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I'm posting this in hopes of getting some feedback on my thoughts of using a bonus that I'm being offered for retirement.
Here's the background data first off:

I'm a government employee, age 35, who is being offered a $30k bonus (taxable) 5 years prior to retirement at 20 years of service.
If I accept the bonus, my retirement pay will be reduced from 50% of base income to 47% of base income. Normally it is reduced to 40%, however I have a weird circumstance where I broke service for a short period of time, but my pay counter continued. So at retirement of 20 years of service, I'll actually be getting 22 years of service in pay.

At the age of 62, my retirement pay will go back up to where it would have been, had I not taken the bonus. This will be reflected in an increase of 8% to 55% of base income. From there it will remain at 55% adjusting for inflation.

My plan so far, consists of dropping the money in to a mutual fund with the expectation of a 5% return rate. With the bonus taxable, I'm expecting somewhere around $22k. At the end of 20 years, with a 5% return rate, I estimate that the amount will then be $28,078.
For the first 5 years POST retirement, I plan on dropping the monthly retirement pay back in to the same account. At which point, at the end of 5 years, it should come out to around $140,269.

From there, I plan on just letting it sit and grow.

My questions are as follows:

Is there a better way?
Is there a way to deposit the money in to an account that is tax deferred, or non-taxable?

I welcome all suggestions.

Thank you

Bart
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bartsd,

Something I do not understand in your post is the return you calculated.

$22K at 5.5% for 20 years will become $58K, not $28.

  Prin      Growth
$22,000.00 $1,100.00
$23,100.00 $1,155.00
$24,255.00 $1,212.75
$25,467.75 $1,273.39
$26,741.14 $1,337.06
$28,078.19 $1,403.91
$29,482.10 $1,474.11
$30,956.21 $1,547.81
$32,504.02 $1,625.20
$34,129.22 $1,706.46
$35,835.68 $1,791.78
$37,627.47 $1,881.37
$39,508.84 $1,975.44
$41,484.28 $2,074.21
$43,558.50 $2,177.92
$45,736.42 $2,286.82
$48,023.24 $2,401.16
$50,424.40 $2,521.22
$52,945.62 $2,647.28
$55,592.90 $2,779.65
$58,372.55 $2,918.63


If you have income that satisfies the requirements for a traditional or Roth IRA, you can do that.

If you currently have no traditional IRAs and you are not eligible for a Roth contribution, you can make a non-deductible contribution to a trad IRA. Once it is there and booked, to a Roth conversion of the entire amount. You will need to pay income tax on any growth that occurs in the trad IRA, a couple dollars at most. The advantage to a Roth is huge later on when RMDs kick in at 70 1/2 for traditional IRAs.

Google "IRS Pub 590" for the regs on IRAs.

Gene
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Interesting, as I've worked with government employees for years and have never had occasion to run into an issue such as yours. I take it this is a state govenment?

I can't quite conceptualize what the 'bonus' you refer to is. It could be an actuarial acceleration of accrued benefits designed to incentivizing early retirement by paying you an early separation lump sum that is actuarialy taken from your pension. If so, this should be able to be treated like any other present value lump sum and rolled over into your IRA. But the $22,000 you indicate you'd receive sounds like the employer is doing a 20% (Fed) plus 6.7% (state?) withholding and sending you what's left as income for the year. If so, this cannot go into a tax deferred account...except perhaps a variable deferred annuity, which I don't recommend due to high expenses and crappy investment choices. You could use growth ETFs which are quite tax efficient, and hold the income producing part of your investment allocation in your IRA, such as REITs, bonds, utilities, etc.

If you put the #22K into a brokerage account and the investment provides an average 5% annual return, the value of the account would grow to $58,370 after 20 years. You don't give the early retirement annuity amount, so I can't calculate what the likely future value would be.

BruceM
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bartsd: "I'm a government employee, age 35, who is being offered a $30k bonus (taxable) 5 years prior to retirement at 20 years of service.

. . .

My plan so far, consists of dropping the money in to a mutual fund with the expectation of a 5% return rate. With the bonus taxable, I'm expecting somewhere around $22k. At the end of 20 years, with a 5% return rate, I estimate that the amount will then be $28,078."


You amy want to check (or explain) your math:

When I run 22k compounded at 4% per annum (I assume a 20% tax rate on your returns of 5%), I get a twenty toal of sligthly more than $48,000 (not $28,078).

Regards, JAFO
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I have no idea what you should do, and this isn't intended to be directed at you personally, but I can't believe that a government worker can receive this much in retirement pay after only 20 years of working. No wonder our government is so screwed up. As for your situation, do whatever maxes out to your greatest benefit, because that's what you've been promised.
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I just realized that I wasn't 100% clear.
The plan is to let the bonus sit in a fund for 5 years, until I retire, and then take the next 5 years of retirement pay and drop it in to the same fund.
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The bonus is the Career Status Bonus that is offered to military personnel.

I realized from another persons reply that I left out or didn't clarify some details.

The plan was to let the money sit in a fund until I retired, and then post retirement, take that retirement pay and dump it in to the same fund.

I'll have to look in to the ETF's. I don't think I've heard of those before.

You are correct on the tax withholding. The bonus is treated as income, which makes it taxable under federal and state. In this case CA, but since I am military I think I will be exempt from state.
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Sorry everyone,

I failed to clarify some details properly.

1. The bonus is offered at 15 years, but you still work until the normal 20 years and then retire at the lower rate of 47%, versus the normal 50% of base income.

2. Dropping the money in to an account consisted of leaving it there for the remainder of the five years that I am still working the government job, and then post retirement dropping the monthly retirement pay in to the same account for the next 5 years.
That is where I get the calculation of 140k.
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bartsd,

In this case CA, but since I am military I think I will be exempt from state.

If you are a resident of CA, then CA laws apply. Normally you are a resident of the state where you entered military service. To change that, you need to make an overt act through the military and the state.

The plan was to let the money sit in a fund until I retired, and then post retirement, take that retirement pay and dump it in to the same fund.

I would never put all my money in one fund. Currently we have 40 individual stocks(72.6%), one stock mutual fund(3.7%), 2 bond funds(1.9%), 21.3% earning 4.5% and the rest cash. 90% of this is in IRAs.

Bottom line, don't put all eggs in one basket.

Before making a lot of decisions and buying ETFs/funds/stock/bonds/etc, I recommend you read through the 13 Steps of Investing Foolishly on the Fool home page:

http://www.fool.com/how-to-invest/thirteen-steps/index.aspx?...

This will answer a lot of those questions and maybe generate some too.

Gene
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Gene,

Thanks for the info.
On the CA issue, for CA state law, if you are active military but outside the state, then you are exempt from state tax, which is currently the case. That's why I stated that I believe I will be exempt from that portion. Obviously I'll have to do my homework first on that.

I agree with not putting everything in one basket. I've been following Motley for a few years now, but figured I would defer to people who are better versed in this subject. Always lots to learn.
Several years back, I started buying stocks, and have some minor spread as you have described.
My concern is using this money as wisely as possible. The counter argument from everyone on NOT taking the bonus is that I could lose around 180k over the lifetime of my retirement, if I took the reduction.
But I know from reading and follwing motley that there has to be a better way, and that this could be a good opportunity to act on it.
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