FEDweek

TSP Withdraw Strategies for a Lifetime Income Stream

In order to get a lifetime, inflation indexed, stream of income from the Thrift Savings Plan (or similar retirement savings plan) you have to have a withdrawal strategy. Unlike your FERS annuity and Social Security, which are both lifetime, inflation indexed income, the TSP is not guaranteed to last you as long as you live; nor does it come with a cost of living adjustment (COLA).

Within the TSP’s current withdrawal choices, there are two options which, if followed, will provide a lifetime stream of income that is annually adjusted for inflation. They are: 1) substantially equal monthly payments following the IRS life expectancy table; and 2) a life annuity with increasing payments. We will look at how much income either choice will give an employee who retires at age 57 with $400,000 in their TSP.

To arrive at the following numbers, we will use the TSP’s “Retirement Income Calculator.” It and other helpful calculators can be found on the TSP website. In addition to the employee’s age and TSP balance (from the above paragraph), let’s assumed that the employee had a spouse of the same age, would live to the age of 90, and that their TSP investments would grow at a 5% per year rate. For the annuity numbers, the calculator defaults to the 2.125% annuity interest rate index that was in effect as of October, 2017.

Using substantially equal monthly payments based on the IRS life expectancy table, the individual received $1,194.74 a month at age 57; $1,985.93 a month at age 69; $1,280.21 per month at age 70, when the payments shift to required minimum distributions; and ended up with $2,692.04 a month at age 90. According to the calculator, there would be an account balance of slightly over $350,000 that would be passed on to heirs.

The life annuity (provided by MetLife) gave our person $1,022 a month at age 57; $1,457 a month at age 69; and, as there is no RMD in the annuity, the number did not decrease at age 70 – but rather it increased slightly to $1501 a month. At age 90 the monthly payment was $2,711. As the individual would have received the purchase price of the annuity back in the payments before death, there would be no money left over for heirs.

Some TSP participants will choose to roll over their TSP into an outside annuity with a financial planner. There are many different types of annuities, with different features, though the income stream will likely be similar to what one could get from MetLife.

Others may choose to follow what is known as the “4% rule”. This “rule” was developed in the late 1970s, using historical market returns from 1926 through 1976 and, running multiple market scenarios, the earliest that an account was depleted at a 4% per year withdrawal rate was 33 years. Many of the scenarios resulted in money remaining in the account well after 33 years. An individual could implement the 4% rule within a TSP account by using the withdrawal choice called substantially equal monthly payments of a fixed dollar amount.

Regardless of what method you use, it pays to pay attention to managing your TSP withdrawals.