle Fund turns into this fund when you’ve reached the retirement date that TSP assigned to your L Fund. It is important to know the makeup of this fund:

More than 70% of the L Income Fund is invested in the G and F Funds. The G and F Funds are geared toward stability and short-term investing, while the C, S, and I Funds are aimed at long-term growth. But in investing, risk and return go hand in hand. Investing for long-term growth introduces more risk and volatility in your portfolio than investing for short-term stability. This introduces a balancing act between how much market exposure you need and how much volatility you can stomach. Market exposure enables investors to take advantage of the upswings but leaves your funds vulnerable against downturns as well.

Your investment allocation throughout retirement should reflect your short-term income needs and your long-term growth objectives. In the short term, stability is more important than gains. You want your funds to be available when you must use them to pay your bills. Savings that you won’t need in the short term could be positioned for long-term growth and thereby taking advantage of market movements. Long-term goals require growth-oriented investments, while short-term spending needs should be supported by more stable assets.

Allocating more than 70% of a retiree’s savings to short-term holdings might put pressure on the financial plan in the long run. That short-term stability comes at the price of lower projected returns and funds aimed at long-term growth. If you add inflation into the mix, your real return might not be what your financial plan needs.

It is understandable that retirees would opt for the L Fund approach. One reason some retirees may prefer the L Income Fund is its simplicity. Managing investments, monitoring allocations, and rebalancing a portfolio requires time and attention. For retirees who prefer a more hands-off approach, simplicity can be a welcome feature. But a default allocation cannot account for your income needs, your tax situation, or your time horizon, because it was not built with any of them in mind. This is why it can be valuable to have a relationship with a financial planner in place before you reach the point of not wanting or being able to manage your own finances.

Whatever asset allocation suits your investment strategy in retirement, it is usually better to move toward that allocation gradually rather than making a large shift on the day you retire. That is why preparing for retirement starts years before you actually retire. By gradually adjusting your allocation over time, a process known as a glide path, you can reduce the risk of moving too quickly from a long-term growth strategy to a less volatile retirement allocation. Once you reach your target allocation, the focus shifts to maintaining and rebalancing it.

Tax Strategy

If you don’t have a tax strategy in place, the IRS is perfectly happy to provide one for you. Which may not be the best strategy for you. This is why it is important to prepare for this reality throughout your career. The taxes that have been deferred by contributing to your Traditional TSP will be paid at some point in the future, and the IRS is keeping track of exactly how much income and related income taxes have been deferred.

This is where tax diversification comes in. Instead of relying entirely on one type of retirement account, tax diversification means building savings across Traditional, Roth, and taxable accounts. Each account type is taxed differently, and having a mix can give you more flexibility when deciding where to draw income from in retirement.

Instead of mainly paying regular income taxes during your working years, in retirement your tax bill can become more complicated quickly. Below, we’ll go over the three types of accounts and taxes available for most in the Foreign Service community.

This may sound like a lot of work, and often it is. A tax strategy is not something you dial in once at the outset of your career and never touch again. We monitor these strategies for our clients, make recommendations at least annually, and review them again with each PCS. After all, we are talking about dollars you have already worked for and earned. The point of tax strategy is not to avoid taxes altogether. It is to make intentional decisions so you keep more of what you earn and avoid paying more income tax than necessary.

Tax Deferred Savings

Also known as your Traditional TSP or (Traditional) IRA savings. You defer paying income taxes in the year you contribute to these accounts, but withdrawals in retirement are taxed at your marginal income tax rate. This can work in your favor, but not always and not necessarily every year.

Early in retirement, when your W-2 wages are replaced by the FSPS annuity, you may temporarily be in a lower tax bracket than you were during your career. This makes early retirement in many cases an attractive window to draw from your tax-deferred savings or convert savings into your Roth TSP.

Consider an FSO who retires at 52 after a 20-year career and delays Social Security until age 70. During those years, taxable income may consist primarily of the FSPS annuity. Compared to their working years, this may create a temporary “tax valley” where income falls into lower tax brackets. Those years can present an attractive opportunity for Roth conversions before Social Security benefits and Required Minimum Distributions increase taxable income.

Saving all your retirement funds into your Traditional TSP, and lowering your tax bill during your working years, may accidentally create a large tax bill in retirement. By not saving too much in your Traditional TSP or IRAs, you can mitigate an unnecessarily high tax bill in retirement. But how much is too much? That depends on your other income streams, spending in retirement, and your marginal income tax rate. Tax strategies are personalized and what may work for you might not work for your colleagues.

Roth Savings

Roth savings get taxed in the year they are earned and before they are contributed to your TSP or Roth IRA. Even though you won’t get a tax break during your working years, qualified withdrawals from Roth accounts are income-tax-free.

Making an educated decision on saving in your Roth or Traditional TSP requires knowing your current bracket and having a good idea of what your tax bracket in retirement will be. I estimate this for clients so we can strike a balance between taking tax breaks today and building tax-free income buckets for retirement.

Roth savings have the added benefit that they provide spending flexibility without spiking taxable income in a given year. You can withdraw $250,000 from your Roth TSP to buy the boat you always wanted in retirement without triggering a dollar in taxes.

Traditional and Roth accounts have in common that they become available under the Rule 55 or at 59½, depending on when you retire. One of the most straightforward ways to plan around these age restrictions is to open a taxable brokerage account.

Taxable Savings

In a taxable account, your contributions are made with after-tax dollars, and any investment gains are taxed as well. This makes taxable accounts less tax-efficient than the retirement accounts discussed prior. But this is the price you pay for the flexibility the account offers. There are no age restrictions, contribution limits, or earnings limits that apply. That flexibility becomes especially valuable when you plan to retire early or invest for goals that you don’t want to wait for until retirement.

