FEDweek

Tailoring TSP Withdrawals

Well before making a TSP withdrawal, you should begin thinking of the possible ways a mix and match withdrawal might work for you. The flexibility could allow you to meet several goals at once, rather than choosing which goal was most important to you and dedicating your entire TSP account to that.

For example, you might wish to consider a partial lump sum withdrawal with equal monthly payments or an annuity. This is called the “Winnebago option” because it allows for a major purchase after retirement—not just a recreational vehicle but a major trip, a home renovation or whatever—while also allowing you to gain the steady income stream of monthly payments or an annuity with the rest of your money.

Even combining the two options that produce monthly payments—substantially equal payments and an annuity—might prove advantageous. It would relieve you of the obligation to choose between the two. And it also could provide the combination of guaranteed lifetime income that an annuity brings with the extra cash for your earlier, more active retirement years that the monthly payments options provides. For example, you might consider splitting your account in half, with one part being used to buy an annuity and the remainder as monthly payments that will produce higher monthly income to you for your initial retirement years.

The flexibility of mixing and matching can be used in other ways as well. For example, you might decide that you absolutely want to continue having 75, 80 or some other percentage of your pre-retirement income coming in during your retirement. You might add up your guaranteed income from your basic federal retirement benefits, Social Security and other potential sources of steady income, then figure out how much of a TSP annuity you would need to bring the total up to your target figure. You could designate whatever portion of your account would be needed to produce that much income and then take out any remaining money in your TSP account as a lump sum or as monthly payments.

Similarly, you might see a defined need for a certain level of extra income only for a certain period. For example, your spouse might not be eligible for retirement benefits as soon as you are but the two of you may wish to retire at the same time anyway. You might in that case use monthly payments to provide the needed extra income until his or her benefits begin, with the remainder available for an annuity or a lump sum.

As you think through these possibilities, remember not to spread yourself too thin. Look at your projected TSP account on separation, taking into account the growth of both current and future investments. That may indeed be a large sum–especially if you have many years of investing still ahead of you and you don’t cut into your account through loans or in-service withdrawals. But that one account alone only goes so far. Splitting it up might leave you with less of an annuity than you would prefer, along with a lump sum or monthly payments inadequate for significant uses.