The 4 percent rule with a pension: a veteran retiring at 44 with a TSP

"4 percent means I spend 4 percent of whatever is left"

Not quite. The original research starts with 4 percent of the portfolio on day one, which gives a dollar amount, and then raises that dollar amount each year for inflation. It does not recalculate 4 percent from each new balance. On $410,000 the first-year figure is $16,400, and if prices rise 3 percent, the next year's figure is about $16,892 no matter what the account did.

It also helps to say what the rule is not. It's research on past market data, not an IRS rule and not a promise that an account will last. Nothing in the tax code says you must or may draw 4 percent.

"My pension means the portfolio rate can be aggressive"

Half true, and the half that's false is the costly one. A pension can cover a fixed floor of bills, which lets you draw less from the account. But it doesn't make a big discretionary draw harmless when markets fall, because selling into a down year still shrinks the account for good.

A working rule for veterans with a pension: when it covers your core bills, compare the actual yearly gap with 4 percent of the starting balance and use the lower figure. Go higher only for a documented, temporary expense, such as a roof or a final tuition year, that has its own funding source. For Curtis and Joanne, that means $12,400, not $16,400.

"The 4 percent figure is my after-tax income"

It isn't. Four percent is a gross number, before income taxes and before any fund costs. Draws from a traditional TSP are generally ordinary taxable income, so the IRS counts them just like your pension check.

Picture the moment this goes wrong. A 1099-R arrives in January showing a $16,400 draw, and the household already spent all of it. Part of that money belonged to federal taxes, and now it has to come from savings, or from next year's draw. Roth money is taxed differently, which is why Edgepoint Wealth Management asks about the account's tax type before suggesting any number.

What dates change the number?

Three dates drive this decision, and they come in calendar order. The first is separation from service. Curtis should ask the TSP, or the plan at any future employer, how an income-payment election is started, changed or stopped, and how many days processing takes. Plans differ, so ask for a written confirmation of the steps and timing.

The second is the first day of retirement spending. Set the first-year dollar amount from real spending and real pension income, not from a round percentage. The third is later. Required minimum distributions (RMDs, the amounts the IRS makes you take from pre-tax accounts) start at age 73, or age 75 for people born in 1960 or later. At that point the IRS rules can require a larger draw than the percentage you picked.

If a defense contractor offers a 401(k) match, ask HR whether the match needs a payroll deferral election and what the vesting schedule is. An answer with no match details and no vesting information is the one that should worry you. Read the plan documents yourself before leaving money on the table.

Separation from service

Retirement and later

How does Curtis and Joanne's gap compare with 4 percent?

Their gap is $12,400 a year, which is $4,000 less than the $16,400 that 4 percent of their TSP would produce. For a household whose pension covers most bills, the gap is the better first number to test.

Take Curtis and Joanne, a hypothetical couple, 44 and 42. Curtis is retiring from the Air Force as an E-8 after 22 years under High-3. Joanne is a nurse, and they have 2 teenagers at home. They hold $410,000 in the TSP and Curtis's pension is $3,300 a month. Once Curtis stops full-time work, their household bills come to $52,000 a year before tax.

Step one, the pension: $3,300 × 12 = $39,600 a year. Step two, the gap: $52,000 − $39,600 = $12,400. Step three, the 4 percent draw: $410,000 × 4% = $16,400. Step four, the difference: $16,400 − $12,400 = $4,000 above the gap. If the TSP is traditional, both figures are gross taxable income, so they must re-run the numbers after estimating taxes. Our calculator handles that kind of check.

Joanne's position matters here. If the household draws only what the gap needs, the extra $4,000 stays invested each year. That can leave more account value for her or the children, though values can rise or fall and nothing is guaranteed. Over a long retirement, a lower draw is also the cushion if Curtis dies first and Joanne has to cover the bills on a reduced survivor income.

One caveat applies. A starting estimate like this isn't enough for a household with large near-term college costs, variable business income, debt payments, or a pension election that hasn't been finalized. Curtis and Joanne have two teenagers, so tuition may need its own line.

The arithmetic

What it means for Joanne

Can the draw change after a bad year?

Yes, the calculation can be revised whenever spending, pension income or market values change. What you can change in the plan itself depends on the plan's current procedures, so ask the TSP or your 401(k) administrator before you count on it.

Some choices are easy to reverse: a spreadsheet assumption, or a payment amount where the plan lets you edit it. Others aren't. A new recurring loan payment, such as a boat or a second car, becomes a fixed bill that the pension and the account must carry for years. Make the reversible choices first, and treat the permanent ones with more suspicion.

Edgepoint Wealth Management starts with the pension gap

Edgepoint Wealth Management would first put the pension, household bills, the TSP's tax type and any employer-plan match on one page. The first test is whether $12,400, $16,400 or no current draw fits the real cash gap and the tax withholding. For more, see our articles on the High-3 pension gap and on how the TSP and an IRA differ after retirement.