Retiring before 55 generally means the FSPS annuity needs to cover your living expenses until other retirement accounts become available at 59½ under the standard rules. However, I have not met an FSO for whom this scenario was realistic. That is why, to have access to funds before your retirement accounts become available, you may need savings in accounts that you can access penalty-free at any age. This is where taxable investment accounts come into play. These accounts come with their own tax advantages. If you hold an investment in this account for long enough, at least a year, the tax rate can be 15%. If your taxable income falls below the long-term capital gains (LTCG) tax threshold, the gains in this account can even be taxed at the 0% federal LTCG rate.

This can create a useful planning opportunity in your early retirement years, especially for retirees whose taxable income temporarily consists mainly of the FSPS annuity and discretionary savings withdrawals. In those years, some long-term capital gains from a taxable account may qualify for the 0% federal rate.

The added complexity is that investment changes inside taxable accounts can create taxable events. Selling investments can trigger capital gains taxes, even when the sale is part of normal portfolio maintenance. For example, rebalancing the account by selling one investment and buying another may create a tax bill. In some cases, you may be able to reduce that risk by directing new contributions toward the parts of the portfolio that need to be increased, rather than selling existing holdings. Taxable accounts can offer useful planning opportunities, but they also create more chances to trigger an unintended tax bill.

Roth conversions

Roth conversions are the act of moving funds from a tax-deferred account into a Roth account. By moving the funds, you recognize them as income during the year in which they are moved. The two main benefits are:

1. You get to choose when you pay income tax on the funds. If you plan carefully, you may be able to take advantage of this opportunity in years where your marginal income tax bracket drops to a lower level than usual.
2. Once those funds are moved into your Roth TSP, they can grow and compound tax-free for as long as you leave the funds in the account.

For a deep dive on TSP Roth in-plan conversions, you can watch our webinar here.

Roth conversions can be a great tool for lowering Required Minimum Distributions (RMDs), lowering Medicare Surcharges (IRMAA surcharges), and lowering your lifetime income tax bill. They can also be used for state-tax arbitrage.

We published an article on weighing Roth vs. Traditional TSP savings here, outlining the upsides and drawbacks of each type of savings.

Withdrawal strategies

Your withdrawal strategy in retirement depends on a few things, most importantly your income needs. Once you know how much you need to withdraw every month or pay period, you can plan the details of your investment and tax strategy.

TSP fixed amounts

Just like with the L Fund, the TSP offers you a set-it-and-forget-it option to manage your withdrawals as well. Setting a minimum amount of standard withdrawals might take some of the manual labor out of taking your retirement withdrawals, but withdrawing on autopilot does not consider unintended tax consequences and cash needs. Every dollar that comes out of your retirement accounts loses its tax-advantaged status forever. Withdrawing more than you need gives away the tax benefits your TSP offers, and withdrawing too much from your Traditional TSP might push you into a higher income tax bracket. A more hands-on approach when withdrawing calibrated amounts from Traditional and Roth TSP can preserve tax advantages for as long as possible and minimize lifetime income taxes.

Investments

Investment strategies in retirement usually balance capital preservation and long-term growth. You generally want enough assets insulated from market forces so that when there is another market correction, you can ride it out by relying on your cash and bond reserves. Whether you are invested in the L Income Fund, withdrawing a fixed 4%, following a guardrails strategy, or maintaining several years of spending needs in fixed-income investments, each approach comes with its own asset allocation mix that requires ongoing maintenance and rebalancing.

Retirement tax traps

The Social Security Tax Torpedo

Withdrawing too much in any given year may not necessarily increase your marginal income tax rate. But even if so, it could increase the income tax you’ll pay on your Social Security benefits.

Up to 85% of your Social Security benefits are taxable at your income tax rate. For example, a retiree who withdraws an additional $20,000 from a Traditional TSP may find that more of their Social Security benefits become taxable, increasing the total tax cost of that withdrawal.

Medicare Surcharges

Medicare surcharges are threshold-based and follow their own brackets. These brackets have a two-year lookback period, so the surcharges you pay in 2027 will be based on your income in 2025. You can find the brackets here.

The fact that these brackets are cliff-based instead of progressive means that crossing these brackets by even $1 can cause your Medicare premiums to go up. That can be a costly but potentially avoidable mistake. This is another reason why a more active approach in managing your retirement withdrawals can work out in your favor. If you are seeing that your income is about to cross into Medicare surcharge territory, you can simply stop withdrawing from your Traditional TSP and start withdrawing from your Roth TSP.

Conclusion

Retirement income planning for FSOs is not something that begins on the first day of retirement. It starts much earlier, with the first TSP contribution, the choice between Traditional and Roth savings, and the decision to build taxable savings outside of retirement accounts. Decisions made during A-100 can still affect the flexibility you have decades later.

Over the course of a Foreign Service career, the focus usually shifts from building wealth to preserving it, accessing it, and using it wisely. That shift requires coordination. Your investment allocation affects how much risk you take. Your tax strategy affects which accounts you draw from. Your withdrawal strategy affects how long your savings last and how much of your income is exposed to taxes, Social Security taxation, and Medicare surcharges.

Whether you use the L Income Fund, a guardrails strategy, Roth conversions, taxable savings, or a more customized withdrawal plan, none of these decisions stands alone. Each one affects the others. The goal is to turn retirement savings into a retirement paycheck that supports your spending, protects your long-term plan, and avoids unnecessary tax costs along the way.

From A-100 through retirement, the right strategy changes with each stage of your career. What worked during your first tour may not be the right approach by your fourth tour, and what works during your fourth tour may need to change again as retirement approaches.