How to Size Your TSP G Fund in Retirement Around Your Pension

One, two or three years of G Fund draws

If your pension covers 75% or more of spending, hold 1 year of TSP income draws in the G Fund (Option 1). At 50% to 75% coverage, hold 2 years (Option 2). Below 50%, hold 3 years (Option 3). If retired pay plus Social Security covers every bill, the cushion is optional, and if a year of draws is under about $10K it hardly changes anything. The size of the cushion doesn't change the tax cost either. A traditional TSP draw is ordinary income, reported to you on Form 1099-R, whether it's sold from G shares or C shares. What changes the tax is which balance a draw comes from, traditional or Roth, and that only moves tax into another year.

How many years of draws should Colleen keep in the G Fund?

Colleen should keep 2 years of draws, or $72K, in the G Fund. She spends $96K a year, her Coast Guard retired pay covers $60K of it (62.5%), and TSP draws fill the remaining $36K. Coverage between 50% and 75% calls for 2 years, and $72K is about 9% of her $780K.

Hypothetical: Colleen, 54, is a single retired Coast Guard commander who now directs emergency management at a hospital for $140K a year. She plans to leave at 62 and expects to spend $8,000 a month until Social Security starts. Retired pay of about $5,000 a month covers 62.5% of that, so TSP draws fill $3,000 a month, or $36K a year. Then $36K × 2 years = $72K, and $72K ÷ $780K is about 9%. The calculator on this site lets you try your own pension share.

Each draw comes out proportionally from every fund, so the G Fund shrinks a little with every installment. After a down year for stocks Colleen has two moves. She can use an interfund transfer to shift money from G back toward stocks, or leave the stocks alone and refill G later. Transfers inside the TSP aren't taxable, and each $36K traditional draw is taxed as ordinary income no matter which fund it's sold from. Stock funds can lose value, including the money put in; that is the reason the cushion exists.

Picture a second retiree, also hypothetical, with the same $780K whose pension covers $90K of $96K. He draws only $6K a year, so 1 year, $6K, is plenty and most of that account can stay in stock funds. Same balance, opposite choice, because the coverage share differs. Look at the Colleen column and the pension-heavy column in the table to see where each lands.

Colleen's mother, who lives with her, will probably raise it first. She'll ask what happens to the household budget if markets fall the year Colleen leaves the hospital job. The 2-year figure answers her in one number: $72K, or 24 months of draws, sitting where stocks can't hurt it.

First Premier Bank puts one decision on the roadmap at a time. Here that's the cushion size, settled 6 months before the last paycheck, with the Roth conversion question kept for its own due date.

After a down year, two moves

Who raises it at home

Which G Fund beliefs don't match the TSP rules?

Five common G Fund beliefs fail against written TSP rules: the fund holds Treasury securities with no principal loss, draws come proportionally from every fund, interfund transfers aren't taxable, one fund mix covers both balances, and multiple partial withdrawals are allowed after separation.

Start with the rule column. Every belief in the table is contradicted by written TSP rules, and the right-hand column tells you what to do instead.

Two small mistakes often show up in the same year. Pulling the whole $72K cushion out of the TSP into a bank account in one year adds $36K of extra taxable income; at an assumed 10-point higher marginal rate, that's $3,600. Then leaving the TSP all in stocks means a 20% drop forces a $36K draw from shares worth $45K before the fall, locking in $9K. Combined, that's about $12,600, for illustration.

One honest limit: the cushion guards against selling stocks in a down market, not against inflation or one-off costs like a roof or long-term care for a parent. And someone still drawing a salary, like Colleen at 54, doesn't need one yet. First Premier Bank clients who want to move the whole TSP out can read about the TSP to IRA rollover; the Roth TSP versus traditional TSP question has its own article.

Beliefs checked against the rules

Two mistakes that arrive together

The due dates behind the cushion

For Colleen the dates run in this order. At 54, no cushion is needed while her salary covers spending. At 59½ the 10% early penalty ends, since she left the Coast Guard before 55. At 62 she plans to leave the hospital, so the cushion should be in place 6 months earlier. Medicare starts at 65, the SSA full retirement age is 67, and the IRS starts required minimum distributions at 75 because she was born after 1960. Two rule changes matter for older roadmaps. Multiple partial withdrawals are now allowed after separation, so she no longer needs to move years of cash to a bank in one taxable withdrawal. The RMD age has also moved later, which leaves more years before forced draws begin.

What should I ask First Premier Bank about my G Fund cushion?

Ask how many years of draws belong in the G Fund at your pension's stated share of spending, and which balance, traditional or Roth, each draw should come from in the first 3 years. Bring your retired pay statement and your latest TSP statement, so the answer uses your numbers and not a template's. First Premier Bank then turns the cushion into one line on the roadmap, with a due date.